At a recent presentation on the new version of the Global Investment Performance Standards (GIPS(R) 2010), I was asked if the asset-weighted standard deviation would be permitted for the new requirement to report a three year, annualized standard deviation. Once again we see some confusion as the asset-weighted form of the standard deviation only applies when measuring dispersion, not volatility (a single period vs. a time-series evaluation).

That being said, just why do firms calculate the asset-weighted standard deviation? Nowhere do we see this measure in the GIPS standards. Granted, it was part of and actually encouraged in the AIMR-PPS(R), but it somehow has dropped off the radar, to which I say “hallelujah.” I was never a fan of this measure.

How do you interpret it? Standard deviation is easy: assuming a normal distribution, the average, plus and minus the standard deviation, represents approximately two-thirds of the total distribution. Easy. But what do we do with the asset-weighted variety?

It was encouraged for use because, after all, our composite return is an asset-weighted average, therefore we of course would want an asset-weighted measure for dispersion. And why again? If you can’t interpret it, what is its value?

If you can provide some insights, please do. Otherwise, I would be happy to sign the petition to ban its use!