R8 - 5.1: Fairfax Case - Exhibit 9

A

archived_user

New member
Joined
Jun 18, 2026
Messages
0
Reaction score
0
In the “Summary Data” Table from Exhibit 9, I am having trouble getting the values for “Expected after-tax total return.” I don’t know if I’m just making a “stupid” math error or if I’m not understanding a concept. Are any of the asset classes exempt from the 35% tax rate? Please show actual calculations. Thank you.
 
Also, since I have no information concerning covariance between the Asset Classes, does this mean that Ms. Fairfax’s analyst calculated the “Expected Standard Deviation” for the Allocation Options A through E behind the scenes (i.e. - just a given for the example, not numbers that we can actually replicate)?
 
Municipal bonds are tax exempt and if you deduct taxes and weigh all after-tax returns accordingly then you get quite close to the figures in the exhibit (I get a net difference across the 5 portfolios of 0.12%, probably rounding error).
The “Expected real after-tax return” is simply the difference between “Expected after-tax total return” and inflation, which is 4%. (Fisher equation).
On your second query I agree we need correlations to be able to find the portfolio standard deviation.
 
By the way Fisher equation can be written as
(1+nominal)=(1+inflation)*(1+real)
or
nominal = inflation +real
which is a close [linear] approximation of the first equation
I see this issue (which one to use) discussed many times on L3
 
Hi - (1+inflation) * (1+real) * (inflation*real) actually but the last term generally approaches 0 so can be neglected…
 
You must log in or register to reply here.
Back
Top