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Up1
Hi,
when Before tax Expected Return of various asset allocation alternatives eg A, B, C, D given – and a tax-rate is given, do we
1) calculate after-tax return for each alternative ?
2) then look at return objective for endowment, foundation etc. and then choose the most suitable asset allocation ?My qs is do we always decide based on AFTER-TAX Exp. Return if given Before-tax Exp. Return ?
Thanks very much
Aaliya -
Up5
Thanks very much Mattyc – clear now.
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Up4
For these types of questions I tend to use a more mosaic approach and looking at the required return as one part of it. The other parts are suitable allocations, liquidity and appropriate risk.
In this case when looking at the required RoR component it would by easier to convert the institutions RoR to pre-tax to make it comparable to the allocations. It wouldnt matter if you did it the opposite way either, as long as you are able to match up pre-tax to pre-tax or after-tax with after-tax. So my understanding is that there is not a required way to end up selecting the most appropriate asset allocation unless specifically asked to calculate the after-tax returns of each allocation.
Hope that helps.
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