Performance Measurement: CFA® Level III

It is 5–10% of the 2027 Level III exam. 37 learning outcomes across 3 learning modules.

48 practice questions and 8 formula cards on this topic in the app.

Portfolio Performance Evaluation

• Explain what performance measurement, attribution and appraisal each contribute to evaluating a portfolio and how the three link together
• Set out the features that make a performance attribution process effective
• Distinguish attribution of return from attribution of risk, and macro-level from micro-level return attribution
• Explain how transactions-based, holdings-based and returns-based attribution work, with the strengths and weaknesses of each
• Interpret where a portfolio's returns came from using a given attribution method
• Interpret the results produced by attribution analysis of a fixed-income portfolio
• Discuss the factors that guide the choice of a risk attribution method
• Separate the part of investment results due to the asset owner's decisions from the part due to the manager, and interpret each
• Explain the purposes served by liability-based benchmarks
• Set out the main kinds of asset-based benchmark
• Discuss the tests used to judge whether a benchmark is sound
• Explain how a misspecified benchmark distorts attribution and appraisal analysis
• Set out the difficulties that arise when choosing benchmarks for alternative investments
• Compute and interpret maximum drawdown, drawdown duration, upside and downside capture ratios, the appraisal ratio and the Sortino ratio
• Explain where appraisal measures and associated metrics fall short
• Assess whether an investment manager's results reflect genuine skill

Investment Manager Selection

• Set out the stages of the manager selection process, with due diligence among them
• Distinguish Type I from Type II errors when deciding whether to hire or keep a manager
• Explain how style analysis, both holdings-based and returns-based, supports the choice of investment managers
• Explain how maximum drawdown, drawdown duration, capture ratios on the upside and downside, and up/down capture help in assessing managers
• Assess the investment philosophy of a manager and the process by which it reaches investment decisions
• Discuss how behavioural factors shape the decisions of an investment team and propose ways to limit their influence
• Weigh the benefits and costs of separate accounts against those of pooled investment vehicles
• Contrast the main forms of investment manager contract, covering their key provisions and their advantages and drawbacks
• Set out the three standard ways a performance-based fee can be structured
• Analyse an illustrative performance-based fee schedule and interpret its outcomes

Overview of the Global Investment Performance Standards

• Discuss what the GIPS standards aim to achieve, whom they cover, and how they help investment managers as well as prospective clients and investors
• Explain the basic requirements for claiming GIPS compliance, including how the firm is defined and how it defines discretion
• Discuss the GIPS rules for calculating returns, covering how fees and expenses, cash and cash equivalents, and external cash flows are treated
• Explain the valuation hierarchy that the GIPS standards recommend
• Explain the GIPS rules for calculating composite returns, including the permitted ways of asset-weighting the returns of member portfolios
• Explain what makes a portfolio discretionary for composite construction and, from a set of facts, judge whether a given portfolio is likely to qualify
• Explain how composites are defined around a shared mandate, objective or strategy, and why this matters
• Explain the GIPS composite construction rules, covering when portfolios may move between composites, when new portfolios must be added and when terminated ones must be removed
• Explain what the GIPS standards require in presenting and reporting performance
• Explain when a new or acquiring firm may link to, or show as its own history, the performance record of a prior firm or affiliation
• Discuss why firms seek GIPS verification, what it covers and how it is carried out