CAIA Exam Questions and Answers 100% Correct!

An asset-pricing model that attempts to explain how investors should behave is a(n): - ANSWER-normative model. Normative models attempt to explain how investors should behave. Positive models attempt to explain how investors do behave. Theoretical models use assumptions and logic, while empirical models are based on historically observed behavior. Henry Thompson examines a sample of returns for a private equity fund and finds that the sample excess kurtosis equals 3. Regarding the private equity fund's returns, which of the following conclusions should Thompson reach? - ANSWER-The fund's returns tend to be leptokurtic. If excess kurtosis is positive, the returns are leptokurtic. The distribution of leptokurtic returns is higher at the peak, and fatter in the tails, versus the normal distribution. Asset-pricing models that describe differences across subjects for a single point in time are most likely known as: - ANSWER-cross-sectional models. Cross-sectional models describe differences across subjects for a single point in time. Normative models attempt to explain how investors should behave. Positive models attempt to explain how investors do behave. Empirical models are based on historically observed behavior. Which of the following is NOT an input into a VaR calculation? - ANSWER-The maximum loss estimate is the output of the VaR calculation, not an input. A simulation recently was performed in which future scenarios are derived from an assumed model. The simulated outcomes were used to indicate what types of losses are possible for a hedge fund. Which type of value at risk (VaR) method would most likely be used in this situation? - ANSWER-Monte Carlo VaR. In a Monte Carlo VaR, a model is developed that simulates values for risk factors (e.g., interest rates) and estimates how changes in risk factors affect the fund's returns. The simulation randomly generates possible outcomes for the fund, and those simulated outcomes measure the amount of losses that are possible for the fund. The Formika Tactical Allocation hedge fund had poor performance for two straight years and stopped reporting performance data to various hedge fund databases. As a result, the Formika Fund was removed from those databases. This is an example of what potential type of database bias? - ANSWER-Survivorship bias. Survivorship bias refers to the fact that hedge funds that stop reporting performance da