Annualized Volatility FIGURE 32.6 Optimal Efficient Frontiers investor could alter asset allocation or location to obtain the most favorable impact on expected long-term results.

Asset allocation. The model relates risk to expected real long-term after-tax results. This is done to capture the powerful impact of estate taxes. It has the added benefit of focusing on what is most relevant to the investor. The classic efficient frontier relates risk to return. Return, however, is an intermediary variable. The investor is interested in wealth and will likely make asset allocation decisions on the basis of the expected wealth and the volatility of the expected wealth.

Estate planning. We took the existing estate plan as fixed in our two examples. However, this modeling process can be used to evaluate changes to estate plans as well. For example, if Mr. Jones was considering buying a life insurance policy as a mechanism for reducing estate taxes, he could first observe his efficient frontier based on the existing estate plan. Then he would alter the model to include the life insurance policy and calculate a new efficient frontier. This efficient frontier would reflect the optimal use of that policy within the context of his other estate entities. A comparison of the efficient frontiers would allow for evaluation of the likely benefit of the life insurance policy on his long-term wealth transfer to his beneficiaries.

Concentrated stock positions. Some investors have a significant portion of their wealth in a single stock with very low cost basis. This is often the result of the sale of a business or stock-based compensation. These investors face the issue of achieving diversification and risk reduction for the least amount of tax. If Mr. Smith's personal assets included a large position in low-cost-basis shares