CAIA LATEST UPDATED 2026 ALL QUESTIONS
AND ANSWERS SURE A+
✔✔Structured PIPE Transaction - ✔✔issues floating rate instruments (e.g. floating ratio
convertible debt) that allow the floating conversion rate to increase as the stock price
declines. To prevent a potential death spiral, the company should establish a
conversion ratio that contains price floor provisions. In other words, the PIPE should
have a conversion ratio ceiling.
✔✔Credit-linked notes (CLN) - ✔✔Bonds issued with an embedded credit option. If
there is no default, the holder of the CLN receives a coupon payment and the payment
of the par value at maturity, similar to a standard bond. If there is a default, the investor
will either receive a reduction in coupon payment or partial redemption of principal
value. Since they function more like an individual bond, CLNs are considered on-
balance sheet assets, and are useful for investors who want to take on more credit
exposure, but do not want to invest in derivatives. The main reason an investor would
invest in a CLN is because the investor will receive a higher coupon payment for
bearing credit risk. The investor will incur losses if a default occurs, but does not share
in upside gains resulting from an improvement in the credit quality of the issuer.
✔✔Advantages of secondary PE market - ✔✔- Greater access to future private equity
funds.
- More effective vintage year diversification.
- Faster profit realization.
,- Opportunistic buying.
✔✔External Credit Enhancement - ✔✔a form of insurance on the CDO trust's portfolio
that can be acquired through an outside third party in the form of a standard insurance
contract, a put option, or a credit default swap.
✔✔Spurious Correlation - ✔✔a false indication of a true relationship, is coincidental or
idiosyncratic, and is limited to the set of observations being examined. Therefore,
spurious correlations vary over time.
✔✔Self Selection Bias - ✔✔Tendency of managers to report favorable results and not
report unfavorable results. Thus, for hedge funds, reported returns may not be an
accurate representation of the total population of returns, and industry returns may be
lower than what the reported figures would suggest.
✔✔Structural Models - ✔✔model default as a function of borrower-specific
characteristics (e.g., balance sheet data, debt-to-equity ratio, balance sheet data).
Reduced-form models infer the probability of default through the observed market prices
of liquid securities. Less liquid securities can then be priced using the information
obtained from more liquid securities.
✔✔Reference Pool - ✔✔the actual pool of assets and/or derivatives held in the special
purpose vehicle (SPV) within the overall CDO structure.
✔✔Debt Service Coverage Ratio - ✔✔Debt service coverage ratio = net operating
income/total loan payment
✔✔Equity Linked Structured Products - ✔✔based on low risk assets guaranteeing a
minimum level of return and then provide additional upside by tying returns to a risky
asset. They differ from other structured product types that are based on pools of risky
assets.
✔✔R-Squared - ✔✔"Goodness of Fit"; measures the explanatory power of a regression.
Ranges from 0 to +1
E.g. when applies to a CAPM based regression- an R-squared of .80 indicates that 80%
of the variation in the asset's excess returns is explained by the market's excess
returns.
✔✔IRRs and Cash Flows - ✔✔High negative IRRs are highly sensitive to changes in
terminal period cash flows. High positive IRRs are less sensitive to changes in terminal
period cash flows than they are to high negative cash flows.
✔✔Relative Value Strategy - ✔✔The usual strategy is to take positions in two securities
that are mispriced relative to each other. The expectation is that their prices will
converge to appropriate values in the future.
, ✔✔Self-selection bias - ✔✔refers to the fact that only hedge funds that choose to report
their returns to the database have their performance numbers included. Most managers
will only report if they feel their returns are above average and that inclusion in a
database will help them attract new business. The implication is that only better
performing managers report their performance, causing an upward bias in performance.
✔✔Short-bias hedge funds - ✔✔Negatively correlated with world equities. The annual
average mean return of short-bias funds was approximately zero, which is lower than
the mean returns of world equities. In addition, short-bias hedge funds had a slightly
higher standard deviation. As a result, the Sharpe ratio of short-basis funds was lower
than that of world equities.
✔✔Geometric Mean - ✔✔given compounded returns: e^arithmetic mean-1
given simple returns: [ln(1+r1)+ln(1+r2)...]/n
✔✔Effective Duration - ✔✔measures the interest rate risk of a position and includes the
effects of embedded option characteristics. For example, in the case of mortgage-
backed securities (MBS), borrowers in the loans underlying the MBS have the option to
prepay early.
✔✔Black-Scholes option pricing model - ✔✔provides a simple structural model that
views a firm's debt and equity as options. With this view of the capital structure, owning
the equity of the firm is equivalent to owning a call option on the assets of the firm, and
owning the debt is equivalent to owning the assets and writing a call option.
Inputs:
- S- Asset price (delta)
- st dev- volatility (vega)
- Rf- interest rate
- T - time to expiration
- X - exercise price
✔✔Venture Capital - ✔✔Venture capital involves senior equity investments in start-up
ventures that are unable to attract capital from more traditional sources such as banks.
Often, there are insufficient tangible assets to collateralize traditional bank loans.
Venture capitalists wish to be compensated in stock or equity-linked securities, not debt.
The burn rate looks at how cash is spent (not how expenses are incurred). Venture
capital investments typically require capital to be committed for 5 to 10 years,
✔✔Volatility Arbitrage Strategies - ✔✔Manager buys the security with low implied
volatility and shorts the security with high implied volatility. The expectation is that the
implied volatilities will revert back to the historical volatility.
AND ANSWERS SURE A+
✔✔Structured PIPE Transaction - ✔✔issues floating rate instruments (e.g. floating ratio
convertible debt) that allow the floating conversion rate to increase as the stock price
declines. To prevent a potential death spiral, the company should establish a
conversion ratio that contains price floor provisions. In other words, the PIPE should
have a conversion ratio ceiling.
✔✔Credit-linked notes (CLN) - ✔✔Bonds issued with an embedded credit option. If
there is no default, the holder of the CLN receives a coupon payment and the payment
of the par value at maturity, similar to a standard bond. If there is a default, the investor
will either receive a reduction in coupon payment or partial redemption of principal
value. Since they function more like an individual bond, CLNs are considered on-
balance sheet assets, and are useful for investors who want to take on more credit
exposure, but do not want to invest in derivatives. The main reason an investor would
invest in a CLN is because the investor will receive a higher coupon payment for
bearing credit risk. The investor will incur losses if a default occurs, but does not share
in upside gains resulting from an improvement in the credit quality of the issuer.
✔✔Advantages of secondary PE market - ✔✔- Greater access to future private equity
funds.
- More effective vintage year diversification.
- Faster profit realization.
,- Opportunistic buying.
✔✔External Credit Enhancement - ✔✔a form of insurance on the CDO trust's portfolio
that can be acquired through an outside third party in the form of a standard insurance
contract, a put option, or a credit default swap.
✔✔Spurious Correlation - ✔✔a false indication of a true relationship, is coincidental or
idiosyncratic, and is limited to the set of observations being examined. Therefore,
spurious correlations vary over time.
✔✔Self Selection Bias - ✔✔Tendency of managers to report favorable results and not
report unfavorable results. Thus, for hedge funds, reported returns may not be an
accurate representation of the total population of returns, and industry returns may be
lower than what the reported figures would suggest.
✔✔Structural Models - ✔✔model default as a function of borrower-specific
characteristics (e.g., balance sheet data, debt-to-equity ratio, balance sheet data).
Reduced-form models infer the probability of default through the observed market prices
of liquid securities. Less liquid securities can then be priced using the information
obtained from more liquid securities.
✔✔Reference Pool - ✔✔the actual pool of assets and/or derivatives held in the special
purpose vehicle (SPV) within the overall CDO structure.
✔✔Debt Service Coverage Ratio - ✔✔Debt service coverage ratio = net operating
income/total loan payment
✔✔Equity Linked Structured Products - ✔✔based on low risk assets guaranteeing a
minimum level of return and then provide additional upside by tying returns to a risky
asset. They differ from other structured product types that are based on pools of risky
assets.
✔✔R-Squared - ✔✔"Goodness of Fit"; measures the explanatory power of a regression.
Ranges from 0 to +1
E.g. when applies to a CAPM based regression- an R-squared of .80 indicates that 80%
of the variation in the asset's excess returns is explained by the market's excess
returns.
✔✔IRRs and Cash Flows - ✔✔High negative IRRs are highly sensitive to changes in
terminal period cash flows. High positive IRRs are less sensitive to changes in terminal
period cash flows than they are to high negative cash flows.
✔✔Relative Value Strategy - ✔✔The usual strategy is to take positions in two securities
that are mispriced relative to each other. The expectation is that their prices will
converge to appropriate values in the future.
, ✔✔Self-selection bias - ✔✔refers to the fact that only hedge funds that choose to report
their returns to the database have their performance numbers included. Most managers
will only report if they feel their returns are above average and that inclusion in a
database will help them attract new business. The implication is that only better
performing managers report their performance, causing an upward bias in performance.
✔✔Short-bias hedge funds - ✔✔Negatively correlated with world equities. The annual
average mean return of short-bias funds was approximately zero, which is lower than
the mean returns of world equities. In addition, short-bias hedge funds had a slightly
higher standard deviation. As a result, the Sharpe ratio of short-basis funds was lower
than that of world equities.
✔✔Geometric Mean - ✔✔given compounded returns: e^arithmetic mean-1
given simple returns: [ln(1+r1)+ln(1+r2)...]/n
✔✔Effective Duration - ✔✔measures the interest rate risk of a position and includes the
effects of embedded option characteristics. For example, in the case of mortgage-
backed securities (MBS), borrowers in the loans underlying the MBS have the option to
prepay early.
✔✔Black-Scholes option pricing model - ✔✔provides a simple structural model that
views a firm's debt and equity as options. With this view of the capital structure, owning
the equity of the firm is equivalent to owning a call option on the assets of the firm, and
owning the debt is equivalent to owning the assets and writing a call option.
Inputs:
- S- Asset price (delta)
- st dev- volatility (vega)
- Rf- interest rate
- T - time to expiration
- X - exercise price
✔✔Venture Capital - ✔✔Venture capital involves senior equity investments in start-up
ventures that are unable to attract capital from more traditional sources such as banks.
Often, there are insufficient tangible assets to collateralize traditional bank loans.
Venture capitalists wish to be compensated in stock or equity-linked securities, not debt.
The burn rate looks at how cash is spent (not how expenses are incurred). Venture
capital investments typically require capital to be committed for 5 to 10 years,
✔✔Volatility Arbitrage Strategies - ✔✔Manager buys the security with low implied
volatility and shorts the security with high implied volatility. The expectation is that the
implied volatilities will revert back to the historical volatility.
