CAIA PORTFOLIO MANAGEMENT AND
RISK ANALYSIS REVIEW QUESTIONS WITH
COMPLETE SOLUTION GUIDE
●● List the four major types of real assets other than land and other
types of real estate.
Answer: Natural resources, commodities, infrastructure, and intellectual
property.
●● List the three major types of alternative investments other than real
assets in the CAIA curriculum.
Answer: Hedge funds, Private Equity, and Structured Products
●● Name the five structures that differentiate traditional and alternative
investments
Answer: Regulatory Structures, Securities Structures, Trading
Structures, Compensation Structures, and Institutional Structures.
●● Which of the five structures that differentiate traditional and
alternative investments relates to the taxation of an instrument?
Answer: Regulatory Structures
,●● Name the four return characteristics that differentiate traditional and
alternative investments.
Answer: Diversification, Illiquidity, Inefficiency, and Nonnormality.
●● Name four major methods of analysis that distinguish the analysis of
alternative investments from the analysis of traditional investments.
Answer: Return Computation Methods, Statistical Methods, Valuation
Methods, Portfolio Management Methods.
●● Describe an incomplete market.
Answer: An incomplete market refers to the lack of investment
opportunities that causes market participants to be unable to implement
an investment strategy that satisfies their exact preferences such as risk
preferences.
●● Define active management.
Answer: Active management refers to efforts of buying and selling
securities in pursuit of superior combinations of risk and return.
●● What distinguishes use of the term pure arbitrage from the more
general usage of the term arbitrage?
Answer: Pure arbitrage is risk free, while arbitrage, as a more general
term is not risk free. Pure arbitrage is an attempt to earn risk-free profits
through the simultaneous purchase and sale of identical positions trading
at different prices in different markets. Whereas, arbitrage is used to
,represent efforts to earn superior returns even when risk is present
because the long and short positions are not identical assets or are not
held over the same time period.
●● What is the term for a private management advisory firm that serves
a group of related and ultra-high net worth investors?
Answer: Family office
●● In a large financial services organization, what is the name used to
denote the people and processes that play a supportive role in the
maintenance of accounts and information systems as well as in the
clearance and settlement of trades?
Answer: Back office operations
●● Are dealer banks described as buy-side or sell-side market
participants?
Answer: Sell-side market participants
●● List several advantages of Separately Managed Accounts relative to
funds.
Answer: 1) A fund investor owns shares of a company (the fund) that in
turn owns other investments, whereas an SMA investor actually owns
the invested assets as the owner on record.
, 2) A fund invests for the common purposes of multiple investors, while
an SMA may have objectives tailored to suit the specific needs of the
investor, such as tax efficiency.
3) A fund is often opaque to its investors to promote confidentiality; an
SMA offers transparency to its investors.
4) Fund investors may suffer adverse consequences from redemptions
(withdrawals) and subscriptions (deposits) by other investors, but an
SMA provides protection from these liquidity issues for its investors.
●● Which of the following participants is LEAST LIKELY to be
classified as an outside service provider to a fund: Arbitrageurs,
accountants, auditors, or attorneys?
Answer: Arbitrageurs
●● List four major legal documents necessary for establishing and
managing a hedge fund?
Answer: Private-placement memorandum, partnership agreement,
subscription agreement, management company operating agreement
●● What is systemic risk?
Answer: Systemic risk is the potential for economy-wide losses
attributable to failures or concerns over potential failures in financial
markets, financial institutions, or major participants.
RISK ANALYSIS REVIEW QUESTIONS WITH
COMPLETE SOLUTION GUIDE
●● List the four major types of real assets other than land and other
types of real estate.
Answer: Natural resources, commodities, infrastructure, and intellectual
property.
●● List the three major types of alternative investments other than real
assets in the CAIA curriculum.
Answer: Hedge funds, Private Equity, and Structured Products
●● Name the five structures that differentiate traditional and alternative
investments
Answer: Regulatory Structures, Securities Structures, Trading
Structures, Compensation Structures, and Institutional Structures.
●● Which of the five structures that differentiate traditional and
alternative investments relates to the taxation of an instrument?
Answer: Regulatory Structures
,●● Name the four return characteristics that differentiate traditional and
alternative investments.
Answer: Diversification, Illiquidity, Inefficiency, and Nonnormality.
●● Name four major methods of analysis that distinguish the analysis of
alternative investments from the analysis of traditional investments.
Answer: Return Computation Methods, Statistical Methods, Valuation
Methods, Portfolio Management Methods.
●● Describe an incomplete market.
Answer: An incomplete market refers to the lack of investment
opportunities that causes market participants to be unable to implement
an investment strategy that satisfies their exact preferences such as risk
preferences.
●● Define active management.
Answer: Active management refers to efforts of buying and selling
securities in pursuit of superior combinations of risk and return.
●● What distinguishes use of the term pure arbitrage from the more
general usage of the term arbitrage?
Answer: Pure arbitrage is risk free, while arbitrage, as a more general
term is not risk free. Pure arbitrage is an attempt to earn risk-free profits
through the simultaneous purchase and sale of identical positions trading
at different prices in different markets. Whereas, arbitrage is used to
,represent efforts to earn superior returns even when risk is present
because the long and short positions are not identical assets or are not
held over the same time period.
●● What is the term for a private management advisory firm that serves
a group of related and ultra-high net worth investors?
Answer: Family office
●● In a large financial services organization, what is the name used to
denote the people and processes that play a supportive role in the
maintenance of accounts and information systems as well as in the
clearance and settlement of trades?
Answer: Back office operations
●● Are dealer banks described as buy-side or sell-side market
participants?
Answer: Sell-side market participants
●● List several advantages of Separately Managed Accounts relative to
funds.
Answer: 1) A fund investor owns shares of a company (the fund) that in
turn owns other investments, whereas an SMA investor actually owns
the invested assets as the owner on record.
, 2) A fund invests for the common purposes of multiple investors, while
an SMA may have objectives tailored to suit the specific needs of the
investor, such as tax efficiency.
3) A fund is often opaque to its investors to promote confidentiality; an
SMA offers transparency to its investors.
4) Fund investors may suffer adverse consequences from redemptions
(withdrawals) and subscriptions (deposits) by other investors, but an
SMA provides protection from these liquidity issues for its investors.
●● Which of the following participants is LEAST LIKELY to be
classified as an outside service provider to a fund: Arbitrageurs,
accountants, auditors, or attorneys?
Answer: Arbitrageurs
●● List four major legal documents necessary for establishing and
managing a hedge fund?
Answer: Private-placement memorandum, partnership agreement,
subscription agreement, management company operating agreement
●● What is systemic risk?
Answer: Systemic risk is the potential for economy-wide losses
attributable to failures or concerns over potential failures in financial
markets, financial institutions, or major participants.
