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Assume that on October 20, 2005, Firm X, which is in compliance with the Global Investment Performance Standards (GIPS), acquired the assets for Firm Z, which is not in compliance with the GIPS standards. Until what date may Firm X continue to claim compliance with the Standards before it must have the assets of Firm Z GIPS compliant?

A) October 20, 2006.

B) January 1, 2007.

C) January 1, 2006.

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Under GIPS standard 5.A.48.b, if a compliant firm acquires or is acquired by a non-compliant firm, the firms have one year to bring the non-compliant firm’s acquired assets into compliance.

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Three portfolio managers left their previous employer two years ago to form Atomic Investment Management. The reason for their departure was a desire to be solely responsible for investment decisions as opposed to the consensus approach that was utilized at their old firm. Atomic wants to claim compliance with the Global Investment Performance Standards (GIPS), but does not have a 5-year minimum compliance history. Under the GIPS standards, which of the following actions may Atomic take in order to claim compliance? Atomic may:

A) present a 2-year GIPS-compliant performance history.

B) link three years of the managers' performance history from the previous employer to the 2-year history since Atomic's inception with a clear and unambiguous disclosure.

C) not present its performance in compliance with the GIPS until it has established a 5-year performance history.

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Atomic does not meet the test of performance portability under GIPS standard 5.A.48.a. Thus, performance results from the previous employer cannot be linked to or used to represent Atomic’s historical record. In any case, Atomic is not required to present a 5-year GIPS-compliant performance record. Since Atomic is less than five years old, it can claim compliance with GIPS by presenting a GIPS-compliant performance history for the two years since its inception.

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Mesa Asset Management has claimed compliance with the Global Investment Performance Standards (GIPS®) for many years and it is now January 1, 2011. Robert Flay, managing director for Mesa wants to go beyond merely complying with the standards and wants to incorporate all of the GIPS recommendations, particularly those dealing with presentation and reporting. Flay asks two of his performance analysts, Catherine Cora and Luigi Batali for suggestions as to how Mesa can incorporate the recommendations.

Cora:	“Mesa is permitted to link our noncompliant annual performance data from 1996-1999 to our GIPS compliant data, as long as we meet the disclosure requirements. GIPS reporting recommendations suggest that we eliminate all non-compliant data after presenting the required 5 years of compliant historical performance.”
Batali:	“Including a measure of the standard deviation of composite returns is extra information that will provide prospective clients with information regarding the fluctuation of composite returns over time.”

After listening to their statements, Flay should:

A) disagree with both Cora, but agree with Batali.

B) disagree with both Cora and Batali.

C) agree with Cora, but disagree with Batali.

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Flay should disagree with both Cora and Batali. According to Standard 5.A.2. For periods beginning on or after January 1, 2011, firms must present for each annual period:

• Three-year annualized ex-post standard deviation using monthly returns for the composite and benchmark.
• An additional 3-year ex-post risk measure if management feels standard deviation is inappropriate. The firm must match the periodicity of calculated returns used for the composite and benchmark.

Note that this standard deviation measure would be different from the internal dispersion measure that measures the standard deviation within the composite (relative to the average composite return). Recommendations for presenting relevant composite-level risk measures include: Standard 5.B.5. For each year that annualized composite and benchmark returns are reported, the corresponding annualized standard deviation of monthly returns for the composite and benchmark. Standard 5.B.6. Additional ex-post composite risk measures.
Although the recommendations do not suggest eliminating non-compliant data according to Standard 5.B.8, Firms should comply with the GIPS for all historical periods, this indicates firms should bring non-compliant data that is linked with compliant data into compliance.

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Which of the following measures of portfolio dispersion is least likely to reflect an outlying portfolio?

A) Mean absolute deviation.

B) Standard deviation.

C) Interquartile range.

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Of the four dispersion measures, only the interquartile range ignores the values of outliers. This measure provides the value of the second and third quartiles, and is not affected by individual portfolio results within the top and bottom quartiles.

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A composite contains portfolios A, B, C and D that had returns during the year of 3.8 percent, -4.6 percent, 16.1 percent and 7.4 percent respectively. Which of the following statements best describes the provisions of GIPS with respect to measures of dispersion?

A) The standard deviation is the most appropriate measure, but the firm should disclose whether the denominator in the calculation is the number of portfolios or the number of portfolios minus one.

B) No measure of dispersion needs to be presented.

C) The standard deviation should be shown using either equal weightings or asset weightings.

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No measures of dispersion need to be shown since the composite contains fewer than six portfolios.

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Which of the following investments is most likely to be covered by the real estate provisions of the GIPS?

A) A commercial mortgage-backed security on a new office block.

B) A commingled investment in a group of residential properties.

C) A real estate investment trust.

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The general provisions of the GIPS would apply to REITs, any common stock, CMBSs and many private debt investments. The residential properties are the only investment listed that would fall under the real estate provisions.

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A portfolio consists of three approximately equal investments: some retail property, a large commercial loan and some common stock in a construction company. Which of the following best describes how the GIPS provisions would be applied?

A) The carve-out provisions would apply; with the retail property and the loan using the real estate GIPS provisions, and common stock using the general GIPS provisions.

B) The carve-out provisions would apply; with the retail property using the real estate GIPS provisions, and the loan and common stock using the general GIPS provisions.

C) Since only part of the portfolio is comprised of real estate investment, the general provisions of the GIPS would apply to the entire portfolio.

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With this mixed portfolio, the carve-out provisions apply. Note that only the retail property falls under the real estate GIPS provisions.

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The calculation of capital return under the GIPS provisions for real estate is performed by dividing a measure of return by capital employed. Beginning with the change in value of the real estate (and cash), how would the calculation of return account for capital expenditures, nonrecoverable expenses, and sales proceeds?

Capital Expenditures

Nonrecoverable Expenses

Sales Proceeds

A) Subtract No adjustment Add

B) Add No adjustment Subtract

C) Subtract Subtract Add

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Capital return is calculated by dividing a return measure by capital employed. The return measure equals the change in value during the period (i.e. ending market value less beginning market value) minus capital expenditures plus sales proceeds. Nonrecoverable expenses would be deducted from income return.

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When performing the return calculations for real estate, which of the following best describes capital employed under the GIPS real estate provision?

A) Beginning of period capital.

B) Beginning of period capital adjusted by time-weighted cash flows.

C) Beginning of period, end of period or a time-weighted average capital may be used, provided it is applied consistently and fully disclosed.

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All return calculations must use beginning capital adjusted for time-weighted cash flows during the period.

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A firm calculates income return, capital return and total return for their real estate composite using the GIPS provisions for real estate. Is it necessary for the sum of income return plus capital return to equal total return in each quarter, and the sum of the four quarterly income returns to equal the income return for the year?

Quarterly Sum

Annual Sum

A) No Yes

B) Yes Yes

C) Yes No

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For each period, the total return must equal income return plus capital return. However, for the year, each component of return (i.e. income and capital) may be calculated using chain-linked time-weighted rates of return. Hence the annual return will slightly exceed the sum of the quarterly returns.