NEWEST Chartered Alternative Investment
Analyst (CAIA) Level I EXAM | ULTIMATE
EXAM WITH CORRECT ANSWERS AND
RATIONALES FOR CERTIFICATION
SUCCESS
1. The primary characteristic that distinguishes
alternative investments from traditional investments
is:
A) High liquidity
B) Low fees
C) Low correlation with traditional asset classes
D) Guaranteed returns
E) Daily pricing
Correct answer: C
Rationale: Alternatives often provide diversification
through low correlation with stocks and bonds.
2. Which of the following is a key risk of alternative
investments?
A) Illiquidity
,B) Lack of transparency
C) Valuation challenges
D) All of the above
E) None of the above
Correct answer: D
Rationale: Alternatives typically exhibit all these
risks.
3. Hedge funds are characterized by:
A) High regulation
B) The ability to use leverage, derivatives, and short
selling
C) Daily liquidity
D) Low fees
E) Guaranteed returns
Correct answer: B
Rationale: Hedge funds use a wide range of
investment techniques.
4. The typical fee structure for a hedge fund is:
,A) 1% management fee and 10% incentive fee
B) 2% management fee and 20% incentive fee
C) 5% management fee and 0% incentive fee
D) 0% management fee and 50% incentive fee
E) 10% management fee and 10% incentive fee
Correct answer: B
Rationale: The industry standard is "2 and 20."
5. The "high-water mark" provision in a hedge fund
means:
A) The fund manager receives incentive fees only on
new profits after prior losses have been recovered
B) The fund manager receives incentive fees
regardless of prior losses
C) The fund has a minimum investment amount
D) The fund has a maximum investment amount
E) The fund has a lock-up period
Correct answer: A
Rationale: High-water marks protect investors from
paying fees on the same gains twice.
, 6. The "lock-up period" in a hedge fund refers to:
A) The period during which the fund cannot accept
new investments
B) The period during which investors cannot redeem
their capital
C) The period during which the fund manager is
locked into their position
D) The period during which the fund is closed to new
investors
E) The period during which the fund's assets are
frozen
Correct answer: B
Rationale: Lock-up periods restrict redemptions.
7. A hedge fund that takes both long and short
positions in equities is employing a:
A) Global macro strategy
B) Long/short equity strategy
C) Event-driven strategy
D) Relative value strategy
E) Managed futures strategy
Analyst (CAIA) Level I EXAM | ULTIMATE
EXAM WITH CORRECT ANSWERS AND
RATIONALES FOR CERTIFICATION
SUCCESS
1. The primary characteristic that distinguishes
alternative investments from traditional investments
is:
A) High liquidity
B) Low fees
C) Low correlation with traditional asset classes
D) Guaranteed returns
E) Daily pricing
Correct answer: C
Rationale: Alternatives often provide diversification
through low correlation with stocks and bonds.
2. Which of the following is a key risk of alternative
investments?
A) Illiquidity
,B) Lack of transparency
C) Valuation challenges
D) All of the above
E) None of the above
Correct answer: D
Rationale: Alternatives typically exhibit all these
risks.
3. Hedge funds are characterized by:
A) High regulation
B) The ability to use leverage, derivatives, and short
selling
C) Daily liquidity
D) Low fees
E) Guaranteed returns
Correct answer: B
Rationale: Hedge funds use a wide range of
investment techniques.
4. The typical fee structure for a hedge fund is:
,A) 1% management fee and 10% incentive fee
B) 2% management fee and 20% incentive fee
C) 5% management fee and 0% incentive fee
D) 0% management fee and 50% incentive fee
E) 10% management fee and 10% incentive fee
Correct answer: B
Rationale: The industry standard is "2 and 20."
5. The "high-water mark" provision in a hedge fund
means:
A) The fund manager receives incentive fees only on
new profits after prior losses have been recovered
B) The fund manager receives incentive fees
regardless of prior losses
C) The fund has a minimum investment amount
D) The fund has a maximum investment amount
E) The fund has a lock-up period
Correct answer: A
Rationale: High-water marks protect investors from
paying fees on the same gains twice.
, 6. The "lock-up period" in a hedge fund refers to:
A) The period during which the fund cannot accept
new investments
B) The period during which investors cannot redeem
their capital
C) The period during which the fund manager is
locked into their position
D) The period during which the fund is closed to new
investors
E) The period during which the fund's assets are
frozen
Correct answer: B
Rationale: Lock-up periods restrict redemptions.
7. A hedge fund that takes both long and short
positions in equities is employing a:
A) Global macro strategy
B) Long/short equity strategy
C) Event-driven strategy
D) Relative value strategy
E) Managed futures strategy
