TY - JOUR T1 - Return–Risk Ratios Under Taxation JF - The Journal of Portfolio Management SP - 43 LP - 51 DO - 10.3905/JPM.2009.35.4.043 VL - 35 IS - 4 AU - Martin L Leibowitz AU - Anthony Bova Y1 - 2009/07/31 UR - https://pm-research.com/content/35/4/43.abstract N2 - Intuition implies that taxes always detract from investment returns, which is, of course, true, but intuition tells us nothing about how an investor’s return–risk balance might be altered by taxation. The authors address the issue by drawing upon a simple two-asset model composed of cash and a single equity asset, with the latter subject to an advantageous capital gains tax rate. It turns out that even though the taxed investor receives a lower net return, a differential tax structure can lead to return–risk ratios that are actually greater than their tax-free counterparts. Over short-term horizons, given standard assumptions, the taxed investor’s return–risk advantages are not sufficient to provide high probabilities for achieving positive spreads over the risk-free rate. To capture such excess returns with an acceptable probability, investors—taxed or not—must move to significant equity positions, plan on five-year or longer horizons, or assume the presence of higher-than-standard equity return premiums.TOPICS: Portfolio construction, portfolio theory, VAR and use of alternative risk measures of trading risk ER -