CAIA Level II Exam I Questions and Answers 100% Verified

CAIA Level II Exam I Questions and Answers 100% Verified Collar strategy consists of... - answerownership of a risky asset with a long position in a put option on the underlying asset, and a short position in the call option on the underlying asset Hedging Bucket - answerwithin a plan's asset-liability framework seeks to track the plan's liabilities and minimize the volatility of the plan surplus Overlay approach - answerrelies on derivatives contracts to create hedges growth bucket - answerinvests the surplus in riskier investments to generate greater return Duration matching approach - answeris a hedging bucket approach that matches the duration of the plan assets with the plan's liabilities. Factors that lead to currency appreciation in one country relative to others: - answerLow inflation High real interest rates Policies attracting capital flows Slow income growth (less demand for imports) Comparative advantage in export goods production Funded status of a pension plan - answercalculated as market value of assets minus projected benefit obligation Risk Parity Approach to asset allocation - answerAllocates the weights of asset classes of a portfolio so each asset class contributes the SAME percentage of risk to the portfolio. Consequently, over-weights LESS risky assets. Security Selection... - answerAsset class return relative to a benchmark Strategic asset allocation... - answerCalculated as the long-term asset allocation weights multiplied by the benchmark returns for each asset class Market Timing AKA Tactical Asset Allocation - answerEarning excess returns by changing the asset class weights from target asset class weights Performance during a crisis - answerMacro funds = good Managed futures = good Government bonds = good Hedge Fund Arbitrage = bad Four core factors that affect the risk of plan liabilities - answer1. interest rate levels and direction 2. inflation (both realized and expected) 3. the retirement cycle 4. mortality risk Three approaches to risk measurement for defined benefit plan - answer1. Asset-focused risk management 2. Asset-liability risk management 3. Integrated asset-liability risk management Asset-focused risk management - answerConsiders only the risk of plan assets Asset-liability risk management - answerfocuses on the surplus of plan assets over liabilities (most important high-level risk is the risk aka volatility of the surplus) Integrated asset-liability risk management - answerintegrates management of the surplus with the operations of the plan sponsor An asset with HIGH volatility and POSITIVE correlation with plan liabilities... - answercan still be considered to have low risk under asset-liability framework Duration matching - answerIn DB plans tries to match assets and liabilities based upon duration (effective maturity)... addresses interest rate risk.. uses different fixed income instruments (not derivatives) Cash Flow matching - answerIn DB plans tries to match the timing of actual cash flows... relies heavily upon bond ladders (portfolio of fixed income where each bond has a different maturity date) Current Account - answermeasures trade in goods and services for a country Reserve Account - answerrecords transactions in foreign currencies affected by inflows and outflows from international trade and investment Persistent trade deficits result in... - answertrading capital and financial assets for the goods and services of another country Commodity exports' affect on reserve account - answerbecause commodity prices can be highly volatile, countries with commodity-dependent economies have established STABILIZATION funds to smooth the impact of commodity prices Change in Reserve Account = .... - answerChange in current account + change in capital account Current account surplus - answera country exports more than it imports Capital account - answermeasures cross-border investment, such as loans or purchases and sales of assets. Net inflows = capital account surplus A country's balance of payments accounts - answer1. current account 2. capital account 3. reserve account Four types of Sovereign Wealth Funds - answer1. Stabilization funds = smooth volatility (invests significantly in fixed income) 2. Savings funds = benefit future g