Caia Level 1

Caia Level 1 Questions

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D. Z.

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D. Z.

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This flashcard set covers advanced finance topics at an expert level, focusing on risk management, investment strategies, and portfolio optimization. It delves into concepts like risk parity, alpha and beta management, and various investment structures, including hedge funds and collateralized debt obligations (CDOs). The flashcards explore methods for performance testing, due diligence processes, and the intricacies of credit derivatives. Ideal for finance professionals and investors, this set provides a comprehensive understanding of sophisticated financial instruments and strategies to enhance investment decision-making and portfolio performance.

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253

Students

Language

English

Category

Finance

Level

Other

Created / Updated

10.02.2016 / 13.06.2022

Similar cards

Chapter 29 - What measures R -square?

the percent of the variation in the dependent variable explained by the independent variables

Chapter 29 - A statistical method that derives estimates that minimize the sum of squared residuals refers to?

OLS ordinary least squares method

Chapter 29 - What 3 conditions must be met that the OLS method generate accurate and unbiased estimates?

- uncorrelated - homoskedastic - normally distributed

Chapter 29 - What is the problem of multicollinearity?

slope and intercept are biased upward, therefore, in return the t -statistic is biased downward - -> Type II error

Chapter 29 - Why are multifactor models applied?

to explain fund returns relative to: - returns of asset classes held by the fund (style analysis) - returns of funds with similar strategies - market factors that drive asset returns - fund replication using specialized market factors

Chapter 29 - Which of the four multifactor models works for hedge funds?

fund replication using specialized market factors

Chapter 29 - What are the 4 methods to test for perfomance persistence?

- Regression test - Measure of skill test - Persistence of volatility test - Serial correlation test

Chapter 30 - When is a portfolio dominant to another portfolio?

if it offers higher return with equal or less risk or if it offers lower risk with equal or higher expected return

Chapter 30 - efficient portfolios are expected to?

- Maximize exoected return within a risk class - Minimize risk within a return class

Chapter 30 - What are the 3 constraints subject for mean -variance optimized portfolios?

- target risk (variance) - portfolio sum = 100% - no short sale

Chapter 30 - What states the two -fund separation theorem?

all investors maximize their risk -return rate by investing in a risk -free fund and the diversified market fund

Chapter 30 - What is a hurdle rate regarding portfolio theory?

the minimum acceptable expected return that an asset can earn to be included in a portfolio

Chapter 30 - Why does mean -variance optimization (MVO) often fail to produce ex -post optimal portfolios?

- non -normality - nonstationarity - investment constraints: shortfall risk, tracking error, and illiquidity

Chapter 30 - What are the 3 extensions of the MVO (mean -variance optimization)?

- Black -Litterman approach - shrinkage techniques - additional constraints approach

Chapter 30 - The process of defining an acceptable amount of risk and then selecting portfolio weights based on the targeted, or budgeted risk refers to?

risk budgeting

Chapter 30 - A risk budgeting strategy that allocates risks equally across asset classes in the portfolio refers to?

Risk parity

Chapter 30 - What are the 3 steps to apply risk parity?

- define total risk of the portfolio - calculate marginal risk contribution of each asset class to the total risk of the portfolio - detemine portfolio weights

Chapter 31 - State 4 ways to seperate Alpha from Beta.

- futures contracts - swap contracts - options - long and short positions in indices using ETFs and cash products

Chapter 31 - State the process when using futures to offset small -cap risk and layer on the risk of the S&P500

- invest cash in the small -cap strategy to generate alpha - take short position in a small -cap index using futures contracts to offset small -cap risk - take long position in the S&P500 via S&P500 futures to layer on the risk exposure of large -cap stocks

Chapter 31 - exploiting opportunities to increase alpha while simultaneously managing beta exposure to a target level refers to?

Portable Alpha

Ethical and Professional Standards - Describe the structure of the CFA Institute Professional Conduct Program and the process for the enforcement of the Code and Standards

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- Self -disclosure, - Written complaints by the Professional Conduct staff - Complaints received through sources, - Reports by a CFA exam - Interview member/candidate, - Interview complainant, - Collect documents and records - No disciplinary sanctions, - Cautionary letter, - Discipline member/candidate

Ethical and Professional Standards - State the six components of the Code of Ethics

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- Act with integrity, competence, diligence, respect, and in an ethical manner with the public, clients, prospective clients, employers, employees, colleagues in the investment profession, and other participants in the global capital markets; - Place the integrity of the investment profession and the interest of clients above their own personal interests - Use reasonable care and exercise independent professional judgement when conducting investment analysis, making investment recommendations, taking investment action, and engaging in other professional activities - Practice and encourage others to practice in a professional and ethical manner that will reflect credit on themselves and the profession - Promote the integrity of, and uphold the rules governing, capital markets - Maintain and improve their professional competence and strive to maintain and improve the competence of other investment professionals

Ethical and Professional Standards - State the seven Standards of Professional Conduct

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I: Professionalism II: Integrity of Capital Markets III: Duties to Clients IV: Duties to Employers V: Investment Analysis, Recommendations, and Actions VI: Conflicts of Interest VII: Responsibilities as a CFA Institute Member or CFA Candidate

Ethical and Professional Standards - What are the sub -sections of PROFESSIONALISM?

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Knowledge of the Law Independence and Objectivity Misrepresentation Misconduct

Ethical and Professional Standards - What are the sub -sections of INTEGRITY OF CAPITAL MARKETS?

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Material Nonpublic Information Market Manipulation

Ethical and Professional Standards - What are the sub -sections of DUTIES TO CLIENTS?

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Loyalty, Prudence, and Care Fair Dealing Suitability Perfomance Presentation Preservation of Confidentiality

Ethical and Professional Standards - What are the sub -sections of DUTIES TO EMPLOYERS?

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Loyalty Additional Compensation Arragements Responsibility of Supervisors

Ethical and Professional Standards - What are the sub -sections of INVESTMENT ANALYSIS, RECOMMENDATIONS, AND ACTIONS?

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Diligence and Reasonable Basis Communication with Clients and Prospective Clients Record Retention

Ethical and Professional Standards - What are the sub -sections of CONFLICTS OF INTEREST?

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Disclosure of Conflicts Priority of Transactions Referral Fees

Ethical and Professional Standards - What are the sub -sections of RESPONSIBILITIES AS A CFA INSTITUTE MEMBER OR CFA CANDIDATE?

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Conduct as Members and Candidates in the CFA Program Reference to CFA Institute, the CFA Designation, and the CFA Program

Chapter 1 - What is an traditional investment?

Traditional investments include long positions in equities, fixed income, and cash

Chapter 1 - What are the five types of alternative investments?

Real assets Hedge funds Commodities Private Equity (including mezzanine and distressed debt) Structured Products (including credit derivatives)

Chapter 1 - Describe real assets

real assets focuses on investments in which the underlying assets involve direct ownership of nonfinancial assets

Chapter 1 - What subset of real assets is not included in the CAIA curriculum

Timberland, raw land and farmland

Chapter 1 - What is a hedge funds unique fueature?

Hedge funds are less regulated than trad. Investments

Chapter 1 - What are subsets of private equity?

Venture capital Leveraged buyouts Mezzanine debt Distressed debt

Chapter 1 - Describe private equity

Private equity includes both equity and debt positions that, among other things, are not publicly traded

Chapter 1 - What is the simplest and most common example of structured products

debt and equity securities

Chapter 1 - What are subsets of structured products?

Collateralized debt obligations CDOs Credit derivatives

Chapter 1 - What are the five primary types of structures?

Regulatory structures Securities structures Trading structures Compensations structures Institutional structures

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Flashcards

Chapter 21 - What are the 3 primary sources through LBO funds are financed?

- Senior debt - Mezzanine debt - Equity

Chapter 21 - What are the 6 exit strategies of LBOs?

- Sale to a strategic buyer - Sale to a financial buyer - Sale via IPO - New LBO - Refinancing - Hybrid strategy

Chapter 21 - What are the 4 benefits for the public market that result from the application of corporate governance principles by LBO firms?

- CG principles remain in place after the company becomes public again - threat for management of being removed if no CG are incorporated - provide a roadmap for other manager - helps prevent the formation of inefficient conglomerates

Chapter 21 - What are the advantages and disadvantages of club deals?

+ larger capital pool + investment restrictions + pooled resources - lack of market participants - lack of defined leadership for the business plan

Chapter 21 - Why are LBOs less risky than venture capital deals?

- LBO targets have track record with proven products/services - LBO are able to diversify while venture capital firms are specialized - IPO exit strategy is much more realistic

Chapter 22 - Firm using mezzanine debt are able to lower their WACC. True or False?

True

Chapter 22 - Mezzanine debt covenants generally allow a maximum loan -to -EBITDA multiple of?

4-4,5

Chapter 22 - What are the 7 different types of transactions mezzanine financing is typically used?

- Management buyout - Leveraged buyout - Growth and/or expansion - Acquisitions - Company recapitalization - Commercial real estate financing - Bridge financing

Chapter 22 - What are the 4 primary lenders/investors of mezzanine debt?

- Mezzanine funds - Insurance companies - Traditional senior lenders (banks) - Traditional venture capital firms

Chapter 22 - What are unique characteristics of mezzanine debt?

- Board respresentation - Restrictions on the borrower - Flexibility - Negotiations with senior creditors - Subordination - Acceleration of senior debt - Assign interest to third parties - Takeout provision

Chapter 22 - What are the 5 factors that have led to an increase in distressed debt?

- new types of commercial loans - active portfolio management - increased debt levels - increased M&A and LBO activity - growth of covenant -light loans

Chapter 22 - What are the 3 categories distressed debt investing can be classified into?

- active investors seeking control - active investors not seeking control - passive investors

Chapter 22 - What are the steps in a chapter 11 bankruptcy process?

- file for protection under chapter 11 - court freezes all default notices ( - accelerated process with pre -packaged bankruptcy filling) - create and file a plan of reorganization - convince creditors to accept plan - if accepted seek approval by court - if not accepted submit new plan

Chapter 22 - What are the 2 reasons why a lender will grand DIP (debtor -in -possession financing) financing?

- allows borrower to continue opperations - DIP loans have first priority

Chapter 23 - What are the 3 forms of credit risk?

- defult risk - downgrade risk - credit spread risk

Chapter 24 - Derivative instruments that are designed to transfer the risk of a single entity or reference are called?

single -name instruments

Chapter 24 - What is the most common single -name instrument?

CDS credit default swap

Chapter 24 - What is the difference between funded and unfunded credit instruments?

Funded credit instruments involve the transfer of notional principal

Chapter 24 - Whar are the 4 characteristic stages of the evolution of the credit derivatives market

- Defensive stage (late 1980s - early 1990s) - Emergence of intermediaries (1991 - late 1990s) - Development of Redulations (late 1990s - 2002) - Liquid Market (2003 - present)

Chapter 24 - A bilateral OTC contract between a protection buyer (short credit risk) and a protection seller (long credit risk) is called?

Credit Default Swap CDS

Chapter 24 - What are the 2 types of swaps that trade credit risk are..

- CDS (credit default swap) - TRS (total return swaps)

Chapter 24 - What are the 5 key types of terms negotiated between CDS buyer and seller?

-CDS spread - Contract size and maturity - Payment trigger events - Method of settlement - Choice of assets to deliver

Chapter 24 - What are the 4 key parameters that define a CDS?

- Credit reference - Notional amount - CDS spread - CDS maturity

Chapter 24 - What are the 3 ways to unwind an existing CDS position?

- contract termination - offsetting postion - novation

Chapter 24 - The growth of the CDS market is the result of the followingg 5 reasons.

- ability to isolate pure credit risk - synthetic short credit positions can be implemented cheaply and effectively - ability to create synthetically credit exposure without owning the underlying asset - serve as a link between bond, loan, equity, structured products - provide much needed liquidity during market stress

Chapter 24 - Risks associated with credit derivatives include?

- Operational risk - Pricing/model risk - Liquidity risk

Chapter 24 - CDS Risks are..

- Counterparty risk - Basis risk

Chapter 25 - What are the 3 periods of a CDO?

- Ramp -up period - Revolving period - Amortization period

Chapter 25 - What are the 3 measures that are used describe the underlying CDO pool?

- weighted average rating factor WARF -> measures the risk; scale 1 -10'000 - weighted average spead WAS -> measure of the return - diversity score -> measures diversity

Chapter 25 - What are the 2 main types of CDOs?

- balance sheet CDO - arbitrage CDO

Chapter 25 - What are the 3 goals of issueing a balance sheet CDO?

- reduce credit exposure from balance sheet - capital infusion - reduce regulatory capital charges

Chapter 25 - What ist the primary goal of an arbitrage CDO?

earn profits through management fees and excess spread in the equity tranche

Chapter 25 - What are the 2 types of balance sheet CDOs?

- cash -funded CDOs - synthetic CDOs

Chapter 25 - Whar are the 3 types of arbitrage CDOs?

- cash flow CDOs - market value CDOs - synthetic CDOs

Chapter 25 - What are the 2 key differences between cash -funded and synthetic balance sheet CDOs?

- Ownership: cash -funded own the assets - Use of proceeds from the sale of tranches: cash -funded buy laons and bonds from collateral, synthetic buy treasury securities

Chapter 25 - What are the advantages of synthetic CDOs as an arbitrage CDO?

- avoids the transfer of assets - less burdensome - scarce assets - use of leverage

Chapter 25 - What is the difference between cash flow and market value CDOs?

- cash flow CDOs: maturities of CDO assets and liabilities are matched - market value CDOs: portfolio is actively traded to generate a higher return

Chapter 25 - What are credit enhancements and what is the most common form of credit enhancement?

credit enhancements are made to improve credit ratings. Subordination

Chapter 25 - What are forms of internal and external credit enhancement?

internal: - overcollateralization - excess spread - cash external: - standard insurance contract - put option - CDS

Chapter 25 - What is the most frequent method for modeling CDO default risk?

copula approach

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