Caia Level 1

Caia Level 1 Questions

Caia Level 1 Questions


D. Z.
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.
Flashcards
253
Students
7
Language
English
Category
Finance
Level
Other
Created / Updated
10.02.2016 / 13.06.2022

Cartes-fiches

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

Chapter 25 - What are risks associated with CDOs?

- financial engineering risk - differences in payment periodicity and dates - basis risk - credit spread compression - yield curve risk

Chapter 27 - What are the 3 reasons the actual strategy may diverge from the stated strategy?

- style drift - operational errors - fraud

Chapter 27 - What are the 3 primary sources of operational risks?

- operational errors - operational fraud - agency conflicts

Chapter 27 - What are the 3 main actions a firm can take to control operational risks?

- Prevention - Detection - Mitigation

Chapter 27 - To what extent did operational risk contribute to hedge fund failures (in %)?

54%

Chapter 27 - What are the 3 primary sources of fund risk?

- risks inherent in the stated hedge fund strategy - risks that arise from the use of leverage - idiosyncratic risks that arise from the implementation of the actual strategy

Chapter 28 - What are the 7 phases of a due diligence process?

- Fund structure review - Investment strategy review - Administrative review - Performance review - Risk Assessment - Legal review - Checking references

Chapter 28 - What are 3 fundamental questions a potential investor should ask?

- What is the fund's investment objective? - What is the fund's investment process? - What is the fund manager's comepitive advantage / value added?

Chapter 29 - A regression describes the relationship between?

a dependent variable and one or more independent variables

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

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