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CAIA Level 2 Exam Questions
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CAIA Level 2 Exam Questions
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CAIA Level 2 Exam QuestionsWhich U.S. regulatory body is responsible for overseeing the derivatives market? - correct
answer-The U.S. Commodity Futures Trading Commission (CFTC)
Of the following U.S. federal statutes, which one provides registration and regulation of
persons and entities who are engaged in providing advice to others?
A.The Securities Act of 1933
B. The Securities Exchange Act of 1934
C. The Investment Advisers Act of 1940
D. The Investment Company Act of 1940 - correct answer-C. The Investment Advisers Act of
1940
For what purpose was the Dodd-Frank Act enacted? - correct answer-The Dodd-Frank Act
was enacted to promote the financial stability of the U.S. by improving accountability and
transparency in the financial system, to end "too big to fail", to protect the American taxpayer
by ending bailouts, to protect consumers from abusive financial services practices, and for
other purposes.
In the United States, a firm manages a hedge fund with $50 million in assets under
management and operates in a state that does not require the registration of investment
advisers. Is national registration still required, and who is the firm's regulator? - correct
answer-Yes, registration is required, and the regulator is the Securities and Exchange
Commission (SEC).
What is the difference between an initial public offering (IPO) and an initial coin offering
(ICO)? - correct answer-An initial public offering (IPO) sells shares of a company for the first
time, while an initial coin offering (ICO) sells ownership of an asset as tracked through a coin
or a digital token.
Each European country has its own scheme for regulation and compliance. Therefore, an
alternative investment manager must comply with the individual regulatory bodies in each
country. Under what circumstance would there be an exception to this rule? - correct
answer-If a manager seeks to conduct business within the European Union, they are subject
to a single regulatory scheme, as long as the manager is domiciled in one of its member
states.
What are the major differences between Undertakings for Collective Investments in
Transferable Securities (UCITS) and Alternative Investment Funds (AIFs) in Europe? -
correct answer-These are the following differences:
1. UCITS are generally for retail investors with small investment amounts while AIFs are for
investors with higher investments
2. UCITS are restricted to safe and liquid assets while AIFs have fewer investment
restrictions
3. UCITS limit leverage while AIFs can use reasonable levels of leverage
,Name the two methods available to fund managers to engage in the marketing of AIFs by
AIFMs - correct answer-The two methods are as follows:
1. Using a marketing passport available under the AIFMD
2. Marketing in a specific EU member country in accordance with that country's private
placement regime
What is entailed within asset stripping rules and how long do the rules apply after acquiring
control of a non-listed company? - correct answer-Asset stripping rules prevent an AIF from
making a controlling private equity investment, having the non-listed company take a loan,
and then distributing the loan proceeds themselves. The rules are in effect for two years.
Describe the duties of the Securities and Futures Ordinance (SFO) and the Securities and
Futures Commission (SFC) in Hong Kong. - correct answer-The Securities and Futures
Ordinance (SFO) is the primary legislation for the regulation of asset management activity in
Hong Kong. The Securities and Futures Commission (SFC) is the regulator responsible for
overseeing the SFO in Hong Kong.
Under which three situations would a fund manager not be required to obtain a capital
markets services (CMS) license in Singapore? - correct answer-Under the following three
situations:
1. It carries on fund management in Singapore on behalf of not more than 30 qualified
investors, (of which not more than 15 may be funds or limited partnerships).
2. The total value of the assets managed does not exceed a specific amount set out in the
regulations.
3. It is registered with the Monetary Authority of Singapore (MAS) as a registered fund
management company (RFMC).
Describe the role of the Financial Supervisory Service (FSS) in South Korea. - correct
answer-The Financial Supervisory Service (FSS) in South Korea is responsible for
inspection of financial institutions as well as enforcement of relevant regulations as directed
by the FSC.
Describe the level of regulation for marketing of fund interests in Japan. - correct
answer-The marketing of fund interests in Japan is heavily regulated.
geopolitical beta - correct answer-adds to the growth and inflation expectations in developing
expected returns on various assets
1. What are some of the potential motivations for ESG adoption amongst institutional
investors? - correct answer-The goals and motivations are as follows:
A. Increasing risk-adjusted returns
B. Reducing reputational risk
C. Address stakeholder concerns
D. Doing the right thing or improving the planet
2. List some of the challenges faced by institutional investors regarding ESG. - correct
answer-The following are challenges:
A. ESG Adoption
,B. Lack of Standards
C. Cost
3. Water conservation, biodiversity, endangered species, and chemical usage are all
environmental issues associated with which asset class? - correct answer-Natural
Resources
4. For natural resource investors, compliance with health and safety standards for workers,
customers, and surrounding communities would most likely fit into which component of ESG:
Environmental, Social, or Governance? - correct answer-This issue would fall under Social
considerations.
5. Explain some considerations an ESG investor might have when allocating to commodity
derivatives. - correct answer-The presence of non-commercial (or speculative) investors can
lead to increased price volatility. This can be problematic for food-related products,
especially for poor economies that rely heavily on agriculture.
6. Investors can access commodities through derivatives or through physical ownership.
Why might ESG investors avoid buying physical commodities? - correct answer-Buying
physical commodities with limited supply can have a large impact on the demand for that
commodity and more directly impact the price/volatility.
7. Why might environmental stewardship be such a large consideration for an ESG investor
in real estate? - correct answer-Buildings and construction activity account for 36% of global
final energy use and are responsible for 39% of global carbon emissions. Both also can
create significant amounts of waste.
8. What are some of the key rationales behind ESG adoption amongst hedge fund
managers? - correct answer-Some of the key drivers behind the shift in adoption by hedge
funds include regulation, risk management, client demand, and new potential sources of
alpha.
9. Regarding hedge fund governance and transparency, describe the rationale behind the
Open Protocol Hedge Fund Reporting and describe its framework. - correct answer-The
Open Protocol Hedge Fund Report was created to bridge investors— needs for risk and
portfolio metrics and the need of hedge funds to maintain some level of privacy around
detailed data. The Protocol provides a standard and consistent framework around data and
inputs, calculations and methods, timely and regular report, and protocols and standards.
10. Describe the arguments for and against hedge fund managers implementing short selling
as part of their process - correct answer-Proponents of short-selling claim that it provides a
vital function in the marketplace, as it dampens the potential for over-priced securities or
prevents and punishes corporate fraud and mismanagement. Arguments against
short-selling claim that short-sellers hope for price declines, which is harmful to market
sentiment and could potentially increase market volatility.
11. How might an activist hedge fund manager fit into an ESG framework? - correct
answer-Activist hedge fund managers can urge or pressure management to take a more
, positive position when working with stakeholders such as employees, communities,
customers, and suppliers.
12. How does ESG adoption in private equity differ from other alternative investments? -
correct answer-PE firms can require portfolio companies to make certain commitments that
comply with shared ESG objectives. Additionally, PE firms can institute longer horizon ESG
goals and objectives for portfolio companies.
Describe the goals of the Global Reporting Initiative (GRI) and the Global Reporting Initiative
Standards. - correct answer-GRI seeks to help businesses and governments worldwide
understand and communicate their impact on critical sustainability issues such as climate
change, human rights, governance and social well-being.
The GRI standards are meant to enable all organizations to report publicly on their
economic, environmental, and social impacts − and show how they contribute towards
sustainable development. The standards also serve as a reference for policy makers and
regulators.
At the board meeting of a publicly-traded company, a large shareholder stood up and made
the argument that the board and management should focus solely on one thing − maximizing
shareholder value by focusing on total return. What additional goal might an ESG investor
advocate for that would conflict with this shareholder's view? - correct answer-One of the
goals of ESG advocates would be for equitable distribution of returns amongst stakeholders
of a company, not just maximizing shareholder return.
Is there academic consensus about the relationship between companies that exhibit positive
ESG characteristics (high ESG scores) and equity market performance? What about high
ESG scores and risk? - correct answer-No, there is no consensus in empirical research.
While some academic papers have identified a positive relationship between high ESG
scores and performance, others have found the opposite or that ESG scores can be
explained by common equity factors (as identified by Rabener). Giese and Lee (2019) found
that ESG characteristics had a positive effect on risk (i.e., dampening risk), in particular
mitigating tail risk.
Compare the consistency of credit rating organizations relative to ESG ratings organizations
- correct answer-There has been criticism the heterogeneity of ESG-related ratings for the
same firms across ratings agencies. For example, one study found that while the three
biggest credit rating agencies (Moody's, S&P, and Fitch) have credit ratings correlations of
0.9, the ESG ratings of MSCI, Sustainalytics, and Reprisk have an ESG ratings correlation of
0.32.
What are the five ESG categories included on the SASB Materiality Map? - correct
answer-The five ESG categories are Environment, Social Capital, Human Capital, Business
Model and Innovation, and Leadership and Governance.
What is the purpose of the United Nations' 17 Sustainable Development Goals (SDG)? -
correct answer-The United Nations published a list of 17 goals to "improve the plight of the
human race," seeking to improve incomes, living conditions, and reduce poverty and
inequality worldwide while stalling or reversing the impact of climate change.
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