CFA Institute CIPM Investment Performance Practice Test

CFA Institute’s Certificate in Investment Performance Measurement (CIPM) is a specialized route for investment performance measurement, attribution, appraisal, manager selection, reporting, and ethics.

Use these 12 original sample questions for initial self-assessment. They are not official CFA Institute questions and do not reproduce a live exam; they are designed to preview performance-measurement, attribution, reporting, and ethics judgment before you choose whether this Finance Prep route is the one you want next.

What this route should test

• calculating and interpreting investment performance measures
• distinguishing attribution, appraisal, reporting, and manager-selection decisions
• recognizing when performance presentation, benchmark choice, or disclosure creates a misleading result
• applying professional standards to performance communication

Sample Exam Questions

Use these questions to test whether you can distinguish measurement, attribution, appraisal, reporting, and manager-selection decisions instead of treating all performance questions as return calculations.

Question 1

Topic: time-weighted return

Why is time-weighted return often used to evaluate an investment manager?

• A. It always equals the client’s personal internal rate of return
• B. It reduces the effect of external cash flows outside the manager’s control
• C. It ignores all portfolio valuation changes
• D. It measures only tax efficiency

Best answer: B

Explanation: Time-weighted return isolates manager performance by removing much of the effect of external cash flows. Money-weighted return is more sensitive to the timing and size of cash flows.

Question 2

Topic: money-weighted return

Which situation makes money-weighted return especially relevant?

• A. The evaluator wants to ignore all investor cash flows
• B. The manager has no control over the investment process
• C. The portfolio has no beginning or ending value
• D. The investor wants to understand the actual return earned on capital invested over time

Best answer: D

Explanation: Money-weighted return reflects the timing and size of investor cash flows. It can be useful for assessing the investor’s realized experience, especially when cash-flow decisions are part of the evaluation.

Question 3

Topic: attribution

A portfolio outperforms because it held more of a sector that outperformed the benchmark. What is this most likely called in a basic attribution framework?

• A. Allocation effect
• B. Currency translation only
• C. Custody reconciliation
• D. Fee compression

Best answer: A

Explanation: Allocation effect measures the impact of overweighting or underweighting segments relative to the benchmark. Security selection measures performance within a segment.

Question 4

Topic: selection effect

A manager has the same sector weights as the benchmark but chooses stronger-performing stocks within each sector. What attribution effect is most directly indicated?

• A. Allocation effect only
• B. Benchmark timing error
• C. Selection effect
• D. Settlement effect

Best answer: C

Explanation: Selection effect captures the manager’s success in choosing securities within benchmark segments. If sector weights match the benchmark, allocation effect may be small while selection effect drives excess return.

Question 5

Topic: benchmark quality

A small-cap manager compares performance against a broad large-cap index. What is the main problem?

• A. The manager should never use benchmarks
• B. A broad large-cap index always understates return
• C. Benchmark choice affects only marketing, not analysis
• D. The benchmark may not represent the manager’s mandate, risk, or opportunity set

Best answer: D

Explanation: A valid benchmark should be appropriate, investable, measurable, unambiguous, and reflective of the mandate. A mismatched benchmark can make performance evaluation misleading.

Question 6

Topic: appraisal ratio

What does an appraisal ratio most directly relate to?

• A. Total return divided by total assets
• B. Active return relative to active risk
• C. Coupon income divided by par value
• D. Trading volume divided by shares outstanding

Best answer: B

Explanation: The appraisal ratio evaluates active return per unit of active risk. It is useful when assessing manager skill relative to benchmark-relative risk.

Question 7

Topic: performance presentation

A firm presents only the best-performing account from a strategy and omits similar accounts with weaker results. What is the main concern?

• A. The presentation may be misleading because it is not representative
• B. The presentation is automatically acceptable if the chosen account is real
• C. Account selection has no effect on performance communication
• D. The weakest account should always be shown alone

Best answer: A

Explanation: Selective presentation can mislead users by overstating the strategy’s performance. Fair performance reporting should be representative and adequately disclosed.

Question 8

Topic: risk-adjusted performance

A portfolio has the highest return among peers but also much higher volatility and drawdown. What should the analyst evaluate?

• A. Return only, because risk is irrelevant after performance is known
• B. The number of holdings only
• C. Risk-adjusted performance and whether the return compensated for the risk taken
• D. The manager’s marketing budget

Best answer: C

Explanation: CIPM-style performance work should connect return to risk. Higher return can be attractive, but evaluation should consider volatility, drawdown, tracking error, and mandate consistency.

Question 9

Topic: manager selection

During manager due diligence, a strategy shows strong backtested performance but no live track record. What is the best response?

• A. Treat the backtest as equivalent to live results
• B. Ignore methodology and focus only on the final number
• C. Reject every strategy with a backtest automatically
• D. Review assumptions, survivorship bias, transaction costs, capacity, and whether results are robust

Best answer: D

Explanation: Backtests can be useful but can also overstate results if assumptions are unrealistic. Due diligence should challenge methodology, costs, data quality, capacity, and robustness.

Question 10

Topic: fee impact

Two managers report identical gross returns, but one charges materially higher fees. What should the evaluator compare for client outcomes?

• A. Gross return only
• B. Net-of-fee performance and whether the higher cost is justified
• C. Office size
• D. Number of employees only

Best answer: B

Explanation: Clients experience net performance after fees. Gross returns can help evaluate investment skill, but net-of-fee results are critical for client outcomes.

Question 11

Topic: composite construction

Why should similar discretionary portfolios be grouped into an appropriate composite?

• A. To present a more representative record for a strategy
• B. To hide underperforming accounts
• C. To avoid documenting the investment process
• D. To make benchmark selection unnecessary

Best answer: A

Explanation: Composite construction helps present performance for a defined strategy rather than cherry-picking accounts. The composite should be defined and maintained consistently.

Question 12

Topic: ethics and disclosure

A performance report changes benchmark methodology but does not tell clients. Why is that a problem?

• A. Benchmark changes are always prohibited
• B. Clients do not need benchmark information
• C. Undisclosed methodology changes can make performance comparisons misleading
• D. Benchmark methodology affects only custody fees

Best answer: C

Explanation: Benchmark and methodology changes can affect reported relative performance. Clear disclosure helps users understand comparability and prevents misleading conclusions.

CIPM quick checklist

• Can you explain when time-weighted return and money-weighted return answer different questions?
• Can you separate allocation, selection, benchmark, and risk-adjusted performance issues?
• Can you identify when a performance presentation is technically true but still misleading?

Related CFA Institute pages

• CFA Level I
• CFA Level III
• CFA Institute updates