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CIPM (Certificate in Investment Performance Measurement)
Level II Exam | Latest Verified Questions and Detailed Answers
OVERVIEW DESCRIPTION
This Comprehensive set of multiple choice questions is designed for the Certificate in
Investment Performance Measurement (CIPM) Level II exam, a computer-based test
administered by the CFA Institute. The exam’s structure uses scenario-based item-
sets to evaluate a candidate’s ability to apply advanced concepts in performance
evaluation, risk assessment, and manager selection. Content areas assessed include
the heaviest-weighted topic, Manager Selection (30%), along with Performance
Attribution, Performance Appraisal, Ethics and Professional Standards, GIPS®
compliance, and sophisticated return measurement methodologies.
Scenario 1: Global Equity Manager Screening
ABC Pension Plan is conducting a search for a global equity manager. The investment
staff applies a quantitative screen: minimum 3-year annualized information ratio of 0.5,
maximum tracking error of 6%, and at least $2 billion in assets under management. They
gather data on four candidate managers:
Manager A: IR 0.65, TE 5.5%, AUM $3.2B
Manager B: IR 0.45, TE 4.8%, AUM $2.5B
Manager C: IR 0.70, TE 7.0%, AUM $4.0B
Manager D: IR 0.55, TE 5.0%, AUM $1.8B
QUESTION 1
Which manager(s) pass the quantitative screen?
A) Manager A only
B) Managers A and C only
C) Managers A and D only
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D) Manager A only, but C fails on tracking error
CORRECT ANSWER: A
EXPERT RATIONALE: Manager A satisfies all three criteria. Manager B fails the IR
threshold, Manager C exceeds the tracking error limit, and Manager D falls below the
minimum AUM.
QUESTION 2
After screening, the staff proceeds to qualitative due diligence. Which of the following is
a key component of operational due diligence?
A) Assessing the investment philosophy’s consistency with the manager's process
B) Reviewing the firm’s disaster recovery and business continuity plans
C) Analyzing the sector allocation of the portfolio
D) Comparing the manager’s composite returns to benchmarks
CORRECT ANSWER: B
EXPERT RATIONALE: Operational due diligence concentrates on non-investment
infrastructure such as compliance, systems, and business continuity. The other options
relate to investment due diligence.
QUESTION 3
During due diligence, the staff discovers that Manager A’s lead portfolio manager,
responsible for the entire track record, recently left the firm. According to CFA Institute
guidance, what is the most appropriate action?
A) Continue the evaluation as long as the firm has a succession plan
B) Immediately eliminate the manager from consideration
C) Assess whether the investment process remains intact and the new manager has
relevant experience
D) Rely on the quantitative record, as past performance is the best indicator
CORRECT ANSWER: C
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EXPERT RATIONALE: A key person departure requires evaluating process continuity and
the successor’s capability, not automatic disqualification. The track record may no longer
be representative.
QUESTION 4
The staff considers using a consultant’s database to screen managers. What is a known
limitation of commercial manager databases?
A) They are free of survivorship bias
B) They include all investment products ever offered
C) They may suffer from backfill bias that inflates historical returns
D) They provide complete transparency on fee arrangements
CORRECT ANSWER: C
EXPERT RATIONALE: Databases often backfill a new manager’s historical performance,
biasing the composite history upward. Survivorship bias and incomplete coverage are
also common problems.
Scenario 2: Fixed-Income Fee Negotiation
XYZ Foundation is negotiating fees with a potential fixed-income manager, Manager E.
The fee structure proposed is 50 bps on the
first 100million,40bpsonthenext100million,40bpsonthenext150 million, and 30 bps
on assets
above 250million.Thefoundationplanstoinvest250million.Thefoundationplanstoi
nvest200 million. Manager E’s gross annual return for the last three years was 6.5%, with
a benchmark return of 6.0% and a tracking error of 1.2%.
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QUESTION 1
What is the total management fee in dollars for an investment
of 200million?A)200million?A)100,000
B) 900,000C)900,000C)700,000
D) 1,000,000CORRECTANSWER:BEXPERTRATIONALE:Thefeeis0.501,000
,000CORRECTANSWER:BEXPERTRATIONALE:Thefeeis0.50100M
= 500,000,plus0.40500,000,plus0.40100M
= 400,000,foratotalof400,000,foratotalof900,000. The third tier does not apply.
QUESTION 2
If the manager’s gross return is 6.5%, what is the net return before any other expenses?
A) 6.05%
B) 6.00%
C) 5.95%
D) 5.80%
CORRECT ANSWER: A
EXPERT RATIONALE: The fee drag is 900,000/900,000/200,000,000 = 0.45%. Net return
= 6.50% – 0.45% = 6.05%.
QUESTION 3
The foundation wants to assess skill using the net-of-fee information ratio. What is the
net-of-fee information ratio?
A) 0.42
B) 0.50
C) 0.04
D) 0.33
CORRECT ANSWER: C
CIPM (Certificate in Investment Performance Measurement)
Level II Exam | Latest Verified Questions and Detailed Answers
OVERVIEW DESCRIPTION
This Comprehensive set of multiple choice questions is designed for the Certificate in
Investment Performance Measurement (CIPM) Level II exam, a computer-based test
administered by the CFA Institute. The exam’s structure uses scenario-based item-
sets to evaluate a candidate’s ability to apply advanced concepts in performance
evaluation, risk assessment, and manager selection. Content areas assessed include
the heaviest-weighted topic, Manager Selection (30%), along with Performance
Attribution, Performance Appraisal, Ethics and Professional Standards, GIPS®
compliance, and sophisticated return measurement methodologies.
Scenario 1: Global Equity Manager Screening
ABC Pension Plan is conducting a search for a global equity manager. The investment
staff applies a quantitative screen: minimum 3-year annualized information ratio of 0.5,
maximum tracking error of 6%, and at least $2 billion in assets under management. They
gather data on four candidate managers:
Manager A: IR 0.65, TE 5.5%, AUM $3.2B
Manager B: IR 0.45, TE 4.8%, AUM $2.5B
Manager C: IR 0.70, TE 7.0%, AUM $4.0B
Manager D: IR 0.55, TE 5.0%, AUM $1.8B
QUESTION 1
Which manager(s) pass the quantitative screen?
A) Manager A only
B) Managers A and C only
C) Managers A and D only
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D) Manager A only, but C fails on tracking error
CORRECT ANSWER: A
EXPERT RATIONALE: Manager A satisfies all three criteria. Manager B fails the IR
threshold, Manager C exceeds the tracking error limit, and Manager D falls below the
minimum AUM.
QUESTION 2
After screening, the staff proceeds to qualitative due diligence. Which of the following is
a key component of operational due diligence?
A) Assessing the investment philosophy’s consistency with the manager's process
B) Reviewing the firm’s disaster recovery and business continuity plans
C) Analyzing the sector allocation of the portfolio
D) Comparing the manager’s composite returns to benchmarks
CORRECT ANSWER: B
EXPERT RATIONALE: Operational due diligence concentrates on non-investment
infrastructure such as compliance, systems, and business continuity. The other options
relate to investment due diligence.
QUESTION 3
During due diligence, the staff discovers that Manager A’s lead portfolio manager,
responsible for the entire track record, recently left the firm. According to CFA Institute
guidance, what is the most appropriate action?
A) Continue the evaluation as long as the firm has a succession plan
B) Immediately eliminate the manager from consideration
C) Assess whether the investment process remains intact and the new manager has
relevant experience
D) Rely on the quantitative record, as past performance is the best indicator
CORRECT ANSWER: C
,3|Page
EXPERT RATIONALE: A key person departure requires evaluating process continuity and
the successor’s capability, not automatic disqualification. The track record may no longer
be representative.
QUESTION 4
The staff considers using a consultant’s database to screen managers. What is a known
limitation of commercial manager databases?
A) They are free of survivorship bias
B) They include all investment products ever offered
C) They may suffer from backfill bias that inflates historical returns
D) They provide complete transparency on fee arrangements
CORRECT ANSWER: C
EXPERT RATIONALE: Databases often backfill a new manager’s historical performance,
biasing the composite history upward. Survivorship bias and incomplete coverage are
also common problems.
Scenario 2: Fixed-Income Fee Negotiation
XYZ Foundation is negotiating fees with a potential fixed-income manager, Manager E.
The fee structure proposed is 50 bps on the
first 100million,40bpsonthenext100million,40bpsonthenext150 million, and 30 bps
on assets
above 250million.Thefoundationplanstoinvest250million.Thefoundationplanstoi
nvest200 million. Manager E’s gross annual return for the last three years was 6.5%, with
a benchmark return of 6.0% and a tracking error of 1.2%.
, 4|Page
QUESTION 1
What is the total management fee in dollars for an investment
of 200million?A)200million?A)100,000
B) 900,000C)900,000C)700,000
D) 1,000,000CORRECTANSWER:BEXPERTRATIONALE:Thefeeis0.501,000
,000CORRECTANSWER:BEXPERTRATIONALE:Thefeeis0.50100M
= 500,000,plus0.40500,000,plus0.40100M
= 400,000,foratotalof400,000,foratotalof900,000. The third tier does not apply.
QUESTION 2
If the manager’s gross return is 6.5%, what is the net return before any other expenses?
A) 6.05%
B) 6.00%
C) 5.95%
D) 5.80%
CORRECT ANSWER: A
EXPERT RATIONALE: The fee drag is 900,000/900,000/200,000,000 = 0.45%. Net return
= 6.50% – 0.45% = 6.05%.
QUESTION 3
The foundation wants to assess skill using the net-of-fee information ratio. What is the
net-of-fee information ratio?
A) 0.42
B) 0.50
C) 0.04
D) 0.33
CORRECT ANSWER: C
