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orange line is below the benchmark line (TFSA, in
blue) since we are subtracting the income taxes on
the return, and that it is less steep, meaning that
for every incremental increase in after-tax beta, the
after-tax return is lower. If the equities were not
taxed as capital gains, the slope would be even less
steep (grey line).
FEATURE ARTICLE
The beta of a portfolio is the weighted average
of the betas of each individual security. With a
beta of 1 for equities and 0.16 for fixed income, the
different combinations lead to the same result as
for individual securities, that is, the non-registered
line (orange) is below the TFSA's blue line, mainly
due to income taxes.
After-tax beta is very similar to "unlevered" beta,
also called debt-free beta or asset data. Debt-
free beta measures the company's market risk
without the impact of debt. We therefore have
to remove the financial repercussions of leverage
and isolate the risk related solely to the company's
assets. Subtracting the taxes on the beta can be
compared to determining the real impact of the
after-tax return risk. In other words, not considering
income taxes in the beta is a little like amplifying
the volatility to determine the return.
In conclusion, when working with different savings
vehicles, it is just as important to calculate the
after-tax risk as the after-tax return, especially in
an account where the returns are not tax-sheltered.
