What is the definition of accrual equivalent return and how is it calculated?
Thanks!
Actual equivalent return is the return that equates your post tax future value, without including a tax charge.
Accrual equivalent return is the tax free return that if accrued annually produces the same after-tax accumulation in a taxable portfolio.
If your return is 10% and you’re taxed at 25%, then your accrual equivalent return is 7.5%, your actual return after paying taxes.
Start with $100, grow it by $10, and pay taxes on it brings it down to 107.5. The equl return is 7.5%.
the errata says this is optional
Its the same as CAGR only after tax FV is taken.
I was talking with Mark Meldrum this last week and he assured me that CFA Institute said that they were no longer testing accrual equivalent return and accrual equivalent tax rate (which was really annoying as it meant that I had to rewrite two questions on a morning practice exam I’d done).
This was in the errata for last year as well…is it that hard to mark the pages as optional?
Ah thanks folks!