CAIA Level II Exam I Questions & Answers 100% Correct

Collar strategy consists of... - ANSWER-ownership of a risky asset with a long position in a put option on the underlying asset, and a short position in the call option on the underlying asset Hedging Bucket - ANSWER-within a plan's asset-liability framework seeks to track the plan's liabilities and minimize the volatility of the plan surplus Overlay approach - ANSWER-relies on derivatives contracts to create hedges growth bucket - ANSWER-invests the surplus in riskier investments to generate greater return Duration matching approach - ANSWER-is a hedging bucket approach that matches the duration of the plan assets with the plan's liabilities. Factors that lead to currency appreciation in one country relative to others: - ANSWER-Low inflation High real interest rates Policies attracting capital flows Slow income growth (less demand for imports) Comparative advantage in export goods production Funded status of a pension plan - ANSWER-calculated as market value of assets minus projected benefit obligation Risk Parity Approach to asset allocation - ANSWER-Allocates the weights of asset classes of a portfolio so each asset class contributes the SAME percentage of risk to the portfolio. Consequently, over-weights LESS risky assets. Security Selection... - ANSWER-Asset class return relative to a benchmark Strategic asset allocation... - ANSWER-Calculated as the long-term asset allocation weights multiplied by the benchmark returns for each asset class Market Timing AKA Tactical Asset Allocation - ANSWER-Earning excess returns by changing the asset class weights from target asset class weights Performance during a crisis - ANSWER-Macro funds = good Managed futures = good Gover