Reading 49: Global Investment ....mance Standards－LOS i Investment, standards, including, respect, label

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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 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.

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

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.

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

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Answer and Explanation

Standard 3.A.4 states that terminated portfolios must be included in the historical record of the appropriate composites up to the last full measurement period that the portfolio was under management. The inclusion of terminated portfolios in historical performance prevents survivorship bias.

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

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

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

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

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

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Answer and Explanation

Under GIPS standard 3.A.8, composites must include only assets under management and may not link simulated or model portfolios with actual performance. Simulated, back-tested, or model portfolio results do not represent the returns of actual assets under management and, thus, may not be included in composites performance results.

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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 TIMs compliance with the Global Investment Performance Standards (GIPS)? (Assume that TIM is GIPS-compliant in all other areas). TIM is:

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

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

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

D) GIPS-compliant as long as the simulated value equity portfolio is included in a value equity composite.

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Answer and Explanation

A firm may not include model performance results in its presentation and claim compliance with GIPS. Under GIPS Standard 3.A.8, composites must include only assets under management and may not link simulated or model portfolios with actual performance. Simulated, back-tested, or model portfolio results do not represent the returns of actual assets under management and, thus, may not be included in composites performance results.