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CAIA® Level II Workbook CAIA® Level II Workbook Practice questions, exercises, and keywords to test your knowledge MARCH 2021 CAIA Level II Workbook, March 2021 CAIA Level II Workbook Table of Contents Preface ................................................................................................................................................. 3 Review Questions and Answers....................................................................................................... 4 Part 1: Ethics Regulations and ESG ............................................................................................. 4 Chapter 3: Global Regulation ................................................................................................. 4 Chapter 4: ESG and Alternative Investments ....................................................................... 8 Chapter 5: ESG Analysis and Application ........................................................................... 11 Part 2: Models ................................................................................................................................ 16 Chapter 6: Modeling Overview and Interest Rate Models.............................................. 16 Chapter 7: Credit Risk Models ................................................................................................ 19 Chapter 8: Multi-Factor Equity Pricing Models ................................................................... 23 Chapter 9: Asset Allocation Processes and the Mean-Variance Model ...................... 26 Chapter 10: Other Asset Allocation Approaches .............................................................. 30 Part 3: Institutional Asset Owners and Investment Policies .................................................. 33 Chapter 11: Types of Asset Owners and the Investment Policy Statement ................. 33 Chapter 12: Foundations and the Endowment Model .................................................... 36 Chapter 13: Pension Fund Portfolio Management ............................................................ 43 Chapter 14: Sovereign Wealth Funds ................................................................................... 51 Chapter 15: Family Offices and the Family Office Model ............................................... 54 Part 4: Risk and Risk Management ............................................................................................ 57 Chapter 16: Cases in Tail Risk ................................................................................................. 57 Chapter 17: Benchmarking and Performance Attribution .............................................. 61 Chapter 18: Liquidity and Funding Risks .............................................................................. 65 Chapter 19: Hedging, Rebalancing, and Monitoring ....................................................... 71 Chapter 20: Risk Measurement, Risk Management, and Risk Systems .......................... 74 Part 5: Methods for Alternative Investing................................................................................. 77 Chapter 21: Valuation and Hedging Using Binomial Trees .............................................. 77 Chapter 22: Directional Strategies and Methods .............................................................. 82 Chapter 23: Multivariate Empirical Methods and Performance Persistence............... 84 Chapter 24: Relative Value Methods ................................................................................... 87 Chapter 25: Valuation for Private Assets: The Case of Real Estate ................................ 90 1 CAIA Level II Workbook, March 2021 Part 6: Accessing Alternative Investments .............................................................................. 95 Chapter 26: Hedge Fund Replication .................................................................................. 95 Chapter 27: Diversified Access to Hedge Funds ................................................................ 99 Chapter 28: Access to Real Estate and Commodities ...................................................104 Chapter 29: Access Through Private Structures ...............................................................108 Chapter 30: The Risk and Performance of Private and Listed Assets ..........................112 Part 7: Due Diligence and Selecting Managers ..................................................................118 Chapter 31: Active Management and New Investments .............................................118 Chapter 32: Selection of a Fund Manager .......................................................................121 Chapter 33: Investment Process Due Diligence...............................................................124 Chapter 34: Operational Due Diligence ...........................................................................127 Chapter 35: Due Diligence of Terms and Business Activities .........................................132 Part 8: Volatility and Complex Strategies ..............................................................................133 Chapter 36: Volatility as a Factor Exposure ......................................................................133 Chapter 37: Volatility, Correlation, and Dispersion Products and Strategies .............136 Chapter 38: Complexity and Structured Products ..........................................................140 Chapter 39: Insurance-Linked and Hybrid Securities ......................................................142 Chapter 40: Complexity and the Case of Cross-Border Real Estate Investing ..........145 Glossary of Keywords .....................................................................................................................148 CAIA Association Editorial Staff ...................................................................................................196 2 CAIA Level II Workbook, March 2021 Preface Congratulations on your successful completion of Level I and welcome to Level II of the Chartered Alternative Investment Analyst (CAIA) program. The CAIA Charter Program, organized by CAIA Association and co-founded by the Alternative Investment Management Association (AIMA) and the Center for International Securities and Derivatives Markets (CISDM), is the only globally recognized professional designation in the area of alternative investments, the fastest growing segment of the investment industry. The following is a set of materials designed to help you prepare for the CAIA Level II exam. Workbook The exercises are provided to help candidates enhance their understanding of the reading materials. The questions that will appear on the actual Level II exam will not be of the same format as these exercises. In addition, the exercises presented here have various levels of difficulty, and, therefore, candidates should not use them to assess their level of preparedness for the actual examination. March 2021 Level II Study Guide It is critical that each candidate carefully review the study guide. It contains information about topics to be studied as well as a list of equations that the candidate MAY see on the exam. The study guide can be found on the CAIA website, on the Curriculum page. Errata Sheet Correction notes appear in the study guide to address known errors existing in the assigned readings that are viewed as being substantive. Occasionally, additional errors in the readings and learning objectives are brought to our attention after publication. At those points, we will then post the errata directly to a separate errata sheet on the Curriculum and Study Materials section of the CAIA website. It is the responsibility of the candidate to review these errata prior to taking the examination. Please report suspected errata to [email protected]. The Level II Examination and Completion of the Program All CAIA candidates who are not CFA Charterholders must pass the Level I examination before sitting for the Level II examination. Separate Study Guides are available for each level. As with the Level I examination, the CAIA Association administers the Level II examination twice annually. Upon successful completion of the Level II examination, and if the candidate has met all the Association’s membership requirements, the CAIA Association will confer the CAIA Charter upon the candidate. Candidates should refer to the CAIA website, www.caia.org, for information about examination dates and membership requirements. 3 CAIA Level II Workbook, March 2021 Review Questions and Answers Part 1: Ethics Regulations and ESG Note: There are no exercises for Chapter 1 and Chapter 2. Chapter 3: Global Regulation Exercises 1. Which U.S. regulatory body is responsible for overseeing the derivatives market? 2. 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 3. For what purpose was the Dodd-Frank Act enacted? 4. 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? 5. What is the difference between an initial public offering (IPO) and an initial coin offering (ICO)? 6. Each European country has its own scheme for regulation
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