CAIA Practice Questions

CAIA Practice Questions What assets are often characterized as traditional by some and alternatives by others in: hedge funds, private equity, and real assets - ✔✔Hedge Funds: Liquid alternative mutual funds Private Equity: Closed-end funds with illiquid holdings Real Assets: Public real estate and public equities of corporations with performance dominated by stable positions in real assets 4 major methods of analysis that distinguish the analysis of alternative investments from trad. investments - ✔✔Return Computation Methods, Statistical Methods, Valuation Methods, Portfolio Management Methods Define investment - ✔✔Investment is any deferred consumption 4 major types of real assets other than land and other types of real estate - ✔✔Natural Resources, Commodities, Infrastructure, and IP 4 return characteristics that differentiate trad. and alt investments - ✔✔Diversification, Illiquidity, Inefficiency, Nonnormality Define Active Management - ✔✔Refers to efforts of buying and selling securities in pursuit of superior combos of risk and return Define an incomplete market - ✔✔Refers to lack of investment opportunities that causes market participants to be unable to implement an investment strategy that satisfices their exact preferences such as risk 4 major types of alt investments - ✔✔Real Assets, HF, PE, Structured Products When did avg quality corp bonds and international equities become commonly viewed as institutional quality inv. in US? - ✔✔Between 1950-1980 4 major legal documents necessary for establishing and managing a HF - ✔✔Private-Placement memoranda, partnership agreement, subscription agreement, & management company operating agreement What is qualified majority? - ✔✔More than 75% of LPs voting to make a decision What is Systematic Risk? - ✔✔Risk in the potential for economy wide losses attributable to failures or concerns over potential failures in markets 3 constraints against achieving alternative investment benefits through liquid products - ✔✔Leverage, Regulatory constrains on concentration, Illiquidity constraints Difference between a hard hurdle and soft hurdle rate - ✔✔Hard hurdle rate limits incentive fees to profits in excess of the hurdle rate Soft hurtle rate allows fund managers to earn an incentive fee on all profits, given the hurdle rate has been acheived is IRR a dollar-weighted return or a time-weighted return? - ✔✔IRR is the primary method of computing dollar-weighted return What is the primary cause of the shape of the J-curve of interim private equity fund returns? - ✔✔It is caused by a combo of early expense recognition, early loss recognition, and deferred gain recognition An investment has two solutions for its IRR. What can be said about the investment and the usefulness of the two solutions?