CAIA LATEST EXAMS TEST PAPER QUESTIONS
AND ANSWERS SURE A+
✔✔Name the four major methods of analysis that distinguish the analysis of alternative
investments from the analysis of traditional investments. - ✔✔Return Computation
Methods, Statistical Methods, Valuation Methods, Portfolio Management Methods.
✔✔Define active management. - ✔✔Active management refers to efforts of buying and
selling securities in pursuit of superior combinations of risk and return.
✔✔In a large financial services organization, what is the name used to denote the
people an processes that play a supportive role in the maintenance of accounts and
information systems as well as in the clearance and settlement of trades? - ✔✔Back
office operations
✔✔List several advantages of Separately Managed Accounts (SMAs) relative to funds. -
✔✔1) A fund investor owns shares of a company (the fund) that in turn owns other
investments, whereas an SMA investor actually owns the invested assets as the owner
on record.
2) A fund invests for the common purposes of multiple investors, while an SMA may
have objectives tailored to suite the specific needs of the investor, such as tax
efficiency.
,3) A fund is often opaque to its investors to promote confidentiality; an SMA offers
transparency to its investors.
4) Fund investors may suffer adverse consequences from redemptions (withdrawals)
and subscriptions (deposits) by other investors, but an SMA provides protection from
these liquidity issues for its only investor.
✔✔Which of the following participants is LEAST Likely to be classified as an outside
service provider to a fund: Arbitrageurs, accountants, auditors, or attorneys? -
✔✔Arbitrageurs
✔✔List four major legal documents necessary for establishing and managing a hedge
fund. - ✔✔Private-placement memoranda, partnership agreement, subscription
agreement, management company operating agreement.
✔✔What is a qualified majority? - ✔✔More than 75% of LPs voting to make a decision
(e.g., the decision to extend the investment period or the fund's distribution.
✔✔Is the New York Stock Exchange a secondary or third market? - ✔✔Secondary
market
✔✔What are the three constraints against achieving alternative investment benefits
through liquid products? - ✔✔1) Leverage: there is a 300% asset coverage rule that
requires a mutual fund to have assets totaling at least three times the total borrowings
of the fund, thus limiting borrowing to 33% of assets. UCITS restrictions are even
tighter.
2) Regulatory constraints on concentration
3) Illiquidity constraints
✔✔What is the general term denoting compound interest when the interest is not
continuously compounded? - ✔✔Discrete compounding
✔✔An IRR is estimated for a fund based on an initial investment when the fund was
created, several annual distributions and an estimate of the fund's value prior to its
termination. What type of IRR is this? - ✔✔Since Inception IRR
✔✔An analyst computes the IRR of one alternative to be 20% and another to be 30%.
When the analyst combines the cash flows of the two alternatives into a single
investment, must the IRR of the combination be greater than 20% and less than 30%? -
✔✔No. THe answer is not immediately apparent because the IRR of a portfolio of two
investments is not generally equal to a value-weighted average of the IRRs of the
constituent investments. If the cash flows from two investments are combined to form a
portfolio, the IRR of the portfolio can vary substantially from an average of the IRRs of
the two investments.
,✔✔Is an IRR a dollar-weighted return or a time-weighted return? Why? - ✔✔The IRR is
the primary method of computing a dollar weighted return.
✔✔What is the primary cause of the shape of teh J-curve of interim private equity fund
returns? - ✔✔It is caused by a combination of early expense recognition, early loss
recognition, and deferred gain recognition.
✔✔In which scenario will a clawback clause lead to payments? - ✔✔A clawback clause,
clawback provision or clawback option is designed to return incentive fees to LPs when
early profits are followed by subsequent losses.
✔✔Describe the difference between an ex ante return and an ex post return in the case
of a financial asset. - ✔✔Ex post returns are realized outcomes rather tan anticipated
outcomes. Future possible returns and their probabilities are referred to as
expectational or ex ante returns.
✔✔Contrast the kurtosis and the excess kurtosis of the normal distribution. -
✔✔Kurtosis serves as an indicator of the peaks and tails of a distribution. In the case of
a normally-distributed variable the kurtosis is 3. Excess kurtosis is equal to kurtosis
minus 3. Thus a normally distributed variable has an excess kurtosis of 0. Excess
kurtosis provides a more intuitive measure of kurtosis relative to the normal distribution
since it varies around zero to indicate kurtosis that is larger (positive) or smaller
(negative) than the case of the normal distribution.
✔✔How would a large increase in the kurtosis of a return distribution affect its shape? -
✔✔Kurtosis is typically viewed as capturing the fatness of the tails of a distribution, with
high values of kurtosis, or positive values of excess kurtosis, indicating fatter tails (i.e.
higher probabilities of extreme outcomes) than is found in the case of a normally
distributed variable. Kurtosis can also be viewed as indicating the peakedness of a
distribution, with a sharp narrow peak in teh center being associated with high values of
kurtosis, or positive values of excess kurtosis.
✔✔Using statistical termniology, what does the volatility of a return mean? - ✔✔Volatility
is often used synonymously with standard deviation in investments.
✔✔The covariance between the returns of two financial assets is equal to the product of
the standard deviations of the returns of the two assets. What is the primary statistical
terminology for this relationship? - ✔✔The covariance will equal the product of the
standard deviations when correlation coefficient is equal to one.
✔✔What is the value of the beta of the following three investments: a fund that tracks
the overall market index, a riskless asset, and a bet at a casino table? - ✔✔+1, 0, 0
(assuming the casino bet is a traditional bet not based on market outcomes)
, ✔✔In the case of a financial asset with returns that have zero autocorrelation, what is
the relationship between the variance of the assets daily returns and the variance of the
asset's monthly returns? - ✔✔The variance of the monthly returns are T times the
variance of the daily returns where T is the number of trading days in the month.
✔✔In the case of a financial asset with returns that have autocorrelation approaching
+1, what is the relationship between the standard deviation of the asset's monthly
returns and the standard deviation of the asset's annual return? - ✔✔In the perfectly
correlated case the standard deviation of a multiperiod return is proportional to T. In the
case the annual vol is 12 times the monthly vol.
✔✔What is the general statistical issue addressed when the GARCH method is used in
a time series analysis of returns? - ✔✔The tendency of an asset's variance to change
through time.
✔✔Jane studies past prices and volume of trading in major public equities and
establishes equity market neutral positions based on her forecasts of prices. Jane
consistently outperforms market indices of comparable risk. Does the performance
indicate that the equity market is informationally inefficient at the semistrong level? -
✔✔The underlyin equity market is informationally inefficient at both the weak level and
the semi-strong level since an inefficiency at a "lower" level indicates inefficiency at a
"higher" level because the underlying information sets are cumulative moving from weak
to strong.
✔✔List two major factors that drive informational market efficiency through facilitating
better investment analysis. - ✔✔1) Assets will also tend to trade at prices closer to their
informationally efficient values when there is easier access to better information.
2) Assets will also tend to trade at prices closer to their informationally efficient values
when there is less uncertainty about their valuation. In other words, when there are
better valuation methods.
✔✔What does the modified Fisher equation express regarding minimal interest rate
determinants? - ✔✔It expresses the nominal interest rate as the combination of the
after-tax real interest rate, r, and the anticipated rate of inflation, with an adjustment for
income tax.
✔✔What does it mean to bootstrap a yield curve? - ✔✔It is the process of recursively
estimating spot rates using one or more zero-coupon bonds on the short end and
coupon bonds on the medium- and long-term regions of the term structure.
✔✔In which theory of the term structure of interest rates do all bonds have the same
expected return? - ✔✔Unbiased expectations theory.
AND ANSWERS SURE A+
✔✔Name the four major methods of analysis that distinguish the analysis of alternative
investments from the analysis of traditional investments. - ✔✔Return Computation
Methods, Statistical Methods, Valuation Methods, Portfolio Management Methods.
✔✔Define active management. - ✔✔Active management refers to efforts of buying and
selling securities in pursuit of superior combinations of risk and return.
✔✔In a large financial services organization, what is the name used to denote the
people an processes that play a supportive role in the maintenance of accounts and
information systems as well as in the clearance and settlement of trades? - ✔✔Back
office operations
✔✔List several advantages of Separately Managed Accounts (SMAs) relative to funds. -
✔✔1) A fund investor owns shares of a company (the fund) that in turn owns other
investments, whereas an SMA investor actually owns the invested assets as the owner
on record.
2) A fund invests for the common purposes of multiple investors, while an SMA may
have objectives tailored to suite the specific needs of the investor, such as tax
efficiency.
,3) A fund is often opaque to its investors to promote confidentiality; an SMA offers
transparency to its investors.
4) Fund investors may suffer adverse consequences from redemptions (withdrawals)
and subscriptions (deposits) by other investors, but an SMA provides protection from
these liquidity issues for its only investor.
✔✔Which of the following participants is LEAST Likely to be classified as an outside
service provider to a fund: Arbitrageurs, accountants, auditors, or attorneys? -
✔✔Arbitrageurs
✔✔List four major legal documents necessary for establishing and managing a hedge
fund. - ✔✔Private-placement memoranda, partnership agreement, subscription
agreement, management company operating agreement.
✔✔What is a qualified majority? - ✔✔More than 75% of LPs voting to make a decision
(e.g., the decision to extend the investment period or the fund's distribution.
✔✔Is the New York Stock Exchange a secondary or third market? - ✔✔Secondary
market
✔✔What are the three constraints against achieving alternative investment benefits
through liquid products? - ✔✔1) Leverage: there is a 300% asset coverage rule that
requires a mutual fund to have assets totaling at least three times the total borrowings
of the fund, thus limiting borrowing to 33% of assets. UCITS restrictions are even
tighter.
2) Regulatory constraints on concentration
3) Illiquidity constraints
✔✔What is the general term denoting compound interest when the interest is not
continuously compounded? - ✔✔Discrete compounding
✔✔An IRR is estimated for a fund based on an initial investment when the fund was
created, several annual distributions and an estimate of the fund's value prior to its
termination. What type of IRR is this? - ✔✔Since Inception IRR
✔✔An analyst computes the IRR of one alternative to be 20% and another to be 30%.
When the analyst combines the cash flows of the two alternatives into a single
investment, must the IRR of the combination be greater than 20% and less than 30%? -
✔✔No. THe answer is not immediately apparent because the IRR of a portfolio of two
investments is not generally equal to a value-weighted average of the IRRs of the
constituent investments. If the cash flows from two investments are combined to form a
portfolio, the IRR of the portfolio can vary substantially from an average of the IRRs of
the two investments.
,✔✔Is an IRR a dollar-weighted return or a time-weighted return? Why? - ✔✔The IRR is
the primary method of computing a dollar weighted return.
✔✔What is the primary cause of the shape of teh J-curve of interim private equity fund
returns? - ✔✔It is caused by a combination of early expense recognition, early loss
recognition, and deferred gain recognition.
✔✔In which scenario will a clawback clause lead to payments? - ✔✔A clawback clause,
clawback provision or clawback option is designed to return incentive fees to LPs when
early profits are followed by subsequent losses.
✔✔Describe the difference between an ex ante return and an ex post return in the case
of a financial asset. - ✔✔Ex post returns are realized outcomes rather tan anticipated
outcomes. Future possible returns and their probabilities are referred to as
expectational or ex ante returns.
✔✔Contrast the kurtosis and the excess kurtosis of the normal distribution. -
✔✔Kurtosis serves as an indicator of the peaks and tails of a distribution. In the case of
a normally-distributed variable the kurtosis is 3. Excess kurtosis is equal to kurtosis
minus 3. Thus a normally distributed variable has an excess kurtosis of 0. Excess
kurtosis provides a more intuitive measure of kurtosis relative to the normal distribution
since it varies around zero to indicate kurtosis that is larger (positive) or smaller
(negative) than the case of the normal distribution.
✔✔How would a large increase in the kurtosis of a return distribution affect its shape? -
✔✔Kurtosis is typically viewed as capturing the fatness of the tails of a distribution, with
high values of kurtosis, or positive values of excess kurtosis, indicating fatter tails (i.e.
higher probabilities of extreme outcomes) than is found in the case of a normally
distributed variable. Kurtosis can also be viewed as indicating the peakedness of a
distribution, with a sharp narrow peak in teh center being associated with high values of
kurtosis, or positive values of excess kurtosis.
✔✔Using statistical termniology, what does the volatility of a return mean? - ✔✔Volatility
is often used synonymously with standard deviation in investments.
✔✔The covariance between the returns of two financial assets is equal to the product of
the standard deviations of the returns of the two assets. What is the primary statistical
terminology for this relationship? - ✔✔The covariance will equal the product of the
standard deviations when correlation coefficient is equal to one.
✔✔What is the value of the beta of the following three investments: a fund that tracks
the overall market index, a riskless asset, and a bet at a casino table? - ✔✔+1, 0, 0
(assuming the casino bet is a traditional bet not based on market outcomes)
, ✔✔In the case of a financial asset with returns that have zero autocorrelation, what is
the relationship between the variance of the assets daily returns and the variance of the
asset's monthly returns? - ✔✔The variance of the monthly returns are T times the
variance of the daily returns where T is the number of trading days in the month.
✔✔In the case of a financial asset with returns that have autocorrelation approaching
+1, what is the relationship between the standard deviation of the asset's monthly
returns and the standard deviation of the asset's annual return? - ✔✔In the perfectly
correlated case the standard deviation of a multiperiod return is proportional to T. In the
case the annual vol is 12 times the monthly vol.
✔✔What is the general statistical issue addressed when the GARCH method is used in
a time series analysis of returns? - ✔✔The tendency of an asset's variance to change
through time.
✔✔Jane studies past prices and volume of trading in major public equities and
establishes equity market neutral positions based on her forecasts of prices. Jane
consistently outperforms market indices of comparable risk. Does the performance
indicate that the equity market is informationally inefficient at the semistrong level? -
✔✔The underlyin equity market is informationally inefficient at both the weak level and
the semi-strong level since an inefficiency at a "lower" level indicates inefficiency at a
"higher" level because the underlying information sets are cumulative moving from weak
to strong.
✔✔List two major factors that drive informational market efficiency through facilitating
better investment analysis. - ✔✔1) Assets will also tend to trade at prices closer to their
informationally efficient values when there is easier access to better information.
2) Assets will also tend to trade at prices closer to their informationally efficient values
when there is less uncertainty about their valuation. In other words, when there are
better valuation methods.
✔✔What does the modified Fisher equation express regarding minimal interest rate
determinants? - ✔✔It expresses the nominal interest rate as the combination of the
after-tax real interest rate, r, and the anticipated rate of inflation, with an adjustment for
income tax.
✔✔What does it mean to bootstrap a yield curve? - ✔✔It is the process of recursively
estimating spot rates using one or more zero-coupon bonds on the short end and
coupon bonds on the medium- and long-term regions of the term structure.
✔✔In which theory of the term structure of interest rates do all bonds have the same
expected return? - ✔✔Unbiased expectations theory.
