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ArchivedEffective: 1 May, 2010 - 31 December, 2019Categories: RiskSource: GIPS Executive Committee
For periods ending on or after 1 January 2011, firms must present, as of each annual period end, the three-year annualized ex-post standard deviation (using monthly returns) of both the composite and the benchmark. If the firm determines that the three-year annualized ex-post standard deviation is not relevant or appropriate, the firm must also present a three-year ex-post risk measure in addition to the three-year annualized ex-post standard deviation. Our global equity composite is calculated monthly and has a benchmark for which only quarterly returns are calculated by a third-party. We present the three-year annualized ex-post standard deviation of the composite, but do not believe it is relevant to our strategy.
We are trying to determine which additional risk measure we will present to satisfy the requirement to present an additional three-year ex-post measure of risk if the firm determines that standard deviation is not relevant or appropriate for the composite. We would like to select a three-year ex-post risk measure that can be presented for both the composite and benchmark. As composite returns are calculated monthly and benchmark returns calculated quarterly, this does not seem possible as it fails the periodicity test. What should we do?
The periodicity of the composite and the benchmark must be the same when calculating ex-post risk measures. In this circumstance, the firm would be required to use quarterly composite returns, not monthly returns, when calculating the required additional ex-post risk measure. The firm must also determine that there are enough data points for the selected measure to be statistically significant so as not to be misleading. The firm must describe why the ex-post standard deviation is not relevant or appropriate, the additional risk measure that is presented, and why it was selected. The firm is still required to show the three- year annualized ex-post standard deviation using monthly returns for the composite and disclose that the measure is not presented for the benchmark because monthly returns for the benchmark are not available.