Sample Questions Level I

March 2010
SM
CAIA 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 actual
questions. 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 Funds
Questions 62 through 74 Commodities and Managed Futures
Questions 75 through 87 Private Equity
Questions 88 through 100 Credit Derivatives
******************************************************************
 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
SM
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 on
the other side of the wall?
A. Run a market simulation to determine if the sharing of the information will

significantly alter the mix of total information currently available.
B. Determine if the information about to be shared concerns a security on a watched
or restricted list.
C. Consult a designated compliance officer to determine if sharing the information is
necessary.
D. Make sure that no previous trading violations have been filed against the person
on the other side of the wall.
2. Why do the Code and Standards recommend that investment personnel not participate
in equity initial public offerings (IPOs)?
A. Because participation in equity IPOs may have the appearance of appropriating an

attractive investment opportunity from clients for personal gain
B. Because equity IPOs, while providing short term gains, are usually not prudent
long term investments
C. Because equity IPOs carry substantial systematic risk such that they usually fall
outside the limits established in the investor policy statement
D. Because equity IPOs are often illiquid so that it is difficult for investors to sell the
shares quickly at a fair price
3. According to the Code and Standards, what is the first step that a member should
follow if he or she has grounds to believe that imminent or ongoing employer
activities are illegal or unethical?
A. Maintain a file of the activity or activities with proper documentation

B. Bring the activity to the attention of their employer through their supervisor
C. Move to establish a formal written policy of violations and penalties within the
firm
D. Maintain confidentiality in order to preserve the integrity of the firm
 Copyright 2010 CAIA Association. All rights reserved. 1

4. According to the Code and Standards, which of the following best describes
appropriate conduct related to the acceptance of gifts from clients?
A. Members may accept gifts from clients if they are disclosed and if the employer
finds 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 the

standard “independence and objectivity?”
A. Protecting the integrity of opinion

B. Restricting special cost arrangements
C. Creating restricted lists
D. Reporting unethical trading behavior
6. According to the Code and Standards, which of the following actions is proper with
regard to investing in oversubscribed issues?
A. Orders for the smallest subscribers get filled first

B. Orders for institutional subscribers get filled first
C. Orders should be prorated to all subscribers
D. 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 of
presentation materials contain sections that are in violation of the Code and
Standards. 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 of
any 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 his
concerns to his supervisor, who also concludes that there is nothing to be concerned
about, given the counsel’s advice. According to the Code and Standards, what should
Carl do?
A. Maintain current files for protection in the event of a formal complaint

B. Dissociate from the conduct through whatever means necessary
C. Stay informed about changes in the law, in case the advice from legal counsel is
no longer valid
D. Communicate the Code and Standards to each of his supervisors with a specific
reference to the violations so that his actions are on file

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 and
Standards. The President of one particular brokerage firm is appreciative of Marco's
business 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 the
Code and Standards?
A. There is no violation because the President's house would not have been used had
Marco not taken the offer.
B. There is no violation because the Code and Standards do not preclude customary
entertainment.
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 a
portion of the firm’s research, prepared by another department, includes survivorship
bias such that some of the firm’s performance is exaggerated. Joanna presents the
report to prospective clients in order to solicit new business, but steers clear of any
reference to the exaggerated performance.
Which of the following describes Joanna’s behavior with respect to the Code and
Standards?
A. Joanna violated the Code and Standards because the report misrepresents
performance.
B. Joanna violated the Code and Standards, because the report was prepared by
multiple sources, and she failed to explicitly acknowledge those sources.
C. Joanna did not violate the Code and Standards because she did not include the
biased data in her presentation.
D. Joanna did not violate the Code and Standards because she has never included
such a bias in her own research.

10. Nadia Petrav is an investment advisor and holds a professional designation that
requires all members to adhere to the Code and Standards. She works for a
multinational investment company located in the United States, but is registered in,
does business in, and lives in an emerging country with laws and regulations
considered 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. Which
of the following best describes her requirements, according to the Code and
Standards?
A. Nadia is required to apply the Code and Standards in all aspects of her business
and is not allowed to hold short positions in her client’s accounts, but can hold
short 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 her
personal 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 her
personal 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 personal
account.
11. Sharma Vora, a research analyst for the pharmaceutical industry, has recommended
that the firm take an equity interest in CISDA, a small biotechnology firm. After
writing and publishing his initial report, Sharma purchases CISDA stock for his own
portfolio. He has been asked to write a second report on CISDA. What action should
Sharma take in order to be compliant with the Code and Standards?
A. Sell his CISDA stock in a relatively short period of time

B. Restrict any additional purchase of CISDA stock
C. Disclose his CISDA holdings at the time of the second report
D. Remove himself as a CISDA analyst

12. The FDA's decision not to approve the marketing of Alton's new drug Formizone was
both unexpected and bad news for Alton. The news was received from the FDA late
Friday after trading was closed. Over the weekend Alton's President leaked the news
to 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 his
Alton shares. In addition to placing that trade, Logan places an order to short Alton's
shares for herself.
Which of the following describes Logan's behavior with respect to the Code and
Standards?
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 professional
designation that requires members to adhere to the Code and Standards. As part of
her presentation she notes that performance represents a weighted composite of all of
the firm's portfolios, and that returns are shown prior to fees and taxes. She is careful
to note that some of the performance history includes terminated accounts while some
of the performance history does not. She also states that the performance presentation
is in compliance with Global Investment Performance Standards (GIPS).
Which of the following best describes the performance presentation with respect to
the Code and Standards?
A. The presentation is not in compliance because it does not include terminated

accounts 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 of

Practice admonishes members and candidates against professional dishonesty, fraud
or deceit and against committing any act that reflects adversely on their professional
reputation, integrity or competence?
A. Knowledge of the Law

B. Independence and Objectivity
C. Misrepresentation
D. Misconduct

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 an
independent contractor for TPI (working from her home) and had no agreement with
the 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 information
sent to her by TPI and saved on her home computer. According to the Standards and
Practice, which of the following statements best summarized Ms. Yang’s duties to
TPI?
A. Since Ms. Yang was an independent contractor, not an employee, she is not
subject 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 like
an 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 from
her home computer when the relationship was terminated.
16. Which of the following categories would NOT be considered a super asset class?
A. Capital assets
B. Intangible assets
C. Assets that are used as inputs to creating economic value
D. Assets that are a store of value
17. Which of the following actions is MOST accurately associated with tactical asset
allocation?
A. Investment decisions with a long term perspective

B. Investment decisions that do not emphasize current market conditions
C. Investment decisions with a primary goal of maximizing return
D. Investment decisions that do not depend on ability to diversity

18. Which of the following sets of investment categories or products is MOST accurately
described as being driven by beta rather than alpha?
A. Enhanced index and 130/30 funds

B. Enhanced index and long/short investing
C. Passive index and nonlinear returns
D. Passive index and absolute returns
19. Which of the following types of beta is most associated with active returns rather than
with systematic risk premiums?
A. Classic beta
B. Bespoke beta
C. Alternative beta
D. Bulk beta
20. Janmar Fund selects investments to match an index that it has created. The index
concentrates its positions on investments that are viewed as being substantially
underpriced relative to others based on Fama-French’s three-factor model for
describing equity market risk premiums. The Janmar Fund’s strategy is best
described by which pair of related concepts?
A. Exogenous alpha and fundamental beta

B. Exogenous alpha and cheap beta
C. Endogenous alpha and fundamental beta
D. Endogenous alpha and cheap beta
21. How are beta driven products generally described?
A. As requiring substantial information to implement

B. As difficult to create without relatively high costs
C. As having returns uncorrelated with the overall market
D. As attempting to capture systematic risk premiums

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 models

B. The alpha is ex post and is identified using factor models
C. The alpha is ex ante and is identified using option pricing models
D. 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 in
the performance of an investment manager?
A. Identifying true systematic risk exposures

B. Observing alpha and properly deducing beta
C. 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 wealth

B. Investors have similar risk tolerances
C. Investors have homogenous return expectations
D. 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 across
active bets
B. The IC is the correlation between portfolio returns and market returns through
time
C. The IC is the correlation between forecasted returns and actual returns across
active bets
D. The IC is the correlation between forecasted returns and actual returns through
time

26. Which of the following scenarios MOST accurately describes the typical income tax
implications of REIT dividends for pension funds?
A. The REIT would pay taxes on the income and the pension fund would pay taxes
on the dividend
B. The REIT would not pay taxes on the income but the pension fund would pay
taxes on the dividend
C. The REIT would pay taxes on the income but the pension fund would not pay
D. The REIT would not pay taxes on the income and the pension fund would not pay
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 risk
B. The investor enjoys higher liquidity as well as a decrease in systematic risk
C. The investor suffers lower liquidity and assumes an increase in systematic risk
D. 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 investments

B. Receives its revenue from rental and lease payments
C. 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 REIT
B. As a finite life REIT
C. As a single property REIT
D. As a dedicated REIT

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 subsidiary
C. Unlike a down-REIT, an UPREIT directly owns real estate assets
D. 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 skew

B. By a large value of excess kurtosis and a positive skew
C. By near zero excess kurtosis and a negative skew
D. By near zero excess kurtosis and a positive skew
32. Past correlation of US REIT returns (over the last 20+ years) tends to indicate which
of the following aspects of REITs as a diversifier?
A. REITs diversified a bond portfolio very well and diversified a large stock
portfolio better than a small stock portfolio
B. REITs diversified a bond portfolio very poorly and diversified a large stock
portfolio better than a small stock portfolio
C. REITs diversified a bond portfolio very well and diversified a small stock
portfolio better than a large stock portfolio
D. REITs diversified a bond portfolio very poorly and diversified a small stock
portfolio better than a large stock portfolio
33. How is the NCREIF Property Index calculated?
A. Monthly based on monthly appraisals

B. Monthly with varied appraisal intervals
C. Quarterly based on quarterly appraisals
D. Quarterly with varied appraisal intervals

34. Which of the following results is NOT an implication of the smoothing of real estate
returns due to the use of appraisals?
A. Lagging of returns
B. Decreased average returns
C. Decreased volatility of returns
D. 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 sold

B. Using a hedonic price index to adjust for characteristic differences
C. 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 Real
Estate Investment Fiduciaries (NCREIF) for analyzing direct real estate investing?
A. Core
B. Satellite
C. Value-added
D. Opportunistic
37. What style of real estate investing is characterized by being the most liquid, the most
developed, the least leveraged, and the most recognizable?
A. Core
B. Satellite
C. Value-added
D. Opportunistic

38. Which of the following characteristics best describes PERE (private equity real
estate) investments?
A. Low to moderate leverage

B. Low risk real estate holdings
C. Easily valued using transactions data
D. 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 the
other three strategies?
A. Merger arbitrage
B. Fixed income arbitrage
C. Relative value arbitrage
D. Convertible arbitrage
41. A hedge fund of funds reports a monthly hurdle rate vis-à-vis large cap stocks of
0.0047. What does this mean?
A. The fund of funds must earn at least 47 basis points per month to be a valuable
addition 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.

42. According to Anson, which question is NOT considered to be part of the investment
objective 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. Capacity
B. Leverage
C. Drawdown
D. Lock-up
44. The Sharpe ratio for Company A is 0.34, while the Sharpe ratio for Company B is
0.39. What can be said about Company B?
A. As measured by the Sharpe ratio, Company B’s risk adjusted return is superior
B. As measured by the Sharpe ratio, Company B’s mean return is higher
C. As measured by the Sharpe ratio, Company B’s standard deviation of returns is
higher
D. 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 that
expected by a normal distribution?
A. Excess kurtosis
B. Leptokurtosis
C. Platykurtosis
D. Mesokurtosis

46. Logic fund is performing well and has decided to begin reporting its performance to
various hedge fund databases. This is an example of what potential type of data risk?
A. Liquidation bias
B. Survivorship bias
C. Selection bias
D. Event bias
47. Returns of a hedge fund over four consecutive years are 4.5%, 10.8%, 19.1%, and
11.2%. 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 management
B. Between 8,000 to 10,000 funds with $1.8 trillion of assets under management
C. Between 80,000 to 100,000 funds with $180 billion of assets under management
D. Between 80,000 to 100,000 funds with $1.8 trillion of assets under management

49. Consider an equity long/short hedge fund manager who at the beginning of 2008 went
long by 150% of the portfolio value in a fund with leverage and a beta of 1.25 and
simultaneously went short by 50% of the portfolio value in an exchange-traded fund
that passively replicates exposure to the overall market. What is the weighted
average beta of this equity long/short portfolio?
A. 1.125
B. 1.250
C. 1.375
D. 1.875
50. Anson places the “Activist Investors” strategy within which hedge fund category?
A. Market directional
B. Corporate restructuring
C. Convergence trading
D. Opportunistic
51. Which types of securities do Regulation D hedge funds typically invest?
A. Private securities of companies in financial distress or in bankruptcy

B. Public securities of companies in financial distress or in bankruptcy
C. Private securities that are newly issued by public companies
D. Public securities that are newly issued by companies going public
52. For what primary reason would an investor examine the serial correlation of hedge
fund returns?
A. To investigate whether performance persistence exists

B. To measure the extent to which hedge funds are diversifiers
C. To provide an improved risk measure of idiosyncratic risk
D. To estimate the sign and magnitude of the fund’s alpha

53. Which of the following statements is LEAST accurate in explaining why a diversified
hedge fund investment program might be viewed as a bond substitute?
A. Hedge fund returns tend to have relatively low correlations with equities
B. Hedge fund returns are highly correlated with bond returns
C. Hedge fund returns tend to have lower risk than most types of stocks
D. Hedge funds tend to displace bonds in an efficient frontier analysis
54. Schanzy Funds has these three managerial positions: chief investment officer, chief
financial officer and chief risk officer. As a small fund, Schanzy Funds is considering
asking an especially gifted employee, Brian Ozymandias, to hold more than one
position. What is your recommendation with respect to the combination of duties?
A. Brian should not hold any combination of those positions

B. Brian should not be chief investment officer and chief financial officer
C. Brian should not be chief financial officer and chief risk officer
D. Brian should not be chief investment officer and chief risk officer
55. The return distribution of credit risky investments would be expected to have what
characteristics?
A. Platykurtosis and positive skew

B. Leptokurtosis and negative skew
C. Platykurtosis and negative skew
D. Leptokurtosis and positive skew
56. Assuming that the returns of a particular position are normally distributed, and that
the one week Value at Risk (VaR) is $100, what would the four week VaR be?
A. $ 100
B. $ 200
C. $ 400
D. $1,600

57. Derek Fund combines a well hedged position in competitively priced assets with very
large simultaneous short positions in out of the money calls and puts. A due diligence
analysis focused on a time period exhibiting relative market calmness should expect
the fund to exhibit what return characteristics?
A. High alpha and platykurtosis

B. High alpha and leptokurtosis
C. Negative alpha and platykurtosis
D. Negative alpha and leptokurtosis
58. Which of the following option positions of and by itself best describes the payoff
characteristics of a hedge fund manager entitled to incentive fees based on the profits
of the fund?
A. Long a call
B. Short a call
C. Long a put
D. Short a put
59. Kelly Fund has experienced a large increase in current and anticipated volatility in its
net asset value. How should Suzanne, the founder of the Fund, view this increased
volatility?
A. As placing her wealth at decreased risk while increasing the value of her incentive
fees
B. As placing her wealth at decreased risk and decreasing the value of her incentive
fees
C. As placing her wealth at increased risk while increasing the value of her incentive
fees
D. As placing her wealth at increased risk and decreasing the value of her incentive
fees
60. Which of the following collapses was most clearly marked by years of fraudulent
concealment of investment losses?
A. Amaranth Hedge Fund

B. Bayou Management
C. Carlyle Group
D. Peleton Partners Hedge Fund

61. Which of the following statements most accurately describes the average returns and
cross-sectional volatilities of hedge fund indices and stock market indices (January
1990 to June 2008)?
A. Hedge fund index returns were tightly clustered and had higher volatility than
stock indices
B. Hedge fund index returns were widely dispersed and had higher volatility than
stock indices
C. Hedge fund index returns were tightly clustered and had lower volatility than
stock indices
D. Hedge fund index returns were widely dispersed and had lower volatility than
stock indices
62. Which of the following comes closest to the fair price on a 6-month futures contract
on the S&P 500 index given the following information: an index at 1500, the risk free
rate at 5%, and the dividend yield at 1%?
A. $1,530
B. $1,545
C. $1,560
D. $1,590
63. Which term describes the following relationship between the expected spot price and
the price of the commodity futures contract?
E(ST) > FT
A. Roll yield
B. Contango
C. Parity
D. Backwardation
.
64. Who is the primary regulator of the managed futures industry?
A. The Securities and Exchange Commission

B. The Managed Futures Association
C. The Commodities Futures Trading Commission
65. With respect to commodities futures contracts, what type of margin relates to the
fluctuation in the value of an investor’s account?
A. Initial margin
B. Linked margin
C. Variation margin
D. Maintenance margin

66. Which of the following describes interest rate parity?
A. The price of commodity futures will adjust such that investors earn the risk free
rate of interest.
B. The future exchange rate between two currencies will be dependent upon the
differences 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 where

F > Ser(T-t). How, in this case, can the hedge fund manager earn a profit?
A. By buying the underlying asset and selling the futures contract

B. By buying the underlying asset and buying the futures contract
C. By selling short the underlying asset and buying the futures contract
D. 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 can
explain the shape of the price curve?
A. The additional risk accepted by the hedger over short periods

B. The additional risk accepted by the hedger over long periods
C. The additional risk accepted by the speculator over short periods
D. The additional risk accepted by the speculator over long periods

69. What is NOT a distinguishing characteristic of the Mount Lucas Management
Commodity Index (vis-à-vis the other commodity indices)?
A. Trend following
B. Negative skew
C. Long and short positions
D. Less dispersion
70. How does adding a commodity index to a portfolio of stocks and bonds change the
efficient 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” structure

B. 1%-2% management fees but no performance fees
C. 3%-5% management fees but no performance fees
72. What does the evidence from an empirical analysis of indices show with respect to
adding managed futures to a portfolio of stocks and bonds?
A. Increased downside risk but an improved risk-return tradeoff

B. Increased downside and an improved risk-return tradeoff
C. Decreased downside risk but an improved risk-return tradeoff
D. Decreased downside risk and an improved risk-return tradeoff

73. The domestic one year risk free interest rate is 10%, the current spot exchange rate
with a particular foreign currency is 1.00, and a one year futures contract on the
foreign 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 assets
indicated in hostile markets?
A. That commodity futures provided downside protection and the non-US stocks
decreased risk exposures
B. That commodity futures provided downside protection but the non-US stocks
increased risk exposures
C. That commodity futures provided no downside protection but the non-US stocks
decreased risk exposures
D. That commodity futures provided no downside protection and the non-US stocks
increased risk exposures
75. Which of the following does NOT describe an area of specialization in the venture
capital industry?
A. Specialization by industry
B. Specialization by geography
C. Specialization by currency
D. Specialization by stage of financing
76. What is the practice of buying non-financial companies by financial institutions

called?
A. A crossover
B. Merchant banking
C. A leveraged buyout (an LBO)
D. Private investment in a public entity (a PIPE)

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

B. Significant positive skewness
C. A near symmetrical distribution
D. Significant negative kurtosis
78. A private equity transaction where an investor or group of investors bargain directly
with a public company to acquire an equity position is known as what?
A. A mezzanine debt transaction

B. A distressed debt transaction
C. A crossover transaction
D. 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 the
choices below) are first to be satisfied?
A. Subordinated debt
B. Equity
C. Bank debt

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 venture
capital 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 fees

B. As management fees of 3.0-5.0% with incentive fees
C. As management fees of 2.0-2.5% with incentive fees
D. 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 it
has been repaid to a certain level?
A. Priority of payment
B. The takeout provision
C. Acceleration
D. Subordination
85. Which statement most accurately describes the committed capital to leveraged
buyouts in the U.S. from 1990-2008?
A. Committed capital has varied substantially including a decline after 2000

B. Committed capital has risen somewhat steadily and markedly
C. Committed capital has fallen somewhat steadily but slightly
D. Committed capital has had very little variation

86. The risk and return spectrum for private equity can best be described by which of the
following statements?
A. Leveraged buyouts are most risky and distressed debt is least risky
B. Venture capital is most risky and mezzanine debt is least risky
C. Leveraged buyouts are most risky and mezzanine debt is least risky
D. Venture capital is most risky and distressed debt is least risky
87. “Direct secondaries” in the private equity market can most accurately be described by
which of the following statements?
A. Secondary market sales of private equity shares rather than partnership interests
B. Secondary market sales without the services of a broker or intermediary
C. 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 risk
originates from shifts in default possibility.
B. Downgrade risk moves in one direction only (down) while credit spread risk can
move in either direction (up or down).
C. Downgrade risk originates from a review by an independent agency while credit
spread risk originates from a reaction in the financial markets.
D. Downgrade risk is most influenced by world events while credit risk is most
influenced by company-specific events.
89. Which of the following terms is NOT associated with managing credit risk?
A. Underwriting standards
B. Diversification
C. Asset sales
D. 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 the
S&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.

91. Corporate bank loans that are legally committed lines of credit are known as what?
A. Call options
B. Revolvers
C. First loss loans
D. Collateralized debt obligations
92. Which of the following is TRUE with respect to credit-linked notes?
A. They are issued as zero coupon bonds

B. They are bonds that return the par value to the investor in the event of default or
downgrade
C. They are bonds that pay a higher coupon rate to the investor compared with
similar bonds with no credit linkage
D. They are bonds that can be put back to the issuing firm in the event of a default or
downgrade
93. Which of the following statements accurately describes the relationship between
collateralized bond obligations (CBOs), collateralized debt obligations (CDOs), and
collateralized loan obligations (CLOs)?
A. Any CBO can be considered a CDO

B. Any CDO can be considered a CLO
C. Any CLO can be considered a CBO

94. Which of the following statements LEAST accurately describes collateralized debt
obligations (CDOs), collateralized bond obligations (CBOs), and collateralized loan
obligations (CLOs)?
A. Arbitrage CDOs are primarily created by money managers

B. Balance sheet CDOs are primarily created by banks and insurance companies
C. Balance sheet CDOs are usually CLOs and often free regulatory capital
D. Arbitrage CDOs are usually long some CBOs and short other CBOs
95. Which of the following statements LEAST accurately describes overcollateralization

in the context of collateralized debt obligations (CDOs)?
A. Overcollateralization is a form of internal credit enhancement

B. 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 a
collateralized debt obligations (CDOs)?
A. Formulation period
B. Revolving period
C. Amortization period
D. Ramp up period
97. A CDO trust holds $500 million in bonds with an 9% coupon. The CDO has three
tranches: A $400 million A tranche with a coupon of 9%, a $50 million B tranche
with 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 following
values is closest to the annual cash flow that the equity tranche holders can expect to
receive?
A. $6,000,000
B. $4,500,000
C. $4,000,000
D. $0

98. Which of the following statements most accurately characterizes a collateralized fund
obligation (CFO)?
A. CFO structures typically have three tranches

B. 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 collateralized

commodity obligation (CCO)?
A. The underlying assets are often commodity trigger swaps (CTSs)

B. CCO structures are “bullets” that reference a single commodity
C. Portfolio construction rules may be needed to earn high credit ratings
100. Which of the following statements LEAST accurately characterizes a single-tranche

CDO (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 structure
C. Uses a credit default swap like a normal synthetic CDO
D. The structure is also referred to as a “CDO on demand”

March 2010
SM
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
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
33 D AICTAI, pages 83,85

38 D AICTAI, pages 114-115
44 A Prerequisite Material, Quantitative Analysis, Page 118
47 C Prerequisite Material, Quantitative Analysis, Page 90
57 A AICTAI, pages 208, 242-246
60 B AICTAI, pages 292-293

99 B AICTAI, pages 580-581
100 A AICTAI, pages 581
SPH: Standards of Practice Handbook. 9th edition. Charlottesville, Virginia: CFA Institute,
2005. CFA Institute Standards of Professional Conduct
AICTAI: An Introduction to Core Topics in Alternative Investments (Wiley Finance) by CAIA

Association and Mark J. Anson (Hardcover - Oct 5, 2009)

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March 2010

 Copyright 2010 CAIA Association. All rights reserved.

A. Run a market simulation to determine if the sharing of the information will

A. Because participation in equity IPOs may have the appearance of appropriating an

A. Maintain a file of the activity or activities with proper documentation

 Copyright 2010 CAIA Association. All rights reserved. 1

5. Which of the following is NOT a procedure of compliance with respect to the

A. Protecting the integrity of opinion

A. Orders for the smallest subscribers get filled first

A. Maintain current files for protection in the event of a formal complaint

 Copyright 2010 CAIA Association. All rights reserved. 2

 Copyright 2010 CAIA Association. All rights reserved. 3

A. Sell his CISDA stock in a relatively short period of time

 Copyright 2010 CAIA Association. All rights reserved. 4

A. There is no violation as Logan owes no duty to Alton's shareholders.

A. The presentation is not in compliance because it does not include terminated

14. Which of the following categories under “Professionalism” in the Standards of

A. Knowledge of the Law

 Copyright 2010 CAIA Association. All rights reserved. 5

A. Investment decisions with a long term perspective

 Copyright 2010 CAIA Association. All rights reserved. 6

A. Enhanced index and 130/30 funds

A. Exogenous alpha and fundamental beta

21. How are beta driven products generally described?

A. As requiring substantial information to implement

 Copyright 2010 CAIA Association. All rights reserved. 7

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

A. Identifying true systematic risk exposures

A. Investors have similar levels of wealth

 Copyright 2010 CAIA Association. All rights reserved. 8

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

A. Invests in the equities of publicly traded real estate investments

 Copyright 2010 CAIA Association. All rights reserved. 9

A. An UPREIT facilitates the capitalization needed to go public

A. By a large value of excess kurtosis and a negative skew

33. How is the NCREIF Property Index calculated?

A. Monthly based on monthly appraisals

 Copyright 2010 CAIA Association. All rights reserved. 10

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

A. Using only the properties that have recently been sold

 Copyright 2010 CAIA Association. All rights reserved. 11

A. Low to moderate leverage

A. Global macro strategies may invest in commodities.

 Copyright 2010 CAIA Association. All rights reserved. 12

A. What markets does the hedge fund manager invest?

 Copyright 2010 CAIA Association. All rights reserved. 13

 Copyright 2010 CAIA Association. All rights reserved. 14

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

A. Private securities of companies in financial distress or in bankruptcy

A. To investigate whether performance persistence exists

 Copyright 2010 CAIA Association. All rights reserved. 15

A. Brian should not hold any combination of those positions

A. Platykurtosis and positive skew

 Copyright 2010 CAIA Association. All rights reserved. 16

A. High alpha and platykurtosis

A. Amaranth Hedge Fund

 Copyright 2010 CAIA Association. All rights reserved. 17

A. The Securities and Exchange Commission

 Copyright 2010 CAIA Association. All rights reserved. 18

67. Consider the case of a non-dividend paying financial asset where

A. By buying the underlying asset and selling the futures contract

A. The additional risk accepted by the hedger over short periods

 Copyright 2010 CAIA Association. All rights reserved. 19

A. It shifts the frontier down and to the right.