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CAIA Level 1 Exam Study Guide with Complete Solutions liquid alternatives - Answer️️ -Liquid alternatives typically have (1) constraints on permissible investments strategies (for example, liquidity and leverage limits), (2) no incentive fees, (3) less skilled managers as a result of less ...

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  • August 27, 2024
  • 44
  • 2024/2025
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  • caia level 1 exam study guide with complete soluti

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©SOPHIABENNET@2024/2025 Monday, August 19, 2024 10:32 PM


CAIA Level 1 Exam Study Guide with
Complete Solutions

liquid alternatives - Answer✔️✔️-Liquid alternatives typically have (1)
constraints on permissible investments strategies (for example, liquidity
and leverage limits), (2) no incentive fees, (3) less skilled managers as a
result of less attractive compensation and limited strategies, and (4) an
inability to earn substantial illiquidity premiums.



constrained clone - A liquid investment fund that seeks to replicate the
strategy of an existing alternative investment but imposes some constraint
(e.g., liquidity, leverage, diversification) is categorized as a constrained
clone.



unconstrained clone - a near-identical strategy that mimics an existing
alternative investment strategy that is itself relatively liquid (and therefore
doesn't need much modification)



liquidity-based replication products - ensures liquidity is present by
selecting liquid investments that have similar characteristics to illiquid
securities used in alternative funds




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,©SOPHIABENNET@2024/2025 Monday, August 19, 2024 10:32 PM

diversified/absolute return products - focuses on creating returns that
have low correlation with traditional assets; does not attempt to mimic an
alternative investment strategy

fund legal documents - Answer✔️✔️-The subscription agreement
determines if a potential investor meets the legal requirements to invest in
a fund by asking the investor a set of questions. The offering documents
explain the potential trading strategies and associated risks of a fund. The
partnership agreement describes the legal framework of the partnership
and the terms and conditions for all parties in a fund. The management
company operating agreement defines the responsibilities of the limited
partnership members and of the fund.

market types - Answer✔️✔️-primary - relate to the sale of newly issued
securities (including secondary issues and securitizations)



secondary - where securities trade after their initial issuance; consist of
both physical exchanges and OTC markets



third - a subset of the OTC market where participants make markets in and
trade exchange-listed securities




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,©SOPHIABENNET@2024/2025 Monday, August 19, 2024 10:32 PM

fourth - describe the direct exchange of securities between investors
without using the services of a broker/intermediary; facilitated by
electronic communication network (ECN)

Federal Reserve leverage rule - Answer✔️✔️-The standard Federal Reserve
leverage rule requires a deposit of at least 50% of the purchase cost/short
sale proceeds of a trade, or margin transaction. Alternative investment
managers that seek higher levels of leverage must avoid falling under this
rule by registering as a broker-dealer, using a joint back office account, or
relying on a broker-dealer that is located offshore.

four categories of institutional-quality alternative assets - Answer✔️✔️-real
assets, hedge funds, private equity, structured products

five structures that describe alternative assets - Answer✔️✔️-regulatory,
securities, trading, compensation, and institutional

alternative investments risk and return characteristics - Answer✔️✔️-1.
diversification - seen as diversifiers

2. illiquidity - liquidity risk premia

3. inefficiency - not all information is incorporated into prices

4. non-normal returns

primary goals of investing in alternative investments - Answer✔️✔️-1. active
management - create better risk and return combinations not found in
passive investing




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2. generate absolute and relative returns

3. arbitrage, return enhancement, and diversification

forms of market efficiency - Answer✔️✔️-weak form efficiency - asset prices
reflect all available historical data on prices and volumes; cannot earn
superior returns using technical analysis



semistrong form efficiency - asset prices reflect all publicly available
information; cannot earn superior returns with either technical or
fundamental analysis



strong from efficiency - asset prices reflect all publicly and privately
available information; no investor can earn superior returns



market efficiency affected by: asset size, trade frequency, trading frictions,
regulations, information access, valuation accuracy

multifactor asset pricing model - Answer✔️✔️-describes the relationship
between expected returns of assets and the assets' exposures to multiple
risk factors, and therefore better explain systematic risk than single factor
models




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