Why Does the Tax System Appear to Treat Profits and Losses

question 23

Essay

Why does the tax system appear to treat profits and losses asymmetrically?

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Definitions:

Principle of Diversification

A risk management strategy that mixes a wide variety of investments within a portfolio to reduce exposure to any single asset's volatility.

Positively Correlated Stocks

Stocks whose prices tend to move in the same direction due to similar underlying factors or market conditions.

Volatility

A statistical measure of the dispersion of returns for a given security or market index, often associated with the degree of risk or uncertainty.

Systematic Risk

The risk inherent to the entire market or a whole market segment, which cannot be mitigated through diversification alone.