GIPS: Standard 2. Calculation Methodology

A major reorganization of an investment firm's leadership coincidentally occurs after a period of falling yields. The new lead portfolio manager directs the firm to increase its allocation to bonds. Before a presentation of GIPS-compliant performance, the manager computes composite returns with the new allocation over the previous three years and shows that the firm's composites beat their benchmarks substantially. The firm _most likely_:

Incorrect. There is one violation committed by the firm.

Correct. GIPS require that composite performance be consistent over time and that any change in the firm's organization should not result in any alteration of the firm's composites. Changing the allocation to bonds is clearly altering historical performance, especially since yields have fallen.

Incorrect. GIPS require three-year composite return presentation.

commits no violation.

violates GIPS because it altered historical performance.

violates GIPS because it reports three-year returns instead of five-year returns.