Accrual Equivalent Returns

[tz1028]

CFA curriculum, Volume 2, page 244
Reading 10: Taxes and Private Wealth Management in a Global Context
Please i need help to understand why this Erratum: it approaches the annaul return after realized taxes r* , instead of the pretax return r.
1. it make sense to me more that: the “accrual eqivalent return” approaches the “pretax return r” (not the after tax return r*), as more of the portfolio return is deferred.
2. and please explain accrual equivalent return approaches (r or r*) as the time horizon increases?

 

[caramel288]

It is a siple case of time value of money. The AER contains both realised and deferred taxes. the difference between AER and pre tax return is the tax drag. As the time horizon increases the TIME VALUE of tax defferal increases with time. the AER moves closer to r as more of the portfolio return is not getting taxed because of deferral and the portfolio earns compound interest tax free. Plug is some numbers and play around.