towardsutopia21

Return increases and volatility down
with taxable account gov’t shares part of the risk

Wendy01

^I did what Zerobonus did, but after the exam, I rethought the question and realized there weren’t any gains.
when government\s share of taxes lowers portfolio’s volatility, it lowers both losses and gains.
in this case, portfolio had loss, so the loss is lowered in taxable account.

ShooterMcCFA

passme wrote:
^I did what Zerobonus did, but after the exam, I rethought the question and realized there weren’t any gains.
when government\s share of taxes lowers portfolio’s volatility, it lowers both losses and gains.
in this case, portfolio had loss, so the loss is lowered in taxable account.


A lower loss = higher return
-5% return is higher than -10% return, no?

amqata

The original poster forgot to mention that the question was about ‘that year’.
Now, if both accounts were 100 at the beginning and lost 20%, ending value is 80. Neither pay taxes and since we are interested in ‘that year’ only (not future tax harvesting benefits), the return was equal -20% for both.
I believe the same should apply to volatility ‘that year’. If your accounts go down 20%, they go down 20% and have thus the same volatility. Of course one could invent assumptions on what would have happened if we had measured volatility based on monthly values during ‘that year’. In that case, one month’s loss would have decreased tax liability the next month and sigma(1-t) would have applied. But now we only had one year and one observation.

noel

Someone should email them and challenge this question