Free CFA Level III: Portfolio Management Performance Measurement Practice Questions

Performance measurement and attribution on CFA Level III covers time-weighted and money-weighted return calculations, benchmark selection, macro and micro attribution analysis, and investment manager evaluation.

88 Questions
43 Easy
30 Medium
15 Hard
2026 Syllabus

Sample Questions

Question 1 Easy
The appraisal ratio measures:
Solution
C is correct.

The appraisal ratio is calculated as the portfolio's alpha (the return earned beyond what is explained by systematic risk exposure) divided by the portfolio's unsystematic (residual or idiosyncratic) risk. It measures the manager's ability to generate abnormal returns per unit of diversifiable risk taken.
Question 2 Medium
Based on Exhibit 2, Jensen's alpha for the Bayview portfolio is closest to:
Solution
C is correct. Jensen's alpha is α=Rp−[Rf+β(Rb−Rf)]\alpha = R_p - [R_f + \beta(R_b - R_f)]. With Rp=8.20%R_p = 8.20\%, Rf=2.50%R_f = 2.50\%, β=1.10\beta = 1.10, and Rb=7.40%R_b = 7.40\%: α=8.20%−[2.50%+1.10(7.40%−2.50%)]=8.20%−[2.50%+5.39%]=8.20%−7.89%=0.31%\alpha = 8.20\% - [2.50\% + 1.10(7.40\% - 2.50\%)] = 8.20\% - [2.50\% + 5.39\%] = 8.20\% - 7.89\% = 0.31\%.
Question 3 Hard
Using Exhibit 2, the 3-year Modigliani-Modigliani (M2M^{2}) measure for the Carlyle Fund is closest to:
Solution
B is correct. The Modigliani-Modigliani (M2M^{2}) measure rescales the portfolio's excess return to the benchmark's level of total risk and then adds back the risk-free rate, allowing a direct comparison with the benchmark return on a like-risk basis:

M2=Rf+(Rp−Rf)×σMσpM^{2} = R_{f} + (R_{p} - R_{f}) \times \frac{\sigma_{M}}{\sigma_{p}}

Plugging in the Exhibit 2 values:

M2=3.0%+(14.2%−3.0%)×14.0%16.5%=3.0%+11.2%×0.8485≈3.0%+9.50%=12.50%M^{2} = 3.0\% + (14.2\% - 3.0\%) \times \frac{14.0\%}{16.5\%} = 3.0\% + 11.2\% \times 0.8485 \approx 3.0\% + 9.50\% = 12.50\%

Because M2M^{2} (12.50%) exceeds the Russell 1000 Growth return of 11.0%, the Carlyle Fund delivered positive risk-adjusted performance over the 3-year period (an M2M^{2} alpha of roughly +1.50%).
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