CAIA LEVEL 1 STUDY GUIDE 2025/2026 QUESTIONS WITH
ANSWERS TAGGED A+
✔✔Carry Trade - ✔✔Long position and a short position
Ex. Shorting a 4% US bond and buying a 5% Japanese bond
If you hedge the currency risk (in an efficient market), you would not earn any benefit
from this transaction
✔✔Duration - ✔✔elasticity of a bond price with respect to a shift in its yield. Assumes
continuous compounding
✔✔Modified duration - ✔✔risk measure used with discrete compounding applications in
which the traditional duration formula is adjusted through division by (1+y/m)
✔✔Portfolio duration - ✔✔value-weighted average of the durations
✔✔duration of a zero coupon bond - ✔✔always equal to the time to its maturity because
there is only one payment- when the bond matures
✔✔Duration of Floating-Rate Bond - ✔✔The Time to the Next Reset Period
✔✔Swap - ✔✔string of forward contracts (rather than having to enter into a bunch of
separate ones)
✔✔No Arbitrage theory of forward contracts - ✔✔A relatively long-term zero-coupon
bond will offer the same total return as a strategy of investing in a shorter zero-coupon
bond and using a forward contract to lock in the return from the maturity of the shorter
bond to the maturity of the longer bond.
✔✔Financed position - ✔✔economic ownership without paying the purchase price
✔✔Storage costs include: - ✔✔warehouse fees, insurance, transportation, and
spoilage.
✔✔Convenience yield - ✔✔economic benefit of directly holding a real asset
✔✔Which markets do forwards / futures use? (theyre different) - ✔✔Forwards - OTC ,
more custom
Futures - Exchange traded with better liquidity, sizes, transparency
✔✔Are forwards mtm? are futures mtm? - ✔✔forwards are not mtm.
Futures ARE mtm.
,✔✔Maintenance margin requirement - ✔✔Margin calls are issued when the margin falls
below the Maintenance margin requirement (Usually 70% of initial margin).
✔✔usual margin amount - ✔✔Usual margin amount is less than 10% of the underlying
commodity
✔✔1 futures oil contract is how many barrels? - ✔✔1,000
✔✔Rolling futures contracts - ✔✔closing positions in short-term futures and
simultaneously replacing w/ similar positions with longer terms.
✔✔covered call - ✔✔Short the call, and long the stock
✔✔protective put - ✔✔long stock and long put
✔✔Calendar spreads / horizontal spreads (Options) - ✔✔differences only in expiration
date
✔✔Vertical spreads (Options) - ✔✔only differ in strike price
✔✔Diagonal spread (Options) - ✔✔differ in expiration date and strike price
✔✔Bull spread (Options) - ✔✔Long position has LOWER strike price than short position
✔✔Bear spread (Options) - ✔✔Long position has HIGHER strike price than short
position
✔✔Ratio spread - ✔✔2 bullish options and 1 bear option gives more leverage to the bull
✔✔Straddle - ✔✔call and put both long (or short) same strike price
✔✔Strangle - ✔✔call and a put both long (or short) DIFFERENT strike price
✔✔Rho - ✔✔The sensitivity of the option price to the risk-free rate.
✔✔Semivariance - ✔✔similar to Sample Variance but only including observations less
than or equal to the arithmetic mean
✔✔VaR - value at risk - ✔✔max loss over a specified time and probability
✔✔100k VaR with 99% confidence over 1 year means .. - ✔✔99% chance your value
wont drop by more than 100k over the next year.
, ✔✔Monte Carlo simulation - ✔✔pretending to go through the scenario thousands of
times and recording the results
✔✔To adjust a standard deviation to periods, multiply it by - ✔✔The square root of time
periods
✔✔Sharpe ratio reflects what? - ✔✔Added return for every point of added risk.
Not useful in non-normal distributions because it relies heavily on standard deviation
✔✔Treynor ratio reflects - ✔✔return per unit of additional beta. Risk of an asset in a
diversified portfolio.
Excess return / beta
✔✔Sortino ratio reflects - ✔✔helps with non normal downside risk. More applicable in
alternative investments.
(Expected portfolio return - target ) / target semistandard deviation
✔✔information ratio reflects - ✔✔(Expected return minus benchmark) / tracking error
higher means - Track the benchmark well and consistently outperform the benchmark.
✔✔three performance measures that are not return-to-risk ratios - ✔✔Jensens Alpha
M - squared
Average tracking error
✔✔Jensens alpha compares: - ✔✔(Expected return of your asset - expected return of
assets of similar risk)
✔✔M-squared approach - ✔✔Shows the expected return of the asset if it had the same
amount of risk as an investment in the general market
✔✔Beta nonstationarity - ✔✔tendency of systematic risk of a security, strategy, or fund
to shift through time.
✔✔Beta creep - ✔✔when hedge fund strategies pick up more systematic market risk
over time. Typically when the funds get bigger and bigger.
✔✔Do down markets usually increase or decrease beta? - ✔✔Beta expansion - beta
increasing due to economic shifts. Ex. Down markets usually increase beta
✔✔Abnormal return persistence - ✔✔idiosyncratic performance in one time period to be
correlated with idiosyncratic performance in a subsequent time period. usually hints at
good managerial skill
ANSWERS TAGGED A+
✔✔Carry Trade - ✔✔Long position and a short position
Ex. Shorting a 4% US bond and buying a 5% Japanese bond
If you hedge the currency risk (in an efficient market), you would not earn any benefit
from this transaction
✔✔Duration - ✔✔elasticity of a bond price with respect to a shift in its yield. Assumes
continuous compounding
✔✔Modified duration - ✔✔risk measure used with discrete compounding applications in
which the traditional duration formula is adjusted through division by (1+y/m)
✔✔Portfolio duration - ✔✔value-weighted average of the durations
✔✔duration of a zero coupon bond - ✔✔always equal to the time to its maturity because
there is only one payment- when the bond matures
✔✔Duration of Floating-Rate Bond - ✔✔The Time to the Next Reset Period
✔✔Swap - ✔✔string of forward contracts (rather than having to enter into a bunch of
separate ones)
✔✔No Arbitrage theory of forward contracts - ✔✔A relatively long-term zero-coupon
bond will offer the same total return as a strategy of investing in a shorter zero-coupon
bond and using a forward contract to lock in the return from the maturity of the shorter
bond to the maturity of the longer bond.
✔✔Financed position - ✔✔economic ownership without paying the purchase price
✔✔Storage costs include: - ✔✔warehouse fees, insurance, transportation, and
spoilage.
✔✔Convenience yield - ✔✔economic benefit of directly holding a real asset
✔✔Which markets do forwards / futures use? (theyre different) - ✔✔Forwards - OTC ,
more custom
Futures - Exchange traded with better liquidity, sizes, transparency
✔✔Are forwards mtm? are futures mtm? - ✔✔forwards are not mtm.
Futures ARE mtm.
,✔✔Maintenance margin requirement - ✔✔Margin calls are issued when the margin falls
below the Maintenance margin requirement (Usually 70% of initial margin).
✔✔usual margin amount - ✔✔Usual margin amount is less than 10% of the underlying
commodity
✔✔1 futures oil contract is how many barrels? - ✔✔1,000
✔✔Rolling futures contracts - ✔✔closing positions in short-term futures and
simultaneously replacing w/ similar positions with longer terms.
✔✔covered call - ✔✔Short the call, and long the stock
✔✔protective put - ✔✔long stock and long put
✔✔Calendar spreads / horizontal spreads (Options) - ✔✔differences only in expiration
date
✔✔Vertical spreads (Options) - ✔✔only differ in strike price
✔✔Diagonal spread (Options) - ✔✔differ in expiration date and strike price
✔✔Bull spread (Options) - ✔✔Long position has LOWER strike price than short position
✔✔Bear spread (Options) - ✔✔Long position has HIGHER strike price than short
position
✔✔Ratio spread - ✔✔2 bullish options and 1 bear option gives more leverage to the bull
✔✔Straddle - ✔✔call and put both long (or short) same strike price
✔✔Strangle - ✔✔call and a put both long (or short) DIFFERENT strike price
✔✔Rho - ✔✔The sensitivity of the option price to the risk-free rate.
✔✔Semivariance - ✔✔similar to Sample Variance but only including observations less
than or equal to the arithmetic mean
✔✔VaR - value at risk - ✔✔max loss over a specified time and probability
✔✔100k VaR with 99% confidence over 1 year means .. - ✔✔99% chance your value
wont drop by more than 100k over the next year.
, ✔✔Monte Carlo simulation - ✔✔pretending to go through the scenario thousands of
times and recording the results
✔✔To adjust a standard deviation to periods, multiply it by - ✔✔The square root of time
periods
✔✔Sharpe ratio reflects what? - ✔✔Added return for every point of added risk.
Not useful in non-normal distributions because it relies heavily on standard deviation
✔✔Treynor ratio reflects - ✔✔return per unit of additional beta. Risk of an asset in a
diversified portfolio.
Excess return / beta
✔✔Sortino ratio reflects - ✔✔helps with non normal downside risk. More applicable in
alternative investments.
(Expected portfolio return - target ) / target semistandard deviation
✔✔information ratio reflects - ✔✔(Expected return minus benchmark) / tracking error
higher means - Track the benchmark well and consistently outperform the benchmark.
✔✔three performance measures that are not return-to-risk ratios - ✔✔Jensens Alpha
M - squared
Average tracking error
✔✔Jensens alpha compares: - ✔✔(Expected return of your asset - expected return of
assets of similar risk)
✔✔M-squared approach - ✔✔Shows the expected return of the asset if it had the same
amount of risk as an investment in the general market
✔✔Beta nonstationarity - ✔✔tendency of systematic risk of a security, strategy, or fund
to shift through time.
✔✔Beta creep - ✔✔when hedge fund strategies pick up more systematic market risk
over time. Typically when the funds get bigger and bigger.
✔✔Do down markets usually increase or decrease beta? - ✔✔Beta expansion - beta
increasing due to economic shifts. Ex. Down markets usually increase beta
✔✔Abnormal return persistence - ✔✔idiosyncratic performance in one time period to be
correlated with idiosyncratic performance in a subsequent time period. usually hints at
good managerial skill
