When creating composites, ________ returns must not be mixed with asset-plus-cash returns.
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A. B. C. D. E.C
To be in compliance with the PPS, a firm creating a composite must meet this requirement.
When creating composites, the correct answer is C. asset-only returns must not be mixed with asset-plus-cash returns.
Composites are used in the investment industry to represent the performance of a group of similar investment portfolios. They are commonly used by investment managers and advisors to measure and communicate their performance to clients. Composites are created by aggregating the returns of individual portfolios that have similar investment objectives, strategies, and risk profiles.
In order to accurately represent the performance of these portfolios, it is important to ensure that the returns being combined are consistent. In the context of the given question, asset-only returns refer to the returns generated solely from the investments held in the portfolio, excluding any cash or cash equivalents. Asset-plus-cash returns, on the other hand, include the returns from both the investments and any cash or cash equivalents held in the portfolio.
The reason why asset-only returns must not be mixed with asset-plus-cash returns when creating composites is to maintain consistency in measuring and comparing the performance of different portfolios. Mixing these two types of returns would introduce an inconsistency in the calculation, making it difficult to accurately assess the performance of the portfolios being represented by the composite.
To ensure consistency, composites are typically constructed using the asset-only returns of the individual portfolios. This approach allows for an apples-to-apples comparison of the investment performance, as it focuses solely on the returns generated from the investments themselves, without being influenced by the presence of cash or cash equivalents.
In summary, when creating composites, it is important to exclude cash-related returns (asset-plus-cash returns) and focus on the returns generated solely from investments (asset-only returns). This helps maintain consistency and accuracy in assessing and comparing the performance of the portfolios represented by the composite.