Question regarding Asset Allocation and the Taxable Investor (Portfolio Management)

CFA Level III Portfolio Management
#1

Hi fellows,

I feel confused when reading the example 5 Asset Allocation and the Taxable Investor (curriculum volume 1, page 418).

  1. For question 1, the solution says the high-yield bond, investment-grade bonds and common stock–dividend income strategies are tax disadvantaged in a taxable portfolio. However, why common stock–total return (capital gain) isn’t tax disadvantaged? I thought the two common stock strategies are subject to the same tax rate? (assuming dividend and capital gain taxes are the same)

  2. Also, in the question 1 solution, it says the volatility of the common stock–capital gain strategy (than dividend strategy) is lower when held in a taxable portfolio. I don’t see why …

  3. In question 2 solution, high-yield bond, investment-grade bonds and common stock–dividend income strategies are put into the Tax Advantaged Retirement Account because they are tax disadvantaged assets - I can get that; but Common stock–total return (capital gain) strategy is put in Taxable Account instead - I think that’s the same question as in 1. - why the capital gain stock strategy is tax-efficient?

Sorry for asking so much, I am just so confused. thank you all.

#2

In the real world, dividends are typically taxed at a higher rate than (long-term) capital gains.

#3

Thank you ! Maybe this explains why it’s relatively more efficient and should be put into the taxable account.

#4

My pleasure.