Free CFA Level III: Private Wealth Performance Measurement Practice Questions
Performance measurement and attribution on CFA Level III covers return calculation methods, benchmark selection, attribution analysis, and manager evaluation in the context of private wealth management.
88 questions43 easy30 medium15 hard2026 syllabus
Sample Questions
Question 1
Easy
The appraisal ratio measures:
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Correct Answer: C
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 1, the Brinson-Hood-Beebower allocation effect for Bayview is closest to:
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Correct Answer: A
Solution
A is correct. The BHB allocation effect is ∑(wp−wb)×Rb. Technology: (0.35−0.28)(12%)=0.84%. Financials: (0.20−0.25)(8%)=−0.40%. Healthcare: (0.30−0.22)(7%)=0.56%. Energy: (0.15−0.25)(2%)=−0.20%. Total =0.84−0.40+0.56−0.20=0.80%.
Question 3
Hard
After completing the attribution and appraisal work, which of the following statements most accurately characterizes Bayview's 2025 value added?
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Correct Answer: B
Solution
B is correct. The BHB allocation effect is +0.80% (overweighting outperforming Technology and Healthcare, underweighting underperforming Energy), while the selection effect is ∑wb(Rp−Rb)=0.56−0.50+0.44−1.50=−1.00% (dominated by Energy, where portfolio stocks returned -4% versus the sector benchmark's +2%). With interaction of +1.00%, the total active return is +0.80%. Jensen's alpha is a positive 0.31%, confirming that the sector tilts more than offset weak security selection.
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