Reading 49: Global Investment Performance Standards Los i~Q1-3

respect, including, following, standards, Investment

LOS i: State the requirements and recommendations of the GIPS standards with respect to composite construction, including switching portfolios among composites, the timing of the inclusion of new portfolios in composites, and of the exclusion of terminated portfolios from composites.

Q1. Which of the following is NOT a composite construction requirement of the Global Investment Performance Standards (GIPS)?

A) All actual fee-paying discretionary portfolios must be included in at least one composite.

B) Composites must include new portfolios on a timely and consistent basis after the portfolio comes under management--unless specifically mandated by the client.

C) Terminated portfolios must be removed from the historical record of the appropriate composites for all years for which they were included in the composites.

Q2. Which of the following is NOT a composite construction requirement under the Global Investment Performance Standards (GIPS)?

A) Firms must disclose the use of simulated or model portfolio results.

B) Firm composites must be defined according to similar investment objectives and/or strategies.

C) Carve-out returns excluding cash cannot be used to create a stand-alone composite.

Q3. Teaton Investment Management (TIM) has recently developed a proprietary prediction model. To test the model, TIM created a returns history for an equity value portfolio using hypothetical assets and a back-tested asset allocation strategy. TIM intends to include the simulated portfolio results in its performance presentation. Which of the following most accurately describes TIM’s compliance with the Global Investment Performance Standards (GIPS)? (Assume that TIM is GIPS-compliant in all other areas). TIM is:

A) GIPS-compliant as long as it discloses the inclusion of simulated returns in its performance presentation.

B) not GIPS-compliant because the standards do not permit the inclusion of simulated portfolio results in performance presentations.

C) GIPS-compliant if it includes the simulated portfolio in a composite that consists solely of simulated portfolios.