New AI Knowledge Series Developed for CAIA Candidates

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Publication: 
Journal of Alternative Investments

In 2003, when the first Chartered Alternative Investment Analyst (CAIA) exams were offered, just 79 financial professionals worldwide registered.  Although the number was not significant, the exams were a milestone for the year-old CAIA Association

Today, just seven years later, the CAIA designation has grown to be the global mark of distinction in alternative investments.  Membership in the Association has surpassed 3,500 professionals comprised of portfolio managers, financial planners, institutional investors, consultants, and regulators from 96 countries. 

In 2010, the CAIA Association reached another milestone.  Candidates who sit for the CAIA designation’s Level I and Level II exams this year will use the newly published CAIA Alternative Investment Knowledge Series to study for the exams.  This set of comprehensive source materials covers the information and associated skills required for all professionals working with alternative investments.  The series is the result of collaborative work with CAIA members, industry experts, and academics, including Mark Anson, Ernest Jaffarian, Francois Lhabitant, Thomas Meyer, Pierre-Yves Mathonet, Richard Spurgin, and David McCarthy.

The next CAIA exam registration cycle opens Monday, April 5 and closes Monday, August 2 for the September exams, which will be held from Monday, Sept. 13 to Friday, Oct. 1.  Those interested in taking the exams or referring others to the exams are often curious about the types of questions asked.  To help candidates assess their knowledge and to familiarize them with the exam formats, the CAIA Association offers a Prerequisite Diagnostic Review (PDR) and a Mini Quiz on the website at caia.org.

The PDR allows candidates to assess whether they have an understanding of the foundations of finance and quantitative analysis that is assumed knowledge in the CAIA curriculum.  The following three questions are representative of the prerequisite knowledge.

  1. Which of the following values comes closest to the conversion premium of a convertible bond that has a par value of $1,000, a current market value of $850, a conversion ratio of 30, and whose stock trades currently at $27 per share?
    1. $ 40
    2. $150
    3. $190
    4. $200
  2. An 8% coupon 30-year annual pay bond has a par value of $1,000 and sells for $1,150.  The bond is callable in 10 years at a call price of $1,100.  Which of the following percentages comes closest to the bond’s yield to call?
    1. 6.25%
    2. 6.65%
    3. 7.05%
    4. 7.45%
  3. Which of the following statistics is used to measure the degree of fat tails in a distribution?
    1. Skewness
    2. Kurtosis
    3. Serial Correlation
    4. Variance

To earn the CAIA designation, candidates must pass two exam levels.  Level I curriculum is designed to cover the fundamental knowledge that is essential for all investment industry participants.  Level II curriculum is designed to provide in-depth knowledge of the decision making analysis portfolio managers must perform when allocating across diverse asset classes.  Both levels address ethics and professional conduct – essential components of the CAIA curriculum.  Upon successful completion of both levels, CAIA candidates should possess the core competencies to select, manage, and monitor an institutional quality portfolio consisting of both traditional and alternative assets.

The Mini Quiz is a random drawing from a pool of CAIA Level I and Level II sample questions.  The following questions are among those on the Mini Quiz:

  1. According to the Code and Standards, which of the following best describes appropriate conduct related to the acceptance of gifts from clients?
    1. Members may accept gifts from clients if they are disclosed and if the employer finds that the gifts will not affect independence and objectivity.
    2. Members may accept gifts so long as their market value is less than $100.
    3. Members cannot accept gifts under any circumstances, in order to avoid even the appearance of a conflict.
    4. Members cannot accept gifts under any circumstances, because research has shown that any gift, large or small, impairs ethical judgment.
  2. A hedge fund of funds reports a monthly hurdle rate vis-à-vis large cap stocks of 0.0047.  What does this mean?
    1. The fund of funds must earn at least 47 basis points per month to be a valuable addition for risk budgeting purposes.
    2. The fund of funds’ average return over the most recent month is 47 basis points.
    3. The fund of funds’ ratio of average return to standard deviation of return is 47 basis points per month.
    4. On a monthly basis, the fund of funds is expected to earn 47 basis points more than the risk free rate of return.
  3. Which of the following comes closest to the fair price on a 6-month futures contract on the S&P 500 index given the following information: an index at 1500, the risk free rate at 5%, and the dividend yield at 1%?
    1. $1,530
    2. $1,545
    3. $1,560
    4. $1,590
  4. Which segment of the convertible profile graph is described by a convertible option that is “at-the-money?”
    1. Distressed
    2. Busted
    3. Hybrid
    4. Equity
  5. Consider an equity market where prices are volatile but are not trending, and an investor who is in both cash and equity.  What would be TRUE in this case?
    1. A simple buy-and-hold will outperform a simple constant-mix strategy
    2. A simple constant-mix strategy will outperform a simple buy-and-hold strategy
    3. A simple constant-mix strategy will underperform a constant-proportion portfolio insurance strategy
    4. A constant-proportion portfolio insurance strategy will outperform a simple buy-and-hold strategy

The CAIA exams are self-study and can be taken at testing centers throughout the world. The caia.org website provides information on the CAIA program, registration process, and testing centers. 

Answers:
PDR:  1 – A, 2 – B,  3 - B
Mini Quiz:  1 – A, 2 – A, 3 – A, 4 – C, 5 - B