CIPM Level 2 Exam 2026: Complete Study Guide — Manager Selection, Attribution & Performance Appraisal
- Kateryna Myrko
- 22 hours ago
- 6 min read
CIPM® Level II is where the program turns from “can you calculate and explain performance?” into “can you judge skill, diagnose drivers, and select managers in messy real-world conditions.” Officially, the Level II exam is 80 questions in 3 hours, delivered as scenarios plus multiple-choice.
That format matters: you’re not just solving isolated calculations—you’re interpreting a case, choosing the right framework, and defending an answer that’s “most appropriate” given constraints.
Below is a complete, practical guide to what to master for 2026—and how to study efficiently.
1) Understand the exam’s “shape” before you study
Exam mechanics (official):
Structure: 80 questions
Length: 3 hours
Format: scenarios + multiple-choice
Results: typically within 60 days
What this implies for strategy
You must practice reading and extracting what matters from a vignette quickly.
You need “decision rules” (which model/metric applies) more than memorizing definitions.
You should train with timed scenario sets, not only chapter-end questions.
CFA Institute also notes successful candidates report studying an average of 155 hours per exam.
2) Performance measurement topics at Level II: derivatives, hedging, and denominator traps
Level II expands return measurement into portfolios that break the “simple market value” assumptions—especially when notional exposure and derivatives are involved.
From the 2026 Level II learning outcomes, you should be able to:
Calculate and interpret returns for long–short, short extension, and market-neutral portfolios
Define economic (notional) exposure and notional return
Apply return approaches for portfolios using forwards, futures, swaps, and options
Handle unhedged vs partially hedged multicurrency portfolios
Recognize the zero or near-zero denominator problem (common in overlay strategies)
How Level II tests thisExpect scenario questions where the “math” is straightforward but the real test is:
choosing the correct return denominator (market value vs notional exposure)
explaining how a derivative position changes portfolio exposure and therefore performance interpretation
Study move: build a mini-checklist for each derivative type: what exposure is created, what’s the payoff profile, what return measure is meaningful.
3) Data integrity: reconcile discrepancies like a performance professional
Level II data integrity is less “what is data quality?” and more “why do real performance numbers disagree?”
The 2026 outcomes emphasize:
Causes of performance discrepancies between investment manager vs custodian
Causes of discrepancies between NAV-based performance vs end-of-day time-weighted performance
Best practices for maintaining composite data so it reliably represents a strategy
What to be able to do on exam day
Identify the likely root cause: corporate actions processing, pricing timing, FX rate choice, accrual conventions, treatment of fees/cash flows, or data cut-off differences.
Pick the best corrective action (policy, reconciliation process, exception reporting, source-of-truth governance).
4) Attribution: go beyond Brinson—multi-currency, derivatives, and fixed income
Level II attribution moves into “real portfolio” complexity:
A) Strategy benchmarks and “normal weights”
You’ll see the benchmark problem from the investment manager’s perspective:
Understand normal (neutral) weights
Distinguish published benchmark-centered disciplines vs manager strategy disciplines
Explain why strategy benchmarks can be more appropriate for certain manager styles
Understand how benchmark choice impacts attribution, tracking error, and information ratios
B) Multi-currency attribution (Karnosky–Singer)
You’re expected to calculate and interpret:
Asset allocation, security selection, and currency allocation effects using Karnosky–Singer
A geometric approach when returns aren’t continuously compounded
Why interest rate differentials matter in multi-currency attribution
Common trap: confusing “currency effect” with “local return effect.” Your process should always separate:
local asset return
FX movement
(when relevant) carry/interest differentials
C) Attribution with shorts, futures, and options
You’re specifically expected to calculate and interpret attribution results for portfolios containing:
short positions
futures
options
Skill test: keeping sign conventions straight (short weights, active exposures) and interpreting whether the manager’s decision added or detracted given the chosen benchmark.
D) Fixed-income attribution: know the approaches and when each is suitable
The Level II outline calls out three major fixed-income attribution approaches:
Exposure decomposition (duration-based)
Yield curve decomposition (duration-based)
Yield curve decomposition (full repricing)
What’s typically tested is not heavy bond math—it’s whether you can match:
user/decision process (rates vs spread vs curve positioning)
implementation complexity
limitations and interpretation
5) Performance appraisal: distinguish skill from luck—then choose the right tool
Performance appraisal in Level II becomes more judgment-heavy. The learning outcomes include:
Distinguishing skill vs luck and spotting appraisal mistakes
Using quality control charts
Evaluating how benchmark and factor selection affects appraisal (and consequences of wrong benchmarks)
Understanding how cash holdings affect appraisal
Recognizing limits of historical performance
Identifying characteristics of superior active managers
Justifying selection of appraisal measures
Evaluating strategies with non-linear returns
Analyzing the skill of an active manager
How to think about appraisal questionsWhen you see performance numbers, ask (in this order):
Is the benchmark correct? (if not, everything is contaminated)
Is the risk measure consistent with the mandate? (total vs relative vs downside vs drawdown)
Are returns linear? (options/convexity strategies require different evaluation tools)
Is the record long and stable enough to infer skill?
Equity style analysis: “What does the manager actually do?”
The outline explicitly includes characteristic-based analysis to:
Understand strategy at a deeper level
Evaluate philosophy and risk tolerance
Assess performance across market environments and periods
This is a manager-selection bridge: style analysis is used to detect style drift, hidden factor bets, and whether performance is repeatable.
6) Manager selection: where Level II is won or lost
CFA Institute states Level II contains all the manager search and selection content. The 2026 outcomes cover the full lifecycle:
A) Process and due diligence fundamentals
You must be able to:
Place selection within the client’s IPS
Evaluate qualitative considerations
Explain the components of selection, including due diligence
Contrast Type I vs Type II errors in hiring/retention
Evaluate adherence to stated philosophy and process
B) Manager evaluation tools beyond “alpha”
Level II expects you to use measures like:
upside/downside capture
drawdown and drawdown duration
batting average
style analysis (returns-based vs holdings-based)
C) Vehicles, contracts, and fees
You’ll need to compare:
pooled vehicles vs separate accounts
contract types and key provisions
forms of performance-based fees and how to interpret a schedule
D) Special cases by manager type
The outline explicitly calls out special considerations for:
passive
hedge funds
private equity
real estate
equity vs fixed income
E) Portfolio-of-managers thinking (optimization concepts)
Later outcomes focus on:
utility function components for selection
why the utility uses active return (not total return)
incorporating risk and search/monitoring costs
optimal mix of managers
misfit risk and pure information ratio
limitations of relying on historical alphas/style boxes
estimating optimization inputs and why optimization often favors lower active-risk managers
This is where many candidates struggle: it’s conceptually “portfolio theory applied to managers,” not securities.
7) GIPS and performance presentation: advanced compliance logic
Level II expects you to evaluate:
fundamentals of compliance (firm definition, total firm assets, conditions to claim compliance)
discretionary vs non-discretionary classification
composite construction appropriateness (inclusions/exclusions, switching, significant cash flows, model/simulated linked performance)
presentation/reporting requirements, disclosures
portability of track records
benefits of verification
Study move: build scenario flashcards: “Portfolio has large external cash flows” / “Firm acquired a track record” / “Model portfolio linked performance” → what is allowed, what must be disclosed, what is prohibited.
A practical 7-week study plan for CIPM Level 2 Exam 2026 (built for scenarios)
Weeks 1–2: Manager selection foundation + style analysis
IPS context, Type I/II errors, interview/on-site logic
returns-based vs holdings-based style analysis, style drift detection
Week 3: Performance appraisal deepening
benchmark/factor selection effects, non-linear return strategy evaluation
quality control charts, common appraisal mistakes
Week 4: Multi-currency attribution
drill until decomposition is automatic; add interest differential intuition
Week 5: Fixed-income attribution approaches
match approach to use case; interpret outputs
Week 6: Derivatives/overlay performance measurement
notional exposure, long–short and market-neutral returns, denominator pitfalls
Week 7: GIPS + mixed scenario sets
composite construction scenarios + portability + disclosures
2–3 full timed mocks of scenario blocks
Throughout: maintain an “error log” where every missed question becomes a rule (benchmark selection, sign convention, or method choice).
Final takeaway
CIPM Level II 2026 is a practitioner exam: it rewards candidates who can interpret performance—not just compute it. If you master (1) manager selection decision-making, (2) multi-currency and fixed-income attribution frameworks, (3) appraisal under benchmark/factor uncertainty, and (4) GIPS scenario logic, you’ll be prepared for both the exam and the job this credential targets.
Unlock your potential with our comprehensive CIPM Level 2 Program practice exams and study packages!
Comments