CAIA LEVEL 1 EVALUATION EXAM 2025/2026 QUESTIONS
WITH ANSWERS TAGGED A+
✔✔5 variables that determine the price of an option on a non-dividend stock according
to Black Scholes option pricing model - ✔✔1. Price of the underlying asset
2. Strike Price
3. Return vol. of the underlying asset
4. Time to the options expieration
5. Riskless rate
✔✔What are the carrying costs (and benefits) of physical inventory such as a
commodity? - ✔✔Carrying costs of physical inventory include interest (r) and storage
(c), the benefit of physical inventory is the convenient yield
✔✔What two spot interest rates imply the value of a six-month forward contract from a
six-month T-bill? - ✔✔Current six-month and 12-month spot rates are needed to find the
six-month forward contract for a six-month T-bill
✔✔What is maintenance margin? - ✔✔Collateral put up by the investor on an ongoing
basis until the position is closed out
✔✔What two assets form a long straddle? - ✔✔Long call and long put with the same
strike price
✔✔Which is more likely to be ore liquid, a forward contract or a futures contract? - ✔✔A
futures contract is more likely to be more liquid
✔✔What are the names of the first and second derivatives of an option price with
respect to the price of the option's underlying asset? - ✔✔Delta & Gamma
✔✔When is Monte Carlo analysis most appropriate as an estimation technique? - ✔✔It
is best used in difficult problems where it is not practical to find expected valued and
standard deviations using mathematical solutions
✔✔Define tracking error - ✔✔Indicates the dispersion of the returns of an investment
relative to a benchmark return, where a benchmark return is the contemporaneous
realized return on an index or peer group of comparable risk
✔✔Define average tracking error - ✔✔Simply refers to the avg. difference between an
investments return relative to its benchmark
✔✔Define Value at Risk (VAR) - ✔✔VAR is the maximum loss over a specified time
period within a specified probability
, ✔✔Define Conditional Value at Risk (CVAR) - ✔✔CVAR is the expected loss of the
investor given that VAR has been equaled or exceeded. CVAR will exceed VAR
✔✔What is Jensen's Alpha? - ✔✔Direct measure of the absolute amount by which an
asset is estimated to outperform
✔✔3 major types of model misspecification in the context of estimating systematic risk -
✔✔Omitted (or misidentified) systematic return factors
Misestimated betas
Nonlinear risk-return relationships
✔✔Does ex ante alpha lead to ex post alpha? - ✔✔Not necessarily. While ex ante alpha
may be viewed as expected idiosyncratic return, ex post alpha is realized idiosyncratic
return. Simply put, ex post alpha is the extent to which an asset outperformed or
underperformed its benchmark in a specified time period. Ex post alpha can be the
result of luck and/or skill. To the extent that an investor suffers bad luck, ex ante will not
guarantee ex post alpha.
✔✔What is the goal of an empirical investigation of abnormal return persistence? -
✔✔To identify ex ante alpha
✔✔Two common interpretations of the investment term alpha - ✔✔1. Alpha refers to
any excess or deficient investment return after the return has been adjusted for the time
value of money (risk free rate) and for the effects of bearing systematic risk (beta)
2. Alpha can also refer to the extent to which the skill, information, and knowledge of an
investment manager generates superior risk-adjusted returns
✔✔What are two methods of detecting outliers in a statistical analysis? - ✔✔Detection
through visual inspection of plots
Ordered listings of the variables and regression residuals
✔✔What is the term for investment products trying to deliver systematic risk exposure
with an emphasis on doing so in a highly cost-effective manner? - ✔✔Beta Drivers (or
passive indexers)
✔✔What is the role of a Timberland Investment Management Organization (TIMO)? -
✔✔Timberland Investment Management Organizations (TIMOs) provide management
services to timberland owned by institutional investors such as pension plans,
endowments, foundations, & insurance companies
WITH ANSWERS TAGGED A+
✔✔5 variables that determine the price of an option on a non-dividend stock according
to Black Scholes option pricing model - ✔✔1. Price of the underlying asset
2. Strike Price
3. Return vol. of the underlying asset
4. Time to the options expieration
5. Riskless rate
✔✔What are the carrying costs (and benefits) of physical inventory such as a
commodity? - ✔✔Carrying costs of physical inventory include interest (r) and storage
(c), the benefit of physical inventory is the convenient yield
✔✔What two spot interest rates imply the value of a six-month forward contract from a
six-month T-bill? - ✔✔Current six-month and 12-month spot rates are needed to find the
six-month forward contract for a six-month T-bill
✔✔What is maintenance margin? - ✔✔Collateral put up by the investor on an ongoing
basis until the position is closed out
✔✔What two assets form a long straddle? - ✔✔Long call and long put with the same
strike price
✔✔Which is more likely to be ore liquid, a forward contract or a futures contract? - ✔✔A
futures contract is more likely to be more liquid
✔✔What are the names of the first and second derivatives of an option price with
respect to the price of the option's underlying asset? - ✔✔Delta & Gamma
✔✔When is Monte Carlo analysis most appropriate as an estimation technique? - ✔✔It
is best used in difficult problems where it is not practical to find expected valued and
standard deviations using mathematical solutions
✔✔Define tracking error - ✔✔Indicates the dispersion of the returns of an investment
relative to a benchmark return, where a benchmark return is the contemporaneous
realized return on an index or peer group of comparable risk
✔✔Define average tracking error - ✔✔Simply refers to the avg. difference between an
investments return relative to its benchmark
✔✔Define Value at Risk (VAR) - ✔✔VAR is the maximum loss over a specified time
period within a specified probability
, ✔✔Define Conditional Value at Risk (CVAR) - ✔✔CVAR is the expected loss of the
investor given that VAR has been equaled or exceeded. CVAR will exceed VAR
✔✔What is Jensen's Alpha? - ✔✔Direct measure of the absolute amount by which an
asset is estimated to outperform
✔✔3 major types of model misspecification in the context of estimating systematic risk -
✔✔Omitted (or misidentified) systematic return factors
Misestimated betas
Nonlinear risk-return relationships
✔✔Does ex ante alpha lead to ex post alpha? - ✔✔Not necessarily. While ex ante alpha
may be viewed as expected idiosyncratic return, ex post alpha is realized idiosyncratic
return. Simply put, ex post alpha is the extent to which an asset outperformed or
underperformed its benchmark in a specified time period. Ex post alpha can be the
result of luck and/or skill. To the extent that an investor suffers bad luck, ex ante will not
guarantee ex post alpha.
✔✔What is the goal of an empirical investigation of abnormal return persistence? -
✔✔To identify ex ante alpha
✔✔Two common interpretations of the investment term alpha - ✔✔1. Alpha refers to
any excess or deficient investment return after the return has been adjusted for the time
value of money (risk free rate) and for the effects of bearing systematic risk (beta)
2. Alpha can also refer to the extent to which the skill, information, and knowledge of an
investment manager generates superior risk-adjusted returns
✔✔What are two methods of detecting outliers in a statistical analysis? - ✔✔Detection
through visual inspection of plots
Ordered listings of the variables and regression residuals
✔✔What is the term for investment products trying to deliver systematic risk exposure
with an emphasis on doing so in a highly cost-effective manner? - ✔✔Beta Drivers (or
passive indexers)
✔✔What is the role of a Timberland Investment Management Organization (TIMO)? -
✔✔Timberland Investment Management Organizations (TIMOs) provide management
services to timberland owned by institutional investors such as pension plans,
endowments, foundations, & insurance companies
