Sample Questions Level I

March 2010 SM CAIA Level I Sample Questions Chartered Alternative Investment Analyst® These questions are designed to be representative of the format and nature of actual CAIA Level I examination questions in March 2010. The sample questions are not a facsimile of the actual questions. The sample questions do not cover all of the study materials that comprise the CAIA Level I curriculum, nor have they been verified to be equally difficult as the actual questions. Accordingly, these sample questions should not be used to assess a candidate’s level of preparedness for the exam.

Question Breakdown ****************************************************************** Questions 1 through 15 Professional Standards and Ethics Questions 16 through 25 Introduction to Alpha and Beta Drivers Questions 26 through 38 Real Estate Questions 39 through 61 Hedge Funds Questions 62 through 74 Commodities and Managed Futures Questions 75 through 87 Private Equity Questions 88 through 100 Credit Derivatives ******************************************************************

 Copyright 2010 CAIA Association. All rights reserved. No part of this publication may be reproduced, electronically or mechanically, without prior written consent of the CAIA Association.

CAIA 1.

SM

March 2010 Level I Sample Questions

Which of the following describes what an employee behind a firewall should first do if he or she needs to share confidential information about an issue with someone on the other side of the wall? A. Run a market simulation to determine if the sharing of the information will significantly alter the mix of total information currently available. B. Determine if the information about to be shared concerns a security on a watched or restricted list. C. Consult a designated compliance officer to determine if sharing the information is necessary. D. Make sure that no previous trading violations have been filed against the person on the other side of the wall.

2.

Why do the Code and Standards recommend that investment personnel not participate in equity initial public offerings (IPOs)? A. Because participation in equity IPOs may have the appearance of appropriating an attractive investment opportunity from clients for personal gain B. Because equity IPOs, while providing short term gains, are usually not prudent long term investments C. Because equity IPOs carry substantial systematic risk such that they usually fall outside the limits established in the investor policy statement D. Because equity IPOs are often illiquid so that it is difficult for investors to sell the shares quickly at a fair price

3.

According to the Code and Standards, what is the first step that a member should follow if he or she has grounds to believe that imminent or ongoing employer activities are illegal or unethical? A. Maintain a file of the activity or activities with proper documentation B. Bring the activity to the attention of their employer through their supervisor C. Move to establish a formal written policy of violations and penalties within the firm D. Maintain confidentiality in order to preserve the integrity of the firm

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4.

According to the Code and Standards, which of the following best describes appropriate conduct related to the acceptance of gifts from clients? A. Members may accept gifts from clients if they are disclosed and if the employer finds that the gifts will not affect independence and objectivity. B. Members may accept gifts so long as their market value is less than $100. C. Members cannot accept gifts under any circumstances, in order to avoid even the appearance of a conflict. D. Members cannot accept gifts under any circumstances, because research has shown that any gift, large or small, impairs ethical judgment.

5.

Which of the following is NOT a procedure of compliance with respect to the standard “independence and objectivity?” A. B. C. D.

6.

According to the Code and Standards, which of the following actions is proper with regard to investing in oversubscribed issues? A. B. C. D.

7.

Protecting the integrity of opinion Restricting special cost arrangements Creating restricted lists Reporting unethical trading behavior

Orders for the smallest subscribers get filled first Orders for institutional subscribers get filled first Orders should be prorated to all subscribers Orders for subscribers not filled in the previous issue get filled first

Carl St. Germaine believes that reports published by his firm and used as part of presentation materials contain sections that are in violation of the Code and Standards. He has brought the conduct to the attention of the firm’s legal counsel, whose opinion is that the reports can be presented because they are not in violation of any law. He has brought the activity to the attention of the firm’s compliance officer, whose recommendation is to trust the opinion of legal counsel. He has taken his concerns to his supervisor, who also concludes that there is nothing to be concerned about, given the counsel’s advice. According to the Code and Standards, what should Carl do? A. Maintain current files for protection in the event of a formal complaint B. Dissociate from the conduct through whatever means necessary C. Stay informed about changes in the law, in case the advice from legal counsel is no longer valid D. Communicate the Code and Standards to each of his supervisors with a specific reference to the violations so that his actions are on file

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8.

Marco is a security analyst who places trades through a number of brokerage firms. Marco holds a professional designation requiring members to adhere to the Code and Standards. The President of one particular brokerage firm is appreciative of Marco's business and offers Marco the use of his house on Nantucket in Massachusetts for a week when he'll be out of the country. Marco accepts this offer. Which of the following statements regarding Marco’s actions is consistent with the Code and Standards? A. There is no violation because the President's house would not have been used had Marco not taken the offer. B. There is no violation because the Code and Standards do not preclude customary entertainment. C. Marco violated the Code and Standards by entering into a soft-dollar arrangement. D. Marco violated the Code and Standards by the acceptance of a gift that could compromise his independence and objectivity.

9.

Joanna Wasic is a research analyst for a fund of hedge funds. She learns that a portion of the firm’s research, prepared by another department, includes survivorship bias such that some of the firm’s performance is exaggerated. Joanna presents the report to prospective clients in order to solicit new business, but steers clear of any reference to the exaggerated performance. Which of the following describes Joanna’s behavior with respect to the Code and Standards? A. Joanna violated the Code and Standards because the report misrepresents performance. B. Joanna violated the Code and Standards, because the report was prepared by multiple sources, and she failed to explicitly acknowledge those sources. C. Joanna did not violate the Code and Standards because she did not include the biased data in her presentation. D. Joanna did not violate the Code and Standards because she has never included such a bias in her own research.

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10.

Nadia Petrav is an investment advisor and holds a professional designation that requires all members to adhere to the Code and Standards. She works for a multinational investment company located in the United States, but is registered in, does business in, and lives in an emerging country with laws and regulations considered less strict than the Code and Standards. Her home country does not allow advisors to hold short positions for their clients or in their personal account. Which of the following best describes her requirements, according to the Code and Standards? A. Nadia is required to apply the Code and Standards in all aspects of her business and is not allowed to hold short positions in her client’s accounts, but can hold short positions in her personal account as long as they are disclosed. B. Nadia is required to apply the Code and Standards in all aspects of her business, and is allowed to hold short positions in both her client’s accounts and in her personal account. C. Nadia is required to apply the less strict laws and regulations of her home country, and is not allowed to hold short positions in either her client’s accounts or in her personal account. D. Nadia is required to apply the Code and Standards in all aspects of her business, and is not allowed to hold short positions in either her clients or in her personal account.

11.

Sharma Vora, a research analyst for the pharmaceutical industry, has recommended that the firm take an equity interest in CISDA, a small biotechnology firm. After writing and publishing his initial report, Sharma purchases CISDA stock for his own portfolio. He has been asked to write a second report on CISDA. What action should Sharma take in order to be compliant with the Code and Standards? A. B. C. D.

Sell his CISDA stock in a relatively short period of time Restrict any additional purchase of CISDA stock Disclose his CISDA holdings at the time of the second report Remove himself as a CISDA analyst

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12.

The FDA's decision not to approve the marketing of Alton's new drug Formizone was both unexpected and bad news for Alton. The news was received from the FDA late Friday after trading was closed. Over the weekend Alton's President leaked the news to a select few family and friends. One of those friends, Josh Sentinel, called his broker Logan on Sunday to describe the situation and to instruct her to sell all his Alton shares. In addition to placing that trade, Logan places an order to short Alton's shares for herself. Which of the following describes Logan's behavior with respect to the Code and Standards? A. There is no violation as Logan owes no duty to Alton's shareholders. B. There is no violation under the "mosaic" theory. C. Logan violated the Code and Standards because she placed a trade without first consulting her other clients. D. Logan violated the Code and Standards by initiating the transaction to sell shares based upon material nonpublic information.

13.

Taylor Alexander of Taylor and Taylor Investment Advisors holds a professional designation that requires members to adhere to the Code and Standards. As part of her presentation she notes that performance represents a weighted composite of all of the firm's portfolios, and that returns are shown prior to fees and taxes. She is careful to note that some of the performance history includes terminated accounts while some of the performance history does not. She also states that the performance presentation is in compliance with Global Investment Performance Standards (GIPS). Which of the following best describes the performance presentation with respect to the Code and Standards? A. The presentation is not in compliance because it does not include terminated accounts in all cases. B. The presentation is in compliance with GIPS. C. The presentation is not in compliance because it reports performance prior to management fees and taxes. D. The performance is not in compliance because it reports results as a representation of weighted composites.

14.

Which of the following categories under “Professionalism” in the Standards of Practice admonishes members and candidates against professional dishonesty, fraud or deceit and against committing any act that reflects adversely on their professional reputation, integrity or competence? A. B. C. D.

Knowledge of the Law Independence and Objectivity Misrepresentation Misconduct

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15.

Quan Yang has terminated her professional relationship with Ten Peller Investments (TPI) and has started her own hedge fund . Ms. Yang clearly served as an independent contractor for TPI (working from her home) and had no agreement with the firm with regard to solicitation of TPI clients or retention of client information. After leaving TPI, Ms. Yang called several TPI clients using the contact information sent to her by TPI and saved on her home computer. According to the Standards and Practice, which of the following statements best summarized Ms. Yang’s duties to TPI? A. Since Ms. Yang was an independent contractor, not an employee, she is not subject to the “Duties to Employers” section of the Standards of Practice. B. Ms. Yang is subject to all of the provisions of the “Duties to Employers” but like an employee is free to use the client contact information after leaving the firm. C. Ms. Yang violated the standards by not erasing all client contact information from her home computer when the relationship was terminated.

16.

Which of the following categories would NOT be considered a super asset class? A. B. C. D.

17.

Capital assets Intangible assets Assets that are used as inputs to creating economic value Assets that are a store of value

Which of the following actions is MOST accurately associated with tactical asset allocation? A. B. C. D.

Investment decisions with a long term perspective Investment decisions that do not emphasize current market conditions Investment decisions with a primary goal of maximizing return Investment decisions that do not depend on ability to diversity

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18.

Which of the following sets of investment categories or products is MOST accurately described as being driven by beta rather than alpha? A. B. C. D.

19.

Which of the following types of beta is most associated with active returns rather than with systematic risk premiums? A. B. C. D.

20.

Classic beta Bespoke beta Alternative beta Bulk beta

Janmar Fund selects investments to match an index that it has created. The index concentrates its positions on investments that are viewed as being substantially underpriced relative to others based on Fama-French’s three-factor model for describing equity market risk premiums. The Janmar Fund’s strategy is best described by which pair of related concepts? A. B. C. D.

21.

Enhanced index and 130/30 funds Enhanced index and long/short investing Passive index and nonlinear returns Passive index and absolute returns

Exogenous alpha and fundamental beta Exogenous alpha and cheap beta Endogenous alpha and fundamental beta Endogenous alpha and cheap beta

How are beta driven products generally described? A. B. C. D.

As requiring substantial information to implement As difficult to create without relatively high costs As having returns uncorrelated with the overall market As attempting to capture systematic risk premiums

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22.

How is the alpha of a particular investment differentiated from the beta? A. B. C. D.

23.

The alpha is ex post and is identified using option pricing models The alpha is ex post and is identified using factor models The alpha is ex ante and is identified using option pricing models The alpha is ex ante and is identified using factor models

What is considered to be the most important task in distinguishing alpha from beta in the performance of an investment manager? A. Identifying true systematic risk exposures B. Observing alpha and properly deducing beta C. Measuring the returns of relevant factors

24.

There are several common reasons why alpha is argued to be a “zero sum game”. Which of the following is NOT one of those reasons? A. B. C. D.

25.

Investors have similar levels of wealth Investors have similar risk tolerances Investors have homogenous return expectations Investors have similar tax rates

Which of the following is MOST accurate with regard to the information coefficient (IC) in the Fundamental Law of Active Management? A. The IC is the correlation between portfolio returns and market returns across active bets B. The IC is the correlation between portfolio returns and market returns through time C. The IC is the correlation between forecasted returns and actual returns across active bets D. The IC is the correlation between forecasted returns and actual returns through time

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26.

Which of the following scenarios MOST accurately describes the typical income tax implications of REIT dividends for pension funds? A. The REIT would pay taxes on the income and the pension fund would pay taxes on the dividend B. The REIT would not pay taxes on the income but the pension fund would pay taxes on the dividend C. The REIT would pay taxes on the income but the pension fund would not pay taxes on the dividend D. The REIT would not pay taxes on the income and the pension fund would not pay taxes on the dividend

27.

What are the typical implications to an REIT investor of REITs being listed? A. B. C. D.

28.

The investor enjoys higher liquidity but assumes an increase in systematic risk The investor enjoys higher liquidity as well as a decrease in systematic risk The investor suffers lower liquidity and assumes an increase in systematic risk The investor suffers lower liquidity but enjoys a decrease in systematic risk

Which of the following describes a typical equity REIT? A. Invests in the equities of publicly traded real estate investments B. Receives its revenue from rental and lease payments C. Does not issue debt, utilize leverage or otherwise borrow

29.

What is NOT one of the major ways that a REIT can be structured? A. B. C. D.

As an indexed REIT As a finite life REIT As a single property REIT As a dedicated REIT

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30.

Which of the following statements is LEAST accurate regarding UPREITs and downREITs? A. B. C. D.

31.

How would a histogram of US REIT returns over the last twenty years be described? A. B. C. D.

32.

An UPREIT facilitates the capitalization needed to go public In a down-REIT, an older REIT typically forms a subsidiary Unlike a down-REIT, an UPREIT directly owns real estate assets Both UPREITs and down-REITs are driven by tax consequences

By a large value of excess kurtosis and a negative skew By a large value of excess kurtosis and a positive skew By near zero excess kurtosis and a negative skew By near zero excess kurtosis and a positive skew

Past correlation of US REIT returns (over the last 20+ years) tends to indicate which of the following aspects of REITs as a diversifier? A. REITs diversified a bond portfolio very well and diversified a large portfolio better than a small stock portfolio B. REITs diversified a bond portfolio very poorly and diversified a large portfolio better than a small stock portfolio C. REITs diversified a bond portfolio very well and diversified a small portfolio better than a large stock portfolio D. REITs diversified a bond portfolio very poorly and diversified a small portfolio better than a large stock portfolio

33.

How is the NCREIF Property Index calculated? A. B. C. D.

Monthly based on monthly appraisals Monthly with varied appraisal intervals Quarterly based on quarterly appraisals Quarterly with varied appraisal intervals

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stock stock stock stock

34.

Which of the following results is NOT an implication of the smoothing of real estate returns due to the use of appraisals? A. B. C. D.

35.

What is NOT a major method of unsmoothing a real estate index? A. B. C. D.

36.

Using only the properties that have recently been sold Using a hedonic price index to adjust for characteristic differences Using simulated leverage to magnify the dispersion in the returns Using econometrics to remove the embedded lag on the time series

Which of the following styles was NOT developed by the National Council of Real Estate Investment Fiduciaries (NCREIF) for analyzing direct real estate investing? A. B. C. D.

37.

Lagging of returns Decreased average returns Decreased volatility of returns Decreased correlations (with stocks and bonds)

Core Satellite Value-added Opportunistic

What style of real estate investing is characterized by being the most liquid, the most developed, the least leveraged, and the most recognizable? A. B. C. D.

Core Satellite Value-added Opportunistic

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38.

Which of the following characteristics best describes PERE (private equity real estate) investments? A. B. C. D.

39.

Which of the following statements about the global macro strategy is NOT true? A. B. C. D.

40.

Global macro strategies may invest in commodities. Global macro managers have a broad investment universe. Global macro funds tend to have large amounts of investor capital. Global macro strategies tend to be unable to apply leverage.

Which of the following four hedge fund strategies would be most likely to include the other three strategies? A. B. C. D.

41.

Low to moderate leverage Low risk real estate holdings Easily valued using transactions data Often originating in Europe

Merger arbitrage Fixed income arbitrage Relative value arbitrage Convertible arbitrage

A hedge fund of funds reports a monthly hurdle rate vis-à-vis large cap stocks of 0.0047. What does this mean? A. The fund of funds must earn at least 47 basis points per month to be a valuable addition for risk budgeting purposes. B. The fund of funds’ average return over the most recent month is 47 basis points. C. The fund of funds’ ratio of average return to standard deviation of return is 47 basis points per month. D. On a monthly basis, the fund of funds is expected to earn 47 basis points more than the risk free rate of return.

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42.

According to Anson, which question is NOT considered to be part of the investment objective of the hedge fund? A. B. C. D.

43.

What is known as a decline in the net asset value of a hedge fund? A. B. C. D.

44.

What markets does the hedge fund manager invest? What fees will the hedge fund manager charge? What is the hedge fund manager’s general investment strategy? What is the hedge fund manager’s benchmark, if any?

Capacity Leverage Drawdown Lock-up

The Sharpe ratio for Company A is 0.34, while the Sharpe ratio for Company B is 0.39. What can be said about Company B? A. As measured by the Sharpe ratio, Company B’s risk adjusted return is superior B. As measured by the Sharpe ratio, Company B’s mean return is higher C. As measured by the Sharpe ratio, Company B’s standard deviation of returns is higher D. As measured by the Sharpe ratio, Company B’s excess return is higher

45.

Which statistical term describes a distribution where the tails are thinner than that expected by a normal distribution? A. B. C. D.

Excess kurtosis Leptokurtosis Platykurtosis Mesokurtosis

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46.

Logic fund is performing well and has decided to begin reporting its performance to various hedge fund databases. This is an example of what potential type of data risk? A. B. C. D.

47.

Returns of a hedge fund over four consecutive years are 4.5%, 10.8%, 19.1%, and 11.2%. Which of the following comes closest to the hedge fund’s geometric mean? A. B. C. D.

48.

Liquidation bias Survivorship bias Selection bias Event bias

10.2% 10.4% 11.3% 11.7%

What is the approximate size of the hedge fund industry in the US in 2007 and 2008? A. B. C. D.

Between 8,000 to 10,000 funds with $180 billion of assets under management Between 8,000 to 10,000 funds with $1.8 trillion of assets under management Between 80,000 to 100,000 funds with $180 billion of assets under management Between 80,000 to 100,000 funds with $1.8 trillion of assets under management

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49.

Consider an equity long/short hedge fund manager who at the beginning of 2008 went long by 150% of the portfolio value in a fund with leverage and a beta of 1.25 and simultaneously went short by 50% of the portfolio value in an exchange-traded fund that passively replicates exposure to the overall market. What is the weighted average beta of this equity long/short portfolio? A. B. C. D.

50.

Anson places the “Activist Investors” strategy within which hedge fund category? A. B. C. D.

51.

Market directional Corporate restructuring Convergence trading Opportunistic

Which types of securities do Regulation D hedge funds typically invest? A. B. C. D.

52.

1.125 1.250 1.375 1.875

Private securities of companies in financial distress or in bankruptcy Public securities of companies in financial distress or in bankruptcy Private securities that are newly issued by public companies Public securities that are newly issued by companies going public

For what primary reason would an investor examine the serial correlation of hedge fund returns? A. B. C. D.

To investigate whether performance persistence exists To measure the extent to which hedge funds are diversifiers To provide an improved risk measure of idiosyncratic risk To estimate the sign and magnitude of the fund’s alpha

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53.

Which of the following statements is LEAST accurate in explaining why a diversified hedge fund investment program might be viewed as a bond substitute? A. B. C. D.

54.

Schanzy Funds has these three managerial positions: chief investment officer, chief financial officer and chief risk officer. As a small fund, Schanzy Funds is considering asking an especially gifted employee, Brian Ozymandias, to hold more than one position. What is your recommendation with respect to the combination of duties? A. B. C. D.

55.

Brian should not hold any combination of those positions Brian should not be chief investment officer and chief financial officer Brian should not be chief financial officer and chief risk officer Brian should not be chief investment officer and chief risk officer

The return distribution of credit risky investments would be expected to have what characteristics? A. B. C. D.

56.

Hedge fund returns tend to have relatively low correlations with equities Hedge fund returns are highly correlated with bond returns Hedge fund returns tend to have lower risk than most types of stocks Hedge funds tend to displace bonds in an efficient frontier analysis

Platykurtosis and positive skew Leptokurtosis and negative skew Platykurtosis and negative skew Leptokurtosis and positive skew

Assuming that the returns of a particular position are normally distributed, and that the one week Value at Risk (VaR) is $100, what would the four week VaR be? A. B. C. D.

$ 100 $ 200 $ 400 $1,600

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57.

Derek Fund combines a well hedged position in competitively priced assets with very large simultaneous short positions in out of the money calls and puts. A due diligence analysis focused on a time period exhibiting relative market calmness should expect the fund to exhibit what return characteristics? A. B. C. D.

58.

Which of the following option positions of and by itself best describes the payoff characteristics of a hedge fund manager entitled to incentive fees based on the profits of the fund? A. B. C. D.

59.

High alpha and platykurtosis High alpha and leptokurtosis Negative alpha and platykurtosis Negative alpha and leptokurtosis

Long a call Short a call Long a put Short a put

Kelly Fund has experienced a large increase in current and anticipated volatility in its net asset value. How should Suzanne, the founder of the Fund, view this increased volatility? A. As placing her wealth at decreased risk while increasing the value of her incentive fees B. As placing her wealth at decreased risk and decreasing the value of her incentive fees C. As placing her wealth at increased risk while increasing the value of her incentive fees D. As placing her wealth at increased risk and decreasing the value of her incentive fees

60.

Which of the following collapses was most clearly marked by years of fraudulent concealment of investment losses? A. B. C. D.

Amaranth Hedge Fund Bayou Management Carlyle Group Peleton Partners Hedge Fund

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61.

Which of the following statements most accurately describes the average returns and cross-sectional volatilities of hedge fund indices and stock market indices (January 1990 to June 2008)? A. Hedge fund index returns were tightly clustered and had higher stock indices B. Hedge fund index returns were widely dispersed and had higher stock indices C. Hedge fund index returns were tightly clustered and had lower stock indices D. Hedge fund index returns were widely dispersed and had lower stock indices

62.

volatility than volatility than volatility than

Which of the following comes closest to the fair price on a 6-month futures contract on the S&P 500 index given the following information: an index at 1500, the risk free rate at 5%, and the dividend yield at 1%? A. B. C. D.

63.

volatility than

$1,530 $1,545 $1,560 $1,590

Which term describes the following relationship between the expected spot price and the price of the commodity futures contract? E(ST) > FT A. B. C. D.

64.

Roll yield Contango Parity Backwardation

. Who is the primary regulator of the managed futures industry? A. The Securities and Exchange Commission B. The Managed Futures Association C. The Commodities Futures Trading Commission

65.

With respect to commodities futures contracts, what type of margin relates to the fluctuation in the value of an investor’s account? A. B. C. D.

Initial margin Linked margin Variation margin Maintenance margin

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66.

Which of the following describes interest rate parity? A. The price of commodity futures will adjust such that investors earn the risk free rate of interest. B. The future exchange rate between two currencies will be dependent upon the differences in their interest rates. C. Interest rates will adjust to changes in inflationary expectations between countries. D. Futures prices and spot prices are connected by the difference between the short term and long term interest rate.

67.

Consider the case of a non-dividend paying financial asset where F > Ser(T-t). How, in this case, can the hedge fund manager earn a profit? A. B. C. D.

68.

By buying the underlying asset and selling the futures contract By buying the underlying asset and buying the futures contract By selling short the underlying asset and buying the futures contract By selling short the underlying asset and selling the futures contract

Contango futures markets are said to have an upward sloping price curve. What can explain the shape of the price curve? A. B. C. D.

The additional risk accepted by the hedger over short periods The additional risk accepted by the hedger over long periods The additional risk accepted by the speculator over short periods The additional risk accepted by the speculator over long periods

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69.

What is NOT a distinguishing characteristic of the Mount Lucas Management Commodity Index (vis-à-vis the other commodity indices)? A. B. C. D.

70.

How does adding a commodity index to a portfolio of stocks and bonds change the efficient frontier? A. B. C. D.

71.

Trend following Negative skew Long and short positions Less dispersion

It shifts the frontier down and to the right. It shifts the frontier down and to the left. It shifts the frontier up and to the left. It shifts the frontier up and to the right.

What is the typical fee arrangement paid to Commodity Trading Advisors (CTAs)? A. The “2 and 20” structure B. 1%-2% management fees but no performance fees C. 3%-5% management fees but no performance fees

72.

What does the evidence from an empirical analysis of indices show with respect to adding managed futures to a portfolio of stocks and bonds? A. B. C. D.

Increased downside risk but an improved risk-return tradeoff Increased downside and an improved risk-return tradeoff Decreased downside risk but an improved risk-return tradeoff Decreased downside risk and an improved risk-return tradeoff

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73.

The domestic one year risk free interest rate is 10%, the current spot exchange rate with a particular foreign currency is 1.00, and a one year futures contract on the foreign currency has a price of 1.05 domestic units per unit of foreign currency. Assuming continuous compounding, which of the following rates is closest to the one year risk free interest rate in the foreign currency? A. B. C. D.

74.

5.12% 10.24% 15.36% 20.48%

What has empirical analysis of efficiency frontiers (including US stocks and bonds) with an allocation of 10% to commodity futures and of correlations between assets indicated in hostile markets? A. That commodity futures provided downside protection and the non-US decreased risk exposures B. That commodity futures provided downside protection but the non-US increased risk exposures C. That commodity futures provided no downside protection but the non-US decreased risk exposures D. That commodity futures provided no downside protection and the non-US increased risk exposures

75.

stocks stocks stocks

Which of the following does NOT describe an area of specialization in the venture capital industry? A. B. C. D.

76.

stocks

Specialization by industry Specialization by geography Specialization by currency Specialization by stage of financing

What is the practice of buying non-financial companies by financial institutions called? A. B. C. D.

A crossover Merchant banking A leveraged buyout (an LBO) Private investment in a public entity (a PIPE)

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77.

What are the return patterns for leveraged buyouts (LBOs) shown to exhibit? A. B. C. D.

78.

A private equity transaction where an investor or group of investors bargain directly with a public company to acquire an equity position is known as what? A. B. C. D.

79.

A mezzanine debt transaction A distressed debt transaction A crossover transaction A PIPE transaction

Which of the following is TRUE of mezzanine financing? A. B. C. D.

80.

Significant negative skewness Significant positive skewness A near symmetrical distribution Significant negative kurtosis

It is senior to debt represented by bank loans. Mezzanine financing typically has an equity kicker. Return expectations to mezzanine funds is at about the same level as LBO funds. Mezzanine financing tends to attract the most capital in a robust economy.

Under the rules of priority with respect to security holders, whose claims (from the choices below) are first to be satisfied? A. Subordinated debt B. Equity C. Bank debt

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81.

Which of the following is most accurate regarding club deals in the LBO market? A. They are rarely utilized in the LBO market. B. They limit the auction process leading to companies being acquired at less attractive prices. C. They might reflect a lack of opportunities in the LBO market. D. They lead to a more concentration of risk particularly for large deals.

82.

Which of the following describes the J Curve effect in the life cycle of the venture capital firm? A. B. C. D.

83.

How can typical fees for venture capital funds be described? A. B. C. D.

84.

As management fees of 2.0-2.5% with no incentive fees As management fees of 3.0-5.0% with incentive fees As management fees of 2.0-2.5% with incentive fees As management fees of 3.0-3.5% with no incentive fees

What characteristic allows the mezzanine investor to purchase the senior debt once it has been repaid to a certain level? A. B. C. D.

85.

Profits in the early years followed by losses in the later years. Flat revenues in the early years followed by profits in the later years. Losses in the early years followed by profits in the later years. Moderate profits in the early years followed large profits in the later years.

Priority of payment The takeout provision Acceleration Subordination

Which statement most accurately describes the committed capital to leveraged buyouts in the U.S. from 1990-2008? A. B. C. D.

Committed capital Committed capital Committed capital Committed capital

has varied substantially including a decline after 2000 has risen somewhat steadily and markedly has fallen somewhat steadily but slightly has had very little variation

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86.

The risk and return spectrum for private equity can best be described by which of the following statements? A. B. C. D.

87.

Leveraged buyouts are most risky and distressed debt is least risky Venture capital is most risky and mezzanine debt is least risky Leveraged buyouts are most risky and mezzanine debt is least risky Venture capital is most risky and distressed debt is least risky

“Direct secondaries” in the private equity market can most accurately be described by which of the following statements? A. Secondary market sales of private equity shares rather than partnership interests B. Secondary market sales without the services of a broker or intermediary C. Sales of secondary public offerings without investment bankers

88.

How does downgrade risk differ from credit spread risk? A. Downgrade risk originates from interest rate shifts while credit spread risk originates from shifts in default possibility. B. Downgrade risk moves in one direction only (down) while credit spread risk can move in either direction (up or down). C. Downgrade risk originates from a review by an independent agency while credit spread risk originates from a reaction in the financial markets. D. Downgrade risk is most influenced by world events while credit risk is most influenced by company-specific events.

89.

Which of the following terms is NOT associated with managing credit risk? A. B. C. D.

90.

Underwriting standards Diversification Asset sales Immunization

According to the empirical evidence reported by Anson over the time period 19932008, how do the returns of credit-risky investments correlate with the returns on the S&P 500 index? A. B. C. D.

The correlations are all positive and all greater than 0.50. The correlations are all negative and all less than -0.50. The correlations are all positive and in the range of 0.25 to 0.75. The correlations are both positive and negative but near zero.

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91.

Corporate bank loans that are legally committed lines of credit are known as what? A. B. C. D.

92.

Call options Revolvers First loss loans Collateralized debt obligations

Which of the following is TRUE with respect to credit-linked notes? A. They are issued as zero coupon bonds B. They are bonds that return the par value to the investor in the event of default or downgrade C. They are bonds that pay a higher coupon rate to the investor compared with similar bonds with no credit linkage D. They are bonds that can be put back to the issuing firm in the event of a default or downgrade

93.

Which of the following statements accurately describes the relationship between collateralized bond obligations (CBOs), collateralized debt obligations (CDOs), and collateralized loan obligations (CLOs)? A. Any CBO can be considered a CDO B. Any CDO can be considered a CLO C. Any CLO can be considered a CBO

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94.

Which of the following statements LEAST accurately describes collateralized debt obligations (CDOs), collateralized bond obligations (CBOs), and collateralized loan obligations (CLOs)? A. B. C. D.

95.

Arbitrage CDOs are primarily created by money managers Balance sheet CDOs are primarily created by banks and insurance companies Balance sheet CDOs are usually CLOs and often free regulatory capital Arbitrage CDOs are usually long some CBOs and short other CBOs

Which of the following statements LEAST accurately describes overcollateralization in the context of collateralized debt obligations (CDOs)? A. Overcollateralization is a form of internal credit enhancement B. Overcollateralization occurs when too much collateral is used C. Overcollateralization of senior tranches is greater than for junior tranches

96.

Which of the following is NOT one of the three periods of the life cycle of a collateralized debt obligations (CDOs)? A. B. C. D.

97.

Formulation period Revolving period Amortization period Ramp up period

A CDO trust holds $500 million in bonds with an 9% coupon. The CDO has three tranches: A $400 million A tranche with a coupon of 9%, a $50 million B tranche with a coupon of 10% and a $50 million equity tranche with a coupon of 12%. Ignoring bond defaults, changes in market values or any fees, which of the following values is closest to the annual cash flow that the equity tranche holders can expect to receive? A. B. C. D.

$6,000,000 $4,500,000 $4,000,000 $0

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98.

Which of the following statements most accurately characterizes a collateralized fund obligation (CFO)? A. CFO structures typically have three tranches B. Major rating agencies do not rate CFO tranches C. Hedge funds are the primary collateral class of a CFO

99.

Which of the following statements LEAST accurately characterizes a collateralized commodity obligation (CCO)? A. The underlying assets are often commodity trigger swaps (CTSs) B. CCO structures are “bullets” that reference a single commodity C. Portfolio construction rules may be needed to earn high credit ratings

100.

Which of the following statements LEAST accurately characterizes a single-tranche CDO (collateralized debt obligation)? A. B. C. D.

The structure is also referred to as a “bespoke CD” There is only one tranche in the CDO’s capital structure Uses a credit default swap like a normal synthetic CDO The structure is also referred to as a “CDO on demand”

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CAIA

SM

March 2010 Level I Sample Questions Answer Key

SPH = Standards of Practice Handbook AICTAI =An Introduction to Core Topics in Alternative Investments Question 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35

Answer C A B A D C B D A D C D A D A B C A D C D B A A C D A B A C A A D B C

Page Reference SPH, pages 40-42 SPH, pages 122-123 SPH, page 8 SPH, pages 15-16 SPH, pages 19-20 SPH, page 62 SPH, pages 11-13 SPH, pages 20-24 SPH, pages 28-32 SPH, pages 12-13 SPH, pages 116-119 SPH, pages 43-47 SPH, pages 76-78 SPH, page 33 SPH, pages 83-85 AICTAI, page 3 AICTAI, pages 6-7 AICTAI, page 16 AICTAI, page 34 AICTAI, pages 27-28 AICTAI, page 35 AICTAI, page 38 AICTAI, page 39 AICTAI, page 42 AICTAI, page 49 AICTAI, page 69 AICTAI, pages 69-71 AICTAI, page 72 AICTAI, page 72 AICTAI, pages 72-74 AICTAI, page 78 AICTAI, pages 78-79 AICTAI, pages 83,85 AICTAI, page 86 AICTAI, pages 87-88

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Question 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76

Answer B A D D C A B C A C C C B C A C A B D B B A A C B D A D C C B A D B C A D A B C B

Page Reference AICTAI, page 105 AICTAI, page 106 AICTAI, pages 114-115 AICTAI, pages 146-147 AICTAI, page 143 AICTAI, page 163 AICTAI, page 170 AICTAI, page 183 Prerequisite Material, Quantitative Analysis, Page 118 AICTAI, pages 207-208 AICTAI, pages 240-242 Prerequisite Material, Quantitative Analysis, Page 90 AICTAI, page 124 AICTAI, page 125 AICTAI, page 121 AICTAI, page 135 AICTAI, pages 154-155 AICTAI, page 166 AICTAI, page 187 AICTAI, page 208 AICTAI, page 237 AICTAI, pages 208, 242-246 AICTAI, page 274 AICTAI, page 284 AICTAI, pages 292-293 AICTAI, page 263 AICTAI, page 318 AICTAI, page 324 AICTAI, page 367 AICTAI, page 313 AICTAI, page 321 AICTAI, page 319 AICTAI, pages 323-327 AICTAI, page 352 AICTAI, page 357 AICTAI, page 369 AICTAI, page 386 AICTAI, page 321 AICTAI, page 365 AICTAI, pages 411-412 AICTAI, page 447

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Question 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 100

Answer C D B C C C C B A B A C D C B C A D B A C C B A

Page Reference AICTAI, page 519 AICTAI, pages 501-503 AICTAI, page 449 AICTAI, page 479 AICTAI, pages 490-492 AICTAI, pages 410-411 AICTAI, page 397 AICTAI, page 467 AICTAI, page 421 AICTAI, page 460 AICTAI, page 496 AICTAI, page 530 AICTAI, page 532 AICTAI, page 533 AICTAI, page 534 AICTAI, page 541 AICTAI, page 551 AICTAI, pages 552-553 AICTAI, page 564 AICTAI, page 571 AICTAI, pages 566-570 AICTAI, pages 576-580 AICTAI, pages 580-581 AICTAI, pages 581

SPH: Standards of Practice Handbook. 9th edition. Charlottesville, Virginia: CFA Institute, 2005. CFA Institute Standards of Professional Conduct AICTAI: An Introduction to Core Topics in Alternative Investments (Wiley Finance) by CAIA Association and Mark J. Anson (Hardcover - Oct 5, 2009)

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