Sample Questions Level I

8/20/2019 Sample Questions Level I

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Copyright 2010 CAIA Association. All rights reserved.

No part of this publication may be reproduced, electronically or mechanically, without prior written consent of

the CAIA Association.

March 2010

CAIASM

Level I Sample Questions

Chartered Alternative Investment Analyst®

These questions are designed to be representative of the format and nature of actual CAIA Level

I examination questions in March 2010. The sample questions are not a facsimile of the actualquestions. The sample questions do not cover all of the study materials that comprise the CAIA

Level I curriculum, nor have they been verified to be equally difficult as the actual questions.Accordingly, these sample questions should not be used to assess a candidate’s level of preparedness for the exam.

Question Breakdown

******************************************************************

Questions 1 through 15 Professional Standards and Ethics

Questions 16 through 25 Introduction to Alpha and Beta Drivers

Questions 26 through 38 Real Estate

Questions 39 through 61 Hedge FundsQuestions 62 through 74 Commodities and Managed Futures

Questions 75 through 87 Private Equity

Questions 88 through 100 Credit Derivatives

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Copyright 2010 CAIA Association. All rights reserved. 1

March 2010

CAIASM

Level I Sample Questions

1. Which of the following describes what an employee behind a firewall should first do

if he or she needs to share confidential information about an issue with someone onthe other side of the wall?

A. Run a market simulation to determine if the sharing of the information willsignificantly alter the mix of total information currently available.

B. Determine if the information about to be shared concerns a security on a watchedor restricted list.

C. Consult a designated compliance officer to determine if sharing the information isnecessary.

D. Make sure that no previous trading violations have been filed against the personon the other side of the wall.

2. Why do the Code and Standards recommend that investment personnel not participatein equity initial public offerings (IPOs)?

A. Because participation in equity IPOs may have the appearance of appropriating anattractive investment opportunity from clients for personal gain

B. Because equity IPOs, while providing short term gains, are usually not prudentlong term investments

C. Because equity IPOs carry substantial systematic risk such that they usually falloutside the limits established in the investor policy statement

D.

Because equity IPOs are often illiquid so that it is difficult for investors to sell theshares quickly at a fair price

3. According to the Code and Standards, what is the first step that a member shouldfollow if he or she has grounds to believe that imminent or ongoing employeractivities are illegal or unethical?

A. Maintain a file of the activity or activities with proper documentationB. Bring the activity to the attention of their employer through their supervisorC. Move to establish a formal written policy of violations and penalties within the

firmD.

Maintain confidentiality in order to preserve the integrity of the firm


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4. According to the Code and Standards, which of the following best describesappropriate conduct related to the acceptance of gifts from clients?

A. Members may accept gifts from clients if they are disclosed and if the employerfinds that the gifts will not affect independence and objectivity.

B.

Members may accept gifts so long as their market value is less than $100.C. Members cannot accept gifts under any circumstances, in order to avoid even the

appearance of a conflict.D. Members cannot accept gifts under any circumstances, because research has

shown that any gift, large or small, impairs ethical judgment.

5. Which of the following is NOT a procedure of compliance with respect to thestandard “independence and objectivity?”

A. Protecting the integrity of opinion

B.

Restricting special cost arrangementsC. Creating restricted listsD. Reporting unethical trading behavior

6. According to the Code and Standards, which of the following actions is proper withregard to investing in oversubscribed issues?

A. Orders for the smallest subscribers get filled firstB. Orders for institutional subscribers get filled firstC. Orders should be prorated to all subscribersD. Orders for subscribers not filled in the previous issue get filled first

7. Carl St. Germaine believes that reports published by his firm and used as part ofpresentation materials contain sections that are in violation of the Code andStandards. He has brought the conduct to the attention of the firm’s legal counsel,whose opinion is that the reports can be presented because they are not in violation ofany law. He has brought the activity to the attention of the firm’s compliance officer,whose recommendation is to trust the opinion of legal counsel. He has taken hisconcerns to his supervisor, who also concludes that there is nothing to be concernedabout, given the counsel’s advice. According to the Code and Standards, what shouldCarl do?

A. Maintain current files for protection in the event of a formal complaintB. Dissociate from the conduct through whatever means necessaryC. Stay informed about changes in the law, in case the advice from legal counsel is

no longer validD. Communicate the Code and Standards to each of his supervisors with a specific

reference to the violations so that his actions are on file


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8. Marco is a security analyst who places trades through a number of brokerage firms.Marco holds a professional designation requiring members to adhere to the Code andStandards. The President of one particular brokerage firm is appreciative of Marco'sbusiness and offers Marco the use of his house on Nantucket in Massachusetts for a

week when he'll be out of the country. Marco accepts this offer.Which of the following statements regarding Marco’s actions is consistent with theCode and Standards?

A. There is no violation because the President's house would not have been used hadMarco not taken the offer.

B. There is no violation because the Code and Standards do not preclude customaryentertainment.

C. Marco violated the Code and Standards by entering into a soft-dollar arrangement.D. Marco violated the Code and Standards by the acceptance of a gift that could

compromise his independence and objectivity.

9. Joanna Wasic is a research analyst for a fund of hedge funds. She learns that aportion of the firm’s research, prepared by another department, includes survivorshipbias such that some of the firm’s performance is exaggerated. Joanna presents thereport to prospective clients in order to solicit new business, but steers clear of anyreference to the exaggerated performance.Which of the following describes Joanna’s behavior with respect to the Code andStandards?

A. Joanna violated the Code and Standards because the report misrepresentsperformance.

B.

Joanna violated the Code and Standards, because the report was prepared bymultiple sources, and she failed to explicitly acknowledge those sources.

C. Joanna did not violate the Code and Standards because she did not include thebiased data in her presentation.

D. Joanna did not violate the Code and Standards because she has never includedsuch a bias in her own research.


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10. Nadia Petrav is an investment advisor and holds a professional designation thatrequires all members to adhere to the Code and Standards. She works for amultinational investment company located in the United States, but is registered in,does business in, and lives in an emerging country with laws and regulationsconsidered less strict than the Code and Standards. Her home country does not allow

advisors to hold short positions for their clients or in their personal account. Whichof the following best describes her requirements, according to the Code andStandards?

A. Nadia is required to apply the Code and Standards in all aspects of her businessand is not allowed to hold short positions in her client’s accounts, but can holdshort positions in her personal account as long as they are disclosed.

B. Nadia is required to apply the Code and Standards in all aspects of her business,and is allowed to hold short positions in both her client’s accounts and in herpersonal account.

C. Nadia is required to apply the less strict laws and regulations of her home country,

and is not allowed to hold short positions in either her client’s accounts or in herpersonal account.D. Nadia is required to apply the Code and Standards in all aspects of her business,

and is not allowed to hold short positions in either her clients or in her personalaccount.

11. Sharma Vora, a research analyst for the pharmaceutical industry, has recommendedthat the firm take an equity interest in CISDA, a small biotechnology firm. Afterwriting and publishing his initial report, Sharma purchases CISDA stock for his ownportfolio. He has been asked to write a second report on CISDA. What action shouldSharma take in order to be compliant with the Code and Standards?

A. Sell his CISDA stock in a relatively short period of timeB. Restrict any additional purchase of CISDA stockC. Disclose his CISDA holdings at the time of the second reportD. Remove himself as a CISDA analyst


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12. The FDA's decision not to approve the marketing of Alton's new drug Formizone wasboth unexpected and bad news for Alton. The news was received from the FDA lateFriday after trading was closed. Over the weekend Alton's President leaked the newsto a select few family and friends. One of those friends, Josh Sentinel, called his

broker Logan on Sunday to describe the situation and to instruct her to sell all hisAlton shares. In addition to placing that trade, Logan places an order to short Alton'sshares for herself.Which of the following describes Logan's behavior with respect to the Code andStandards?

A. There is no violation as Logan owes no duty to Alton's shareholders.B. There is no violation under the "mosaic" theory.C. Logan violated the Code and Standards because she placed a trade without first

consulting her other clients.D. Logan violated the Code and Standards by initiating the transaction to sell shares

based upon material nonpublic information.

13. Taylor Alexander of Taylor and Taylor Investment Advisors holds a professionaldesignation that requires members to adhere to the Code and Standards. As part ofher presentation she notes that performance represents a weighted composite of all ofthe firm's portfolios, and that returns are shown prior to fees and taxes. She is carefulto note that some of the performance history includes terminated accounts while someof the performance history does not. She also states that the performance presentationis in compliance with Global Investment Performance Standards (GIPS).Which of the following best describes the performance presentation with respect tothe Code and Standards?

A. The presentation is not in compliance because it does not include terminatedaccounts in all cases.

B. The presentation is in compliance with GIPS.C. The presentation is not in compliance because it reports performance prior to

management fees and taxes.D. The performance is not in compliance because it reports results as a representation

of weighted composites.

14. Which of the following categories under “Professionalism” in the Standards ofPractice admonishes members and candidates against professional dishonesty, fraudor deceit and against committing any act that reflects adversely on their professionalreputation, integrity or competence?

A. Knowledge of the LawB. Independence and ObjectivityC. MisrepresentationD. Misconduct


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15. Quan Yang has terminated her professional relationship with Ten Peller Investments(TPI) and has started her own hedge fund . Ms. Yang clearly served as anindependent contractor for TPI (working from her home) and had no agreement withthe firm with regard to solicitation of TPI clients or retention of client information.

After leaving TPI, Ms. Yang called several TPI clients using the contact informationsent to her by TPI and saved on her home computer. According to the Standards andPractice, which of the following statements best summarized Ms. Yang’s duties toTPI?

A. Since Ms. Yang was an independent contractor, not an employee, she is notsubject to the “Duties to Employers” section of the Standards of Practice.

B. Ms. Yang is subject to all of the provisions of the “Duties to Employers” but likean employee is free to use the client contact information after leaving the firm.

C. Ms. Yang violated the standards by not erasing all client contact information fromher home computer when the relationship was terminated.

16. Which of the following categories would NOT be considered a super asset class?

A. Capital assetsB. Intangible assetsC. Assets that are used as inputs to creating economic valueD. Assets that are a store of value

17. Which of the following actions is MOST accurately associated with tactical assetallocation?

A. Investment decisions with a long term perspectiveB. Investment decisions that do not emphasize current market conditionsC. Investment decisions with a primary goal of maximizing returnD. Investment decisions that do not depend on ability to diversity


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22. How is the alpha of a particular investment differentiated from the beta?

A. The alpha is ex post and is identified using option pricing modelsB. The alpha is ex post and is identified using factor models

C.

The alpha is ex ante and is identified using option pricing modelsD. The alpha is ex ante and is identified using factor models

23. What is considered to be the most important task in distinguishing alpha from beta inthe performance of an investment manager?

A. Identifying true systematic risk exposuresB. Observing alpha and properly deducing betaC. Measuring the returns of relevant factors

24.

There are several common reasons why alpha is argued to be a “zero sum game”.Which of the following is NOT one of those reasons?

A. Investors have similar levels of wealthB. Investors have similar risk tolerancesC. Investors have homogenous return expectationsD. Investors have similar tax rates

25. Which of the following is MOST accurate with regard to the information coefficient(IC) in the Fundamental Law of Active Management?

A. The IC is the correlation between portfolio returns and market returns acrossactive bets

B. The IC is the correlation between portfolio returns and market returns throughtime

C. The IC is the correlation between forecasted returns and actual returns acrossactive bets

D. The IC is the correlation between forecasted returns and actual returns throughtime


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26. Which of the following scenarios MOST accurately describes the typical income taximplications of REIT dividends for pension funds?

A.

The REIT would pay taxes on the income and the pension fund would pay taxeson the dividendB. The REIT would not pay taxes on the income but the pension fund would pay

taxes on the dividendC. The REIT would pay taxes on the income but the pension fund would not pay

taxes on the dividendD. The REIT would not pay taxes on the income and the pension fund would not pay

taxes on the dividend

27. What are the typical implications to an REIT investor of REITs being listed?

A.

The investor enjoys higher liquidity but assumes an increase in systematic riskB. The investor enjoys higher liquidity as well as a decrease in systematic riskC. The investor suffers lower liquidity and assumes an increase in systematic riskD. The investor suffers lower liquidity but enjoys a decrease in systematic risk

28. Which of the following describes a typical equity REIT?

A. Invests in the equities of publicly traded real estate investmentsB. Receives its revenue from rental and lease paymentsC. Does not issue debt, utilize leverage or otherwise borrow

29. What is NOT one of the major ways that a REIT can be structured?

A. As an indexed REITB. As a finite life REITC. As a single property REITD. As a dedicated REIT


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30. Which of the following statements is LEAST accurate regarding UPREITs and down-REITs?

A. An UPREIT facilitates the capitalization needed to go public

B.

In a down-REIT, an older REIT typically forms a subsidiaryC. Unlike a down-REIT, an UPREIT directly owns real estate assetsD. Both UPREITs and down-REITs are driven by tax consequences

31. How would a histogram of US REIT returns over the last twenty years be described?

A. By a large value of excess kurtosis and a negative skewB. By a large value of excess kurtosis and a positive skewC. By near zero excess kurtosis and a negative skewD. By near zero excess kurtosis and a positive skew

32. Past correlation of US REIT returns (over the last 20+ years) tends to indicate whichof the following aspects of REITs as a diversifier?

A. REITs diversified a bond portfolio very well and diversified a large stockportfolio better than a small stock portfolio

B. REITs diversified a bond portfolio very poorly and diversified a large stockportfolio better than a small stock portfolio

C. REITs diversified a bond portfolio very well and diversified a small stockportfolio better than a large stock portfolio

D. REITs diversified a bond portfolio very poorly and diversified a small stockportfolio better than a large stock portfolio

33. How is the NCREIF Property Index calculated?

A. Monthly based on monthly appraisalsB. Monthly with varied appraisal intervalsC. Quarterly based on quarterly appraisalsD. Quarterly with varied appraisal intervals


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34. Which of the following results is NOT an implication of the smoothing of real estatereturns due to the use of appraisals?

A.

Lagging of returnsB. Decreased average returnsC. Decreased volatility of returnsD. Decreased correlations (with stocks and bonds)

35. What is NOT a major method of unsmoothing a real estate index?

A. Using only the properties that have recently been soldB. Using a hedonic price index to adjust for characteristic differencesC. Using simulated leverage to magnify the dispersion in the returns

D.

Using econometrics to remove the embedded lag on the time series

36. Which of the following styles was NOT developed by the National Council of RealEstate Investment Fiduciaries (NCREIF) for analyzing direct real estate investing?

A. CoreB. SatelliteC. Value-addedD. Opportunistic

37.

What style of real estate investing is characterized by being the most liquid, the mostdeveloped, the least leveraged, and the most recognizable?

A. CoreB. SatelliteC. Value-addedD. Opportunistic


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38. Which of the following characteristics best describes PERE (private equity realestate) investments?

A. Low to moderate leverage

B.

Low risk real estate holdingsC. Easily valued using transactions dataD. Often originating in Europe

39. Which of the following statements about the global macro strategy is NOT true?

A. Global macro strategies may invest in commodities.B. Global macro managers have a broad investment universe.C. Global macro funds tend to have large amounts of investor capital.D. Global macro strategies tend to be unable to apply leverage.

40. Which of the following four hedge fund strategies would be most likely to include theother three strategies?

A. Merger arbitrageB. Fixed income arbitrageC. Relative value arbitrageD. Convertible arbitrage

41. A hedge fund of funds reports a monthly hurdle rate vis-à-vis large cap stocks of0.0047. What does this mean?

A. The fund of funds must earn at least 47 basis points per month to be a valuableaddition for risk budgeting purposes.

B. The fund of funds’ average return over the most recent month is 47 basis points.C. The fund of funds’ ratio of average return to standard deviation of return is 47

basis points per month.D. On a monthly basis, the fund of funds is expected to earn 47 basis points more

than the risk free rate of return.


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42. According to Anson, which question is NOT considered to be part of the investmentobjective of the hedge fund?

A. What markets does the hedge fund manager invest?

B.

What fees will the hedge fund manager charge?C. What is the hedge fund manager’s general investment strategy?D. What is the hedge fund manager’s benchmark, if any?

43. What is known as a decline in the net asset value of a hedge fund?

A. CapacityB. LeverageC. DrawdownD. Lock-up

44. The Sharpe ratio for Company A is 0.34, while the Sharpe ratio for Company B is0.39. What can be said about Company B?

A. As measured by the Sharpe ratio, Company B’s risk adjusted return is superiorB. As measured by the Sharpe ratio, Company B’s mean return is higherC. As measured by the Sharpe ratio, Company B’s standard deviation of returns is

higherD. As measured by the Sharpe ratio, Company B’s excess return is higher

45.

Which statistical term describes a distribution where the tails are thinner than thatexpected by a normal distribution?

A. Excess kurtosisB. LeptokurtosisC. PlatykurtosisD. Mesokurtosis


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46. Logic fund is performing well and has decided to begin reporting its performance tovarious hedge fund databases. This is an example of what potential type of data risk?

A.

Liquidation biasB. Survivorship biasC. Selection biasD. Event bias

47. Returns of a hedge fund over four consecutive years are 4.5%, 10.8%, 19.1%, and11.2%. Which of the following comes closest to the hedge fund’s geometric mean?

A. 10.2%B. 10.4%

C.

11.3%D.

11.7%

48. What is the approximate size of the hedge fund industry in the US in 2007 and 2008?

A. Between 8,000 to 10,000 funds with $180 billion of assets under managementB. Between 8,000 to 10,000 funds with $1.8 trillion of assets under managementC. Between 80,000 to 100,000 funds with $180 billion of assets under managementD. Between 80,000 to 100,000 funds with $1.8 trillion of assets under management


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49. Consider an equity long/short hedge fund manager who at the beginning of 2008 wentlong by 150% of the portfolio value in a fund with leverage and a beta of 1.25 andsimultaneously went short by 50% of the portfolio value in an exchange-traded fundthat passively replicates exposure to the overall market. What is the weighted

average beta of this equity long/short portfolio?

A. 1.125B. 1.250C. 1.375D. 1.875

50. Anson places the “Activist Investors” strategy within which hedge fund category?

A. Market directional

B.

Corporate restructuringC.

Convergence tradingD. Opportunistic

51. Which types of securities do Regulation D hedge funds typically invest?

A. Private securities of companies in financial distress or in bankruptcyB. Public securities of companies in financial distress or in bankruptcyC. Private securities that are newly issued by public companiesD. Public securities that are newly issued by companies going public

52. For what primary reason would an investor examine the serial correlation of hedgefund returns?

A. To investigate whether performance persistence existsB. To measure the extent to which hedge funds are diversifiersC. To provide an improved risk measure of idiosyncratic riskD. To estimate the sign and magnitude of the fund’s alpha


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53. Which of the following statements is LEAST accurate in explaining why a diversifiedhedge fund investment program might be viewed as a bond substitute?

A. Hedge fund returns tend to have relatively low correlations with equitiesB. Hedge fund returns are highly correlated with bond returns

C.

Hedge fund returns tend to have lower risk than most types of stocksD. Hedge funds tend to displace bonds in an efficient frontier analysis

54. Schanzy Funds has these three managerial positions: chief investment officer, chieffinancial officer and chief risk officer. As a small fund, Schanzy Funds is consideringasking an especially gifted employee, Brian Ozymandias, to hold more than oneposition. What is your recommendation with respect to the combination of duties?

A. Brian should not hold any combination of those positionsB. Brian should not be chief investment officer and chief financial officer

C.

Brian should not be chief financial officer and chief risk officerD. Brian should not be chief investment officer and chief risk officer

55. The return distribution of credit risky investments would be expected to have whatcharacteristics?

A. Platykurtosis and positive skewB. Leptokurtosis and negative skewC. Platykurtosis and negative skewD. Leptokurtosis and positive skew

56. Assuming that the returns of a particular position are normally distributed, and thatthe one week Value at Risk (VaR) is $100, what would the four week VaR be?

A. $ 100B. $ 200C. $ 400D. $1,600


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57. Derek Fund combines a well hedged position in competitively priced assets with verylarge simultaneous short positions in out of the money calls and puts. A due diligenceanalysis focused on a time period exhibiting relative market calmness should expectthe fund to exhibit what return characteristics?

A. High alpha and platykurtosisB. High alpha and leptokurtosisC. Negative alpha and platykurtosisD. Negative alpha and leptokurtosis

58. Which of the following option positions of and by itself best describes the payoffcharacteristics of a hedge fund manager entitled to incentive fees based on the profitsof the fund?

A.

Long a callB.

Short a callC. Long a putD. Short a put

59. Kelly Fund has experienced a large increase in current and anticipated volatility in itsnet asset value. How should Suzanne, the founder of the Fund, view this increasedvolatility?

A. As placing her wealth at decreased risk while increasing the value of her incentivefees

B.

As placing her wealth at decreased risk and decreasing the value of her incentivefees

C. As placing her wealth at increased risk while increasing the value of her incentivefees

D. As placing her wealth at increased risk and decreasing the value of her incentivefees

60. Which of the following collapses was most clearly marked by years of fraudulentconcealment of investment losses?

A.

Amaranth Hedge FundB. Bayou ManagementC. Carlyle GroupD. Peleton Partners Hedge Fund


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66. Which of the following describes interest rate parity?

A. The price of commodity futures will adjust such that investors earn the risk freerate of interest.

B.

The future exchange rate between two currencies will be dependent upon thedifferences in their interest rates.C. Interest rates will adjust to changes in inflationary expectations between

countries.D. Futures prices and spot prices are connected by the difference between the short

term and long term interest rate.

67. Consider the case of a non-dividend paying financial asset whereF > Se

r(T-t). How, in this case, can the hedge fund manager earn a profit?

A.

By buying the underlying asset and selling the futures contractB. By buying the underlying asset and buying the futures contractC. By selling short the underlying asset and buying the futures contractD. By selling short the underlying asset and selling the futures contract

68. Contango futures markets are said to have an upward sloping price curve. What canexplain the shape of the price curve?

A. The additional risk accepted by the hedger over short periodsB. The additional risk accepted by the hedger over long periodsC.

The additional risk accepted by the speculator over short periodsD. The additional risk accepted by the speculator over long periods


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69. What is NOT a distinguishing characteristic of the Mount Lucas ManagementCommodity Index (vis-à-vis the other commodity indices)?

A. Trend following

B.

Negative skewC. Long and short positionsD. Less dispersion

70. How does adding a commodity index to a portfolio of stocks and bonds change theefficient frontier?

A. It shifts the frontier down and to the right.B. It shifts the frontier down and to the left.C. It shifts the frontier up and to the left.

D.

It shifts the frontier up and to the right.

71. What is the typical fee arrangement paid to Commodity Trading Advisors (CTAs)?

A. The “2 and 20” structureB. 1%-2% management fees but no performance feesC. 3%-5% management fees but no performance fees

72. What does the evidence from an empirical analysis of indices show with respect toadding managed futures to a portfolio of stocks and bonds?

A. Increased downside risk but an improved risk-return tradeoffB. Increased downside and an improved risk-return tradeoffC. Decreased downside risk but an improved risk-return tradeoffD. Decreased downside risk and an improved risk-return tradeoff


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73. The domestic one year risk free interest rate is 10%, the current spot exchange ratewith a particular foreign currency is 1.00, and a one year futures contract on theforeign currency has a price of 1.05 domestic units per unit of foreign currency.Assuming continuous compounding, which of the following rates is closest to the one

year risk free interest rate in the foreign currency?

A. 5.12%B. 10.24%C. 15.36%D. 20.48%

74. What has empirical analysis of efficiency frontiers (including US stocks and bonds)with an allocation of 10% to commodity futures and of correlations between assetsindicated in hostile markets?

A.

That commodity futures provided downside protection and the non-US stocksdecreased risk exposures

B. That commodity futures provided downside protection but the non-US stocksincreased risk exposures

C. That commodity futures provided no downside protection but the non-US stocksdecreased risk exposures

D. That commodity futures provided no downside protection and the non-US stocksincreased risk exposures

75. Which of the following does NOT describe an area of specialization in the venturecapital industry?

A. Specialization by industryB. Specialization by geographyC. Specialization by currencyD. Specialization by stage of financing

76. What is the practice of buying non-financial companies by financial institutionscalled?

A.

A crossoverB. Merchant bankingC. A leveraged buyout (an LBO)D. Private investment in a public entity (a PIPE)


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77. What are the return patterns for leveraged buyouts (LBOs) shown to exhibit?

A. Significant negative skewnessB. Significant positive skewnessC. A near symmetrical distribution

D.

Significant negative kurtosis

78. A private equity transaction where an investor or group of investors bargain directlywith a public company to acquire an equity position is known as what?

A. A mezzanine debt transactionB. A distressed debt transactionC. A crossover transactionD. A PIPE transaction

79.

Which of the following is TRUE of mezzanine financing?

A. It is senior to debt represented by bank loans.B. Mezzanine financing typically has an equity kicker.C. Return expectations to mezzanine funds is at about the same level as LBO funds.D. Mezzanine financing tends to attract the most capital in a robust economy.

80. Under the rules of priority with respect to security holders, whose claims (from thechoices below) are first to be satisfied?

A.

Subordinated debtB. EquityC. Bank debt


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81. Which of the following is most accurate regarding club deals in the LBO market?

A. They are rarely utilized in the LBO market.B. They limit the auction process leading to companies being acquired at less

attractive prices.C. They might reflect a lack of opportunities in the LBO market.D. They lead to a more concentration of risk particularly for large deals.

82. Which of the following describes the J Curve effect in the life cycle of the venturecapital firm?

A. Profits in the early years followed by losses in the later years.B. Flat revenues in the early years followed by profits in the later years.C. Losses in the early years followed by profits in the later years.

D.

Moderate profits in the early years followed large profits in the later years.

83. How can typical fees for venture capital funds be described?

A. As management fees of 2.0-2.5% with no incentive feesB. As management fees of 3.0-5.0% with incentive feesC. As management fees of 2.0-2.5% with incentive feesD. As management fees of 3.0-3.5% with no incentive fees

84. What characteristic allows the mezzanine investor to purchase the senior debt once ithas been repaid to a certain level?

A. Priority of paymentB. The takeout provisionC. AccelerationD. Subordination

85. Which statement most accurately describes the committed capital to leveragedbuyouts in the U.S. from 1990-2008?

A. Committed capital has varied substantially including a decline after 2000B.

Committed capital has risen somewhat steadily and markedlyC. Committed capital has fallen somewhat steadily but slightlyD. Committed capital has had very little variation


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86. The risk and return spectrum for private equity can best be described by which of thefollowing statements?

A. Leveraged buyouts are most risky and distressed debt is least risky

B.

Venture capital is most risky and mezzanine debt is least riskyC. Leveraged buyouts are most risky and mezzanine debt is least riskyD. Venture capital is most risky and distressed debt is least risky

87. “Direct secondaries” in the private equity market can most accurately be described bywhich of the following statements?

A. Secondary market sales of private equity shares rather than partnership interestsB. Secondary market sales without the services of a broker or intermediaryC. Sales of secondary public offerings without investment bankers

88. How does downgrade risk differ from credit spread risk?

A. Downgrade risk originates from interest rate shifts while credit spread riskoriginates from shifts in default possibility.

B. Downgrade risk moves in one direction only (down) while credit spread risk canmove in either direction (up or down).

C. Downgrade risk originates from a review by an independent agency while creditspread risk originates from a reaction in the financial markets.

D. Downgrade risk is most influenced by world events while credit risk is mostinfluenced by company-specific events.

89. Which of the following terms is NOT associated with managing credit risk?

A. Underwriting standardsB. DiversificationC. Asset salesD. Immunization

90. According to the empirical evidence reported by Anson over the time period 1993-2008, how do the returns of credit-risky investments correlate with the returns on theS&P 500 index?

A. The correlations are all positive and all greater than 0.50.B. The correlations are all negative and all less than -0.50.C. The correlations are all positive and in the range of 0.25 to 0.75.D. The correlations are both positive and negative but near zero.


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91. Corporate bank loans that are legally committed lines of credit are known as what?

A. Call options

B.

RevolversC. First loss loansD. Collateralized debt obligations

92. Which of the following is TRUE with respect to credit-linked notes?

A. They are issued as zero coupon bondsB. They are bonds that return the par value to the investor in the event of default or

downgradeC. They are bonds that pay a higher coupon rate to the investor compared with

similar bonds with no credit linkageD.

They are bonds that can be put back to the issuing firm in the event of a default ordowngrade

93. Which of the following statements accurately describes the relationship betweencollateralized bond obligations (CBOs), collateralized debt obligations (CDOs), andcollateralized loan obligations (CLOs)?

A. Any CBO can be considered a CDOB. Any CDO can be considered a CLOC. Any CLO can be considered a CBO


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94. Which of the following statements LEAST accurately describes collateralized debtobligations (CDOs), collateralized bond obligations (CBOs), and collateralized loanobligations (CLOs)?

A.

Arbitrage CDOs are primarily created by money managersB. Balance sheet CDOs are primarily created by banks and insurance companiesC. Balance sheet CDOs are usually CLOs and often free regulatory capitalD. Arbitrage CDOs are usually long some CBOs and short other CBOs

95. Which of the following statements LEAST accurately describes overcollateralizationin the context of collateralized debt obligations (CDOs)?

A. Overcollateralization is a form of internal credit enhancementB. Overcollateralization occurs when too much collateral is used

C.

Overcollateralization of senior tranches is greater than for junior tranches

96. Which of the following is NOT one of the three periods of the life cycle of acollateralized debt obligations (CDOs)?

A. Formulation periodB. Revolving periodC. Amortization periodD. Ramp up period

97.

A CDO trust holds $500 million in bonds with an 9% coupon. The CDO has threetranches: A $400 million A tranche with a coupon of 9%, a $50 million B tranchewith a coupon of 10% and a $50 million equity tranche with a coupon of 12%.Ignoring bond defaults, changes in market values or any fees, which of the followingvalues is closest to the annual cash flow that the equity tranche holders can expect toreceive?

A. $6,000,000B. $4,500,000C. $4,000,000D. $0


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98. Which of the following statements most accurately characterizes a collateralized fundobligation (CFO)?

A. CFO structures typically have three tranchesB. Major rating agencies do not rate CFO tranches

C.

Hedge funds are the primary collateral class of a CFO

99. Which of the following statements LEAST accurately characterizes a collateralizedcommodity obligation (CCO)?

A. The underlying assets are often commodity trigger swaps (CTSs)B. CCO structures are “bullets” that reference a single commodityC. Portfolio construction rules may be needed to earn high credit ratings

100.

Which of the following statements LEAST accurately characterizes a single-trancheCDO (collateralized debt obligation)?

A. The structure is also referred to as a “bespoke CD”B. There is only one tranche in the CDO’s capital structureC. Uses a credit default swap like a normal synthetic CDOD. The structure is also referred to as a “CDO on demand”


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March 2010

CAIASM

Level I Sample Questions Answer Key

SPH = Standards of Practice Handbook

AICTAI =An Introduction to Core Topics in Alternative Investments

Question Answer Page Reference

1 C SPH, pages 40-42

2 A SPH, pages 122-123

3 B SPH, page 8


5 D SPH, pages 19-20

6 C SPH, page 62

7 B SPH, pages 11-13


9 A SPH, pages 28-3210 D SPH, pages 12-13

11 C SPH, pages 116-119



14 D SPH, page 33


16 B AICTAI, page 3

17 C AICTAI, pages 6-7

18 A AICTAI, page 16

19 D AICTAI, page 34



22 B AICTAI, page 38



25 C AICTAI, page 49


27 A AICTAI, pages 69-71



30 C AICTAI, pages 72-7431 A AICTAI, page 78


33 D AICTAI, pages 83,85




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Question Answer Page Reference



38 D AICTAI, pages 114-115

39 D AICTAI, pages 146-14740 C AICTAI, page 143




44 A Prerequisite Material, Quantitative Analysis, Page 118



47 C Prerequisite Material, Quantitative Analysis, Page 90



50 A AICTAI, page 12151 C AICTAI, page 135






57 A AICTAI, pages 208, 242-246



60 B AICTAI, pages 292-293








68 D AICTAI, pages 323-327



71 A AICTAI, page 36972 D AICTAI, page 386






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Documents

Sample Questions Level I