Exam (elaborations)
CAIA LEVEL 1 PRACTICE QUESTIONS & ANSWERS
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CAIA LEVEL 1 PRACTICE QUESTIONS & ANSWERS
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CAIA LEVEL 1 PRACTICE QUESTIONS & ANSWERSWhich of the following investments is most likely to be considered an institutional quality
alternative investment?
A. Vintage Wine Collection
B. Long/Short Equity Hedge Fund
C. High-Yield Corporate Bond Fund
D. Small Cap Equity Index Fund - Answers-B. Institutional-quality alternative
investments exhibit risk and return characteristics that are acceptable to institutional
investors. Institutional investors have risk and return objectives that prevent them from
investing in very small or highly speculative assets, but as a group, are generally able to
invest in the four categories of alternative investments. A long/short equiyt hedge fund
fits within the requirements of institutional-quality alternative assets.
Institutionas may also invest in high-yield bonds or small cap stocks, but these would be
considered traditional rather than alternative
Which of the following alternative asset classes would grant an investor with a long
position direct control of a nonfinancial asset representing actual consumption rights?
A. Real Assets
B. Hedge Funds
C. Private Equity
D. Structured Products - Answers-A. Real Assets are associated with investments that
directly control nonfinancial assets and represent actual rights to consumption rather
than indirect financial claims to cash flows generated by a firm. Real Assests include
real estate, infrastructure, intellectual property, natural resources and commodities
Which of the following is least likely to be a problem related to the return characteristics
of alternative investments?
A. Illiquidity
B. Inefficiency
C. Absolute Returns
D. Non-normal returns - Answers-C. Alternative investments exhibit different risk and
return characteristics than traditional investments in terms of diversification, illiquidity,
inefficiency and return non-normality.
Iliiquidity creates uncertainty in the relationship between recnt and expected prices for
an asset.
Inefficient markets may suffer from fewer market participants, lower competition, higher
transaction costs, and an inability to establish long or short positions.
Non-normal return distributions create problems when utilizing traditional mean-variance
portfolio optimization techniques.
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