@article {Leibowitz43, author = {Martin L Leibowitz and Anthony Bova}, title = {Return{\textendash}Risk Ratios Under Taxation}, volume = {35}, number = {4}, pages = {43--51}, year = {2009}, doi = {10.3905/JPM.2009.35.4.043}, publisher = {Institutional Investor Journals Umbrella}, abstract = {Intuition implies that taxes always detract from investment returns, which is, of course, true, but intuition tells us nothing about how an investor{\textquoteright}s return{\textendash}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{\textendash}risk ratios that are actually greater than their tax-free counterparts. Over short-term horizons, given standard assumptions, the taxed investor{\textquoteright}s return{\textendash}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{\textemdash}taxed or not{\textemdash}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}, issn = {0095-4918}, URL = {https://jpm.pm-research.com/content/35/4/43}, eprint = {https://jpm.pm-research.com/content/35/4/43.full.pdf}, journal = {The Journal of Portfolio Management} }