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#1

Hi David,

I've been struggling today with the CAPM with the tax factor included. Specifically, I was confused about why the tax factor for the dividend yield of the stock is being added back to the return of the portfolio.

The only explanation I could come up with is that the beta of the risk premium less the tax on the dividend of the market portfolio somehow incorporates the tax on the dividend for the stock.

So the tax on the stock dividend is added back such that the expected return on the portfolio is a pre-tax return.

Can you pls confirm whether I'm right in my assumption? (I hope my question is clear)

Thanks very much,

Deji

I've been struggling today with the CAPM with the tax factor included. Specifically, I was confused about why the tax factor for the dividend yield of the stock is being added back to the return of the portfolio.

The only explanation I could come up with is that the beta of the risk premium less the tax on the dividend of the market portfolio somehow incorporates the tax on the dividend for the stock.

So the tax on the stock dividend is added back such that the expected return on the portfolio is a pre-tax return.

Can you pls confirm whether I'm right in my assumption? (I hope my question is clear)

Thanks very much,

Deji

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