AIMR-PPS Performance Reporting

Explanation

Annual returns for all years must be presented. Performance for periods of less than one year must not be annualized. This is a requirement for presentation of results.

According to the AIMR-PPS (Association for Investment Management and Research-Performance Presentation Standards), when presenting performance results, annual returns for all years must be included. This means that when providing performance information to clients or stakeholders, the annual returns for each year should be disclosed.

However, when it comes to periods of less than one year (such as quarterly or monthly returns), the AIMR-PPS provides specific guidelines. The correct answer to the question is option D: "must be prorated and appropriate disclosures made."

Prorating refers to the practice of adjusting returns for periods of less than one year to reflect their annualized equivalent. It allows for a standardized comparison of performance across different timeframes. To calculate the annualized equivalent, the return for the period is adjusted as if it were extended to cover a full year.

For example, if the performance of an investment is reported for a period of three months, the return for that period will be prorated to reflect what the annual return would be if the performance were maintained for a full year. This adjustment is done by multiplying the return for the period by a factor that represents the number of periods in a year. In the case of a three-month period, the factor would be four (12 months divided by 3 months).

In addition to prorating the returns, appropriate disclosures must also be made when presenting performance results for periods of less than one year. These disclosures should highlight the specific time period covered, the methodology used for prorating, and any limitations or assumptions associated with the calculation.

Option A is incorrect because periods of less than one year should be treated differently from annual returns due to the need for prorating and disclosures. Option B is incorrect because performance for periods of less than one year should be included in the presentation but prorated. Option C is incorrect because the performance for periods of less than one year must be annualized, not left unannualized.

Therefore, the correct answer is option D: Performance for periods of less than one year must be prorated, and appropriate disclosures should be made.