CAIA Level II questions with correct answers

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