CAIA Level 2 Exam Questions and Answers 100% Verified

CAIA Level 2 Exam Questions and Answers 100% Verified Meta risks are qualitative risks not captured by specific and measurable financial risks. events. - answerThey include organizational and human behavior, moral hazard, the misuse and excessive dependence on quantitative methods, market interaction, and extreme capital market A distressed securities strategy is most likely to earn returns from liquidity risk. - answerGlobal macro and equity long/short are most likely to earn returns from directional market risks. Investor protection clauses are clauses within limited partnership agreement and include - answerinvestment strategy, the investment committee, the LP advisory committee, key- person terms, exclusivity, conflicts of interest, and termination Issues facing negatively skewed assets can be addressed by - answer(1) changing the optimization process to account for skewness and kurtosis; (2) adding constraints for skewness and kurtosis; and (3) limiting the portfolio weights applicable to assets with higher moments The AMC requires that managers should provide at least quarterly performance reporting to clients—and within. - answer30 days of the end of the period, if possible. This should be done even for funds with lockup periods AIFs are suitable for larger investors with significant funds to invest. AIFs have few restrictions and can invest in a range of securities, including less liquid alternative investments such as hedge funds, private equity, and real estate. SIFs are specialized funds specifically aimed at qualified investors in Luxembourg. - answerUCITS funds are suitable for smaller investors and typically invest in more liquid and safer investments that are publicly traded. CISs encompass both UCITS funds and AIFs Negative (or exclusionary) screening is an investment approach that avoids including - answerin investment portfolios the equity or bond securities issued by entities with low environmental, social, and governance (ESG) scores or weak ESG performance Natural resource investments should adopt techniques to reduce the negative impact on biodiversity. That would include achieving sufficient diversity of flora and fauna. - answerTogether with farming and timbering, mining can cause significant disruption and degradation of soil conditions. ESG issues are quite similar between indirect and direct investments in natural resources. Studies on protecting endangered species should be taken before the development process to minimize any negative environmental impacts From 2016 to 2018, ESG assets under management in alternative investments increased nearly - answerthreefold from $206 billion to $588 billion Buildings to be significantly refurbished essentially face the same issues as buildings that are being newly developed (e.g., quality of planning, design, and construction). - answerPreparing demolition materials should ideally be done on site. Materials that are safe to use may release toxic gases, so they are not always safely placed in landfills. A predemolition audit is primarily designed to minimize the amount of landfill waste and to promote safe handling of dangerous materials Key drivers behind the movement of hedge funds toward ESG include: - answerregulation, risk management, client demand, and the search for new alpha sources Investments in PRIs qualify for tax advantages in the U.S., and nonprofit or charitable entities can make tax-free distributions from PRIs. PRIs offer ESG impact but provide below-average or no risk-adjusted returns. - answerOn the other hand, MRIs offer both competitive risk- adjusted returns and an ESG impact There are 10 ESG metrics commonly requested by private equity investors: - answer1) existence of an ESG policy, 2) person/group tasked with implementing ESG policy, 3) existence of a corporate code of ethics, 4) existence of any litigation, 5) people diversity, 6) employee composition, 7) environmental policy, 8) CO2 footprint, 9) data and cybersecurity incidents, and 10) health and safety incidents The competitive advantage enjoyed by firms with an ESG strategy include higher-risk-adjusted returns and reduced reputation risk. - answerAbout 65% of institutional investors report that most of their investment managers do not consider ESG when making investment decisions. Currently, there is an insufficient amount of guidance available regarding the determination, and implementation of ESG strategies lacks clarity. Very few alternative asset managers have the skills and knowledge to determine their sources of ESG data and how to collect and assess that data. Polluted water cannot be reused without being properly treated first. - answerRemediation involves restoration of water by reversing or stopping any environmental damage (e.g., pollution). Common issues with risk parity are that historic returns may not provide reasonable basis for future performance of low-volatility strategies; - answerabsence of leverage reduces the ability to adopt low-volatility strategies; and there are no studies that support low-volatility strategies being extended to alternative asset classes Risk budgeting is a process that limits allocation options without calculating portfolio optimization. - answerIt defines a set level of risk and allocates aggregate risk across available subcategories Resampling returns can be executed by. - answer(1) repeated analysis of hypothetical returns simulated from the original sample or (2) repeated analysis of new samples drawn from the original sample Empirical models do not directly evaluate the entity or its surroundings given the difficulty in forecasting risk factors. Instead, empirical models produce a credit score that is used to rank entities by creditworthiness. The Merton model does not produce a credit score but instead is a structural model that prices capital structures with options - answerReduced-form models do not produce a credit score but instead focus on default as a random event that can be quantified using economic and statistical models. Structural credit risk models do not produce a credit score but instead focus on the relationship between capital structure and default from the perspective of the equity owner Risk parity focuses on balancing the risk contributions of constituent assets rather than setting a target for aggregate risk. - answerIt seeks to equalize marginal risk and factors correlation in defining portfolio weight