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CAIA® Level I Workbook

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CAIA® Level I Workbook CAIA® Level I Workbook Practice questions, exercises, and keywords to test your knowledge SEPTEMBER 2021 CAIA Level I Workbook, September 2021 CAIA Level I Workbook Table of Contents Preface ........................................................................................................................................... 3 Workbook ...................................................................................................................................................................... 3 September 2021 Level I Study Guide ....................................................................................................................... 3 Errata Sheet .................................................................................................................................................................... 3 The Level II Examination and Completion of the Program ................................................................................. 3 Review Questions & Answers ................................................................................................. 4 Chapter 1 What is an Alternative Investment? ......................................................................................... 4 Chapter 2 The Environment of Alternative Investments ........................................................................... 6 Chapter 3 Quantitative Foundations ........................................................................................................ 8 Chapter 4 Statistical Foundations ...........................................................................................................10 Chapter 5 Foundations of Financial Economics ......................................................................................... 12 Chapter 6 Derivatives and Risk-Neutral Valuation..................................................................................14 Chapter 7 Measures of Risk and Performance ........................................................................................16 Chapter 8 Alpha, Beta, and Hypothesis Testing ......................................................................................18 Chapter 9 Natural Resources and Land ..................................................................................................20 Chapter 10 Commodities .........................................................................................................................22 Chapter 11 Other Real Assets ..................................................................................................................24 Chapter 12 Real Estate Assets and Debt .................................................................................................. 26 Chapter 13 Real Estate Equity ................................................................................................................. 29 Chapter 14 Structure of the Hedge Fund Industry ................................................................................... 31 Chapter 15 Macro and Managed Futures Funds ...................................................................................... 33 Chapter 16 Event-Driven Hedge Funds .................................................................................................... 35 Chapter 17 Relative Value Hedge Funds .................................................................................................... 37 Chapter 18 Equity Hedge Funds ............................................................................................................... 40 Chapter 19 Funds of Hedge Funds ............................................................................................................ 43 Chapter 20 Private Equity Assets ............................................................................................................. 45 Chapter 21 Private Equity Funds .............................................................................................................. 48 Chapter 22 Private Credit and Distressed Debt ....................................................................................... 50 Chapter 23 Introduction to Structuring ................................................................................................... 52 Chapter 24 Credit Risk and Credit Derivatives ............................................................................................ 55 1 CAIA Level I Workbook, September 2021 Chapter 25 CDO Structuring of Credit Risk .............................................................................................. 57 Chapter 26 Equity-Linked Structured Products ....................................................................................... 59 Applications ............................................................................................................................... 61 Glossary ................................................................................................................................... 310 CAIA Editorial Staff ............................................................................................................... 400 2 CAIA Level I Workbook, September 2021 Preface Welcome to the workbook to “Alternative Investments” Level 1, 4th edition. The CAIA® program, organized by the 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 I 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 I exam will not be of the same format as these exercises. In addition, the exercises presented here have various levels of difficulty and therefore, they should not be used to assess a candidate’s level of preparedness for the actual examination. September 2021 Level I Study Guide It is critical that each candidate should 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 curriculum @caia.org. The Level II Examination and Completion of the Program All CAIA candidates must pass the Level I examination before sitting for the Level II examination. A separate study guide is available for the Level II curriculum. 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 assuming that 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 I Workbook, September 2021 Review Questions & Answers Chapter 1 What is an Alternative Investment? 1. Define investment. • Investment is deferred consumption. 2. List four major types of real assets other than land and other types of real estate. • Natural resources, commodities, infrastructure and intellectual property 3. List the three major types of alternative investments other than real assets in the CAIA curriculum. • Hedge Funds, Private Equity, Structured Products 4. Name the assets that are often characterized as traditional by some and as alternatives by others for each of the following categories: 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 5. Approximately when did average-quality corporate bonds and international equities become commonly viewed as institutional-quality investments in the United States? • Between 1950 to 1980 6. Name the four return characteristics that differentiate traditional and alternative investments. • Diversification, Illiquidity, Inefficiency, Nonnormality 7. Name four major methods of analysis that distinguish the analysis of alternative investments from the analysis of traditional investments. • Return Computation Methods, Statistical Methods, Valuation Methods, Portfolio Management Methods 8. Describe an incomplete market. • An incomplete market refers to the lack of investment opportunities that causes market participants to be unable to implement an investment strategy that satisfies their exact preferences such as risk preferences. 9. Define active management. • Active management refers to efforts of buying and selling securities
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