RT Journal Article
SR Electronic
T1 Refining After-Tax Return and Risk Parameters
JF The Journal of Wealth Management
FD Institutional Investor Journals
SP 8
OP 17
DO 10.3905/jwm.2020.1.112
VO 23
IS 2
A1 Peter Mladina
YR 2020
UL https://pm-research.com/content/23/2/8.abstract
AB Taxes introduce certain complexities, requiring proper adjustments to return and risk parameters. The author offers a refined set of after-tax return and risk equations for use in practice and validates them with a stochastic future value cash flow model. The refined after-tax return and risk parameters can be used in portfolio optimization, Monte Carlo simulation, and deterministic present/future value portfolio modeling with internally consistent results. The refinements improve the discovery of the optimal after-tax portfolio and enhance long-term wealth planning in the presence of risk.TOPICS: Wealth management, factor-based modelsKey Findings• After-tax return and risk parameters are necessary for efficient asset allocation and accurate wealth planning. • Parameters must incorporate tax complexity while producing internally consistent results across portfolio optimization, Monte Carlo simulation, and deterministic modeling. • Refinements include the arithmetic-geometric return treatment with tax, a more precise incorporation of the effective annual capital gains tax rate, and risk manifesting in the price return across the distribution.