CAIA SAMPLE EXAM 1 QUESTIONS
WITH CORRECT ANSWERS
Under which of the following conditions will an investor with positions in futures
contracts receive a margin call - Answer-The maintenance margin becomes greater
than the collateral.
If the collateral of a market participant falls below the maintenance margin requirement,
a margin call is issued
Each grain futures contract calls for delivery of 1,000 bushels of grain and has an initial
margin requirement of $1,000 per contract. Fund XYZ places $10,000 in cash in the
account, after which time the fund does not add or withdraw any other cash. Fund XYZ
enters a long position in 10 grain futures contracts at a futures price of $10 per bushel -
Answer-The account would have been marked-to-market to reflect the delivery date
value of the grain. The mark-to-market amount would be equal to the price difference
multiplied by the position size, or 10 x 1,000 x ($12 - $10) = $20,000. Thus, the delivery
date account value would be equal to $20,000 + the starting value of $10,000 =
$30,000. In order to be able to take delivery of the full position at the delivery date price
of $12 per bushel, the investor would have to add $90,000 to the account, as $120,000 -
$30,000 = $90,000
Best describes a distribution of returns exhibiting a high concentration of outlier events -
Answer-Leptokurtic
The error term represents the portion of the asset's excess return that - Answer-cannot
be explained by changes in systematic factors. Thus, the error term is the excess return
that is due to idiosyncratic risk.
Which of the following commodity instruments tend to have the least counterparty risk? -
Answer-Commodity exchange-traded funds
Term for the economic dispersion resulting from the organization making decisions
contrary to the investor's interests - Answer-Agency risk
The capitalization rate is found as the ratio of operating income and total assets: -
Answer-Operating Income / Assets = ($125,000 - $18,000 - $8,000 - $69,000) /
$250,000 = 12.0%
An analyst has been assigned to evaluate the economic viability of some farmland
purchased by an investor. The investor purchased 20 acres at a cost of $5,000 per
acre. The investor financed the property at a 50% loan-to-value ratio, with an annual
interest rate of 6%. The investor receives annual rent of $500 per acre. Annual property
, taxes are $100 per acre. Insurance costs total $1,000 per year. What are the operating
income and net income for this investment, respectively? - Answer-$7,000 and $4,000
The operating income is found by subtracting taxes and insurance cost from the annual
revenues; the net income is found by subtracting interest from the operating income:
Which of the following is an attribute of infrastructure and is consistent with its
characterization as a defensive investment? - Answer-Inflation-indexed cash flows
Infrastructure assets may have contractual or regulatory revenue structures that are
adjusted for changes in measures of inflation, such as the Consumer Price Index, thus
making for an effective hedge. Their long-term inflation-linked cash flow characteristics
are attractive duration hedges for long-term liabilities.
One of the most popular methods for obtaining exposure to commodities is through
positions in futures contracts and forward contracts. However, investors can also
purchase and physically hold commodities. Which of the following is considered a
marginal benefit of physical ownership as opposed to investing in futures and forwards?
- Answer-Convenience yield
Convenience yield is a market-consensus yield, balancing the supply and demand for
physical ownership of commodities. Physical ownership of commodities offers the
benefit of convenience yield but exposes the owner to the costs of storage and
transportation.
Consider a storable commodity with constant production, limited storage capacity, and
peak demand in the winter months. Assume that interest rates are near zero. According
to the storage model of commodity forward curves, what would be the expected shape
of the forward curve for this commodity from the months of the lowest demand to the
months of peak demand? - Answer-Upward Sloping
During the months of lowest demand, inventory levels would exceed levels of current
demand in anticipation of upcoming peak demand. Storage models predict that the
commodity forward curve will be upward sloping in this case, as the current inventory
levels are beyond the threshold level of demand.
An investor is considering options for improving an undeveloped parcel of land and has
determined that her construction costs and the eventual value of the property are highly
dependent on future states of the economy. Assuming a strong economy, the land can
be improved at an $80,000 construction cost, resulting in an improved property with a
value of $130,000. In a weak economy, the construction costs would drop to $50,000
and the improved property would have a value of $90,000. Comparable improved
properties currently sell for $112,000. What is the risk-neutral probability of a weak
economy - Answer-The way to compute the probabilities is as follows:
$112,000 = ($130,000 x UpProb) + [$90,000 x (1 - UpProb)]
UpProb = 55%, thus DownProb = 45%
WITH CORRECT ANSWERS
Under which of the following conditions will an investor with positions in futures
contracts receive a margin call - Answer-The maintenance margin becomes greater
than the collateral.
If the collateral of a market participant falls below the maintenance margin requirement,
a margin call is issued
Each grain futures contract calls for delivery of 1,000 bushels of grain and has an initial
margin requirement of $1,000 per contract. Fund XYZ places $10,000 in cash in the
account, after which time the fund does not add or withdraw any other cash. Fund XYZ
enters a long position in 10 grain futures contracts at a futures price of $10 per bushel -
Answer-The account would have been marked-to-market to reflect the delivery date
value of the grain. The mark-to-market amount would be equal to the price difference
multiplied by the position size, or 10 x 1,000 x ($12 - $10) = $20,000. Thus, the delivery
date account value would be equal to $20,000 + the starting value of $10,000 =
$30,000. In order to be able to take delivery of the full position at the delivery date price
of $12 per bushel, the investor would have to add $90,000 to the account, as $120,000 -
$30,000 = $90,000
Best describes a distribution of returns exhibiting a high concentration of outlier events -
Answer-Leptokurtic
The error term represents the portion of the asset's excess return that - Answer-cannot
be explained by changes in systematic factors. Thus, the error term is the excess return
that is due to idiosyncratic risk.
Which of the following commodity instruments tend to have the least counterparty risk? -
Answer-Commodity exchange-traded funds
Term for the economic dispersion resulting from the organization making decisions
contrary to the investor's interests - Answer-Agency risk
The capitalization rate is found as the ratio of operating income and total assets: -
Answer-Operating Income / Assets = ($125,000 - $18,000 - $8,000 - $69,000) /
$250,000 = 12.0%
An analyst has been assigned to evaluate the economic viability of some farmland
purchased by an investor. The investor purchased 20 acres at a cost of $5,000 per
acre. The investor financed the property at a 50% loan-to-value ratio, with an annual
interest rate of 6%. The investor receives annual rent of $500 per acre. Annual property
, taxes are $100 per acre. Insurance costs total $1,000 per year. What are the operating
income and net income for this investment, respectively? - Answer-$7,000 and $4,000
The operating income is found by subtracting taxes and insurance cost from the annual
revenues; the net income is found by subtracting interest from the operating income:
Which of the following is an attribute of infrastructure and is consistent with its
characterization as a defensive investment? - Answer-Inflation-indexed cash flows
Infrastructure assets may have contractual or regulatory revenue structures that are
adjusted for changes in measures of inflation, such as the Consumer Price Index, thus
making for an effective hedge. Their long-term inflation-linked cash flow characteristics
are attractive duration hedges for long-term liabilities.
One of the most popular methods for obtaining exposure to commodities is through
positions in futures contracts and forward contracts. However, investors can also
purchase and physically hold commodities. Which of the following is considered a
marginal benefit of physical ownership as opposed to investing in futures and forwards?
- Answer-Convenience yield
Convenience yield is a market-consensus yield, balancing the supply and demand for
physical ownership of commodities. Physical ownership of commodities offers the
benefit of convenience yield but exposes the owner to the costs of storage and
transportation.
Consider a storable commodity with constant production, limited storage capacity, and
peak demand in the winter months. Assume that interest rates are near zero. According
to the storage model of commodity forward curves, what would be the expected shape
of the forward curve for this commodity from the months of the lowest demand to the
months of peak demand? - Answer-Upward Sloping
During the months of lowest demand, inventory levels would exceed levels of current
demand in anticipation of upcoming peak demand. Storage models predict that the
commodity forward curve will be upward sloping in this case, as the current inventory
levels are beyond the threshold level of demand.
An investor is considering options for improving an undeveloped parcel of land and has
determined that her construction costs and the eventual value of the property are highly
dependent on future states of the economy. Assuming a strong economy, the land can
be improved at an $80,000 construction cost, resulting in an improved property with a
value of $130,000. In a weak economy, the construction costs would drop to $50,000
and the improved property would have a value of $90,000. Comparable improved
properties currently sell for $112,000. What is the risk-neutral probability of a weak
economy - Answer-The way to compute the probabilities is as follows:
$112,000 = ($130,000 x UpProb) + [$90,000 x (1 - UpProb)]
UpProb = 55%, thus DownProb = 45%
