THE CHARTERED ALTERNATIVE INVESTMENT ANALYST PROGRAM

THE CHARTERED ALTERNATIVE INVESTMENT ANALYST PROGRAM CAIA LEVEL I Exam Topics SHOWCASE YOUR KNOWLEDGE

LEVEL I CURRICULUM MATERIALS 2 Standards of Practice Handbook. 11th edition. Charlottesville, Virginia: CFA Institute. 2014. ISBN: 978-0938367857. CAIA Knowledge Series CAIA Level I: An Core Topics in, 2 nd edition. Wiley. 2012. ISBN: 978-1-118-25096-9 Level I Study Guide found here for free: http://caia.org/caia-program/curriculum

EXAMINATION FORMAT LEVEL I standards & ethics major areas of alternatives Exam Topics Minimum Weight 200 Multiple Choice Questions Section 1 : 100 questions 120 minutes Section 2 : 100 questions 120 minutes, 5% Private Equity, 5% Risk, 15%, 5%, 15%, 15%, 5% Introduction to, 15% 3

FORMULA SHEETS 4

Reading: Standards of Practice Handbook. 11th Edition, CFA Institute. 2014 The practices and standards for ethical considerations experienced in the investment profession on a daily basis Topics: Standard I: ism 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 Risk 5

Risk 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

Reading: CAIA Level I: An Core Topics in, 2 nd edition. Wiley. 2012. Part I, Chapters 1 7. What Is an Investment? The Environment of Statistical Foundations Risk, Return, and Benchmarking Correlation, Returns, and Performance Measurement Alpha and Beta Hypothesis Testing in Risk 7

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 S&P Goldman Sachs Commodity Index c. Passive index and products with nonlinear returns d. Passive index and products with 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. Risk 8

Reading: CAIA Level I: An Core Topics in, 2 nd edition. Wiley. 2012. Part II, Chapters 8-10. Land, Infrastructure, and Intangible Real Estate Fixed-Income Real Estate Equity Risk 9

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. Risk 10

An analyst has been asked to evaluate the intellectual property (IP) of a new film venture. The analyst estimates the probability of substantial success of the film venture to be 5%. The analyst also expects that the cash flows generated by the film venture will decline at the rate of 1% per year. Assuming a required rate of return of 9%, which of the following 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 * CF 1 )/ (r-g) V = (.05 * 1.00)/(.09-(-.01)) V =.05/.10 = 0.50 Risk 11

Reading: CAIA Level I: An Core Topics in. 2 nd edition. Wiley. 2012. Part III, Chapters 11 17. Hedge Fund Returns and Asset Allocation Macro and Managed Futures Funds Event-Driven Relative Value Equity Funds of Risk 12

Sample Questions An analyst is evaluating the risk-return profile of Derek Fund. The fund combines diversified long and short positions in competitively-priced assets with very large simultaneous short positions in out of the money calls and puts. An analysis based on observations from an extended period characterized by relative market calmness is most likely to suggest which of the following return characteristics for Derek Fund? 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? Risk a. $0 and $30 b. $12 and $18 c. $15 and $15 d. $25 and $5 13

Reading: CAIA Level I: An Core Topics in, 2 nd edition. Wiley. 2012. Part IV, Chapters 18-19. Commodity Futures Pricing : Applications and Evidence Risk 14

Sample Questions Consider the case of a non-dividend-paying financial asset where F > Se r(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. Risk 15

Sample Questions The current value of an equity index is 1500. The annual dividend yield of the index is 1% while the corresponding risk-free rate is 5%. Which of the following comes closest to the fair price on a 6-month futures contract on the index? 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 Risk 16

Reading: CAIA Level I: An Core Topics in, 2 nd edition. Wiley. 2012. Part V, Chapters 20-22. Equity Types of Debt Types of Risk 17

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 with yield to maturity or 1,000 or more basis points above the riskless rate III. Debt rated as CCC or lower by Standard and Poor s IV. Debt with annualized yield 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 Risk b. The takeout provision c. Acceleration d. Subordination 18

Reading: CAIA Level I: An Core Topics in, 2 nd edition. Wiley. 2012. Part VI, Chapters 23-25. Credit Risk and the Structuring of Cash Flows Credit Derivatives Collateralized Debt Obligations Risk 19

Sample Questions Use the following information and the one-step binomial process approach to firm value estimation to answer the next two questions. Apply discrete time compounding in your calculations. 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 Risk 20

Sample Questions Use the following information and the one-step binomial process approach to firm value estimation to answer the next two questions. Apply discrete time compounding in your calculations. 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 riskneutral 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] Risk 200= [1/1.01] [100p+150] p=0.52 21

Reading: CAIA Level I: An Core Topics in, 2 nd edition. Wiley. 2012. Part VII Risk, 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, Alpha, and Beta Risk 22

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 Risk a. I and III b. I and IV c. II and III d. II and IV 23

CANDIDATE EXPERIENCE SHOWCASE YOUR KNOWLEDGE

ADDITIONAL RESOURCES 25 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 Core Topics in Preparatory Program Providers Third-party programs who offer additional resources in studying for CAIA exams

STUDY TIME 26 Average study time for Level I is 200 hours. The Study Calculator is located on the About CAIA page.

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 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 Tutorial 5 minutes 5 minutes Section I: 100 multiple-choice questions 120 minutes Comment Period (optional) Break (optional) 10 minutes 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 March 2012 68% September 2012 64% March 2013 68% September 2013 68% March 2014 67% September 2014 67% March 2015 66%

CANDIDATE PERFORMANCE REPORT 30 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.

CONTACT US 31 Best of luck with exam preparations! If you have additional questions, please contact us at candidate@caia.org.