©SOPHIABENNET@2024/2025 Monday, August 19, 2024 10:32 PM
CAIA Level 2 Exam Study Guide with
Complete Solutions
Meta risks are qualitative risks not captured by specific and measurable
financial risks. events. - Answer✔️✔️-They include organizational and
human behavior, moral hazard, the misuse and excessive dependence on
quantitative methods, market interaction, and extreme capital market
A distressed securities strategy is most likely to earn returns from liquidity
risk. - Answer✔️✔️-Global macro and equity long/short are most likely to
earn returns from directional market risks.
Investor protection clauses are clauses within limited partnership
agreement and include - Answer✔️✔️-investment strategy, the investment
committee, the LP advisory committee, key-person terms, exclusivity,
conflicts of interest, and termination
Issues facing negatively skewed assets can be addressed by - Answer✔️✔️-
(1) changing the optimization process to account for skewness and
kurtosis; (2) adding constraints for skewness and kurtosis; and (3) limiting
the portfolio weights applicable to assets with higher moments
The AMC requires that managers should provide at least quarterly
performance reporting to clients—and within. - Answer✔️✔️-30 days of the
end of the period, if possible. This should be done even for funds with
lockup periods
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AIFs are suitable for larger investors with significant funds to invest. AIFs
have few restrictions and can invest in a range of securities, including less
liquid alternative investments such as hedge funds, private equity, and real
estate. SIFs are specialized funds specifically aimed at qualified investors in
Luxembourg. - Answer✔️✔️-UCITS funds are suitable for smaller investors
and typically invest in more liquid and safer investments that are publicly
traded. CISs encompass both UCITS funds and AIFs
Negative (or exclusionary) screening is an investment approach that avoids
including - Answer✔️✔️-in investment portfolios the equity or bond
securities issued by entities with low environmental, social, and
governance (ESG) scores or weak ESG performance
Natural resource investments should adopt techniques to reduce the
negative impact on biodiversity. That would include achieving sufficient
diversity of flora and fauna. - Answer✔️✔️-Together with farming and
timbering, mining can cause significant disruption and degradation of soil
conditions. ESG issues are quite similar between indirect and direct
investments in natural resources. Studies on protecting endangered species
should be taken before the development process to minimize any negative
environmental impacts
From 2016 to 2018, ESG assets under management in alternative
investments increased nearly - Answer✔️✔️-threefold from $206 billion to
$588 billion
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Buildings to be significantly refurbished essentially face the same issues as
buildings that are being newly developed (e.g., quality of planning, design,
and construction). - Answer✔️✔️-Preparing demolition materials should
ideally be done on site. Materials that are safe to use may release toxic
gases, so they are not always safely placed in landfills. A predemolition
audit is primarily designed to minimize the amount of landfill waste and to
promote safe handling of dangerous materials
Key drivers behind the movement of hedge funds toward ESG include: -
Answer✔️✔️-regulation, risk management, client demand, and the search
for new alpha sources
Investments in PRIs qualify for tax advantages in the U.S., and nonprofit or
charitable entities can make tax-free distributions from PRIs. PRIs offer
ESG impact but provide below-average or no risk-adjusted returns. -
Answer✔️✔️-On the other hand, MRIs offer both competitive risk-adjusted
returns and an ESG impact
There are 10 ESG metrics commonly requested by private equity investors:
- Answer✔️✔️-1) existence of an ESG policy, 2) person/group tasked with
implementing ESG policy, 3) existence of a corporate code of ethics, 4)
existence of any litigation, 5) people diversity, 6) employee composition, 7)
environmental policy, 8) CO2 footprint, 9) data and cybersecurity
incidents, and 10) health and safety incidents
The competitive advantage enjoyed by firms with an ESG strategy include
higher-risk-adjusted returns and reduced reputation risk. - Answer✔️✔️-
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About 65% of institutional investors report that most of their investment
managers do not consider ESG when making investment decisions.
Currently, there is an insufficient amount of guidance available regarding
the determination, and implementation of ESG strategies lacks clarity. Very
few alternative asset managers have the skills and knowledge to determine
their sources of ESG data and how to collect and assess that data.
Polluted water cannot be reused without being properly treated first. -
Answer✔️✔️-Remediation involves restoration of water by reversing or
stopping any environmental damage (e.g., pollution).
Common issues with risk parity are that historic returns may not provide
reasonable basis for future performance of low-volatility strategies; -
Answer✔️✔️-absence of leverage reduces the ability to adopt low-volatility
strategies; and there are no studies that support low-volatility strategies
being extended to alternative asset classes
Risk budgeting is a process that limits allocation options without
calculating portfolio optimization. - Answer✔️✔️-It defines a set level of risk
and allocates aggregate risk across available subcategories
Resampling returns can be executed by. - Answer✔️✔️-(1) repeated analysis
of hypothetical returns simulated from the original sample or (2) repeated
analysis of new samples drawn from the original sample
Empirical models do not directly evaluate the entity or its surroundings
given the difficulty in forecasting risk factors. Instead, empirical models
produce a credit score that is used to rank entities by creditworthiness. The
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