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CAIA EXAM/73 QUESTIONS AND ANSWERS/A+ GRADED
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CAIA EXAM/73 QUESTIONS ANDANSWERS/A+ GRADED
An asset-pricing model that attempts to explain how investors should behave
is a(n): - -normative model.
Normative models attempt to explain how investors should behave. Positive
models attempt to explain how investors do behave. Theoretical models use
assumptions and logic, while empirical models are based on historically
observed behavior.
-Henry Thompson examines a sample of returns for a private equity fund
and finds that the sample excess kurtosis equals 3. Regarding the private
equity fund's returns, which of the following conclusions should Thompson
reach? - -The fund's returns tend to be leptokurtic.
If excess kurtosis is positive, the returns are leptokurtic. The distribution of
leptokurtic returns is higher at the peak, and fatter in the tails, versus the
normal distribution.
-Asset-pricing models that describe differences across subjects for a single
point in time are most likely known as: - -cross-sectional models.
Cross-sectional models describe differences across subjects for a single point
in time. Normative models attempt to explain how investors should behave.
Positive models attempt to explain how investors do behave. Empirical
models are based on historically observed behavior.
-Which of the following is NOT an input into a VaR calculation? - -The
maximum loss estimate is the output of the VaR calculation, not an input.
-A simulation recently was performed in which future scenarios are derived
from an assumed model. The simulated outcomes were used to indicate
what types of losses are possible for a hedge fund. Which type of value at
risk (VaR) method would most likely be used in this situation? - -Monte Carlo
VaR.
In a Monte Carlo VaR, a model is developed that simulates values for risk
factors (e.g., interest rates) and estimates how changes in risk factors affect
the fund's returns. The simulation randomly generates possible outcomes for
the fund, and those simulated outcomes measure the amount of losses that
are possible for the fund.
, -The Formika Tactical Allocation hedge fund had poor performance for two
straight years and stopped reporting performance data to various hedge
fund databases. As a result, the Formika Fund was removed from those
databases. This is an example of what potential type of database bias? - -
Survivorship bias.
Survivorship bias refers to the fact that hedge funds that stop reporting
performance data are removed from the database. Since the most common
reason for not reporting is poor performance, the implication is that there
tends to be an upside bias in database performance.
-Survivorship bias is best classified as a form of: - -selection bias.
Selection bias refers to the exclusion of certain observations from the
sample, causing distortions in the relevant characteristics of the populations.
Survivorship bias is a type of selection bias, in which funds or companies that
are no longer in existence are excluded from the sample
-Given the following information for Blue Fund, what is the beta of Blue
Fund?
Standard deviation of Blue Fund = 0.90
Standard deviation of the market portfolio = 0.40
Correlation between Blue Fund and the market portfolio = 0.50 - -The
correlation of Blue Fund multiplied by the standard deviation of Blue Fund
divided by the standard deviation of the market produces the beta for Blue
Fund.
B blue fund = .50 x (.90/.40) = 1.13
-Which of the following statistics is most useful for a manager with a relative
return mandate? - -Tracking error.
Tracking error measures the extent to which the investment returns deviate
from the benchmark returns over time, and, therefore, is especially useful for
a manager with a relative return mandate. Tracking error quantifies the
uncertainty regarding deviations of the investment return from the
benchmark return.
-Over the past several weeks, an advisor mailed various newsletters with
different predictions to millions of readers. Which of the following terms best
represents the advisor's actions? - -Chumming
Chumming is the fishing term used to describe the process of luring big fish
by scattering pieces of cheap fish as bait. In the world of finance, an
, unscrupulous advisor chums when scattering investment advice, luring
unsuspecting investors.
-An analyst examines the following data for a private equity fund:
Mean return 10%
Standard deviation 20%
Beta 2
Risk-free rate 5%
Target return 8%
Target semi-standard deviation 40%
Benchmark mean return 9%
Tracking error 25%
The information ratio and the Sortino ratio for the private equity fund are
closest to: - -4% and 5%, respectively.
The information ratio equals the portfolio's excess return (defined as the
difference between the mean returns for the portfolio and the benchmark)
divided by the portfolio's tracking error.
(.10 -.09)/.25 = .04
The Sortino ratio equals the portfolio excess return (defined as the difference
between the mean return for the portfolio and the target return) divided by
the target semi-standard deviation (a downside risk measure):
(.10-.08) / .40 = .05
-An analyst derives a quarterly return series X, based on discrete
compounding, and another quarterly return series Y, based on continuous
compounding. Assuming monthly returns are normally distributed, which of
the following statements best describes the properties of the two series? - -
Return series X will not be normally distributed and return series Y will be
normally distributed.
An advantage of continuous compounding is that continuously compounded
returns follow a normal distribution. In contrast, using discrete compounding,
simple returns do not follow a normal distribution
-In hypothesis testing, the component that usually is designed to be rejected
is the: - -null hypothesis.
In hypothesis testing, the null hypothesis is usually designed to be rejected.
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