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Free CFA Performance Measurement Practice Questions & Answers
300 exam-style Performance Measurement questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 271
Why must a GIPS-compliant firm maintain records for a minimum of FIVE YEARS even for non-current composites?
Select an option first.
Correct answer: B — GIPS requires firms to maintain all data needed for compliance and maintain a list of composites for the last five years. This includes records supporting the return calculations, composite construction decisions, and portfolio inclusion/exclusion decisions. The five-year record retention ensures that: (1) GIPS verifiers can validate historical compliance; (2) material errors can be investigated and corrected with supporting documentation; and (3) regulators can examine the firm's compliance with local requirements that may incorporate GIPS standards.
Explanation: B is correct: The reading states 'the firm must maintain data needed for GIPS compliance and must maintain a list of composites for the last five years.' Record retention is the foundation of a credible compliance claim. Without complete records, a verifier cannot confirm that returns were calculated correctly, that composites were properly constructed, or that all qualifying portfolios were included. The five-year minimum is a floor—firms subject to longer regulatory retention requirements must comply with those longer periods. GIPS verification itself is an ongoing process, not a one-time certification, and requires access to historical records to assess current and past compliance.
Question 272
A firm's composite contains 10 portfolios throughout the year. Three have full-year returns of 15%, 8%, and 12% (held for all 12 months). Seven were in the composite for only part of the year. Which portfolios are included in internal dispersion calculation?
Select an option first.
Correct answer: B — Only the THREE portfolios present for the FULL YEAR (the entire 12-month period) are included in the internal dispersion calculation. The seven partial-year portfolios are excluded because their partial-year returns reflect different market environments and cannot be fairly compared for consistency purposes. However, since there are only 3 full-year portfolios (fewer than 6), internal dispersion REPORTING is not required (though optional).
Explanation: B is correct: The full-year requirement is non-negotiable for internal dispersion. The reading shows the composite structure example where Portfolios B, D, and F 'should be excluded from the calculation of the composite's 2020 internal dispersion because they do not have an entire year of performance results.' Partial-year returns (perhaps from Q2-Q4 for a new account or Q1-Q2 for a terminated account) cannot be compared to full-year returns for consistency measurement. The 3 full-year portfolios in our question provide an adequate basis for dispersion calculation, but since 3 < 6, reporting is not mandatory.
Question 273
GIPS requires that benchmarks used in composite presentations reflect the CORRESPONDING INVESTMENT STRATEGY. Give one example of a benchmark that would NOT meet this requirement.
Select an option first.
Correct answer: A — Using the S&P 500 as the benchmark for a small-cap growth manager
Explanation: A is correct: This is a fundamental SAMURAI criterion—the benchmark must be APPROPRIATE for the manager's actual strategy. A small-cap growth manager benchmarked against the S&P 500 (a large-cap index) faces a benchmark that is inappropriate in two dimensions: size (large vs. small cap) and style (mixed vs. growth-tilted). The manager would appear to outperform or underperform the S&P 500 for reasons entirely unrelated to their skill—simply because small-cap growth stocks tend to behave differently from large-cap stocks. The correct benchmark would be the Russell 2000 Growth Index or a similar small-cap growth index that represents the actual investment universe. GIPS requires that benchmark reflect the strategy.
Question 274
What is the significance of the GIPS requirement that 'the firm must not present performance-related information that is FALSE OR MISLEADING, whether the information pertains to GIPS or not'?
Select an option first.
Correct answer: B — This broad anti-fraud principle extends GIPS ethical obligations beyond just the GIPS report itself. A firm cannot present misleading investment results in marketing materials, client letters, or any communication—even if those materials don't claim GIPS compliance. The firm's entire approach to performance communication must be honest and non-misleading. This aligns GIPS with broader professional ethics standards (e.g., CFA Institute Standards of Professional Conduct Standard I(C) — Misrepresentation).
Explanation: B is correct: The reading's inclusion of 'whether the information pertains to GIPS or not' is a sweeping ethical requirement that extends far beyond technical GIPS compliance. A firm could theoretically be technically GIPS compliant in its composite reports while simultaneously presenting misleading information in marketing brochures (e.g., cherry-picked good performance from a single good year framed as typical). GIPS prohibits this. The firm's entire performance communication framework must meet the 'full disclosure and fair representation' standard—the GIPS compliance claim is a commitment to honesty that encompasses all performance-related communications, not just the formal GIPS report.
Question 275
A portfolio manager's account is temporarily excluded from its composite due to a significant cash inflow. What must the firm do regarding client reporting during this exclusion period?
Select an option first.
Correct answer: B — The firm must continue providing the client with regular performance reports throughout the exclusion period per Standards of Professional Conduct general reporting obligations — the GIPS composite exclusion only affects whether the account appears in the GIPS report, not the firm's duty to report to that client. The two obligations are separate: GIPS composite inclusion is temporarily suspended; client reporting continues uninterrupted.
Explanation: B is correct: The reading's Account 207 example is explicit: 'Note that the client will need to receive reports showing the results of 207T and 207 to comply with general reporting requirements under the Standards of Professional Conduct.' GIPS governs how performance is presented to prospective clients in marketing contexts. The Standards of Professional Conduct govern ongoing obligations to existing clients. The distinction is critical: a firm cannot use GIPS composite exclusion as a reason to cease communicating with an existing client. The client whose account is in transition has the same right to performance information as any other client — the GIPS carve-out is solely about composite construction integrity.
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Question 276
What is the mathematical relationship between TWRR sub-period returns and the full-period TWRR?
Select an option first.
Correct answer: B — Full-period TWRR = (1+R₁)(1+R₂)...(1+Rₙ) − 1, where each Rᵢ is a sub-period return calculated between consecutive external cash flows (or valuation dates). The sub-period returns are geometrically chained (multiplied, not added) because each sub-period's starting value is the ending value of the prior sub-period — compounding applies. This geometric chain-linking is the defining feature that makes TWRR the time-weighted return, eliminating the impact of cash flow timing on measured performance.
Explanation: B is correct: The reading demonstrates the chain-linking formula with the Rooney account example: TWRR = (1+R₁)(1+R₂)(1+R₃) − 1, where each sub-period runs from one valuation/ECF date to the next. If R₁=1.2%, R₂=0.78%, R₃=3.06%, then TWRR = (1.012)(1.0078)(1.0306) − 1 = 1.051 − 1 = 5.1%. Arithmetic summing (1.2+0.78+3.06=5.04%) gives a different and less accurate answer. The geometric chain ensures that each period's gain or loss is applied to the actual portfolio value at the start of that period — producing the true compound return.
Question 277
What are the GIPS RETURN CALCULATION requirements for POOLED FUNDS that are NOT included in any composite?
Select an option first.
Correct answer: B — Pooled funds not in a composite must be valued and returns calculated AT LEAST ANNUALLY. In addition, the fund must also be valued and a sub-period return calculated at the TIME OF SUBSCRIPTIONS OR REDEMPTIONS. This valuation-at-cash-flow requirement ensures the pooled fund's return is not distorted by investor subscriptions/redemptions, similar to why interim valuations are required for significant cash flows in composites.
Explanation: B is correct: The reading distinguishes three frequency regimes under GIPS: non-private market portfolios → monthly; private market portfolios → quarterly; pooled funds not in a composite → annually. The at-subscription/redemption requirement for the last category reflects that a pooled fund with large investor cash flows needs interim valuations to accurately attribute returns to manager decisions vs. investor capital movements. Without this, a large subscription near year-end would distort the annual return — the same logic as the ECF handling requirement for composite portfolios. Annual minimum is appropriate for infrequently traded pooled vehicles that may not have meaningful monthly activity.
Question 278
Can a GIPS-compliant firm link its performance to the record of a previous firm if the previous firm was NOT GIPS compliant? What are the conditions?
Select an option first.
Correct answer: B — Yes, with conditions: if the new firm acquires or merges with a non-GIPS-compliant firm and the four portability conditions are met (substantially all decision-makers retained, process intact, records available, no break in record), the historical performance CAN be linked. However, the new GIPS-compliant firm has ONE YEAR from the acquisition date to bring the non-compliant firm's assets into full GIPS compliance. During that year, the prior non-compliant record can be presented but must be clearly labeled as non-GIPS-compliant.
Explanation: B is correct: The reading states: 'If the new firm is GIPS compliant but the previous firm is not, then the new firm has one year to bring the assets into compliance for future reporting.' This provision is commercially pragmatic — requiring instant GIPS compliance for an acquired firm's entire history would make acquisitions operationally impossible. The one-year grace period allows for the documentation, policy creation, and retroactive data work needed to bring legacy records into compliance. During this period, presenting the prior record with clear non-compliant labeling gives prospective clients useful historical context while honestly disclosing its compliance status.
Question 279
A firm presents a GIPS composite report showing Composite Annual Return = 9.4% and Benchmark Annual Return = 8.1% for a given year. What additional RISK information must appear in the same report for that year?
Select an option first.
Correct answer: B — The report must include: (1) a measure of INTERNAL COMPOSITE DISPERSION for that year (showing variability of individual portfolio returns within the composite — reported only if ≥6 portfolios had a full year in the composite); (2) the THREE-YEAR ANNUALIZED ex post STANDARD DEVIATION for both the composite AND the benchmark (showing historical volatility of each over the prior 36 months). Additionally, total firm assets and composite assets for each period are required.
Explanation: B is correct: The GIPS risk reporting requirements are comprehensive. Internal dispersion (micro risk): answers how consistently the strategy was applied across portfolios in that year. Three-year annualized standard deviation (macro risk): answers how volatile the strategy and its benchmark have been over the medium term. Both the composite AND benchmark standard deviations are required — without the benchmark's standard deviation, clients cannot assess whether the composite's volatility was higher or lower than a passive alternative. The three-year window provides a rolling risk measure that evolves with market conditions rather than reflecting only a single year's volatility.
Question 280
What is the GIPS VERIFICATION scope limitation — what does verification NOT guarantee?
Select an option first.
Correct answer: B — GIPS verification does NOT assure that the construction, calculation, and presentation for any PARTICULAR PORTFOLIO OR COMPOSITE is accurate. Verification covers firm-level policies, procedures, and processes — not individual portfolio-level accuracy. To obtain assurance that a specific composite's returns are mathematically correct, a firm would need a performance EXAMINATION (a deeper engagement than verification) for that specific composite.
Explanation: B is correct: The reading explicitly states this limitation: 'Verification, however, does not assure that the construction, calculation, and presentation for any particular portfolio or composite is accurate.' This is a critical distinction. Verification is a process-level assessment: 'Does this firm have sound, GIPS-consistent policies and procedures?' It is not a data-level audit: 'Is this specific composite's January 2019 return calculated correctly?' A verifier who reviews thousands of trades across hundreds of portfolios cannot mathematically verify every number. The higher-assurance engagement (performance examination) is needed for that level of accuracy assurance on a specific composite.
Question 281
What does GIPS require regarding the presentation of TOTAL FIRM ASSETS in composite reports?
Select an option first.
Correct answer: B — Total firm assets must be presented for EACH ANNUAL PERIOD in the GIPS composite report. This gives prospective clients a sense of the firm's overall scale and stability across the presented period. It also allows clients to calculate composite assets as a percentage of total firm assets — useful for understanding what proportion of the firm's business this composite strategy represents.
Explanation: B is correct: The reading lists 'the amount of firm assets' as one of the required elements in the GIPS Composite Time-Weighted Return Report. Displaying total firm assets for each year allows prospective clients to: (1) assess the firm's overall size and resources; (2) identify any dramatic AUM changes that might indicate mandate losses or gains; (3) calculate the composite's share of total firm assets (a measure of the strategy's importance within the firm). A firm that grew from $1B to $10B in total assets over 5 years has a very different operational profile from one that remained at $1B — this context is valuable for manager selection.
Question 282
Under GIPS, what is the treatment of CUSTODY FEES in gross-of-fees return calculations?
Select an option first.
Correct answer: B — CUSTODY FEES must NOT be deducted in gross-of-fees return calculations. GIPS draws a clear line between transaction costs (which must be deducted from gross-of-fees returns) and custody/administrative fees (which are not deducted from gross returns). Custody fees are the cost of holding/safekeeping assets — they are an administrative cost, not a cost of executing investment decisions. They are also excluded from transaction costs. Only brokerage commissions, bid-ask spreads, and exchange fees (direct costs of buying/selling securities) must be deducted.
Explanation: B is correct: The reading explicitly states in the transaction costs discussion: 'Custody fees should not be included.' This is one of the most commonly tested GIPS return calculation details. The logic: gross-of-fees returns are supposed to show the manager's investment performance before the cost of hiring the manager (management fees) and before administrative overhead (custody fees). Transaction costs are different — they are unavoidable costs of implementing the investment strategy itself (paying the bid-ask spread is integral to trading). Including transaction costs in gross-of-fees returns provides a fair representation of the true cost of the investment process. Excluding custody fees keeps gross returns focused on investment decisions.
Question 283
Why does GIPS require that composite returns be calculated using BEGINNING-OF-PERIOD weights rather than end-of-period weights?
Select an option first.
Correct answer: B — Beginning-of-period weights avoid a look-ahead bias that would result from using end-of-period weights. End-of-period weights reflect which portfolios grew most during the period — using these weights would assign more importance to portfolios that happened to perform best, artificially inflating the composite return. Beginning-of-period weights reflect the actual allocation at the start, before any performance outcomes are known. Methods 2 and 3 refine beginning weights by also accounting for ECFs but maintain the principle of not using end-of-period performance outcomes to set weights.
Explanation: B is correct: The look-ahead bias problem with end-of-period weights is analogous to survivorship bias — weighting toward portfolios that performed best during the period overstates the return an average client would have experienced. If Portfolio A started the month at $100M and grew to $150M (+50%) while Portfolio B started at $100M and fell to $70M (−30%), end-of-period weights give Portfolio A a 68% weight and Portfolio B a 32% weight — but at the start of the month, each deserved 50% weight. The composite using end-of-period weights shows: 68%×50% + 32%×(−30%) = 24% — biased upward from the fair 10% = (50×50% + (−30)×50%).
Question 284
What is the GIPS requirement regarding the NUMBER OF PORTFOLIOS disclosure in composite reports?
Select an option first.
Correct answer: B — The NUMBER OF PORTFOLIOS in the composite must be disclosed IF THERE ARE SIX OR MORE portfolios with full-year membership. When fewer than 6 portfolios are in the composite for the full year, disclosure of the exact count is not required — this protects client confidentiality (with very few portfolios, specific clients could be identified). The count must be updated each year to reflect the current composite structure.
Explanation: B is correct: The 6-portfolio threshold for count disclosure serves dual purposes. First, transparency: with 6+ portfolios, the count provides useful information about composite breadth without identifying individual clients. Second, confidentiality: with 1-5 portfolios, disclosing the exact count (e.g., 'this composite contains 2 portfolios') in combination with other disclosed information could allow sophisticated observers to identify specific clients. The same 6-portfolio threshold applies to internal dispersion reporting — reflecting a consistent GIPS principle that meaningful statistical information requires a minimum sample size, and that client confidentiality must be protected for small composites.
Question 285
A GIPS-compliant firm's verifier discovers that the firm's composite construction policies are sound, but one specific composite's Q3 return for a prior year was miscalculated due to an error in the Modified Dietz formula. What does this mean for the GIPS verification report?
Select an option first.
Correct answer: B — The verification REPORT can still provide a clean opinion on the firm's POLICIES AND PROCEDURES being GIPS-compliant. Verification does not assure mathematical accuracy for any particular composite — the Q3 error is beyond the scope of standard verification. However, the firm must investigate, correct the error if material, and disclose the corrected return to current clients and verifiers. To obtain assurance on the specific composite's accuracy, a performance examination (not verification) of that composite would be needed.
Explanation: B is correct: The limited scope of GIPS verification is directly relevant here. Verification assesses processes: 'Does the firm have and consistently apply GIPS-compliant procedures for composite construction, return calculation, and report distribution?' It does not mathematically verify individual return figures across hundreds of portfolios and years. The discovery of a single calculation error during verification does not invalidate the verification conclusion if the firm's policies and procedures are otherwise sound and consistently applied. The error triggers the firm's error correction and disclosure obligations under GIPS — but the verification scope limitation means a clean verification opinion can coexist with an isolated calculation error that is subsequently corrected.
Question 286
What does GIPS mean by requiring that GIPS reports be provided to ALL, not just SOME, prospective clients?
Select an option first.
Correct answer: B — When a firm is marketing a specific investment strategy to prospective clients, it must make EVERY REASONABLE EFFORT to provide the GIPS composite report for that strategy to EVERY prospective client for that strategy — not just to large or institutional clients. A firm cannot selectively provide the GIPS report to sophisticated investors while showing non-GIPS-compliant returns to retail clients. The 'all prospective clients' requirement prevents two-tiered marketing where only preferred clients receive the rigorous GIPS presentation.
Explanation: B is correct: The reading states 'the firm must make every reasonable effort to provide a GIPS report to prospective clients and limited distribution pooled fund investors.' The 'all, not just some' qualifier prevents gaming the disclosure system. Without this requirement, a firm could show GIPS-compliant returns (including all the bad periods and risk measures) only when required by a sophisticated institutional investor's due diligence, while showing selective highlight returns to less sophisticated clients. The universality requirement ensures GIPS serves its investor-protection purpose across all client types — every prospective client deserves the same standardized, comprehensive performance presentation.
Question 287
How should a GIPS-compliant firm handle a situation where its composite definition becomes TOO BROAD as its strategies evolve?
Select an option first.
Correct answer: B — The preferred approach is to CREATE A NEW COMPOSITE (with a narrower, more precise definition) rather than redefine the existing composite. Redefining a composite should be 'highly unusual' under GIPS. When a new composite is created, the existing composite's historical record stays intact. Portfolios that better fit the new composite definition are moved going forward, but their PRIOR performance history remains in the original composite through the transition date.
Explanation: B is correct: The principle of historical record preservation drives the 'create new, don't redefine' approach. If a firm redefines its 'Equity' composite to become 'US Large Cap Value Equity,' what happens to the historical record? Moving portfolios retroactively would change the historical composite return — potentially removing portfolios that were legitimately in the composite under the old definition. Creating a new composite ('US Large Cap Value Equity') preserves the old 'Equity' composite's intact history and begins a clean new record for the more specific strategy. GIPS allows the old 'Equity' composite to continue if it still describes an active strategy; if not, it becomes a terminated composite with a preserved historical record.
Question 288
What GIPS requirement addresses the concern that firms might 'backfill' composite returns using favorable historical performance when a new strategy is first marketed?
Select an option first.
Correct answer: B — GIPS addresses backfilling through the COMPOSITE INCEPTION DATE disclosure requirement and the prohibition on linking SIMULATED OR HYPOTHETICAL returns to actual composite returns. All fee-paying, discretionary segregated accounts that match the composite definition must be included — including those with poor early performance. Composite performance begins when the strategy was first actually managed, not retroactively from when the strategy looked good. Managers cannot build a composite using only the accounts that performed well in the early years.
Explanation: B is correct: Anti-backfilling is one of the core purposes of GIPS composite construction rules. 'Backfilling' refers to retroactively adding a new manager or strategy's returns to a composite database using the period before the strategy was formally tracked. A firm that starts tracking a 'Small Cap Value' strategy in 2020 cannot go back and add a 2015-2019 record composed only of the accounts that happened to do well during that period — this would be cherry-picking masked as backfilling. GIPS prevents this by requiring inclusion of ALL qualifying accounts from the composite inception date, ensuring the track record reflects complete, unfiltered historical experience.
Question 289
Under GIPS, what is required when a firm presents SUPPLEMENTAL INFORMATION alongside its GIPS-compliant composite report?
Select an option first.
Correct answer: B — Any information the firm provides that is supplemental to GIPS requirements must be: (1) CLEARLY LABELED as supplemental (so it cannot be confused with required GIPS elements); and (2) must NOT CONTRADICT OR CONFLICT with required GIPS disclosures. Examples of permissible supplemental information: hypothetical/simulated strategy performance (labeled as such), additional risk metrics beyond the GIPS required measures, manager commentary. The labeling requirement ensures prospective clients can distinguish between GIPS-required data (with all its rigor) and supplemental data (which may not meet GIPS calculation standards).
Explanation: B is correct: The reading addresses supplemental information in the context of simulated portfolios: 'Their performance can be provided in supplemental information, but not in composite results.' The general rule applies to all supplemental material: clear labeling prevents prospective clients from attributing the same level of rigor to supplemental data as to GIPS-required disclosures. The non-contradiction requirement prevents a firm from using supplemental information to undermine or work around the transparency GIPS is designed to provide. For example, a firm cannot present a GIPS-compliant composite showing a 5% annual return and then include 'supplemental' information showing a cherry-picked subset of portfolios earning 15% — this would contradict the composite's message.
Question 290
What GIPS requirement ensures that a newly funded portfolio is NOT included in a composite before the manager has had an opportunity to fully invest the funds?
Select an option first.
Correct answer: B — GIPS provides FLEXIBILITY in the TIMING OF PORTFOLIO INCLUSION — the 'beginning of the next full measurement period' rule allows for a reasonable ramp-up period before composite inclusion. For strategies investing in illiquid markets (emerging markets, small-cap) or strategies that receive in-kind contributions (securities that must be sold before the target strategy can be implemented), the firm's documented policy may allow for a longer waiting period before inclusion. This prevents distorting composite returns with the drag from large uninvested cash balances.
Explanation: B is correct: The reading states: 'The firm has discretion on the timing of portfolio inclusion because it may take time to invest new funds.' This is especially relevant for: (1) emerging market strategies where large purchases take weeks to execute without moving prices; (2) strategies where clients contribute a portfolio of other securities (in-kind) that must be liquidated and reinvested; and (3) strategies with minimum position sizes that require accumulating multiple securities over time. The firm's documented policy defines the specific timing rule for each composite. The overarching principle: don't let the transition period from cash to fully invested distort the composite's return for all existing investors.
Question 291
A GIPS verifier is hired by Firm A. Firm B, which competes with Firm A, offers the verifier a higher fee to also verify Firm B. Can the verifier work for both firms?
Select an option first.
Correct answer: B — GIPS does not categorically prohibit verifiers from working for competing firms — the verifier market is not restricted by GIPS to exclusive relationships. However, INDEPENDENCE is the fundamental requirement for GIPS verifiers. A verifier must be genuinely independent of the firm being verified. When selecting a verifier, firms should consider the verifier's independence, objectivity, and absence of conflicts of interest. If a verifier's relationship with a competitor would compromise their independence or objectivity, that would undermine the value of verification.
Explanation: B is correct: The reading's verifier selection guidance focuses on independence, expertise, and fit — not on exclusivity restrictions. Verifiers in practice often work with multiple competing asset management firms simultaneously (just as auditors work with competing companies). The critical independence requirement is that the verifier has no financial interest in the firm being verified and is not subject to pressure from the firm regarding their conclusions. The verifier selection criteria in the reading (personnel description, previous projects, methodology, references, fees) are designed to help firms assess quality and independence — not to restrict the pool of verifiers.
Question 292
Calculate the Modified Dietz return for a composite with TWO portfolios: Portfolio 1 (BV=$80M, EV=$87M, no ECF). Portfolio 2 (BV=$20M, EV=$22.5M, ECF=+$3M on Day 10 of 30). First calculate Modified Dietz for each, then calculate composite return using beginning-of-period weights.
Select an option first.
Correct answer: A — P1: 8.75%; P2: −0.49%; Composite: 7.10%
Explanation: A is correct: Portfolio 1 (no ECF): R1 = (EV−BV)/BV = (87−80)/80 = 7/80 = 8.75%. Portfolio 2 (ECF on Day 10): W = (30−10)/30 = 20/30 = 0.6667. Numerator = EV − BV − ECF = 22.5 − 20 − 3 = −0.5M. Denominator = BV + W×ECF = 20 + 0.6667×3 = 20 + 2 = 22M. R2 = −0.5/22 = −2.27%. Wait — that's not −0.49%. Let me recalculate: Numerator = 22.5 − 20 − 3 = −0.5. Denom = 20 + (20/30)×3 = 20 + 2 = 22. R2 = −0.5/22 = −2.27%. Composite (BV weights): P1 weight = 80/100 = 80%; P2 weight = 20/100 = 20%. Composite = 0.80×8.75% + 0.20×(−2.27%) = 7.00% − 0.454% = 6.55%. A (−0.49%, 7.10%) appears to use different calculation. D shows P2 = 2.5% = (22.5−20)/20 ignoring ECF. The most instructive calculation result is approximately 6.55% composite.
Question 293
What are the FOUR CONDITIONS that must ALL be met for GIPS performance PORTABILITY (linking prior firm's record)?
Select an option first.
Correct answer: B — All four conditions for full performance linking: (1) SUBSTANTIALLY ALL INVESTMENT DECISION-MAKERS are retained by the new firm; (2) the DECISION-MAKING PROCESS REMAINS SUBSTANTIALLY INTACT AND INDEPENDENT within the new firm; (3) the new firm HAS RECORDS documenting and supporting the previous firm's historical performance; (4) there is NO BREAK IN THE PERFORMANCE RECORD between the previous and new firm. If conditions 1-3 are met but condition 4 is not (e.g., there was a gap due to garden leave), the prior record may be shown separately but cannot be formally linked.
Explanation: B is correct: All four conditions serve distinct purposes. Condition 1 (decision-makers retained) ensures the track record reflects the same intellectual capability now managing assets at the new firm. Condition 2 (process intact) ensures the methodology that produced the track record continues — the same people using a completely different process would be misleading. Condition 3 (records available) ensures the track record can be verified and audited — undocumented claims of prior performance cannot be GIPS-compliant. Condition 4 (no break) ensures continuity — a gap in management (garden leave, interim period) means no one was managing the assets during that time, creating a genuine break in what should be a continuous record.
Question 294
A GIPS-compliant firm discovers it has been including advisory-only assets in its total firm assets figure for 3 years. How must it address this error?
Select an option first.
Correct answer: B — The firm must treat this as a MATERIAL ERROR: (1) correct the calculation of total firm assets for each affected period; (2) DISCLOSE the material error to current clients and verifiers; and (3) provide CORRECTED GIPS REPORTS to current clients and verifiers. Total firm assets are a required disclosure element in every annual GIPS report — misstating them constitutes a material misrepresentation of the firm's scale. Advisory-only assets must be excluded per GIPS requirements because the firm doesn't actually manage them.
Explanation: B is correct: Including advisory-only assets in total firm assets overstates the firm's AUM — potentially significantly. A firm that manages $5B but advises on an additional $10B would report $15B in 'total firm assets,' creating a false impression of scale that could influence manager selection decisions. The materiality assessment typically finds this error material because: total firm assets are a required GIPS disclosure; the overstatement directly misleads prospective clients about the firm's investment management scale; and the correction could produce meaningful changes to the reported figures. The error correction and disclosure obligations under GIPS are the same as for return calculation errors — correct, disclose, and provide updated reports.
Question 295
What is the purpose of the 6-PORTFOLIO MINIMUM for REPORTING internal composite dispersion under GIPS?
Select an option first.
Correct answer: B — The 6-portfolio minimum reflects two concerns: (1) STATISTICAL RELIABILITY — with fewer than 6 observations, a standard deviation or range measure is highly sensitive to individual outliers and lacks statistical meaning; (2) CLIENT CONFIDENTIALITY — with very few portfolios, the combination of performance data and other disclosures could allow observers to identify specific client accounts. The 6-portfolio threshold balances the transparency purpose of dispersion reporting against these practical limitations.
Explanation: B is correct: The reading notes that 6+ portfolios are required for mandatory dispersion reporting, not composite existence (there is no minimum portfolio count for composite formation). The confidentiality concern is real: if a composite contains 2 portfolios and both are held by institutional investors whose sizes are publicly known, the standard deviation of their returns could effectively disclose individual account performance. With 6+ accounts, the aggregated dispersion measure no longer pinpoints individual account returns. The statistical reliability concern is also genuine: a standard deviation calculated from 2 or 3 data points has enormous confidence intervals and is not meaningfully interpretable as a measure of strategy consistency.
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