Free CISI IRT Practice Questions: Portfolio Performance and Review

Use this focused CISI IRT page as a short practice test for Portfolio Performance and Review. The items are original Finance Prep sample exam questions built for scenario-based practice, not trivia, puzzle questions, official CISI questions, copied live-exam content, or exam dumps.

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Sample questions

These are original Finance Prep practice questions aligned to this topic area. They are not official CISI questions, copied live-exam content, or exam dumps. Use them to preview question style and explanation depth before continuing with topic drills, mixed sets, and timed mock exams in Finance Prep.

Question 1

Topic: Portfolio Performance and Review

A UK adviser is reviewing a client’s stocks and shares ISA. The agreed mandate is 50% global equities, 35% sterling investment-grade bonds and 15% cash or short-dated gilts. The objective is long-term capital growth with lower volatility than an all-equity portfolio. Which benchmark is the single best primary comparator for evaluating the portfolio’s performance?

• A. The FTSE 100, because the client is UK resident and holds the investments in an ISA.
• B. A weighted composite of global equity, sterling bond and cash or short-gilt indices in the portfolio’s target proportions.
• C. The Bank of England base rate, because part of the portfolio is held in cash and short-dated gilts.
• D. An IA Global sector average, because the portfolio includes global equities.

Best answer: B

What this tests: Portfolio Performance and Review

Explanation: A suitable performance benchmark should match what the portfolio is trying to achieve and the risks it is expected to take. Here, the mandate is multi-asset, not purely UK equity, cash or global equity. A weighted composite benchmark using relevant indices in the same target proportions gives a fairer comparison because it reflects the strategic allocation and the client’s aim of growth with lower volatility than an all-equity portfolio. Peer groups or single-market indices may be useful secondary context, but they can mislead if their asset mix, risk profile or investment universe differs materially from the mandate being reviewed.

• The FTSE 100 ignores the global equity exposure, bonds and cash allocation, so it is not representative of the mandate.
• The Bank of England base rate is too narrow for a portfolio mainly invested in growth and bond assets.
• An IA Global sector average may help with fund comparison, but it does not reflect the portfolio’s substantial bond and cash holdings.

A composite benchmark reflects the agreed asset mix, mandate and lower-volatility growth objective.

Question 2

Topic: Portfolio Performance and Review

At an annual review, a client tells their adviser that they now needs £30,000 available in cash for a planned expenditure within 12 months. The adviser agrees that the remaining portfolio should be rebalanced to a lower-risk target of 50% equities and 50% bonds.

Current portfolio value is £240,000:

Which rebalancing action best addresses the client’s changed circumstances?

• A. Sell £34,000 of equities, buy £44,000 of bonds, and keep cash at £10,000.
• B. Sell £49,000 of equities, use £29,000 to buy bonds, and hold £30,000 in cash.
• C. Buy £29,000 of equities, sell £49,000 of bonds, and hold £30,000 in cash.
• D. Sell £20,000 of equities and hold the proceeds in cash, leaving bonds unchanged.

Best answer: B

What this tests: Portfolio Performance and Review

Explanation: A portfolio review should respond to material changes in client circumstances, not just compare performance with the old benchmark. The new short-term spending need means £30,000 should be held in cash. This leaves £210,000 to invest under the revised 50% equities and 50% bonds target. Each invested asset class should therefore be £105,000. Current equities are £154,000, so equities must fall by £49,000. Current bonds are £76,000, so bonds must rise by £29,000. The remaining £20,000 from the equity sale increases cash from £10,000 to £30,000.

• Keeping cash at £10,000 ignores the client’s new short-term cash requirement.
• Selling only £20,000 of equities funds the cash need but leaves the invested portfolio overweight equities and underweight bonds.
• Buying equities and selling bonds moves the portfolio further away from the agreed lower-risk allocation.

After reserving £30,000 cash, the £210,000 remaining portfolio should be split equally, so equities and bonds should each be £105,000.

Question 3

Topic: Portfolio Performance and Review

At an annual review, a client says that his income has fallen after moving to a lower-paid role. He also now expects to need £45,000 in 18 months to help a child buy a first home. His ISA and general investment account are still invested 80% in global equities against a long-term growth benchmark, and he has only a modest cash reserve. What is the single best action for the adviser?

• A. Keep the existing 80% equity allocation because the portfolio was originally selected for long-term growth.
• B. Rebalance back to the existing growth benchmark to avoid making changes after a short-term market movement.
• C. Recommend VCT or EIS exposure to improve tax efficiency and replace the expected cash withdrawal.
• D. Reassess his circumstances and capacity for loss, move the required £45,000 toward cash or low-risk short-dated assets, and amend the benchmark for the remaining portfolio.

Best answer: D

What this tests: Portfolio Performance and Review

Explanation: A portfolio review should respond to material changes in client circumstances, not simply compare performance with the old benchmark. A fall in income can reduce capacity for loss, and an identified need for £45,000 in 18 months changes the time horizon and liquidity requirement for that part of the portfolio. The adviser should update the fact-find and suitability assessment, separate the near-term cash requirement from long-term growth money, and reduce investment risk for the amount needed soon. The remaining portfolio may still have a growth objective, but its asset allocation and benchmark should be reviewed so they reflect the client’s current objectives and risk capacity.

• Maintaining the 80% equity allocation ignores the new short-term cash need and reduced income.
• Rebalancing to the old benchmark treats the review as mechanical and fails to update suitability for changed circumstances.
• VCT or EIS exposure may offer tax relief, but it is higher risk and generally unsuitable for money needed in 18 months.

The changed income, lower capacity for loss, and near-term cash need require an updated suitability assessment, liquidity provision, and revised portfolio basis.

Question 4

Topic: Portfolio Performance and Review

An adviser is reviewing two possible US equity benchmarks for a UK client’s global equity fund. The adviser wants the benchmark whose constituent weights are driven mainly by each company’s investable market value, rather than by the nominal price of each share. Which comparison best matches that requirement?

• A. Use the Dow Jones Industrial Average, because it is weighted by free-float market capitalisation; the S&P 500 is price-weighted.
• B. Use the S&P 500, because it is equally weighted across all constituents; the Dow Jones Industrial Average is market-cap weighted.
• C. Use the Dow Jones Industrial Average, because it includes more companies than the S&P 500 and is therefore broader.
• D. Use the S&P 500, because it is weighted by free-float market capitalisation; the Dow Jones Industrial Average is price-weighted.

Best answer: D

What this tests: Portfolio Performance and Review

Explanation: Index construction affects whether a benchmark is a fair comparator for portfolio review. The S&P 500 is commonly used as a broad US equity benchmark and is weighted by free-float market capitalisation, so larger investable companies have greater influence. The Dow Jones Industrial Average is price-weighted, so a company with a higher share price can have more index influence than a larger company with a lower share price. For a fund whose performance should be compared with the investable US equity market, a market-cap weighted index is usually the closer match.

• Reversing the weighting methods gives the wrong benchmark comparison.
• Saying the Dow Jones Industrial Average is broader than the S&P 500 is incorrect; it has fewer constituents.
• Equal weighting is not the standard construction of the S&P 500, and the Dow Jones Industrial Average is not market-cap weighted.

The S&P 500 better matches an investable market-value benchmark, while the Dow Jones Industrial Average gives higher influence to higher-priced shares.

Question 5

Topic: Portfolio Performance and Review

During a scheduled portfolio review, an adviser finds that a client’s objectives, time horizon, risk tolerance and capacity for loss are unchanged. The portfolio remains within its agreed long-term asset allocation and benchmark ranges. However, interest-rate expectations have changed, and a newly available short-duration bond fund can provide similar credit quality with less duration exposure than the existing bond holding. The adviser recommends switching part of the bond holding to the new fund while keeping the total fixed-interest allocation unchanged.

Which broad review principle is being applied?

• A. A full strategic asset allocation reset driven by a change in client circumstances
• B. A benchmark change to avoid comparison with the portfolio’s original mandate
• C. A tactical implementation change within the existing strategic asset allocation
• D. A shift from indirect fund exposure to direct ownership of underlying bonds

Best answer: C

What this tests: Portfolio Performance and Review

Explanation: Portfolio review is not limited to checking whether the client has changed. It should also consider whether the financial environment or available products make the current implementation less suitable or less efficient. Here, the client’s needs and long-term risk profile are unchanged, and the overall fixed-interest allocation is being maintained. The adviser is therefore not redesigning the strategic asset allocation. The proposed switch is a tactical or implementation-level adjustment: it changes how the bond exposure is held in response to interest-rate conditions and the availability of a more suitable fund.

• A strategic asset allocation reset would normally reflect a changed objective, time horizon, risk tolerance or capacity for loss.
• Changing the benchmark merely to avoid comparison with the original mandate would undermine meaningful performance review.
• The new holding is still a fund, so the client is not moving from indirect exposure to direct bond ownership.

The recommendation responds to market conditions and product availability without changing the client’s long-term asset mix or mandate.

Question 6

Topic: Portfolio Performance and Review

Which performance measure is designed to minimise the effect of new money being added to, or withdrawn from, a portfolio at different points during the review period?

• A. Relative return
• B. Money-weighted rate of return
• C. Holding-period return
• D. Time-weighted rate of return

Best answer: D

What this tests: Portfolio Performance and Review

Explanation: Time-weighted rate of return is used to assess portfolio performance while minimising the effect of external cash flows, such as new money being invested or withdrawals being made. It does this by measuring returns over separate sub-periods between cash-flow dates and then compounding those sub-period returns. This makes it more suitable for judging investment management performance, because the manager is not normally responsible for when the client adds or removes money. Money-weighted return, by contrast, is sensitive to the size and timing of cash flows and can be useful for assessing the investor’s personal experience, but it does not neutralise cash-flow timing.

• Money-weighted rate of return is influenced by the size and timing of cash flows, so it can reward or penalise results for client-controlled cash movements.
• Holding-period return measures total return over a period but does not by itself remove the effect of external cash flows.
• Relative return compares performance with a benchmark; it is not a cash-flow-neutral calculation method.

Time-weighting breaks the review period into sub-periods around external cash flows and links the returns, reducing the impact of cash-flow timing.

Question 7

Topic: Portfolio Performance and Review

An attribution extract for a sterling portfolio includes these period figures:

Within the US equity segment, which figure represents the stock-selection effect?

• A. The 3 percentage point sterling impact from the US dollar movement
• B. The 5 percentage point overweight in US equities compared with the benchmark
• C. The 2 percentage point excess local return of the selected US holdings over the US equity benchmark
• D. The return impact of the £10,000 subscription made before the late market rise

Best answer: C

What this tests: Portfolio Performance and Review

Explanation: Performance attribution separates different sources of return. Stock selection looks at whether the securities chosen within a market or asset class outperformed the relevant benchmark for that same segment. Here, the selected US holdings returned 6% in local currency while the US equity benchmark returned 4% in local currency, giving a 2 percentage point selection effect within the US equity segment. The difference between the portfolio and benchmark weights is an asset allocation effect. The dollar movement is a currency effect for a sterling investor. The subscription relates to new-money or timing effects rather than the quality of the selected US shares.

• The US dollar movement affects the sterling translation of overseas returns, not the comparison between selected holdings and the local benchmark.
• The overweight in US equities is an allocation decision, not evidence that the chosen US shares beat their benchmark.
• The subscription timing is a new-money effect and can affect money-weighted returns, but it is not stock selection.

Stock selection compares the selected securities with the relevant benchmark in the same market and currency, so 6% minus 4% equals 2 percentage points.

Question 8

Topic: Portfolio Performance and Review

During an annual review, an adviser confirms that a client’s objectives, risk profile, capacity for loss, and tax wrappers are unchanged. The client’s global multi-asset portfolio returned 5.1% over 12 months, while the agreed composite benchmark returned 6.4%. The client wants to know whether the shortfall came mainly from the asset mix, overseas currency exposure, selected holdings, or trading decisions before agreeing any changes. What is the best next step in the review process?

• A. Run a performance attribution against the agreed composite benchmark, separating allocation, stock selection, currency, and timing effects.
• B. Reassess the client’s risk profile, treating the portfolio’s underperformance as evidence that their attitude to risk has changed.
• C. Replace the worst absolute-returning holding, then review whether the benchmark remains appropriate.
• D. Check unused ISA allowances before analysing why the portfolio lagged its benchmark.

Best answer: A

What this tests: Portfolio Performance and Review

Explanation: Performance review should distinguish between absolute performance and the sources of relative performance. The client already has an agreed benchmark, and suitability facts have not changed. The adviser should therefore use performance attribution to identify how much of the difference from benchmark came from being overweight or underweight asset classes, choosing particular securities or funds, currency movements on overseas assets, and timing decisions. That evidence can then support any recommendation to rebalance, change funds, adjust currency exposure, or leave the portfolio unchanged. Acting before attribution risks solving the wrong problem, such as replacing a fund when the main cause was asset allocation or sterling strength.

• Replacing the worst absolute-returning holding skips the benchmark-relative analysis and may confuse poor market conditions with poor selection.
• Reassessing risk profile is not the next step when the review has already confirmed the client’s circumstances and risk position are unchanged.
• Checking ISA allowances may be useful in a tax review, but it does not explain the source of the benchmark shortfall.

Attribution analysis is the correct next step because it separates the main sources of relative return before any recommendation is made.

Question 9

Topic: Portfolio Performance and Review

An adviser is completing a quarterly portfolio review. The policy states that rebalancing is normally considered only if an asset class is more than 5 percentage points away from its strategic weight. It also states that all bond holdings must be rated at least BBB-. The selected benchmark and the client’s circumstances are unchanged, and there are no corporate actions or settlement problems.

The current portfolio total is £100,000. A corporate bond within fixed interest has just been downgraded from BBB- to BB+; on the agency’s scale, BB+ is below BBB-. Which review trigger should be treated as the main reason for adviser action?

• A. Corporate action because the change relates to a corporate bond issuer
• B. Rebalancing because fixed interest is £3,000 below its strategic-weight value
• C. Credit-rating change in the fixed-interest holding
• D. Administrative issue because cash is £1,000 above its strategic-weight value

Best answer: C

What this tests: Portfolio Performance and Review

Explanation: Current weights should be compared with the strategic weights using the £100,000 portfolio total. UK equities are 52%, fixed interest is 37%, and cash is 11%. The differences from target are +2, -3, and +1 percentage points, so none breaches the stated 5-percentage-point rebalancing tolerance. The decisive event is the downgrade of a bond from BBB- to BB+, with the policy requiring at least BBB-. That makes the credit-rating change the main review trigger. The facts also state that the benchmark, client circumstances, corporate actions, and settlement position have not changed, so those are not the reason for adviser action.

• Rebalancing based on the £3,000 fixed-interest shortfall uses a cash amount rather than the stated percentage-point tolerance.
• A downgrade of a corporate bond is a credit-rating issue, not a corporate action such as a takeover, rights issue, or capital reorganisation.
• Cash being £1,000 above its strategic-weight value is only a 1 percentage-point variance, so it is not an administrative problem on these facts.

The asset-class weights are within the 5-percentage-point rebalancing tolerance, but the bond has fallen below the permitted BBB- rating.

Question 10

Topic: Portfolio Performance and Review

In portfolio performance review, which measure compares a portfolio’s excess return over its benchmark with the volatility of that excess return?

• A. Information ratio
• B. Sharpe ratio
• C. Beta
• D. R-squared

Best answer: A

What this tests: Portfolio Performance and Review

Explanation: The information ratio is used to assess benchmark-relative performance. It compares the active return earned over the benchmark with tracking error, which is the volatility of that active return. A higher information ratio suggests the manager has generated more excess return for each unit of benchmark-relative risk taken. By contrast, the Sharpe ratio evaluates return above the risk-free rate relative to total volatility, so it is not specifically benchmark-relative. Beta measures sensitivity to market movements, while R-squared indicates how much of a portfolio’s variation is explained by the benchmark or market index.

• Sharpe ratio is risk-adjusted, but it uses total volatility and the risk-free rate rather than tracking error against a benchmark.
• Beta indicates market sensitivity, not the reward for taking active risk.
• R-squared shows the strength of the relationship with a benchmark, not excess return per unit of active risk.

It measures active return against tracking error, showing benchmark-relative return per unit of relative risk.

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