1. Professional Ethics and Market Integrity
Which of the following scenarios would most likely violate the Integrity of Capital Markets under CAIA’s ethical guidelines?
A) A portfolio manager recommending a hedge fund investment to clients while being unaware that the fund manager has been investigated for fraud.
B) An investment analyst using publicly available financial statements to estimate a company’s valuation and trade ahead of an earnings release.
C) A senior investment officer at a private equity firm disclosing past performance data selectively to attract investors.
D) A broker receiving a performance-based referral fee for directing clients toward a specific asset manager, while disclosing the arrangement.
2. Alternative Investments - Real Assets CAIA Level 1 , CAIA Level 1 Free Practice Questions
Which of the following characteristics is most unique to Real Assets when compared to other alternative investments?
A) Real assets have an intrinsic link to consumption and economic productivity, whereas hedge funds primarily seek market inefficiencies.
B) Real estate investments offer more liquidity than publicly traded equities due to their asset-backed nature.
C) Infrastructure investments tend to have higher volatility compared to venture capital due to fluctuating commodity prices.
D) Natural resource investments typically exhibit lower price sensitivity to inflation compared to traditional fixed-income securities. CAIA Level 1 , CAIA Level 1 Free Practice Questions
3. Hedge Funds - Strategy Complexity
Which of the following hedge fund strategies is most susceptible to liquidity mismatches and why?
A) Global Macro, due to reliance on liquid futures and FX markets.
B) Convertible Arbitrage, because of significant exposure to illiquid securities and high leverage requirements.
C) Long/Short Equity, due to the ability to adjust exposure dynamically through liquid stock markets.
D) Managed Futures, which primarily trade in highly regulated, liquid derivative markets.
4. Private Debt - Risk Assessment
Which of the following factors is least likely to contribute to the risk premium required by private debt investors?
A) The level of seniority in the capital structure of a leveraged buyout transaction.
B) The liquidity risk premium associated with distressed debt securities.
C) The diversification benefits of private debt in a multi-asset portfolio.
D) The absence of a centralized exchange for trading private debt securities.
5. Digital Assets - Cryptographic Risks
What is the primary difference between Proof of Stake (PoS) and Proof of Work (PoW) in digital asset validation mechanisms?
A) PoS requires significantly more energy consumption than PoW, making it less scalable.
B) PoW secures the blockchain through computational effort, whereas PoS relies on token ownership to validate transactions.
C) PoS validators are incentivized through mining rewards, whereas PoW validators receive staking fees.
D) PoW offers faster transaction finality compared to PoS due to its consensus mechanism.
6. Portfolio Management - Return Computation
Which of the following best explains why the Internal Rate of Return (IRR) can be misleading in private equity performance evaluation?
A) IRR does not account for the time value of money, leading to inconsistent return estimations.
B) IRR assumes that all intermediate cash flows are reinvested at the IRR itself, which may not be realistic.
C) IRR can only be used for assets with a normal return distribution and is unreliable for alternative investments.
D) IRR calculations depend solely on cash inflows and ignore cash outflows, leading to overestimated returns.
7. Risk Measures - Skewness and Kurtosis
Which of the following correctly describes the impact of positive excess kurtosis in an alternative investment portfolio?
A) The portfolio experiences a higher likelihood of extreme gains and losses compared to a normal distribution.
B) Positive kurtosis indicates that the distribution of returns is symmetrical and exhibits lower volatility.
C) A portfolio with positive kurtosis will always outperform a portfolio with lower kurtosis over long time horizons.
D) An increase in kurtosis implies a reduction in the variance of the return distribution.
8. Bond Pricing - Yield to Maturity Calculation
A zero-coupon bond has a face value of $1,000, matures in 5 years, and is currently priced at $783.53. Assuming annual compounding, what is the bond's Yield to Maturity (YTM)?
A) 4.95%
B) 5.00%
C) 5.20%
D) 5.30%
9. Beta and Portfolio Risk
An alternative investment portfolio consists of two assets:
Asset A: Weight = 60%, Beta = 1.2
Asset B: Weight = 40%, Beta = 0.8
What is the portfolio beta?
A) 1.00
B) 1.04
C) 1.08
D) 1.12
10. Value-at-Risk (VaR) Calculation
A hedge fund has a portfolio valued at $50 million. The portfolio exhibits a standard deviation of 8%, and the expected return is 10%. Assuming a normal distribution and a 99% confidence level, what is the one-year VaR (Value-at-Risk)?
A) $7.49 million
B) $8.10 million
C) $8.92 million
D) $9.21 million
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