CAIA Level 1 Questions and Answers 100% Correct.

Value of IP Investment - ANSWER-probability of generating large positive cash flows* cash flow expected in year 1 / investors required rate of return -g 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.