CAIA Level II Sample Exam Questions
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Intuition of the Black-Derman-Toy interest rate model -
Correct Answers ✅Observed spot rates drive rate levels
while implied rate volatilities drive rate spreads
Understanding the intuition of imposing these two conditions
helps in understanding the essence of the BDT model. The
spot rates in the currently observed term structure drive the
overall levels of the rates that are projected throughout the
binomial tree. The implied volatilities of options trading on
short‐term rates (i.e., interest rate caplets) drives the spreads
between the "up rates" and the "down rates" corresponding
to the expiration dates of the caplets
Mitigating Estimation Error Risk in Mean-Variance
Optimization - Correct Answers ✅Mitigating Estimation
Error Risk in Mean-Variance Optimization returns strives to
reduce estimation error and typically is executed by:
(1) repeated analysis of hypothetical returns simulated from
the statistical parameters estimated from the original sample
of returns; or
(2) repeated analysis of new samples of returns generated
from the original sample using draws with replacement
The three major types of credit risk modeling approaches -
Correct Answers ✅I. The structural approach
II. The reduced-form approach
,CAIA Level II Sample Exam Questions
and Verified Answers, 100% Guarantee
Pass (Latest 2025)
III. The empirical approach
The structural approach - Correct Answers ✅In the
structural approach, the framework is set around an explicit
relationship between capital structure and default. The value
of a firm's assets is set equal to the value of its equity plus
the value of its debt. Equity of the firm is viewed as a call
option on the firm's assets, with the strike price being the
face value of the debt due at the time of exercise. In contrast,
bondholders are viewed as having a risk-free bond and a
short position in a put option on the firm's assets. If the value
of assets is less than the face value of the debt, the put
option will be exercised on the bondholders, resulting in their
giving up the risk-free bond and receiving the firm's assets.
Consider a portfolio allocation process in which the following
two portfolio allocation strategies are being considered for
use:
1. Minimum volatility portfolio weights
2. Risk parity portfolio weights
In this particular portfolio allocation process, all the available
investment opportunities have the same return volatilities but
the return correlations between each pair of assets differ.
, CAIA Level II Sample Exam Questions
and Verified Answers, 100% Guarantee
Pass (Latest 2025)
Which of the following correctly identifies the strategies that
will generate equal weightings, if any? - Correct Answers
✅The weights of each asset will tend to be higher for low-
volatility assets and higher for assets that have low
correlations with the rest of the portfolio.
Second, factor-based risk allocation requires asset owners to
take extreme positions in some assets or asset classes.
In the context of the Fama-French model, the conservative
minus aggressive factor is designed to distinguish firms by
which of the following aspects? - Correct Answers ✅The
rate of reported corporate asset investment
The conservative minus aggressive factor is designed to
distinguish firms by the rate of reported corporate asset
investment (with conservative firms exhibiting a lower rate of
investment in corporate assets).
Sensitivities exhibited by Merton's structural model - Correct
Answers ✅The credit spread in Merton's structural model
exhibits sensitivity to maturity.
However, as the time to the debt's maturity is increased, the
probabilities of default (and credit spreads) increase.
and Verified Answers, 100% Guarantee
Pass (Latest 2025)
Intuition of the Black-Derman-Toy interest rate model -
Correct Answers ✅Observed spot rates drive rate levels
while implied rate volatilities drive rate spreads
Understanding the intuition of imposing these two conditions
helps in understanding the essence of the BDT model. The
spot rates in the currently observed term structure drive the
overall levels of the rates that are projected throughout the
binomial tree. The implied volatilities of options trading on
short‐term rates (i.e., interest rate caplets) drives the spreads
between the "up rates" and the "down rates" corresponding
to the expiration dates of the caplets
Mitigating Estimation Error Risk in Mean-Variance
Optimization - Correct Answers ✅Mitigating Estimation
Error Risk in Mean-Variance Optimization returns strives to
reduce estimation error and typically is executed by:
(1) repeated analysis of hypothetical returns simulated from
the statistical parameters estimated from the original sample
of returns; or
(2) repeated analysis of new samples of returns generated
from the original sample using draws with replacement
The three major types of credit risk modeling approaches -
Correct Answers ✅I. The structural approach
II. The reduced-form approach
,CAIA Level II Sample Exam Questions
and Verified Answers, 100% Guarantee
Pass (Latest 2025)
III. The empirical approach
The structural approach - Correct Answers ✅In the
structural approach, the framework is set around an explicit
relationship between capital structure and default. The value
of a firm's assets is set equal to the value of its equity plus
the value of its debt. Equity of the firm is viewed as a call
option on the firm's assets, with the strike price being the
face value of the debt due at the time of exercise. In contrast,
bondholders are viewed as having a risk-free bond and a
short position in a put option on the firm's assets. If the value
of assets is less than the face value of the debt, the put
option will be exercised on the bondholders, resulting in their
giving up the risk-free bond and receiving the firm's assets.
Consider a portfolio allocation process in which the following
two portfolio allocation strategies are being considered for
use:
1. Minimum volatility portfolio weights
2. Risk parity portfolio weights
In this particular portfolio allocation process, all the available
investment opportunities have the same return volatilities but
the return correlations between each pair of assets differ.
, CAIA Level II Sample Exam Questions
and Verified Answers, 100% Guarantee
Pass (Latest 2025)
Which of the following correctly identifies the strategies that
will generate equal weightings, if any? - Correct Answers
✅The weights of each asset will tend to be higher for low-
volatility assets and higher for assets that have low
correlations with the rest of the portfolio.
Second, factor-based risk allocation requires asset owners to
take extreme positions in some assets or asset classes.
In the context of the Fama-French model, the conservative
minus aggressive factor is designed to distinguish firms by
which of the following aspects? - Correct Answers ✅The
rate of reported corporate asset investment
The conservative minus aggressive factor is designed to
distinguish firms by the rate of reported corporate asset
investment (with conservative firms exhibiting a lower rate of
investment in corporate assets).
Sensitivities exhibited by Merton's structural model - Correct
Answers ✅The credit spread in Merton's structural model
exhibits sensitivity to maturity.
However, as the time to the debt's maturity is increased, the
probabilities of default (and credit spreads) increase.
