CAIA Level II Sample Exam Equation Problems Questions and Answers 100% Verified

CAIA Level II Sample Exam Equation Problems Questions and Answers 100% Verified Assume that the parameters of the Vasicek model of the term structure of interest rates are: Current short-term rate: 15% The next period expected short-term rate: 13.5% The long term mean level of the short-term rate: 10% What is the speed of adjustment k? 0.30 For further discussion, see CAIA Level II Curriculum 2022, Topic 3: Models, 3.1 Modeling Overview and Interest Rate Models: Equilibrium Fixed-Income Models. P193 An investor's utility is defined thusly: U(W) = ln W, where W denotes the investor's wealth. The investor's current wealth consists of $100 in cash. The investor is being offered an investment that will return 90% with probability .55, and -90% with probability .45. Should the investor accept the investment offer and place all of W in the investment, or should the investor remain in cash? The investor should remain in cash P295 Utility of cash= SQ(100)=10 Expected utility: (.55SQ(90%) + (.45SQ(-90%)+=9% 10%>9% investors should remain in cash An individual, now at the point of retirement, has saved for retirement through a defined contribution pension plan. The market value of the individual's pension plan is £3 million. The individual wishes to withdraw £250,000 in the first year, and an amount each year thereafter that increases at the rate of inflation. If the real rate of return on the plan is 2% (net of fees), which of the following is closest to the expected economic life of the plan? 13.85 years Firm XYZ's defined benefit pension plan has a projected benefit obligation (PBO) of $100 million and current assets of $100 million. The duration of the pension's liabilities is 10.0 years, while the fund's assets are entirely comprised of a 5.0- year, zero-coupon riskless bond. Assume that all interest rates of all maturities and credit-worthiness immediately rise by 1.0%. Which of the following situations best describes the plan's funded status after the interest rate changes? 5% overfunded 100.015=5 Canada experienced a CAD 1 billion increase in its reserve account while having a CAD 3 billion deficit in its capital account. What was the current account surplus or deficit of Canada? CAD 4 billion surplus Change in Reserve account = Change in current account + Change in capital account Change in current account = 1-(-3)=4 An analyst uses historical data to estimate that the returns of a real estate fund have a beta of 0.40. The analyst then discovers that the return series is smoothed and has a first-order autocorrelation coefficient of 0.40. Which of the following values is the best estimate of the beta of the true (unsmoothed) series of returns for the real estate fund? Check the card for the question A reported price series of real estate values has been found to be smoothed according to the following relationship: *see pictured Assuming that α = .75 and that the most recent reported price change was +$10, which of the following values is the best estimate of the amount by which the most recent true price exceeds the previous reported price? Answer to last question $13.33 10/0.75 = 13.333 A four-year old PE fund required a cash contribution (capital call) of $100 at the end of Year 0 and $100 and the end of Year 1. The PE fund has an NAV at the end of Year 4 of $279.51. The public equity market index generated an annual return of 0% in the first three years and 22.657% in the fourth and final year. What is the amount by which the internal rate of return (IRR) of the PE Fund exceeded the IRR using the PME method? 4.00% -200 * (1 + 0.22657) = $245.31 in the fourth year PME-IRR(-100, -100, 0, 0, $245.31) = 6% For this item, the IRR of these cash flows (-100, -100, 0, 0, $279.51) = 10% Hence, the fund outperformed the public market by 4% The net operating income (NOI) of a property is estimated to be $1 million per year and its value is estimated to be $8 million. Mortgages on similar properties are yielding 9.75% and marginal income tax rates are 40%. What is the cap rate of the property? Cap rate = NOI/Value = 1M/8M = 12.5% A leveraged hedge fund strategy generates a retu