Reading 49: Global Investment ....mance Standards－LOS p Investment, assets, capital, standards, return

tycoon

CFA Institute Area 3-5, 7, 12, 14-18: Portfolio Management
Session 18: Global Investment Performance Standards
Reading 49: Global Investment Performance Standards
LOS p: State and explain the provisions of the GIPS standards for real estate, and calculate total return, income return, and capital return for real estate assets.

tycoon

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) End of period capital.

D) 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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Answer and Explanation

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

tycoon

The calculation of capital return under the GIPS provisions for real estate is performed by dividing a measure of return by capital employed. How would the calculation of return include capital expenditures, nonrecoverable expenses, and sales proceeds?

Capital Expenditures

Nonrecoverable Expenses

Sales Proceeds

A) add no adjustment subtract

B) subtract subtract add

C) subtract no adjustment add

D) add add subtract

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Answer and Explanation

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.

tycoon

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) Yes Yes

B) No No

C) No Yes

D) Yes No

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Answer and Explanation

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.