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

candidate@caia.org.

31

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