This paper discusses after-tax asset allocation for individual investors, investigates mean-variance optimization models, and applies asset location under the after-tax framework. We demonstrate how the traditional allocation approaches fail to take tax properly into consideration. Based on Reichenstein’s early after-tax asset allocation researches, we improve the adjustment for risks of portfolio, especially for fixed income, by choosing appropriate tax rate. Also we test Reichenstein’s and the adjusted models by changing parameters and inputs to evaluate the new model. We illustrate how taxes and saving vehicles affect mean variance optimization and conclude the individual investors should locate bonds in tax-deferred accounts and stocks in taxable accounts.
FRM Project-Simon Fraser University
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