CAIA LEVEL 1 EXAM SCRIPT 2026 FULL
QUESTIONS AND CORRECT ANSWERS
GUARANTEED TO PASS
◉ Operational Risk. Answer: In breaking down the impact of
operational risks on hedge fund failures, fraud (i.e., lying about
investments and/or performance) was the leading cause, followed by (in
order): theft of assets, style drift and unauthorized trades, and inadequate
resources.
◉ fee for taking a firm private. Answer: typically 1%
◉ cds/trs. Answer: A credit default swap (CDS) makes a payment only if
a credit event occurs. In a total return swap (TRS), the swap buyer
receives the total return of the reference asset regardless of whether a
credit event occurs.
The buyer of a TRS (i.e., the credit protection seller) receives the total
return of a reference asset in exchange for LIBOR + spread, and assumes
all credit risk exposure associated with the asset. The seller of the TRS
(i.e., the credit protection buyer) retains ownership, but since cash flows
are passed to the buyer, the seller receives a net cash flow of LIBOR +
spread.
,◉ payment trigger events. Answer: Payment trigger events.
Bankruptcy.
Failure to pay.
Restructuring.
Obligation acceleration.
Obligation default (technical default).
Repudiation/moratorium by a sovereign government.
Government intervention.
◉ A CDS contract may be unwound by:. Answer: Offsetting: Taking an
opposite position either in another CDS contract or in the underlying
asset.
Assignment/Novation: Finding a dealer or other third party that will take
over the obligations of the contract.
Terminating: The original counterparties agree to discontinue the
contract.
◉ There are six major types of participants in the credit derivatives
marke. Answer: Bank trading activities.
,Bank loan portfolio managers.
Hedge funds.
Asset managers.
Insurance companies.
Corporations.
◉ leptokurtic. Answer: Leptokurtic returns have higher probability of
extreme outcomes (e.g., a leptokurtic distribution is "fat tailed"). What
may appear to be a skill event according to the normal distribution, may
be merely a high risk or lucky event when applied to a leptokurtic
distribution.
◉ Permitted and Stated. Answer: The actual investment strategy is the
strategy implemented at a particular point in time. The permitted
investment strategy defines the range of actions that a manager may
take. There is no such thing as a negotiated investment strategy per se.
◉ biggest risk to a employee buyout. Answer: Financing risk refers to
the uncertainty regarding the ability of the acquiring firm or entity to
obtain funding needed to consummate a merger and therefore is a greater
concern in an employee buyout deal.
, ◉ The Code and Standards recommends the following procedures to
minimize the probability of incidents in which Standard I(B) is violated:.
Answer: Protect the integrity of opinions
Create a restricted list
Restrict special cost arrangements
Limit gifts
Restrict investments
Review procedures
Establish an independence policy
Appoint an officer with oversight responsibilities for compliance with
the firm's code of ethics
◉ absolute returns. Answer: comped against a zero return
◉ Expanding into Europe for hedgefunds. Answer: Regulation of hedge
funds in Europe centers on the concept of Undertakings for Collective
Investment in Transferable Securities (UCITS). In effect, a UCITS is a
hedge fund-like investment pool that conforms to European regulations
such that the product can be sold throughout the various members of the
EU. Because UCITS funds are intended for retail investors, they are
subject to very strict investment restrictions and diversification
requirements.
◉ continuous compounding. Answer: e^0.08 − 1 = 1.08329
QUESTIONS AND CORRECT ANSWERS
GUARANTEED TO PASS
◉ Operational Risk. Answer: In breaking down the impact of
operational risks on hedge fund failures, fraud (i.e., lying about
investments and/or performance) was the leading cause, followed by (in
order): theft of assets, style drift and unauthorized trades, and inadequate
resources.
◉ fee for taking a firm private. Answer: typically 1%
◉ cds/trs. Answer: A credit default swap (CDS) makes a payment only if
a credit event occurs. In a total return swap (TRS), the swap buyer
receives the total return of the reference asset regardless of whether a
credit event occurs.
The buyer of a TRS (i.e., the credit protection seller) receives the total
return of a reference asset in exchange for LIBOR + spread, and assumes
all credit risk exposure associated with the asset. The seller of the TRS
(i.e., the credit protection buyer) retains ownership, but since cash flows
are passed to the buyer, the seller receives a net cash flow of LIBOR +
spread.
,◉ payment trigger events. Answer: Payment trigger events.
Bankruptcy.
Failure to pay.
Restructuring.
Obligation acceleration.
Obligation default (technical default).
Repudiation/moratorium by a sovereign government.
Government intervention.
◉ A CDS contract may be unwound by:. Answer: Offsetting: Taking an
opposite position either in another CDS contract or in the underlying
asset.
Assignment/Novation: Finding a dealer or other third party that will take
over the obligations of the contract.
Terminating: The original counterparties agree to discontinue the
contract.
◉ There are six major types of participants in the credit derivatives
marke. Answer: Bank trading activities.
,Bank loan portfolio managers.
Hedge funds.
Asset managers.
Insurance companies.
Corporations.
◉ leptokurtic. Answer: Leptokurtic returns have higher probability of
extreme outcomes (e.g., a leptokurtic distribution is "fat tailed"). What
may appear to be a skill event according to the normal distribution, may
be merely a high risk or lucky event when applied to a leptokurtic
distribution.
◉ Permitted and Stated. Answer: The actual investment strategy is the
strategy implemented at a particular point in time. The permitted
investment strategy defines the range of actions that a manager may
take. There is no such thing as a negotiated investment strategy per se.
◉ biggest risk to a employee buyout. Answer: Financing risk refers to
the uncertainty regarding the ability of the acquiring firm or entity to
obtain funding needed to consummate a merger and therefore is a greater
concern in an employee buyout deal.
, ◉ The Code and Standards recommends the following procedures to
minimize the probability of incidents in which Standard I(B) is violated:.
Answer: Protect the integrity of opinions
Create a restricted list
Restrict special cost arrangements
Limit gifts
Restrict investments
Review procedures
Establish an independence policy
Appoint an officer with oversight responsibilities for compliance with
the firm's code of ethics
◉ absolute returns. Answer: comped against a zero return
◉ Expanding into Europe for hedgefunds. Answer: Regulation of hedge
funds in Europe centers on the concept of Undertakings for Collective
Investment in Transferable Securities (UCITS). In effect, a UCITS is a
hedge fund-like investment pool that conforms to European regulations
such that the product can be sold throughout the various members of the
EU. Because UCITS funds are intended for retail investors, they are
subject to very strict investment restrictions and diversification
requirements.
◉ continuous compounding. Answer: e^0.08 − 1 = 1.08329
