CAIA Level 2 (2024) - Set 7 Exam Questions and Answers

Rebalancing activity - Answer-can be seen as a short strangle trade Short strangle = out-of-the-money calls and out-of-the-money puts are sold. Corpus - Answer-the nominal value of the endowment's initial gift advantages that may explain the outperformance enjoyed by endowments - Answer-1. Aggressive asset allocation 2. Effective investment management research 3. First-mover advantage 4. Access to a network of talented alumni 5. Acceptance of liquidity risk pension plan's PBO - Answer-Can be compared to a short position in bonds, which will change in value by approximately: = -1 * change in yields * duration The leverage aversion theory - Answer-argues that large classes of investors cannot lever up low volatility portfolios to generate attractive returns and that, as a result, low volatility stocks and portfolios are underpriced. Dutch disease - Answer-occurs when large currency inflows (such as from the sale of large quantities of commodities) damages the long-run health of a country's other sources of economic prosperity (such as the country's manufacturing sector). Free ports - Answer-are specialized, climate-controlled repositories for art and other valuable goods belonging to the wealthy - similar to a custody bank for stock certificates. The key advantage is that free ports charge no sales taxes - taxes are charged by the country of destination when the art leaves the free port. Until then, while stored at the free port, the goods are considered "in transit" and typically are not taxed. competitive advantages of family offices - Answer-1. Speed 2. liquidity premium capture 3. alignment of interests 4. aggressive asset allocation Intergenerational equity - Answer-can be expressed by a 50% probability of maintaining the inflation-adjusted value of the endowment in perpetuity VC vs Buyout - Answer-VC investing typically focuses on cutting-edge technology or rapidly growing sectors.