A complaint about misleading performance

The case and its answers

Every question of this case, with its answer and why each other option is wrong.

A firm advertises that a client account grew from ₹10 lakh to ₹15 lakh in one year and calls this a 50% investment return. Its own records show that the client added ₹4 lakh during the year. A second marketing chart shows only the firm’s three successful accounts and excludes seven unsuccessful ones. The firm’s policy requires fair presentation, consistent measurement dates, preservation of original records and review of complaints by someone not responsible for the disputed advertisement. Client Rohan submits a written complaint about the claim. No exact time-weighted or money-weighted return can be calculated because the contribution date and interim values are unavailable.

The complaint procedures are fictional firm policy, not a statement of current statutory deadlines.

1. Q1What investment gain in rupees can be established from the first account’s totals?

   • A

     Option A. ₹1 lakh — Correct answer

   • B

     Option B. ₹5 lakh

     Why it is wrong: This treats the contribution as investment gain.

   • C

     Option C. ₹0

     Why it is wrong: The ending value exceeds opening value plus contribution by ₹1 lakh.

   • D

     Option D. ₹4 lakh

     Why it is wrong: This is the contribution itself.

   Answer: A. ₹15 lakh − ₹10 lakh − ₹4 lakh = ₹1 lakh. Remember: Account growth includes both contributions and investment results.

   Hint, shown before you answer in practice mode: Remove external money from the increase in account value.

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2. Q2What is wrong with calling the ₹10 lakh to ₹15 lakh increase a 50% investment return?

   • A

     Option A. The account ended at less than it started.

     Why it is wrong: It ended at a higher amount.

   • B

     Option B. Every investment return must be below 10%.

     Why it is wrong: No such limit follows from the facts.

   • C

     Option C. A rupee gain cannot be calculated.

     Why it is wrong: A rupee gain can be found from the supplied totals.

   • D

     Option D. The calculation does not adjust for the client’s ₹4 lakh contribution. — Correct answer

   Answer: D. The advertised increase is not solely investment performance. A defensible rate requires cash-flow timing and, depending on the measure, interim valuations. Remember: Do not present contributions as returns.

   Hint, shown before you answer in practice mode: Identify the source of part of the account’s increase.

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3. Q3What additional information is needed for a proper time-weighted return?

   • A

     Option A. Only the final account balance again.

     Why it is wrong: That information is already known and insufficient.

   • B

     Option B. Only the client’s age.

     Why it is wrong: Age does not reconstruct subperiod returns.

   • C

     Option C. Only the advertisement’s publication date.

     Why it is wrong: The relevant dates concern portfolio cash flows.

   • D

     Option D. Portfolio values immediately around external cash flows, including the contribution date. — Correct answer

   Answer: D. The value just before the contribution and the flow date allow performance subperiods to be identified and linked. Remember: State when data are insufficient for a requested performance measure.

   Hint, shown before you answer in practice mode: Time-weighted return links periods separated by external flows.

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4. Q4What bias is created by showing only three successful accounts?

   • A

     Option A. A guaranteed representative sample.

     Why it is wrong: Selecting winners deliberately excludes contrary outcomes.

   • B

     Option B. Selection bias that can overstate the experience of the full client group. — Correct answer

   • C

     Option C. A harmless change because all accounts had identical outcomes.

     Why it is wrong: The case explicitly says seven were unsuccessful.

   • D

     Option D. A correction for inflation.

     Why it is wrong: No inflation adjustment is described.

   Answer: B. The chart excludes less favourable experiences and therefore gives an incomplete view. Remember: A fair performance sample needs a defensible inclusion rule.

   Hint, shown before you answer in practice mode: Ask whether the displayed accounts represent all relevant outcomes.

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5. Q5Which response follows the stated complaint policy?

   • A

     Option A. Delete the advertisement and erase the supporting records.

     Why it is wrong: That prevents a reliable investigation.

   • B

     Option B. Preserve the original material and records, appoint an independent reviewer and correct substantiated misleading claims. — Correct answer

   • C

     Option C. Promise Rohan a future return to settle the concern.

     Why it is wrong: An unsupported return promise does not address the complaint.

   • D

     Option D. Have the same salesperson reject the complaint without review.

     Why it is wrong: The policy requires separation from the disputed advertisement.

   Answer: B. The firm should preserve the record, assess the specific allegations fairly and communicate and implement the findings. Remember: A correction should address the evidence and the cause of the misleading statement.

   Hint, shown before you answer in practice mode: The policy calls for evidence and an appropriate reviewer.

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