CAIA Level II Exam Questions & Answers 100% Accurate

5th percentile vs 25th percentile performance - ANSWER-5th percentile managers outperform in every comparison BUT 25th percentile managers' performance is more volatile --> even if 25th percentile managers outperform they tend to mean revert --> demonstrates the perils of choosing managers based on historical performance alternative asset performance evaluation - ANSWER-unlike in traditional assets, alpha is difficult to define in alternatives investing; success can be defined as positive absolute return over a market cycle, return greater than an available liquid substitute, or risk-adjusted return greater than published peer group returns due diligence - ANSWER-two types: investment process due diligence and operational due diligence investment due diligence: 1. quantitative screening 2. investment team and organizational attributes 3. investment process review 4. performance analysis operational due diligence - important to protect investors from losses due to operational errors/oversights and fraud 1. Document and legal review 2. Verification of vendor relationships 3. Background checks 4. On-site visits 4 determinants of institutional investors' costs - ANSWER-Cost structure influenced by: 1. Policy portfolio - baseline asset mix that reflects long-term risk and return views 2. Portfolio size - larger portfolios tend to be more complex and thus more expensive 3. Investment vehicles - active vs. passive, separate vs. comingled accounts, limited partnerships, direct investing vs. fund of funds 4. investment model - traditional consultant model, internal CIO model, fund of funds model, outsourced CIO model (OCIO model tends to be less expensive than the traditional consultant model or the ICIO model) The traditional consultant model becomes less efficient as the portfolio grows in size and complexity (consultants meet few times per year, are generally more hands off) BUT internal CIO model is prohibitively expensive for most mid-sized institutions --> mid-sized institutions choose FoF model or OCIO model (which could be a FoF or consultant) 4 cat