THE CHARTERED ALTERNATIVE INVESTMENT ANALYST PROGRAM SHOWCASE YOUR KNOWLEDGE CAIA LEVEL I Exam Topics
THE CHARTERED ALTERNATIVE
INVESTMENT ANALYST PROGRAM
SHOWCASE YOUR KNOWLEDGE
CAIA LEVEL I
Exam Topics
LEVEL I CURRICULUM MATERIALS
Standards of Practice Handbook.
10th edition. Charlottesville, Virginia: CFA
Institute. 2010.
ISBN: 978-0938367222.
CAIA Knowledge Series CAIA Level I: An
Introduction to Core Topics in Alternative
Investments, 2nd edition. Wiley. 2012.
ISBN: 978-1-118-25096-9
Level I Study Guide found here for free:
http://caia.org/caia-program/curriculum
2
EXAMINATION FORMAT
LEVEL I
Professional standards & ethics
Introduction to major areas of
alternatives
200 Multiple Choice Questions
Section 1 : 100 questions
120 minutes
Section 2 : 100 questions
120 minutes
3
Professional Standards and
Ethics, 15%
Introduction to Alternative Investments,
15%
Real Assets, 5% Hedge Funds,
15%
Commodities, 5%
Private Equity, 5%
Structured Products, 5%
Risk Management and Portfolio Management,
15%
Exam Topics Minimum Weight
4
FORMULA SHEETS
Professional
Standards and
Ethics
Introduction to
Alternative
Investments
Real Assets
Hedge Funds
Commodities
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
LEVEL I EXAM TOPICS
Reading:
Standards of Practice Handbook. 10th Edition, CFA Institute. 2010
The practices and standards for ethical considerations experienced in the
investment profession on a daily basis
Topics:
Standard I: Professionalism
Standard II: Integrity of Capital Markets
Standard III: Duties to Clients
Standard IV: Duties to Employers
Standard V: Investment Analysis, Recommendations, and Actions
Standard VI: Conflicts of Interest
5
Professional
Standards and
Ethics
Introduction to
Alternative
Investments
Real Assets
Hedge Funds
Commodities
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
LEVEL I EXAM TOPICS
Sample Questions
According to the Code and Standards, what is the first step that a member should take if he or
she has grounds to believe that imminent or ongoing employer activities are illegal or
unethical?
a. Maintain a file with proper documentation of the activity or activities.
b. Bring the activity to the attention of his or her employer through his or her supervisor.
c. Move to establish a formal written policy identifying types of violations and their penalties
within the firm.
d. Maintain confidentiality in order to preserve the integrity of the firm.
Marco Cancellara, CAIA, is a security analyst who places trades through a number of brokerage
firms. The president of one particular brokerage firm is appreciative of Mr. Cancellara’s
business and offers Mr. Cancellara the use of his vacation home for a week. Mr. Cancellara
accepts this offer. Which of the following statements regarding Mr. Cancellara’s actions is
consistent with the Code and Standards?
a. There is no violation because the Code and Standards do not preclude customary
entertainment.
b. Mr. Cancellara violated the Code and Standards by entering into a soft-dollar arrangement.
c. Mr. Cancellara violated the Code and Standards by accepting a gift that could compromise
his independence and objectivity.
6
Professional
Standards and
Ethics
Introduction to
Alternative
Investments
Real Assets
Hedge Funds
Commodities
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
LEVEL I EXAM TOPICS
Reading:
CAIA Level I: An Introduction to Core Topics in Alternative Investments, 2nd edition.
Wiley. 2012.
Part I – Introduction to Alternative Investments, Chapters 1 – 7.
7
What Is an Alternative Investment?
The Environment of Alternative Investments
Statistical Foundations
Risk, Return, and Benchmarking
Correlation, Alternative Returns, and
Performance Measurement
Alpha and Beta
Hypothesis Testing in Alternative Investments
Professional
Standards and
Ethics
Introduction to
Alternative
Investments
Real Assets
Hedge Funds
Commodities
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
LEVEL I EXAM TOPICS
8
Sample Questions
Which of the following sets of investment categories or products is MOST accurately
described as being driven by alpha rather than beta?
a. Enhanced index and 130/30 funds
b. Enhanced index and long/short investing
c. Passive index and nonlinear returns
d. Passive index and absolute returns
How are beta driven products generally described?
a. As requiring substantial information to implement.
b. As difficult to create without relatively high costs.
c. As having returns uncorrelated with the overall market.
d. As attempting to capture systematic risk premiums.
Professional
Standards and
Ethics
Introduction to
Alternative
Investments
Real Assets
Hedge Funds
Commodities
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
LEVEL I EXAM TOPICS
Reading:
CAIA Level I: An Introduction to Core Topics in Alternative Investments, 2nd edition.
Wiley. 2012.
Part II – Real Assets, Chapters 8-10.
9
Land, Infrastructure, and Intangible Real Assets
Real Estate Fixed-Income Investments
Real Estate Equity Investments
Professional
Standards and
Ethics
Introduction to
Alternative
Investments
Real Assets
Hedge Funds
Commodities
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
LEVEL I EXAM TOPICS
Sample Questions
Which of the following scenarios MOST accurately describes the typical US income tax
implications of real estate investment trust (REIT) dividends for pension funds?
a. REITs would pay taxes on their income and pension funds would pay taxes on the
dividends received from REITs.
b. REITs would not pay taxes on their income but pension funds would pay taxes on the
dividends received from REITs.
c. REITs would pay taxes on their income but pension funds would not pay taxes on the
dividends received from REITs.
d. REITs would not pay taxes on their income and pension funds would not pay taxes on the
dividends received from REITs.
10
Professional
Standards and
Ethics
Introduction to
Alternative
Investments
Real Assets
Hedge Funds
Commodities
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
An analyst has been asked to evaluate the intellectual property (IP) value of a new film
venture. In looking at the IP, the analyst views the probability of substantial success of
the investment to be 5%, and the rate at which the cash flows decline or diminish each
year is estimated to be 1%. Assuming a required rate of return of 9% and a successful
outcome, which comes closest to the value of the IP per dollar of the initial cash inflow?
a. $ .44
b. $ .50
c. $ .56
d. $ .63
V = (P * CF1)/ (r-g)
V = (.05 * 1.00)/(.09-(-.01))
V = .05/.10 = 0.50
11
LEVEL I EXAM TOPICS
Professional
Standards and
Ethics
Introduction to
Alternative
Investments
Real Assets
Hedge Funds
Commodities
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
LEVEL I EXAM TOPICS
Reading:
CAIA Level I: An Introduction to Core Topics in Alternative Investments. 2nd edition.
Wiley. 2012.
Part III – Hedge Funds, Chapters 11 – 17.
12
Introduction to Hedge Funds
Hedge Fund Returns and Asset Allocation
Macro and Managed Futures Funds
Event-Driven Hedge Funds
Relative Value Hedge Funds
Equity Hedge Funds
Funds of Hedge Funds
Professional
Standards and
Ethics
Introduction to
Alternative
Investments
Real Assets
Hedge Funds
Commodities
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
LEVEL I EXAM TOPICS
13
Sample Questions
Derek Fund combines a well-hedged position in competitively-priced assets with very large simultaneous short
positions in out of the money calls and puts. A due diligence analysis focused on a time period exhibiting
relative market calmness would be expected to show the fund exhibiting which of the following return
characteristics?
a. High alpha and platykurtosis
b. High alpha and leptokurtosis
c. Negative alpha and platykurtosis
d. Negative alpha and leptokurtosis
Luke’s Locker Corporation has made an offer to purchase RBM Corporation for $30 per share. Immediately prior
to the announcement, RBM was trading at $15 per share. Directly after the initial announcement, the share
price of RBM Corporation moves up to $25 per share. Assume that RBM’s share price would fall back to $12 per
share if the deal does not go through. Further assume a riskless interest rate of 0%, for simplicity. Lucas Hedge
Fund, an event-driven hedge fund, takes a long position in RBM Corporation and takes a binary call option view
of event strategy returns. Viewing the transaction this way, what is the face value of the long position in the
riskless bond, and the potential payout on the call option in the case of a successful merger, respectively?
a. $0 and $30
b. $12 and $18
c. $15 and $15
d. $25 and $5.
Professional
Standards and
Ethics
Introduction to
Alternative
Investments
Real Assets
Hedge Funds
Commodities
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
LEVEL I EXAM TOPICS
Reading:
CAIA Level I: An Introduction to Core Topics in Alternative Investments, 2nd edition.
Wiley. 2012.
Part IV – Commodities, Chapters 18-19.
14
Commodity Futures Pricing
Commodities: Applications and Evidence
Professional
Standards and
Ethics
Introduction to
Alternative
Investments
Real Assets
Hedge Funds
Commodities
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
LEVEL I EXAM TOPICS
15
Sample Questions
Consider the case of a non-dividend-paying financial asset where F > Ser(T-t). How, in this
case, can the hedge fund manager earn a profit?
a. By buying the underlying asset and selling the futures contract.
b. By buying the underlying asset and buying the futures contract.
c. By selling short the underlying asset and buying the futures contract.
d. By selling short the underlying asset and selling the futures contract.
Professional
Standards and
Ethics
Introduction to
Alternative
Investments
Real Assets
Hedge Funds
Commodities
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
LEVEL I EXAM TOPICS
16
Sample Questions
Which of the following comes closest to the fair price on a 6-month futures contract on the
Standard & Poor’s (S&P) 500 index given the following information: an index at 1500, the
risk-free rate at 5%, and the dividend yield at 1%?
a. $1,530
b. $1,545
c. $1,560
d. $1,590
F = S (1+ (r-d)/t)
F = $1,500 * (1+(.05-.01)/2)
F = $1,500 * 1.02
F = $1,530
Professional
Standards and
Ethics
Introduction to
Alternative
Investments
Real Assets
Hedge Funds
Commodities
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
Introduction to Private Equity
Equity Types of Private Equity
Debt Types of Private Equity
LEVEL I EXAM TOPICS
17
Reading:
CAIA Level I: An Introduction to Core Topics in Alternative Investments, 2nd
edition. Wiley. 2012.
Part V – Private Equity, Chapters 20 - 22.
Professional
Standards and
Ethics
Introduction to
Alternative
Investments
Real Assets
Hedge Funds
Commodities
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
LEVEL I EXAM TOPICS
18
Sample Questions
Which of the following are common definitions of distressed debt?
I. Debt that trades at less than half of its principal value
II. Debt whose yield to maturity is 1,000 or more basis points above the riskless rate
III. Debt rated at the level CCC or lower by Standard and Poor’s
IV. Debt with annualized return volatility in excess of 20%
a. II, III, and IV only
b. I, III, and IV only
c. I, II, and IV only
d. I, II, and III only
What characteristic of mezzanine investing allows an investor to purchase the senior debt once it
has been repaid to a certain level?
a. Priority of payment
b. The takeout provision
c. Acceleration
d. Subordination
Professional
Standards and
Ethics
Introduction to
Alternative
Investments
Real Assets
Hedge Funds
Commodities
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
LEVEL I EXAM TOPICS
19
Reading:
CAIA Level I: An Introduction to Core Topics in Alternative Investments, 2nd
edition. Wiley. 2012.
Part VI – Structured Products, Chapters 23-25.
Credit Risk and the Structuring of Cash Flows
Credit Derivatives
Collateralized Debt Obligations
Professional
Standards and
Ethics
Introduction to
Alternative
Investments
Real Assets
Hedge Funds
Commodities
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
LEVEL I EXAM TOPICS
20
Sample Questions
Use the following information and the one-step binomial process approach to firm value
estimation (discrete time compounding) to answer the next two questions. Suppose the
current value of the XYZ Corporation’s assets is £200, and that the value of the firm’s assets
is expected to increase or decrease by 25% over the next year. The firm has one-period zero-
coupon debt outstanding with the notional value of £180.
If the one-year riskless rate is 4% and the risk-neutral probability (π) is 0.58, which of the
following amounts comes closest to the fair value of the risky loan?
a. £154
b. £161
c. £168
d. £175
Value (Assets | Up) =£200* 1.25 = £250, Value(Debt | Up) = £180
Value (Assets | Down) =£200* (1-0.25) = £150, Value(Debt | Down) = £150
Value(Debt) = [p Value(Debt | Up) + (1-p)Value(Debt | Down)]/(1+Rf)
Value(Debt) = [0.58 *180 + (1-0.58)*150]/(1.04) = £161
Professional
Standards and
Ethics
Introduction to
Alternative
Investments
Real Assets
Hedge Funds
Commodities
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
LEVEL I EXAM TOPICS
21
Sample Questions
Use the following information and the one-step binomial process approach to firm value
estimation (discrete time compounding) to answer the next two questions. Suppose the
current value of the XYZ Corporation’s assets is £200, and that the value of the firm’s assets
is expected to increase or decrease by 25% over the next year. The firm has one-period zero-
coupon debt outstanding with the notional value of £180.
If the one-year riskless rate is 1%, which of the following values comes closest to the risk-
neutral probability (π) of an up-move?
a. 0.48
b. 0.50
c. 0.52
d. 0.54
Value (Assets | Up) =£200* 1.25 = £250, Value (Assets | Down) =£200* (1-0.25) = £150
Asset Value = [1/(1+Rf)] [p Value(Assets | Up) + (1-p)Value(Assets | Down)]
200= [1/1.01] [p 250 + (1-p)150]
200= [1/1.01] [100p+150]
p=0.52
Professional
Standards and
Ethics
Introduction to
Alternative
Investments
Real Assets
Hedge Funds
Commodities
Private Equity
Structured
Products
Risk Management
and Portfolio
Management 22
LEVEL I EXAM TOPICS
Reading:
CAIA Level I: An Introduction to Core Topics in Alternative Investments, 2nd
edition . Wiley. 2012.
Part VII – Risk Management and Portfolio Management, Chapters 26-31.
Lessons from Hedge Fund Failures
Risk Analysis
Due Diligence of Fund Managers
Regression, Multivariate, and
Nonlinear Methods
Portfolio Optimization and Risk
Parity
Portfolio Management, Alpha, and
Beta
Professional
Standards and
Ethics
Introduction to
Alternative
Investments
Real Assets
Hedge Funds
Commodities
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
Sample Questions
Which of the following BEST explains why including alternative investments into a portfolio requires
modifications to mean-variance portfolio optimization?
a. Mean-variance optimizers typically place a lower portfolio weight on positively skewed assets
b. Mean-variance optimizers typically place a lower portfolio weight on negatively skewed assets
c. Mean-variance optimizers typically place a higher portfolio weight on positively skewed assets
d. Mean-variance optimizers typically place a higher portfolio weight on negatively skewed assets
AlphaOne fund has historically been controlling the risk of its portfolio using the risk parity approach.
The fund’s risk manager is considering a different approach, a volatility weighted portfolio. Suppose the
fund has only two assets. How would the volatility weighted portfolio be constructed, and how would
you expect the portfolio volatility to compare with the one produced by the risk parity approach?
Asset Weight
I. Proportional to the inverse of the asset’s return volatility
II. Proportional to the asset’s return volatility
Expected portfolio return volatility
III. Less than the one produced by the risk parity approach
IV. The same as the one produced by the risk parity approach
a. I and III
b. I and IV
c. II and III
d. II and IV 23
LEVEL I EXAM TOPICS
CANDIDATE EXPERIENCE
SHOWCASE YOUR KNOWLEDGE
Candidate Handbook- Provides all information related to taking
the enrollment and exam process
Sample Exam- Become familiar with the structure and format
of the CAIA Level I exam
Workbook- For additional practice involving content from CAIA
Level I: An Introduction to Core Topics in Alternative
Investments
Preparatory Program Providers – Third-party programs who
offer additional resources in studying for CAIA exams
25
ADDITIONAL RESOURCES
STUDY TIME
Average study time for Level I is 200 hours.
URL for the study calculator:
https://caia.org/about
26
EXAM DAY
ID Policy
Two valid (not expired) forms of ID
Both must have a signature
One must have a photo
Passport preferred
The name on your IDs must exactly match the name with which you schedule your
exam
Calculator Policy
Texas Instruments BA II Plus (including the Professional model)
Hewlett Packard 12C (including the Platinum edition)
Exam proctors will require that all calculator memory be cleared prior to the
start of the exam
27
LENGTH OF EXAM SESSION
28
Level I Exam – Entire Session
Non-disclosure agreement 5 minutes
Tutorial 5 minutes
Section I:
100 multiple-choice questions
120 minutes
Comment Period (optional) 10 minutes
Break (optional) 30 minutes
Section 2:
100 multiple-choice questions
120 minutes
Comment Period (optional) 10 minutes
TOTAL EXAM SESSION TIME = 5 HOURS
PASS RATES
29
Pass Rates
September 2010 71 %
March 2011 71 %
September 2011 74%
March 2012 68%
September 2012 64%
March 2013 68%
September 2013 68%
30
CANDIDATE PERFORMANCE REPORT
The CAIA Candidate Performance Report is intended to aid in self-assessment by
indicating your areas of relative strength and weakness among the topics in the exam,
compared to a reference group.
The reference group is comprised of all candidates whose total test scores were within
the bottom quartile of those who passed the exam during the testing window in which
you sat for the exam.
Best of luck with exam preparations!
If you have additional questions, please contact us at
31
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