Reading 49: Global Investment ....mance Standards－LOS n Investment, measures, relative, standard, returns

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CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 18: Global Investment Performance Standards
Reading 49: Global Investment Performance Standards
LOS n: Evaluate the relative merits of high/low, interquartile range, and standard deviation as measures of the dispersion of portfolio returns within a composite.

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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 high/low range is inappropriate because the performance of portfolio C is not representative of the composite as a whole.

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

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Answer and Explanation

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

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

A) Standard deviation.

B) Interquartile range.

C) High/low range.

D) Mean absolute deviation.

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Answer and Explanation

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.