b. explain the construction and purpose of composites in performance reporting;
What is a composite?
A composite is defined as a group of portfolios that are managed with the same strategy or objective.
Why are composites used for reporting purposes?
Rather than presenting the performance of each individual portfolio, the firm can simply disclose the composite return of the portfolios as a group.
How does a firm decide which portfolios to include in a composite?
The determination of which portfolios to include in the composite should be done according to pre-established criteria (i.e., on an ex-ante basis), not after the fact. This prevents a firm from including only their best-performing portfolios in the composite.
How is a composite calculated?
The composite return is the asset-weighted average of the performance results of all the portfolios in the composite.