CISI IRT: Portfolio Performance and Review

Topic snapshot

Sample questions

These questions are original Securities Prep practice items aligned to this topic area. They are designed for self-assessment and are not official exam questions.

Question 1

Topic: Portfolio Performance and Review

A client’s portfolio produced the following one-year results:

Exhibit:

• Opening value: £80,000
• Closing value: £84,400
• Income received during the year: £1,600
• Benchmark total return: 5.0%
• Income was retained in the portfolio

Which statement best describes the portfolio’s absolute and relative return for the year?

• A. Absolute return 7.5%; outperformed benchmark by 2.5 percentage points.
• B. Absolute return 5.5%; outperformed benchmark by 0.5 percentage points.
• C. Absolute return 7.5%; underperformed benchmark by 2.5 percentage points.
• D. Absolute return 5.0%; matched benchmark exactly.

Best answer: A

What this tests: Portfolio Performance and Review

Explanation: Absolute return measures the portfolio’s own total gain, including income, over the period. Relative return then compares that result with the benchmark, so this portfolio made 7.5% and beat its benchmark by 2.5 percentage points.

The core concept is that absolute return and relative return answer different review questions. Absolute return asks whether the portfolio itself made or lost money overall, while relative return asks whether it did better or worse than its benchmark.

For this portfolio:

• Total gain = £84,400 + £1,600 - £80,000 = £6,000
• Absolute return = £6,000 / £80,000 = 7.5%
• Relative return = 7.5% - 5.0% = +2.5 percentage points

So the portfolio delivered a positive return in its own right and also outperformed the benchmark. The nearest trap is to ignore the income and calculate only capital growth.

• Ignoring income: The 5.5% figure uses only the rise from £80,000 to £84,400 and leaves out the £1,600 income.
• Sign error: A 7.5% portfolio return is above, not below, a 5.0% benchmark return.
• Benchmark confusion: Saying the portfolio returned 5.0% wrongly substitutes the benchmark’s return for the portfolio’s actual total return.

Including retained income, the portfolio returned 7.5%, which is 2.5 percentage points above the 5.0% benchmark.

Question 2

Topic: Portfolio Performance and Review

A cautious client agreed that her portfolio should preserve capital ahead of inflation over the next 12 months.

Exhibit:

• Agreed benchmark: 60% UK gilts / 40% FTSE All-Share
• Portfolio return: 4.2%
• Agreed benchmark return: 3.8%
• FTSE All-Share return: 9.5%
• CPI inflation: 2.0%

Which assessment is most appropriate?

• A. The portfolio materially underperformed, lagging the relevant measure by 5.3%.
• B. The portfolio broadly met its purpose, outperforming its agreed benchmark by 0.4% and inflation by 2.2%.
• C. The portfolio failed because its real return was only 0.4%.
• D. The portfolio should be judged mainly against the FTSE All-Share because this was the highest market return.

Best answer: B

What this tests: Portfolio Performance and Review

Explanation: Portfolio evaluation is limited if it ignores the portfolio’s purpose and risk level. Here, the agreed benchmark reflects a cautious mandate, so the meaningful comparisons are 4.2% versus 3.8% and versus 2.0% inflation, not versus a pure equity index.

Performance numbers are only meaningful against the right target. This client’s objective was to preserve capital ahead of inflation with a cautious risk level, so the agreed 60% gilts / 40% equity benchmark is the correct reference point. The portfolio returned 4.2%, which is 0.4% above its benchmark and 2.2% above CPI inflation. On the return data given, that supports the conclusion that the portfolio broadly achieved its purpose.

A comparison with the FTSE All-Share alone would be misleading because that index represents a much riskier equity exposure than the client agreed to take. The key limitation of portfolio evaluation is that a raw return, or outperformance against the wrong benchmark, does not show success unless it is linked to objective, risk, and benchmark choice.

• Wrong benchmark: Using the 5.3% gap to the FTSE All-Share compares a cautious mixed portfolio with a much riskier equity index.
• Wrong calculation: The 0.4% figure is benchmark outperformance, not real return; against CPI, the gain in real terms is about 2.2%.
• Highest-return trap: The best-performing index is not automatically the right yardstick; the benchmark must reflect the client’s agreed risk and objective.

Performance should be judged against the agreed cautious benchmark and objective, and 4.2% exceeds both 3.8% and 2.0%.

Question 3

Topic: Portfolio Performance and Review

Which measure is defined as a portfolio’s excess return over the risk-free rate divided by its total risk?

• A. Treynor ratio
• B. Jensen’s alpha
• C. Duration
• D. Sharpe ratio

Best answer: D

What this tests: Portfolio Performance and Review

Explanation: The Sharpe ratio is the standard measure of excess return per unit of total risk. In portfolio review, it helps compare how efficiently different portfolios or products have converted volatility into return.

The core concept is risk-adjusted performance measurement. The Sharpe ratio compares a portfolio’s return above the risk-free rate with the portfolio’s total risk, where total risk is typically measured by standard deviation. That makes it useful when reviewing portfolios or comparing newer products with existing holdings, because it shows whether higher returns were earned efficiently or simply by taking more overall volatility.

By contrast, the Treynor ratio uses systematic risk rather than total risk, Jensen’s alpha measures return relative to that predicted by CAPM, and duration is an interest-rate sensitivity measure for fixed-interest securities. The key distinction is that the Sharpe ratio focuses on excess return per unit of total risk.

• Treynor confusion: this is also a risk-adjusted return measure, but it uses beta, not total volatility.
• Alpha confusion: Jensen’s alpha compares actual return with CAPM-expected return; it is not a return-per-risk ratio.
• Bond risk confusion: duration measures sensitivity to interest-rate changes, so it is not a portfolio performance ratio.

The Sharpe ratio measures risk-adjusted return by comparing excess return with total volatility, usually using standard deviation.

Question 4

Topic: Portfolio Performance and Review

During an ISA review, a client with a passive US equity holding asks why some quoted US indices can be driven more by high share-price stocks than by the largest companies. She wants to know which major US benchmark has this construction method. Which index is the best answer?

• A. S&P 500
• B. Dow Jones Industrial Average
• C. MSCI World
• D. FTSE 100

Best answer: B

What this tests: Portfolio Performance and Review

Explanation: The Dow Jones Industrial Average is the major US index that is price-weighted. That means a stock’s influence depends mainly on its share price, not on the company’s total market capitalisation, so it can behave differently from broader cap-weighted benchmarks.

The core concept is index weighting. In a price-weighted index, a company with a higher quoted share price moves the index more than a lower-priced stock, even if the higher-priced company is smaller overall. That is how the Dow Jones Industrial Average is constructed. By contrast, the S&P 500, FTSE 100 and MSCI World are market-capitalisation-weighted benchmarks, so larger companies by value carry more weight. In portfolio review, this matters because the benchmark should reflect how the underlying fund or market exposure is built. For a passive US large-company holding, confusing a price-weighted index with a cap-weighted one can lead to misleading performance comparisons. The key distinction is the weighting method, not simply the market being measured.

• Broad US equity: The S&P 500 is a widely used US benchmark, but it is weighted by market capitalisation rather than share price.
• UK large caps: The FTSE 100 is also market-capitalisation weighted and is a UK, not a US, equity benchmark.
• Global equities: MSCI World is a developed-market global index and is again market-capitalisation weighted, not price-weighted.

It is a price-weighted US index, so higher-priced shares have greater influence regardless of company market value.

Question 5

Topic: Portfolio Performance and Review

Which performance measure is designed to remove the effect of external cash flows, such as new money being added to a portfolio at different times?

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

Best answer: D

What this tests: Portfolio Performance and Review

Explanation: The time-weighted rate of return is the standard measure when you want to assess underlying portfolio or manager performance without the results being skewed by client cash movements. It removes the impact of when money was added or withdrawn.

The core concept is that external cash flows can distort measured performance if more or less capital is exposed during stronger or weaker market periods. Time-weighted return deals with this by splitting the measurement period at each cash flow and then chain-linking the sub-period returns. That means the result reflects how the investments performed, not the investor’s timing of contributions or withdrawals.

Money-weighted return, by contrast, gives more weight to periods when more money was invested, so it captures the investor’s personal experience rather than isolating manager skill. A simple holding-period return does not properly neutralise mid-period cash flows, and the Sharpe ratio is a risk-adjusted measure, not a cash-flow-adjusted return method.

So the best measure for removing new-money and timing effects is time-weighted return.

• Money-weighted return: this reflects the size and timing of cash flows, so it is affected by when new money enters or leaves.
• Holding-period return: this shows total return over a period but does not isolate the effect of mid-period contributions or withdrawals.
• Sharpe ratio: this measures return relative to volatility and is about risk-adjusted performance, not cash-flow timing.

It chain-links sub-period returns between cash flows, so contributions and withdrawals do not distort the measured investment performance.

Question 6

Topic: Portfolio Performance and Review

At Mrs Khan’s annual review, her £140,000 Stocks and Shares ISA is still intended to fund school fees due in 18 months. The agreed strategy for this stage of the plan is 40% equities and 60% bonds/cash, but after a strong rally the portfolio is now 62% equities. Her capacity for loss remains low. What is the single best adviser action?

• A. Leave the holdings unchanged because the higher equity weight has improved returns.
• B. Replace the holdings with one UK equity income fund for simpler monitoring.
• C. Increase the equity allocation further to protect against future fee inflation.
• D. Rebalance within the ISA back towards the agreed lower-risk asset mix.

Best answer: D

What this tests: Portfolio Performance and Review

Explanation: Regular reviews matter because market movements can change a portfolio’s actual risk even when the client’s objective is unchanged. With school fees due in 18 months and low capacity for loss, a 62% equity exposure is no longer consistent with the agreed strategy, so rebalancing within the ISA is the best response.

The key review concept is that suitability is not judged only at the start of the advice process. Here, the agreed strategy for a near-term liability and low capacity for loss is 40% equities and 60% bonds/cash, but market performance has shifted the actual exposure to 62% equities. A regular portfolio review identifies this asset-allocation drift and allows the adviser to bring risk exposure and implementation back into line with the client’s objective.

Rebalancing within the ISA is the most suitable action because it reduces risk without giving up the tax wrapper. Strong recent returns do not justify keeping a portfolio that is now riskier than agreed, especially when the money will be needed soon.

• Leaving the portfolio unchanged confuses good recent performance with continued suitability; the client now has more equity risk than agreed.
• Increasing equities further would worsen timing risk on money needed in 18 months.
• Moving into a single UK equity income fund may simplify monitoring, but it adds concentration and does not reduce risk appropriately.

Rebalancing restores the portfolio to the agreed risk level for a near-term liability without losing the ISA wrapper.

Question 7

Topic: Portfolio Performance and Review

An adviser is reviewing a client’s Stocks and Shares ISA. The portfolio is a globally diversified discretionary mandate with a strategic split of about 60% equities and 40% bonds, designed for a medium-risk investor with a 10-year horizon. The client wants a fair annual comparison to judge performance for the level of risk taken. Which is the single best benchmark?

• A. A peer-group average of medium-risk mixed-asset funds
• B. The manager’s GIPS composite of all discretionary portfolios
• C. A PIMFA Balanced multi-asset benchmark
• D. The FTSE All-Share index

Best answer: C

What this tests: Portfolio Performance and Review

Explanation: A suitable benchmark should reflect the client’s mandate, risk level and broad asset mix. A PIMFA Balanced multi-asset benchmark is designed for diversified wealth portfolios of similar risk, making it a better review tool than a single-market index, a shifting peer group or a GIPS composite.

The core purpose of benchmarking is to compare portfolio performance against an appropriate yardstick that matches the portfolio’s objective and risk profile. Here, the client has a medium-risk discretionary portfolio with a strategic mix of equities and bonds, so the best benchmark is one built for a similar multi-asset wealth mandate. A PIMFA Balanced benchmark is designed for that type of comparison.

Peer-group averages can be useful as secondary context, but they are less precise because the group’s membership, styles and allocations can vary over time. A broad UK equity index is too narrow because it ignores bonds and overseas holdings. GIPS is also different: it is a standard for fair and consistent performance calculation and presentation, not the benchmark itself.

The best benchmark is the one that most closely reflects the portfolio actually being managed.

• Single-asset mismatch: The FTSE All-Share measures UK equities only, so it does not reflect a global portfolio with a large bond allocation.
• Useful but less exact: A peer-group average can provide context, but it is a moving comparison set rather than a fixed mandate-aligned benchmark.
• Presentation standard, not benchmark: A GIPS composite helps standardise how a firm reports returns, but it does not replace selecting a suitable external benchmark for the client’s portfolio.

It most closely matches the portfolio’s medium-risk, diversified multi-asset mandate, so it is the fairest benchmark for review.

Question 8

Topic: Portfolio Performance and Review

A client’s agreed objective is to generate income from a diversified portfolio with low volatility. Which benchmark property would make the performance review most meaningful?

• A. One that reflects the income objective, low risk and asset mix
• B. One with the longest available performance history
• C. One that measures return without considering volatility
• D. One that produced the highest recent return

Best answer: A

What this tests: Portfolio Performance and Review

Explanation: Portfolio evaluation is only fair when the benchmark matches what the portfolio was designed to achieve and the level of risk it is meant to take. For an income-focused, low-volatility diversified portfolio, the benchmark should reflect objective, risk and asset mix together.

The core principle is benchmark suitability. A portfolio should be reviewed against a comparator that reflects its agreed mandate, because performance numbers on their own can be misleading. In this case, the client wants income, diversification and low volatility, so the benchmark must represent those features rather than simply showing what a popular or high-return market index did.

A good benchmark helps answer whether the portfolio met the client’s objective for the risk taken. A poor benchmark can make suitable performance look weak or make unsuitable risk-taking look impressive. That is why performance review must be linked to objectives, risk and benchmark choice, not just raw return.

The key takeaway is that representativeness matters more than convenience or recent outperformance.

• Long history: Useful for analysis, but history alone does not make a benchmark relevant to the client’s mandate.
• Highest recent return: This is hindsight-based and does not provide a fair or stable basis for evaluation.
• Return only: Ignoring volatility can reward excessive risk, which is inappropriate for a low-volatility objective.

A benchmark is meaningful only if it mirrors the portfolio’s agreed objective, risk level and diversification.

Question 9

Topic: Portfolio Performance and Review

Priya holds a Stocks and Shares ISA invested in an actively managed UK equity fund. At her annual review, she asks two questions: “Am I up or down in money terms?” and “Has the manager added value against the agreed benchmark?” Over the last 12 months, the fund returned 5% after charges and the benchmark, the FTSE All-Share, returned 7%.

Which is the single best interpretation?

• A. The fund made a positive absolute return but a negative relative return.
• B. The fund made a negative absolute return because it lagged the benchmark.
• C. The fund made a positive relative return because it produced a gain after charges.
• D. Absolute return shows benchmark outperformance, while relative return shows money gain or loss.

Best answer: A

What this tests: Portfolio Performance and Review

Explanation: Absolute return answers whether the portfolio gained or lost value over the period. Relative return answers whether it beat or lagged its benchmark; here the fund gained 5% but underperformed the FTSE All-Share by 2%.

The core distinction is that absolute return measures the portfolio’s own result, while relative return compares that result with a benchmark. In Priya’s review, the 5% return answers her first question: she is up in money terms over the year. Comparing 5% with the FTSE All-Share’s 7% answers her second question: the manager did not add value against the agreed benchmark over that period.

• Absolute return: +5%
• Relative return versus benchmark: 5% - 7% = -2%

So the portfolio made money, but it still lagged the market benchmark. The closest distractors confuse making a gain with outperforming a benchmark, which are not the same test.

• Lagging is not a loss: underperforming a benchmark does not mean the portfolio had a negative absolute return; it still rose by 5%.
• Gain is not outperformance: a positive return after charges can still be a negative relative return if the benchmark did better.
• Measures are reversed: absolute return is about gain or loss in value, while relative return is about performance versus the benchmark.

A 5% gain is positive in money terms, but it is 2% behind the 7% benchmark.

Question 10

Topic: Portfolio Performance and Review

An adviser subscribes to a ratings-alert service for all client corporate bond holdings. Which portfolio-review function does this measure most directly support?

• A. Administer client elections on corporate actions.
• B. Track disposals for capital gains tax reporting.
• C. Prompt a suitability review after a material credit-rating downgrade.
• D. Measure an equity fund’s performance against its benchmark.

Best answer: C

What this tests: Portfolio Performance and Review

Explanation: A ratings-alert service is a monitoring control for investment-related changes. It helps the adviser spot bond downgrades quickly and decide whether the holding still matches the client’s agreed risk profile and mandate.

The core concept is ongoing portfolio maintenance. A bond’s credit rating is a key indicator of credit risk, so a downgrade can materially change the investment’s risk characteristics and suitability for a retail client. A ratings-alert service supports event-driven review by flagging those changes promptly, allowing the adviser to reassess whether the bond should still be held in the portfolio.

This is especially relevant where a downgrade moves a bond outside the client’s agreed risk tolerance or asset-allocation limits. Performance benchmarking, tax reporting, and corporate-action administration are all important review tasks, but they are different functions and are not the primary purpose of a ratings-alert service. The key distinction is that the service monitors credit-quality changes, not returns, tax records, or election processing.

• Benchmarking: Comparing a fund with an index is a performance-review task, not a credit-risk monitoring control.
• Tax reporting: Tracking disposals helps with CGT records after sales, but it does not identify deteriorating bond quality.
• Corporate actions: Rights issues, takeovers and similar elections need separate administrative handling, not ratings alerts.

Ratings alerts are used to detect credit-quality changes so the adviser can reassess whether the bond still fits the client’s risk profile.

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Related focused pages

• Free CISI IRT Full-Length Practice Exam
• CISI IRT: Asset Classes
• CISI IRT: Macro-Economic Environment
• CISI IRT: Principles of Investment Risk and Return
• CISI IRT: Taxation of Investors and Investments
• CISI IRT: Investment Products
• CISI IRT: Portfolio Construction and Planning
• CISI IRT: The Process of Giving Investment Advice

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