Performance Measurement

CFA® Level III, published weight 5–10%. Attribution, appraisal, manager selection and the GIPS standards.

What the outline covers

Portfolio Performance Evaluation
Investment Manager Selection
Overview of the Global Investment Performance Standards (GIPS)

Sample questions

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Question 1

A manager overweighted a sector that outperformed the benchmark but selected stocks within it that underperformed. Brinson attribution will show:

A. Positive allocation and positive selection
B. Positive allocation and negative selection
C. Negative allocation and positive selection
D. Negative allocation and negative selection

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B. Sector weighting decisions land in allocation; within-sector security decisions land in selection. The two can and often do have opposite signs.

Reading: Performance Measurement — Portfolio Performance Evaluation

Question 2

An investor allocates to one of many specialist managers within a diversified programme. The most appropriate appraisal measure is:

A. The Sharpe ratio
B. The information ratio
C. Total return
D. The Sortino ratio using total risk

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B. For a benchmarked sleeve within a larger programme, active return per unit of active risk — the information ratio — is the relevant measure.

Reading: Performance Measurement — Investment Manager Selection

Question 3

Hiring a manager who subsequently proves to have no skill is best described as:

A. A Type I error
B. A Type II error
C. A style drift
D. A benchmark misfit

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A. The null hypothesis is that the manager has no skill. Hiring anyway is rejecting a true null — a Type I error.

Reading: Performance Measurement — Investment Manager Selection

Question 4

Under the GIPS standards, a firm claiming compliance must:

A. Include all fee-paying discretionary portfolios in at least one composite
B. Include only its flagship strategies
C. Present a minimum of three years of history
D. Exclude terminated portfolios from historical composites

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A. Firm-wide compliance requires every fee-paying discretionary portfolio to sit in a composite. Terminated portfolios must remain in the historical record.

Reading: Performance Measurement — Overview of the GIPS Standards

Question 5

Which type of due diligence failure most commonly causes catastrophic investor loss?

A. Investment due diligence
B. Operational due diligence
C. Benchmark selection
D. Fee negotiation

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B. Fraud, valuation failure and inadequate controls — operational issues — account for most total losses, despite investment analysis receiving more attention.

Reading: Performance Measurement — Investment Manager Selection

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