internal versus external dispersion -GIPS

[needhelp]

Why is standard deviation an external measure when it is listed as one of the acceptable methods of dispersion.
Totally confused on this. Whats the difference between external and internal and if the Composite shows standard deviation, how do you know that its externally calculated?

 

[bips]

internal - if a composite had 20 port .. what was the volatility of the port around the average
external - if there are 10 composites.. then what is the volatility of those 10 around the average (this though i’m not sure of)

 

[needhelp]

ok i think the answer is that the heading should state that this is ‘composite’ standard deviation and not just std dev. correct?

 

[bips]

umm.. i think i have completely messed up the answer.. bec there is a measure of dispersion that calculates individual port dispersion withing a composite using std dev .. its all hotch potch right now… let me check .. i don’t have my books right now

 

[hala_madrid]

i think internal dispersion is how, during a single year, the return of each subportfolio is distributed around the average return of the portfolios inside the composite
I have seen “external” dispersion mentioned in schweser, but never a definition. I guess (no idea) that perhaps is just the standard deviation, volatility or whatever of the composite during the period

 

[sticky]

Let’s say composite A has got 10 portfolios: #1 thru #10. Each portfolio has got it’s 12 monthly valuations (which is ok before 2010), and hence 12 monthly returns. In other words, you’ve got 10 port x12 = 120 monthly returns in front of you.
For GIPS and internal disperson, you calc the annual return of EACH portfolio first. That is, you calc for r1, r2, … r10. eg. Annual return for portfolio 1, r1, is calculated based on the 12 valuations for portfolio 1.
Now you have r1 thru r10 for the 10 portfolios and you say you want to group them under composite A. Composite return will be weighted averaged from r1 thru r10. The required (internal) dispersion of composite A will be the SD of r1 thru r10.
The (wrong) (external?) dispersion will be involving something like:
- getting SD of the monthly returns of JUST portfolio 1, OR
- getting SD of all the 120 monthly returns of all the 10 portfolios.
Not 100% sure of the external dispersion part but hope this helps.
- sticky

 

[abacus]

Did a Google on internal dispersion & GIPS. Here’s is what I found:
www.swissbanking.org/2005_QAs_for_GIPS.pdf
23. Please clarify how to calculate the required internal dispersion measure.
The internal dispersion is a measure of the variability of portfolio-level returns for only those
portfolios that are included in the composite for the full year. First, the firm must identify which portfolios were in the composite for the full year. Second, the firm must calculate the annual return for each of the portfolios that were included in the composite for the full year. The internal dispersion measure is then calculated using these portfolio-level annual returns. The specific measure of dispersion presented is a required disclosure. If the firm has less than five portfolios in a composite, a measure of dispersion is not required.