Tuesday, March 30, 2010
And the reason we're doing this is why again?
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!