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CAIA EXAM QUESTIONS AND ANSWERS
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CAIA EXAM QUESTIONS AND ANSWERS
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CAIA EXAM QUESTIONS AND ANSWERSAn asset-pricing model that attempts to explain how investors should behave is a(n): -
Answers-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? - Answers-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: - Answers-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.
Survivorship bias refers to the fact that hedge funds that stop reporting performance
data are removed from the database. Since the most common reason for not reporting
is poor performance, the implication is that there tends to be an upside bias in database
performance.
Survivorship bias is best classified as a form of: - Answers-selection bias.
Selection bias refers to the exclusion of certain observations from the sample, causing
distortions in the relevant characteristics of the populations. Survivorship bias is a type
of selection bias, in which funds or companies that are no longer in existence are
excluded from the sample
Given the following information for Blue Fund, what is the beta of Blue Fund?
Standard deviation of Blue Fund = 0.90
Standard deviation of the market portfolio = 0.40
Correlation between Blue Fund and the market portfolio = 0.50 - Answers-The
correlation of Blue Fund multiplied by the standard deviation of Blue Fund divided by the
standard deviation of the market produces the beta for Blue Fund.
B blue fund = .50 x (.90/.40) = 1.13
, Which of the following statistics is most useful for a manager with a relative return
mandate? - Answers-Tracking error.
Tracking error measures the extent to which the investment returns deviate from the
benchmark returns over time, and, therefore, is especially useful for a manager with a
relative return mandate. Tracking error quantifies the uncertainty regarding deviations of
the investment return from the benchmark return.
Over the past several weeks, an advisor mailed various newsletters with different
predictions to millions of readers. Which of the following terms best represents the
advisor's actions? - Answers-Chumming
Chumming is the fishing term used to describe the process of luring big fish by
scattering pieces of cheap fish as bait. In the world of finance, an unscrupulous advisor
chums when scattering investment advice, luring unsuspecting investors.
An analyst examines the following data for a private equity fund:
Mean return 10%
Standard deviation 20%
Beta 2
Risk-free rate 5%
Target return 8%
Target semi-standard deviation 40%
Benchmark mean return 9%
Tracking error 25%
The information ratio and the Sortino ratio for the private equity fund are closest to: -
Answers-4% and 5%, respectively.
The information ratio equals the portfolio's excess return (defined as the difference
between the mean returns for the portfolio and the benchmark) divided by the portfolio's
tracking error.
(.10 -.09)/.25 = .04
The Sortino ratio equals the portfolio excess return (defined as the difference between
the mean return for the portfolio and the target return) divided by the target semi-
standard deviation (a downside risk measure):
(.10-.08) / .40 = .05
An analyst derives a quarterly return series X, based on discrete compounding, and
another quarterly return series Y, based on continuous compounding. Assuming monthly
returns are normally distributed, which of the following statements best describes the
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