The CIPM Level 1 exam from the CFA Institute focuses on investment performance measurement, attribution, and appraisal. Success in this exam requires a strong grasp of key concepts, including performance evaluation methodologies, ethical standards, and risk assessment. To help you prepare, we’ve compiled free practice questions that reflect the exam format and difficulty. These questions will test your knowledge and highlight areas where you may need further study.
Question 1: Ethical and Professional Standards – Conflict of Interest
A portfolio manager, Alex, at Trust Investments manages a hedge fund that invests in emerging markets. Alex recently learned that his cousin is the CFO of a company his fund is considering for investment. The company has a pending merger deal that is expected to drive its stock price significantly higher. Alex has not disclosed this relationship to his firm’s compliance department but proceeds to invest in the company for the fund.
What is Alex’s most significant ethical violation based on the CIPM Ethical and Professional Standards?
A) Misrepresentation – Alex failed to disclose material nonpublic information to investors before making the investment.
B) Priority of Transactions – Alex violated firm policies by trading on insider knowledge before allowing clients to act.
C) Disclosure of Conflicts – Alex has not informed his employer of a material conflict that could impact investment decisions.
Question 2: Performance Evaluation – Rate of Return Measurement
An institutional investor is analyzing three funds with different return methodologies.
Fund A reports a money-weighted rate of return (MWRR) due to frequent inflows and outflows.
Fund B uses a time-weighted rate of return (TWRR) to neutralize external cash flow effects.
Fund C employs a modified Dietz method because of its quarterly reporting cycles.
Which statement best describes the limitation of the performance evaluation methods used by these funds?
A) MWRR is misleading because it assumes equal weighting for all periods, even when cash flows are lumpy.
B) TWRR is unsuitable for fund managers who control cash flows, as it ignores the impact of their decisions.
C) The Modified Dietz method is inaccurate because it does not consider changes in portfolio value between reporting periods.
Question 3: Return Attribution – Selection and Allocation Effects
A pension fund is evaluating the performance of its equity portfolio. The benchmark has returned 5.2%, while the portfolio delivered 6.0%. The performance breakdown is as follows:
Allocation Effect: +0.3%
Selection Effect: +0.5%
Interaction Effect: +0.0%
Which of the following conclusions is the most accurate based on return attribution?
A) The portfolio manager’s excess return is primarily due to superior stock selection rather than sector allocation.
B) The allocation effect is the dominant factor driving excess returns, suggesting sector weighting was the main contributor.
C) The absence of an interaction effect indicates that the portfolio's sector and security choices did not align with the benchmark.
Question 4: Benchmark Analysis – Selecting the Appropriate Benchmark
A portfolio manager at Alpha Asset Management is running a long-only value equity fund. The fund’s primary investment strategy involves investing in mid-to-large-cap stocks with low price-to-book and high dividend yield characteristics. The manager is considering three benchmarks:
Benchmark A: A broad-market index including growth and value stocks across all capitalizations.
Benchmark B: A value-style index focused on mid-to-large-cap stocks in the same region.
Benchmark C: A peer group comparison of active equity fund managers with similar styles.
Which benchmark is the most appropriate for evaluating the manager’s performance and why?
A) Benchmark A – It provides a complete market context, ensuring that value strategies are judged against overall market performance.
B) Benchmark B – It aligns closely with the fund’s investment strategy and ensures that style tilts do not distort performance evaluation.
C) Benchmark C – Peer comparisons provide the best indication of relative performance in actively managed funds.
Question 5: Risk Measurement – Portfolio Risk Attribution
A multi-asset portfolio has an annualized standard deviation of 12%. The risk contribution breakdown is as follows:
Equities contribute 8%
Fixed income contributes 3%
Alternative assets contribute 1%
However, a new risk analysis reveals that the portfolio’s risk profile changes significantly during economic downturns. During market crashes, equities’ risk contribution rises to 14%, while fixed income remains at 3%.
What does this shift suggest about the portfolio’s risk characteristics?
A) The portfolio is improperly diversified, as alternative assets do not sufficiently hedge equity risk in downturns.
B) Fixed income's steady contribution implies it serves as an effective risk stabilizer across market cycles
C) Equities' risk dominance in downturns suggests the portfolio has a positive skew, reducing downside risk exposure.
Question 6: Performance Presentation – Ethical Issues in Performance Reporting
A wealth management firm, SilverStone Investments, is presenting its five-year composite performance results to prospective clients. The firm makes the following disclosures:
It removes portfolios with performance significantly lower than the composite average.
It extrapolates backtested data from a model to simulate additional years of strong returns.
It reports performance gross-of-fees without explicitly mentioning that fees would significantly reduce client returns.
Which of the following is the most egregious ethical violation according to performance presentation standards?
A) Cherry-picking high-performing portfolios distorts composite performance and misleads investors.
B) Using backtested data without full disclosure is acceptable if the model is statistically validated.
C) Reporting gross-of-fees performance without net-of-fees transparency is a minor issue, as investors assume fees apply.
Question 7: Rate of Return Calculation – Time-Weighted vs. Money-Weighted Returns
An investor is evaluating two portfolio return methodologies. The following cash flows and values are provided:
Initial investment: $1,000,000
After 6 months: Investor adds $500,000 when the portfolio is valued at $1,200,000
End of Year Value: $2,000,000
Which of the following is the correct Time-Weighted Rate of Return (TWRR) approximation?
A) 50.0%
B) 42.8%
C) 38.9%
Question 8: Performance Attribution – Allocation & Selection Effects
A portfolio manager's sector allocation and stock selection decisions contributed to performance relative to a benchmark. The following data is available:
Sector | Portfolio Weight (%) | Benchmark Weight (%) | Portfolio Return (%) | Benchmark Return (%) |
Tech | 30 | 20 | 12 | 8 |
Healthcare | 40 | 50 | 10 | 11 |
Using the Brinson-Hood-Beebower (BHB) model, calculate the Allocation Effect for the Tech sector:
A) 0.8%
B) 1.2%
C) 0.6%
Question 9: Risk Measurement – Value at Risk (VaR)
A $10 million portfolio has a daily standard deviation of 2%, and the firm uses a 95% confidence level to calculate Value at Risk (VaR). The Z-score for a 95% confidence level is 1.645.
What is the one-day VaR using the analytical (parametric) method?
A) $200,000
B) $328,000
C) $164,500
Question 10: Benchmark Comparison – Excess Return & Information Ratio
A portfolio manager tracks excess return relative to a benchmark. The annual portfolio return is 7.5%, while the benchmark return is 5.2%. The tracking error (standard deviation of active return) is 1.8%.
What is the Information Ratio (IR)?
A) 1.28
B) 1.56
C) 1.35
Correct Answers & Explanations CIPM Level 1 Practice Questions , CIPM Level 1 , CIPM Level 1 2025
1. Correct Answer: C (Disclosure of Conflicts)
Alex should have disclosed his conflict of interest. The most significant violation is the failure to disclose his relationship, which could impact investment decisions.
2. Correct Answer: B (TWRR is unsuitable for fund managers who control cash flows)
TWRR neutralizes external cash flows, making it ineffective in evaluating fund managers who actively manage inflows/outflows.
3. Correct Answer: A (Stock selection was the main driver of excess return)
Selection effect (+0.5%) was larger than allocation effect (+0.3%), meaning security selection decisions had a greater impact.
4. Correct Answer: B (Benchmark B is the best fit)
A value-style index best represents the fund's strategy. A broad-market index (A) introduces growth stock biases, while peer groups (C) lack transparency.
5. Correct Answer: A (The portfolio lacks proper diversification)
The sharp increase in equities’ risk contribution during downturns suggests inadequate hedging. A well-diversified portfolio should mitigate these swings.
6. Correct Answer: A (Cherry-picking portfolios is unethical)
Removing poor-performing portfolios misleads investors about the true risk and return characteristics of the strategy. CIPM Level 1 Practice Questions , CIPM Level 1 , CIPM Level 1 2025
7. Correct Answer: B (42.8%)
8.Correct Answer: A (0.8%)
9. Correct Answer: A ($200,000)
10. Correct Answer: C (1.35)
If you're looking for more practice questions and study resources to boost your chances of passing the CIPM Level 1 exam, check out our comprehensive study materials below!
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