2014 AM 1E - Unrealized capital gains tax

CFA Level III Portfolio Management
#1

Hi all,

In the 2014 AM exam, question 1E asks for the investment portfolio’s percentage return after taxes. The solution calculates this as:

r* = r x (1 - wartr), so pretax return times one minus the weighted average realized tax rate. The solution ends there.

In the curriculum it says that this will overstate the after tax return since the portion of unrealized capital gains taxes is not accounted for (in this case it’s 9% of the pretax return).

Shouldn’t the solution also incorporate this future tax liability? Or should we assume that this has to be explicitly mentioned in the question?

#2

I think because it mentions ‘over the following year’ at the start of the sub section, it wants you to ignore future liability and focus only on that year.

#3

Rather than working using the formula, isn’t it just easier to calculate the absolute tax payable on the interest/dividend/realized cap gains and deduct that from the total return, and then divide that by 1.33 mn?