NEWEST Chartered Alternative Investment
Analyst (CAIA) Level II exam | ULTIMATE
EXAM WITH CORRECT ANSWERS AND
RATIONALES FOR CERTIFICATION
SUCCESS
1. In the context of hedge fund replication, a "factor-
based" approach seeks to replicate returns using:
A) A set of liquid, tradable risk factors (e.g., equity
market, credit, volatility, liquidity)
B) Only the equity market factor
C) Only the credit factor
D) Only the volatility factor
E) A single hedge fund's returns
Correct answer: A
Rationale: Factor-based replication models use
multiple liquid risk factors to mimic hedge fund
returns.
2. The "cloning" approach to hedge fund replication
is based on the assumption that:
,A) Hedge fund returns are entirely driven by a few
systematic risk factors
B) Hedge fund returns are entirely alpha (manager
skill)
C) Hedge funds have no systematic risk
D) Hedge funds are perfectly liquid
E) Hedge funds have no fees
Correct answer: A
Rationale: Cloning assumes returns can be explained
by factor exposures.
3. The primary challenge in hedge fund replication is:
A) The dynamic nature of hedge fund factor
exposures
B) The low fees of hedge funds
C) The high liquidity of hedge funds
D) The transparency of hedge funds
E) The low volatility of hedge funds
Correct answer: A
,Rationale: Hedge fund factor exposures change over
time, making replication difficult.
4. A "portable alpha" strategy involves:
A) Separating alpha from beta and applying the alpha
to a different beta benchmark
B) Moving alpha from one hedge fund to another
C) Moving beta from one asset class to another
D) Eliminating all beta exposure
E) Eliminating all alpha exposure
Correct answer: A
Rationale: Portable alpha isolates alpha and transfers
it to a desired beta.
5. In a portable alpha strategy, the "alpha" is typically
generated by:
A) An active manager (e.g., a hedge fund)
B) A passive index fund
C) Treasury bills
D) Money market funds
E) Certificates of deposit
, Correct answer: A
Rationale: Alpha comes from active management.
6. In a portable alpha strategy, the "beta" is typically
obtained through:
A) Low-cost passive instruments such as futures or
ETFs
B) High-cost active management
C) Hedge funds
D) Private equity
E) Real estate
Correct answer: A
Rationale: Beta is efficiently obtained through
passive instruments.
7. A common application of portable alpha is:
A) Adding hedge fund exposure to a passive equity
portfolio without changing the portfolio's market beta
B) Adding equity exposure to a hedge fund portfolio
C) Reducing volatility through diversification
Analyst (CAIA) Level II exam | ULTIMATE
EXAM WITH CORRECT ANSWERS AND
RATIONALES FOR CERTIFICATION
SUCCESS
1. In the context of hedge fund replication, a "factor-
based" approach seeks to replicate returns using:
A) A set of liquid, tradable risk factors (e.g., equity
market, credit, volatility, liquidity)
B) Only the equity market factor
C) Only the credit factor
D) Only the volatility factor
E) A single hedge fund's returns
Correct answer: A
Rationale: Factor-based replication models use
multiple liquid risk factors to mimic hedge fund
returns.
2. The "cloning" approach to hedge fund replication
is based on the assumption that:
,A) Hedge fund returns are entirely driven by a few
systematic risk factors
B) Hedge fund returns are entirely alpha (manager
skill)
C) Hedge funds have no systematic risk
D) Hedge funds are perfectly liquid
E) Hedge funds have no fees
Correct answer: A
Rationale: Cloning assumes returns can be explained
by factor exposures.
3. The primary challenge in hedge fund replication is:
A) The dynamic nature of hedge fund factor
exposures
B) The low fees of hedge funds
C) The high liquidity of hedge funds
D) The transparency of hedge funds
E) The low volatility of hedge funds
Correct answer: A
,Rationale: Hedge fund factor exposures change over
time, making replication difficult.
4. A "portable alpha" strategy involves:
A) Separating alpha from beta and applying the alpha
to a different beta benchmark
B) Moving alpha from one hedge fund to another
C) Moving beta from one asset class to another
D) Eliminating all beta exposure
E) Eliminating all alpha exposure
Correct answer: A
Rationale: Portable alpha isolates alpha and transfers
it to a desired beta.
5. In a portable alpha strategy, the "alpha" is typically
generated by:
A) An active manager (e.g., a hedge fund)
B) A passive index fund
C) Treasury bills
D) Money market funds
E) Certificates of deposit
, Correct answer: A
Rationale: Alpha comes from active management.
6. In a portable alpha strategy, the "beta" is typically
obtained through:
A) Low-cost passive instruments such as futures or
ETFs
B) High-cost active management
C) Hedge funds
D) Private equity
E) Real estate
Correct answer: A
Rationale: Beta is efficiently obtained through
passive instruments.
7. A common application of portable alpha is:
A) Adding hedge fund exposure to a passive equity
portfolio without changing the portfolio's market beta
B) Adding equity exposure to a hedge fund portfolio
C) Reducing volatility through diversification
