I notice in one example that after-tax real retun is calculated, then divided by (1-T), to get pre-tax return, then inflation is added for pre-tax nominal return.
Is this correct, or should we add inflation to the after-tax real return, and divide the whole thing by (1-T)?
Isn’t the second method more correct?
The example I reference aboveis from Schweser Volume 2, Exam 2 AM, Q 6A.
That question specifically says to assume the component of return equal to inflation will not be subject to tax, so that’s why they find the after-tax return and then add inflation…why they don’t also include the geometric method is beyond me, but that’s for another post.
Compare that with the CFA 2013 morning mock, question 1 when you sort of do the same thing but in reverse. If you were to work backwards from solving the After-tax real return, you would do the inflation adjustment first, and then the tax adjustment to arrive at pre-tax nominal.
So yes, second method seems more correct, but they specifically say to do it the other way in the Schweser example.
This issue has been discussed several times in the past week alone. I suggest searching for some of those threads. It all depends upon what gets taxed – is it only withdrawals from the portfolio, or does the entire portfolio get taxed in addition to withdrawals? It makes a difference.
A wise man who frequents this forum once said, “Read the vignette.”