Hey guys and gals, Quick question, I was just doing a random FinQuiz item set and it mentioned that downside deviation is not an acceptable measure for internal dispersion under GIPS… is that correct? :s

Thats correct. GIPS currently relies on only standard deviation as an acceptable measure for internal dispersion. However, including downside risk measures would definitely provide greater insight into the portfolio management strategy than the current standard deviation requirement.

Uuuuh… I don’t think that’s right. I know that 36 month standard deviation is the only acceptable method for external dispersion. But I know for sure that inter quartile and high/low method are both accepted for internal dispersion. I am wondering if downside deviation is acceptable for internal or not

Okay then probably my bad. I have kept GIPS for the last two weeks actually. However, I had an idea from my on job project that it doesn’t consider downside deviation measures. Thanks for your insights btw.

My pleasure haha, hopefully someone can answer my original Q!

From the book

The GIPS Glossary defines internal dispersion as “a measure of the spread of the annual returns of individual portfolios within a composite” and indicates that acceptable measures include, but are not limited to, high/low, range, and the equal-weighted or asset-weighted standard deviation of portfolio returns.

The simplest method of expressing internal dispersion for an annual period is to disclose the highest and lowest returns earned by portfolios that were in the composite for the full year.

Alternatively - the high-low range—the arithmetic difference between the highest and the lowest return—might also be presented. In either form, the high/low disclosure is easy to understand. It has, however, a potential disadvantage. In any annual period, an outlier—that is, one portfolio with an abnormally high or low return—may be present, resulting in a measure of dispersion that is not entirely representative of the distribution of returns.

The standard deviation of returns for portfolios included in the composite is another acceptable measure of internal dispersion. As applied to composites, standard deviation measures the cross-sectional dispersion of returns for portfolios included in the composite.

Some firms prefer to present the asset-weighted standard deviation rather than the equal-weighted standard deviation.

Although the GIPS Glossary does not explicitly mentioned it, the interquartile range—the difference between the returns in the first and third quartiles of the dis- tribution—is also an acceptable measure of internal dispersion.

The interquartile range, then, represents the length of the interval containing the middle 50 percent of the data. Because it does not contain the extreme values, the interquartile range is not exposed to the risk of being skewed by outliers. However, prospective clients may be unfamiliar with the interquartile range as a measure of dis- persion. When disclosing that interquartile range is the measure of internal dispersion used, as required by Provision I.4.A.8, firms might wish to include a definition of interquartile range. For instance, the disclosure might read, “The measure of internal dispersion of the returns for portfolios that were included in the composite for the full year is the interquartile range, the spread between portfolio returns at the 25th and 75th percentiles.” Note that the GIPS standards do not limit firms to using one of the measures of internal dispersion described earlier. A firm may prefer another way of expressing composite dispersion. The method chosen should, however, fairly represent the range of returns for each annual period. (This is from my 2014 books - and is consistent with the 2010 GIPS standards, FYI). So NO downside deviation **DOES NOT** cut it.

well that was a read and a half, hahaha thank you cpk! So its either high-low, std dev., or inter quartile for internal dispersion, got it