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 10 - Advantages and disadvantages of Limited Partnerships

+ limited liability + ability mroe aggressive investment style + access to specialized knowhow + possibility of special cash distribution to partners - returns vary greatly - Illiquidity - requier significant capital

Chapter 10 - Open -end real estate mutual funds?

sell shares to stockholders to raise capital and invest this capital in real estate

Chapter 10 - Advantages and disadvantages of Open -end real estate mutual funds

+ access to real estate investments + enter and exit at will + liquidity + regulated by SEC - right to defer investor share redemption - net asset value may trail true market values - commissions, fees, transaction costs - tax inefficient

Chapter 10 - Exchange Taded Funds (ETFs)?

are tradable investment securities that track a particular index

Chapter 10 - Advantages and disadvantages of ETFs

+ low costs + tax efficient + liquidity + ability to take short positions + dividend payments

Chapter 10 - Closed -end real estate mutual funds?

are exchange traded mutual funds with a fixed number of shares outstanding

Chapter 10 - Advantages and disadvantages of Closed -end real estate mutual funds

+ liquidity + can be purchased with margin + long and short positions + transparency + regulated by SEC - tax inefficient - difficult access to specific sectors - discount to NAV

Chapter 10 - How much equity claims must an equity REIT hold at least?

0,75

Chapter 10 - An Real Estate Investment Trust (REIT)?

pools investor capital and makes direct investments in real estate

Chapter 10 - Advantages and disadvantages of REITs

+ potential inflation hedge + no corporate taxation + liquidity + may be margined + quick asset allocation + professional management + corporate governance

Chapter 10 - State the 4 principles of depreciation

1. when depreciation is not allowed for tax reasons the after -tax IRR is less than the pre -tax IRR. Effective tax rate is higher than the stated rate 2. when depreciation for tax reasons equals economic depreciation, then the effective tax rate is equal to the stated tax rate 3. when depreciation for tax reasons is higher (accelerated) then the effective tax rate is less than the stated tax rate 4. when outlays are fully expensed for tax reasons, then after -tax return equals pre -tax return

Chapter 11 - In which structures differ hedge funds from traditional investments?

- trading structure - compensation structure - regulatory structure

Chapter 11 - What are a hedge funds favourable investment attributes?

- Low correlation with traditional investments - long and short positions - potential for larger returns

Chapter 11 - What are the 5 hedge fund classifications based on strategies?

- Futures Funds - Event -Driven Hedge Funds - Relative Value (Arbitrage) Hedge Funds - Equity Hedge Funds - Funds of Funds

Chapter 11 - The high water mark (HWM)?

is the highest NAV that incentive Fees were based on

Chapter 11 - when manager invest a portion of their own money in the fund it is called?

managerial co -investing

Chapter 11 - What are the 5 factors that affect the value of an option on performance fees? And what is their relationship to the option value?

- Strike price (higher of beginning NAV or HWM) -> negative relationship - Current NAV -> positive relationship - Risk -free interest rate -> positive relationship - Volatility of NAV -> positive relationship - Performance fee percentage -> positive relationship

Chapter 11 - What are the two major effects of optionality of performance fees on the behavior of hedge fund managers?

- increase NAV volatility because volatility is positively related to the value of a call option - increase volatility when the option is far out of the money in an attempt to bring the option back into the money

Chapter 11 - What are the factors that limit a manager's desire to increase volatility?

- own money invested in the fund - poor performance will drive NAV further below HWM - poor performance leads investors to pull capital out of the fund which reduces the management fee - damaging reputation

Chapter 12 - What are the 3 primary advantages of Fund of Funds (FOFs)?

- FOFs reflect the actual returns of a diversified investor - FOFs are less biased - the net performance of FOFs is net of costs (e.g. for portfolio construction)

Chapter 12 - What are the 4 broad categories of hedge fund strategies?

- Directional strategies - Event risk strategies - Absolut return strategies - Diversified strategies

Chapter 12 - What are the advantages of Hedge Funds in Portfolios?

- increased return for a given level of risk - lower standard deviation - low correlation of hedge funds with traditional financial assets

Chapter 12 - What is an opportunistic investment strategy?

when de primary goal is to enhance returns through identification of superior investments

Chapter 12 - What are the 2 key goals of implementing an opportunistic strategy to a portfolio?

- adding value through specialization (e.g. market segments, sector) - filling gaps of existing portfolios

Chapter 12 - When high -performing hedge funds raise fees to new customers due to increasing interest from investors it is called?

fee bias

Chapter 12 - What are the advantages of asset -weighted indices compared to equal -weighted indices?

- they incorporate transaction impacts resulting from fund size - most indices from other financial products are also asset -weighted

Chapter 12 - State 5 data biases for hedge fund databases

- survivorship bias - selection bias - instant history bias - luquidation bias - participation bias

Chapter 13 - What are examples of inefficiencies pursued by global macro funds?

- Differencies in policies - Tax and regulation discrepancies - Business cycle disrepancies - Monetary policy mistakes - Macro country events - Behavioral biases - Divergent opinions

Chapter 13 - What are the primary risks of global macro funds?

- market risk - event risk - leverage risk

Chapter 13 - What are the regulation standards set by the CEA for managed futures?

- Financial reporting - Disclosure of trade information - Record keeping

Chapter 13 - What are the 3 segments of managed futures?

- public commodity pools - private commodity pools - individual accounts

Chapter 13 - Which of the 3 segments of managed futures needs to register with the SEC?

public commodity pools

Chapter 13 - What is the difference between Discretionary and Systematic Fund Trading regarding their analysis techniques?

Discretionary fund traders use fundamental analysis while systematic fund traders use technical analysis

Chapter 13 - What is the difference between expected entry and exit prices based on the model and actual entry and exit prices called?

Slippage

Chapter 13 - How is it called when trading rules become less effective over time?

Degradation

Chapter 13 - What are the 3 categories of systematic trading strategies?

- Trend -following Strategie - Non -Trend -following Strategie - Relative Value (Arbitrage)

Chapter 13 - What are risks related to Managed Futures?

- transparency risk - model risk - capacity risk - Liquidity risk - regulatory risk - lack of trends risk

Chapter 14 - What are strategies of event -driven hedge funds?

- activist - distressed securities - merger arbitrage - multi -strategy -funds

Chapter 14 - The economic process of earning relatively small risk premiums for protection against large losses of unfavourable events is known as?

selling insurance

Chapter 14 - What are the 3 components involved in activist investment strategies?

- identifying corporations that do not maximize shareholder value - investing in positions that benefit from changes in corporate governance - Executing favorable corporate governance changes

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