MAXIMIZING AFTER TAX VALUE WILL INCLUDE OPTIMIZING ASSET LOCATION...

4. Maximizing after tax value will

include optimizing asset location.

Traditional mean-variance

Correct

optimization can be modified to

achieve this result or Monte Carlo

simulation can be used.

Candidate discussion: 2 points each for selecting correct for statement 2 and 4. 1 point each

for selecting incorrect for statements 1 and 3 and 1 point each for a correct statement of why

they are incorrect.

(Study Session 4, LOS 9.d)

B. Baltus and Korkov find they are unable to agree on the best method to manage unrealized tax

losses in a portfolio. Baltus states that if there are multiple tax lots with different acquisition prices

and only a portion of the position will be sold, the lowest tax basis lots should be sold. Korkov

states that in the same situation the highest tax basis lots should be sold. Determine who

is more likely to be correct and explain the conditions under which the other method could be

correct.

Grading Guide

Answer for Question 7-B

Generally Korkov is correct and HIFO is best. Selling the highest cost basis lots will realize the

largest loss and create the greatest tax sheltering of other taxable income or gains. Baltus could

be right if tax rates are expected to rise. In that case it might be beneficial to defer the larger

losses until after the higher rates go into effect.

(Study Session 4, LOS 9.g)