CAIA SAMPLE EXAM 1 QUESTIONS
WITH CORRECT ANSWERS
Fundamental to establish suitability - Answer-identify investor constraints
The Code and Standards recommends the following procedures to minimize the
probability of incidents in which Standard I(B) is violated: - Answer-Protect the integrity
of opinions
Create a restricted list
Restrict special cost arrangements
Limit gifts
Restrict investments
Review procedures
Establish an independence policy
Appoint an officer with oversight responsibilities for compliance with the firm's code of
ethic
all oversubscribed issue shares should - Answer-be prorated to all subscribers
With respect to the Code and Standards, how would Mr. Hall's acceptance of NetWorks'
shares best be described? - Answer-Mr. Hall has violated Standard I(B): Independence
and Objectivity
Members may accept gifts from clients if - Answer-they are disclosed to the employer
Fund administrators assist hedge funds with - Answer-bookkeeping, third-party
information gathering, and security valuation.
Which of the following best contrasts forward contracts with futures contracts? -
Answer-Forward contracts generally have more counterparty risk
Futures are standardized exchange-traded products, whereas forwards are typically
customized over-the-counter contracts between two parties. - Answer-As such, forward
contracts carry more counterparty risk compared to futures contracts.
The Fisher effect states that nominal interest rates will incorporate - Answer-both real
interest rates and a premium for anticipated inflation
Fund is organized to deliver beta as cheaply as possible through a passive product tied
to a broad financial market benchmark. How would this fund's strategy be described? -
Answer-As an asset gatherer
Asset gatherers are managers striving to deliver beta as cheaply and efficiently as
possible, and include the large-scale index trackers that produce passive products tied
, to well recognized financial market benchmarks. These managers build value through
scale and processing efficiency
A private equity fund revises its estimated net asset value downward. Which of the
following performance measures remains constant? - Answer-Distribution value to paid-
in ratio
The distribution value to paid-in ratio does not depend on net asset value (NAV). All the
other measures depend on NAV
How does the information ratio (IR) differ from the Sortino ratio? - Answer-Only the IR
uses tracking error as a measure of risk
Suppose that the forward curve of equity index futures prices is downward sloping and
there are no arbitrage opportunities. Which of the following must be true? - Answer-The
index's dividend yield exceeds the riskless interest rate
Why would a commodity investor roll a futures position - Answer-To maintain a
continuous long-term commodity exposure
If the assets have mutually uncorrelated returns, the variance of a portfolio of such
assets is simplified because all the covariances between the assets drop out, leaving -
Answer-variance(portfolio) = sum-across-all-assets([weighti^2] x variance(asseti)).
In this case, we have four equally weighted assets. The weight for each asset = 25%,
whereas the variance for each asset is given as 0.04. Thus, the variance of the portfolio
is equal to (0.0625 x 0.04) * 4 = 0.01
An investment fund begins with $100 in the current time period and earns a rate of
return of 10% for three consecutive years. The fund then attracts an additional $100 in
new investment at the beginning of year 4 and again at the beginning of year 5, but
attracts no new investment at the beginning of year 6. The fund earns no returns (0%) in
years 4, 5, and 6. Which of the following is closest to the time-weighted rate of return of
the fund through the end of year 6? - Answer-The time-weighted return for this
investment is found as:
[1.1 x 1.1 x 1.1 x 1.0 x 1.0 x 1.0]^(1/6) - 1 = [1.331]^(1/6) -1 = 4.9%
Which of the following is best defined as an investor's application to join a limited
partnership? - Answer-Subscription agreement
Which of the following statements represent a correct description of the null and
alternative hypotheses in statistical testing? - Answer-The null hypothesis is a statement
that the analyst is attempting to reject, and the alternative hypothesis is assumed true if
the null hypothesis is rejected
Alternative investments are better known for active management - Answer-and active
managers tend to be evaluated against an absolute return standard.
WITH CORRECT ANSWERS
Fundamental to establish suitability - Answer-identify investor constraints
The Code and Standards recommends the following procedures to minimize the
probability of incidents in which Standard I(B) is violated: - Answer-Protect the integrity
of opinions
Create a restricted list
Restrict special cost arrangements
Limit gifts
Restrict investments
Review procedures
Establish an independence policy
Appoint an officer with oversight responsibilities for compliance with the firm's code of
ethic
all oversubscribed issue shares should - Answer-be prorated to all subscribers
With respect to the Code and Standards, how would Mr. Hall's acceptance of NetWorks'
shares best be described? - Answer-Mr. Hall has violated Standard I(B): Independence
and Objectivity
Members may accept gifts from clients if - Answer-they are disclosed to the employer
Fund administrators assist hedge funds with - Answer-bookkeeping, third-party
information gathering, and security valuation.
Which of the following best contrasts forward contracts with futures contracts? -
Answer-Forward contracts generally have more counterparty risk
Futures are standardized exchange-traded products, whereas forwards are typically
customized over-the-counter contracts between two parties. - Answer-As such, forward
contracts carry more counterparty risk compared to futures contracts.
The Fisher effect states that nominal interest rates will incorporate - Answer-both real
interest rates and a premium for anticipated inflation
Fund is organized to deliver beta as cheaply as possible through a passive product tied
to a broad financial market benchmark. How would this fund's strategy be described? -
Answer-As an asset gatherer
Asset gatherers are managers striving to deliver beta as cheaply and efficiently as
possible, and include the large-scale index trackers that produce passive products tied
, to well recognized financial market benchmarks. These managers build value through
scale and processing efficiency
A private equity fund revises its estimated net asset value downward. Which of the
following performance measures remains constant? - Answer-Distribution value to paid-
in ratio
The distribution value to paid-in ratio does not depend on net asset value (NAV). All the
other measures depend on NAV
How does the information ratio (IR) differ from the Sortino ratio? - Answer-Only the IR
uses tracking error as a measure of risk
Suppose that the forward curve of equity index futures prices is downward sloping and
there are no arbitrage opportunities. Which of the following must be true? - Answer-The
index's dividend yield exceeds the riskless interest rate
Why would a commodity investor roll a futures position - Answer-To maintain a
continuous long-term commodity exposure
If the assets have mutually uncorrelated returns, the variance of a portfolio of such
assets is simplified because all the covariances between the assets drop out, leaving -
Answer-variance(portfolio) = sum-across-all-assets([weighti^2] x variance(asseti)).
In this case, we have four equally weighted assets. The weight for each asset = 25%,
whereas the variance for each asset is given as 0.04. Thus, the variance of the portfolio
is equal to (0.0625 x 0.04) * 4 = 0.01
An investment fund begins with $100 in the current time period and earns a rate of
return of 10% for three consecutive years. The fund then attracts an additional $100 in
new investment at the beginning of year 4 and again at the beginning of year 5, but
attracts no new investment at the beginning of year 6. The fund earns no returns (0%) in
years 4, 5, and 6. Which of the following is closest to the time-weighted rate of return of
the fund through the end of year 6? - Answer-The time-weighted return for this
investment is found as:
[1.1 x 1.1 x 1.1 x 1.0 x 1.0 x 1.0]^(1/6) - 1 = [1.331]^(1/6) -1 = 4.9%
Which of the following is best defined as an investor's application to join a limited
partnership? - Answer-Subscription agreement
Which of the following statements represent a correct description of the null and
alternative hypotheses in statistical testing? - Answer-The null hypothesis is a statement
that the analyst is attempting to reject, and the alternative hypothesis is assumed true if
the null hypothesis is rejected
Alternative investments are better known for active management - Answer-and active
managers tend to be evaluated against an absolute return standard.
