CAIA ACTUAL QUESTIONS AND CORRECT
ANSWERS COMPLETE ALTERNATIVE
INVESTMENTS STUDY GUIDE
●● 4 major methods of analysis that distinguish the analysis of
alternative investments from trad. investments
Answer: Return Computation Methods, Statistical Methods, Valuation
Methods, Portfolio Management Methods
●● Define investment
Answer: Investment is any deferred consumption
●● 4 major types of real assets other than land and other types of real
estate
Answer: Natural Resources, Commodities, Infrastructure, and IP
●● 4 return characteristics that differentiate trad. and alt investments
Answer: Diversification, Illiquidity, Inefficiency, Nonnormality
●● Define Active Management
Answer: Refers to efforts of buying and selling securities in pursuit of
superior combos of risk and return
,●● Define an incomplete market
Answer: Refers to lack of investment opportunities that causes market
participants to be unable to implement an investment strategy that
satisfices their exact preferences such as risk
●● 4 major types of alt investments
Answer: Real Assets, HF, PE, Structured Products
●● When did avg quality corp bonds and international equities become
commonly viewed as institutional quality inv. in US?
Answer: Between 1950-1980
●● 4 major legal documents necessary for establishing and managing a
HF
Answer: Private-Placement memoranda, partnership agreement,
subscription agreement, & management company operating agreement
●● What is qualified majority?
Answer: More than 75% of LPs voting to make a decision
●● What is Systematic Risk?
Answer: Risk in the potential for economy wide losses attributable to
failures or concerns over potential failures in markets
,●● 3 constraints against achieving alternative investment benefits
through liquid products
Answer: Leverage, Regulatory constrains on concentration, Illiquidity
constraints
●● Difference between a hard hurdle and soft hurdle rate
Answer: Hard hurdle rate limits incentive fees to profits in excess of the
hurdle rate
Soft hurtle rate allows fund managers to earn an incentive fee on all
profits, given the hurdle rate has been acheived
●● is IRR a dollar-weighted return or a time-weighted return?
Answer: IRR is the primary method of computing dollar-weighted return
●● What is the primary cause of the shape of the J-curve of interim
private equity fund returns?
Answer: It is caused by a combo of early expense recognition, early loss
recognition, and deferred gain recognition
●● An investment has two solutions for its IRR. What can be said about
the investment and the usefulness of the two solutions?
Answer: There are two sign changes in the cash flow stream of the
investment. None of the IRRs should be used
, ●● What scenario will a clawback clause lead to payments?
Answer: Designed to return incentive fees to LPs when early profits are
followed by subsequent losses
●● General term denoting compound interest when the interest is not
continuously compounded?
Answer: Discrete compounding
●● What is an ex post excess return?
Answer: A realized return expressed as an excess return by subtracting
the riskless return from the assets total return
●● What does it mean to bootstrap a yield curve?
Answer: Process of recursively estimating spot rates using one or more
zero-coupon bonds on the short end and coupon bonds on the medium
and long term regions of the term structure
●● Which theory of the term structure of interest rates do all bonds have
the same expected return?
Answer: Unbiased expectations theory
●● What differentiates a relative pricing model from an absolute pricing
model?
ANSWERS COMPLETE ALTERNATIVE
INVESTMENTS STUDY GUIDE
●● 4 major methods of analysis that distinguish the analysis of
alternative investments from trad. investments
Answer: Return Computation Methods, Statistical Methods, Valuation
Methods, Portfolio Management Methods
●● Define investment
Answer: Investment is any deferred consumption
●● 4 major types of real assets other than land and other types of real
estate
Answer: Natural Resources, Commodities, Infrastructure, and IP
●● 4 return characteristics that differentiate trad. and alt investments
Answer: Diversification, Illiquidity, Inefficiency, Nonnormality
●● Define Active Management
Answer: Refers to efforts of buying and selling securities in pursuit of
superior combos of risk and return
,●● Define an incomplete market
Answer: Refers to lack of investment opportunities that causes market
participants to be unable to implement an investment strategy that
satisfices their exact preferences such as risk
●● 4 major types of alt investments
Answer: Real Assets, HF, PE, Structured Products
●● When did avg quality corp bonds and international equities become
commonly viewed as institutional quality inv. in US?
Answer: Between 1950-1980
●● 4 major legal documents necessary for establishing and managing a
HF
Answer: Private-Placement memoranda, partnership agreement,
subscription agreement, & management company operating agreement
●● What is qualified majority?
Answer: More than 75% of LPs voting to make a decision
●● What is Systematic Risk?
Answer: Risk in the potential for economy wide losses attributable to
failures or concerns over potential failures in markets
,●● 3 constraints against achieving alternative investment benefits
through liquid products
Answer: Leverage, Regulatory constrains on concentration, Illiquidity
constraints
●● Difference between a hard hurdle and soft hurdle rate
Answer: Hard hurdle rate limits incentive fees to profits in excess of the
hurdle rate
Soft hurtle rate allows fund managers to earn an incentive fee on all
profits, given the hurdle rate has been acheived
●● is IRR a dollar-weighted return or a time-weighted return?
Answer: IRR is the primary method of computing dollar-weighted return
●● What is the primary cause of the shape of the J-curve of interim
private equity fund returns?
Answer: It is caused by a combo of early expense recognition, early loss
recognition, and deferred gain recognition
●● An investment has two solutions for its IRR. What can be said about
the investment and the usefulness of the two solutions?
Answer: There are two sign changes in the cash flow stream of the
investment. None of the IRRs should be used
, ●● What scenario will a clawback clause lead to payments?
Answer: Designed to return incentive fees to LPs when early profits are
followed by subsequent losses
●● General term denoting compound interest when the interest is not
continuously compounded?
Answer: Discrete compounding
●● What is an ex post excess return?
Answer: A realized return expressed as an excess return by subtracting
the riskless return from the assets total return
●● What does it mean to bootstrap a yield curve?
Answer: Process of recursively estimating spot rates using one or more
zero-coupon bonds on the short end and coupon bonds on the medium
and long term regions of the term structure
●● Which theory of the term structure of interest rates do all bonds have
the same expected return?
Answer: Unbiased expectations theory
●● What differentiates a relative pricing model from an absolute pricing
model?
