A Model for Tax Advantages of Portfolios with Many Assets
25 Pages Posted: 4 Sep 2005 Last revised: 8 Jan 2015
Date Written: August 1, 2005
Taxable portfolios present challenges for optimization models with even a limited number of assets. Holding many assets, however, has a distinct tax advantage over holding few assets. In this paper, we develop a model that takes an extreme view of a portfolio as a continuum of assets to gain the broadest possible advantage from holding many assets. We find the optimal strategy for trading in this portfolio in the absence of transaction costs and develop bounding approximations on the optimal value. We compare the results in a simulation study to a portfolio consisting only of a market index and show that the multi-asset portfolio's tax advantage can lead either to significant consumption or bequest increases.
Keywords: Taxes, portfolio optimization
JEL Classification: C61, G11, H24
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