5. Internal dispersion is the equal-weighted standard deviation of the annual gross returns of the five
portfolios included in WMC’s Large-Cap Equity Composite.
McGourn asks Walter why he uses standard deviation as the measure of internal dispersion and
whether there are better dispersion measures. Walter responds, “Standard deviation has the advantage
of comparability across investment firms. Other measures, such as the high/low range and the
interquartile range, are skewed by outliers.”
Finally, McGourn asks Walter about WCM’s policies regarding the valuation of its investments. Walter
states that WCM uses a valuation hierarchy based on items 1 through 4 as follows:
Item 1. Observable quoted market prices for similar investments in active markets.
Item 2. Quoted prices for similar investments in markets that are not active.
Item 3. Market-based inputs other than quoted prices that are not observable for the investment.
Item 4. When no quotes or other market inputs are available, we use WCM estimates based on
quantitative models and assumptions.
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