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CAIA Level 1 Exam/66 Questions and Answers/100% Scores
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CAIA Level 1 Exam/66 Questionsand Answers/100% Scores
liquid alternatives - -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
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 - -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 - -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
,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 - -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 - -real assets,
hedge funds, private equity, structured products
-five structures that describe alternative assets - -regulatory, securities,
trading, compensation, and institutional
-alternative investments risk and return characteristics - -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 - -1. active
management - create better risk and return combinations not found in
passive investing
2. generate absolute and relative returns
3. arbitrage, return enhancement, and diversification
-forms of market efficiency - -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 - -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
, risk factors are derived theoretically (logic that captures behavior) or
empirically (historically observed)
application to non-equity alternative investments has been limited e.g. CAPM
cannot explain alternative asset pricing because alternatives have large
idiosyncratic risks that are not easily diversified away
-Fama French - -empirical multifactor model based on three factors: market
beta, market capitalization (SMB), and book-to-market ratio (HML)
subsequently added the Carhart momentum factor (UMD)
-cost of carry model of forward contract pricing - -cost of carry refers to the
cost involved with holding an asset until expiration of the forward contract
and includes both the cost of storing the asset and the opportunity costs
associated with using capital to purchase the asset
any difference between the spot and forward price is due to the cost of carry,
which causes the term structure of forward prices to have a slope (arbitrage
ensures this)
the costs and benefits of direct ownership today versus derivatives
ownership (in the future via a forward) determines the arbitrage-free pricing
relationships between underlying assets and their associated forward
contracts: costs of direct ownership today (opportunity cost of capital and
storage costs of a commodity) are added to the spot price (because these
are costs not borne by the investor when asset is purchased forward) and
benefits of direct ownership (dividends or convenience yield) are subtracted
from the spot price (because these are benefits not enjoyed by purchasing
asset forward)
-term structure of forwards - -in a simple scenario with no interest costs and
dividends (r and d = 0) or if interest costs equal dividends (r = d) forward
prices equal spot prices and the term structure is flat
when interest rates exceed the dividend rate (r > d, or generally when costs
of direct ownership exceed the benefits) forward prices are greater than spot
prices and the term structure is upward sloping (referred to as contango)
when the dividend rate exceeds the interest rate (r < d, or generally when
benefits of direct ownership exceed costs) forward prices are lower than spot
prices and the term structure is downward sloping (referred to as
backwardation)
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