Certificate in Investment Performance Measurement (CIPM) Free Practice Test

Use time-weighted return to assess investment performance while removing the effect of external cash-flow timing. Use money-weighted return to measure the investor’s experience, including when money was added or withdrawn. Suppose 100 grows to 110, the investor adds 50, and the resulting 160 grows to 168 over a second equal-length period. The time-weighted return is (110 ÷ 100) × (168 ÷ 160) − 1 = 15.5%. For the money-weighted return, solve 100(1 + r)² + 50(1 + r) = 168. This gives r about 7.00% per period, or about 14.50% over both periods. The later contribution experienced only the weaker second period, so the investor’s return is lower.

In a two-sector example, the portfolio holds 60% in A at an 8% return and 40% in B at 4%, earning 6.4%. The benchmark holds 50% in each sector, returning 6% in A and 5% in B, for 5.5%. Active return is 0.9 percentage points. Under a benchmark-weight selection convention, allocation contributes 0.1 point from the weight differences relative to the 5.5% benchmark return. Selection contributes 0.5 point from sector return differences at benchmark weights. Interaction contributes 0.3 point because weights and sector returns differ together. The three effects sum to 0.9 point; always check which attribution convention a report uses.

Start with the mandate: required exposures, benchmark, liquidity, and constraints. Check whether the reported record represents the proposed strategy and whether its composite membership and cash treatment are consistent. Examine attribution and risk to see how returns arose, then assess persistence without treating past results as a promise. Finally, test capacity, fees, trading costs, operational controls, and the practical steps needed to fund the mandate. A manager can have an attractive historical return yet be a poor choice if the strategy cannot be implemented at the client’s size or within its constraints.