Correction to Exercise on Sample Exam (Principles Level)

Last week, when I was teaching The Spaulding Group's CIPM Exam prep class for the Principles Level, a student asked me for help with a question on a sample exam from CFA Institute.  The question read:

Which of the following is most likely not a requirement of the GIPS standards for Presentation and Reporting?

a.       Annualizing returns for periods of less than one year.

b.      Presenting the total return for the benchmark for each annual period.

c.       Presenting the percentage of composite assets represented by non-fee-paying portfolios.

The sample exam stated that “b” was the correct answer, and the explanation states that the answer choice of “b” is not a requirement.

I indicated to the class that this appeared to be an error, as presenting the total return for the benchmark as of the end of each annual period is definitely required by GIPS provision I.5.A.1.e.   It seemed to me that the choice of "a" was the correct answer as we must never annualize returns of less than a year (GIPS I.5.A.4).

I later learned that the candidate that asked the question had a copy of an old sample exam, and that the question had been reworded as follows on the most recent copy of the sample exam:

           Which of the following is most likely a requirement of the GIPS standards for Presentation

           and Reporting?

          A.      Annualizing returns for periods of less than one year.

          B.      Presenting the total return for the benchmark for each annual period.

          C.      Presenting the percentage of composite assets represented by non-fee-paying portfolios.

This time, the answer key indicated that "C" was the correct response.   While it is true that item "C" is a requirement, it is also true that item "B" is a requirement, based on GIPS provision I.5.A.1.e, as I indicated above.

To end this long story, I contacted CFA Institute, and they indicated that this is indeed an error, which will be corrected.    Thus, I wanted to pass this on to candidates who may have been perplexed by this question.  And if you are a Principles Level candidate and were perplexed by the question, don't feel bad... I passed this by my Expert Level class students last week, and an interesting debate ensued with views all over the map.  So, sometimes this stuff is not so easy!