2.5. topic 5: private equity. -...
TRANSCRIPT
Exam I. CAIA I. 2017.
Pag. 166/300 ©FINANCER TRAINING Alexey De La Loma CFA, CMT, CAIA, FRM, EFA, CFTe
2.5. Topic 5: Private Equity.
146
Mark the correct sentence in relation to the definition of the private equity term as defined in the CAIA
curriculum.
a) The CAIA curriculum includes also public securities.
b) The CAIA curriculum includes also securities that are not equity.
c) Both A and B are correct.
d) Neither B nor B are correct.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 22
147
Private equity is used in the CAIA curriculum as a generic term to encompass four distinct categories or
asset groups, which one of the following is not one of these categories?
a) Venture capital.
b) Buyouts.
c) Mezzanine financing.
d) Corporate debt.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 22
148
According to the CAIA curriculum private equity investments can be divided into three main levels or
layers, which one of the following is not one of these levels?
a) Private equity firms.
b) Private equity funds.
c) Underlying business enterprises.
d) All of the above are true layers.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 22
149
The year a particular private equity fund commences operations is known as its
a) Start-up year.
b) Vintage year.
c) Trigger year.
d) None of the above.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 22
CAIA I. 2017. Exam I.
Alexey De La Loma ©FINANCER TRAINING Pag. 167/300 CFA, CMT, CAIA, FRM, EFA, CFTe
150
Private equity is used in the CAIA curriculum as a generic term to encompass four distinct categories or
asset groups, which one of these categories focuses on equity claims of enterprises that are attempting to
emerge into large firms?
a) Venture capital.
b) Buyouts.
c) Mezzanine financing.
d) Corporate debt.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 22
151
If we define the main stages in the life of corporations as: start-up, growth and mature, determine the
correct sentence that illustrates the difference between venture capital and buyouts.
a) Venture capital funds focus on the start-up stage, while buyouts focus on the growth stage.
b) Venture capital funds focus on the start-up stage, while buyouts focus on the mature stage.
c) Venture capital funds focus on the growth stage, while buyouts focus on the mature stage.
d) None of the above.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 23
152
Which one of the following sentences regarding the main differences between venture capital and buyouts
is correct?
a) Venture capital funds are idea-driven while buyout funds are operations-driven.
b) In venture capital control of the company is generally not absolute, while in buyout funds this control
is usually absolute.
c) The target return, as measured by the IRR, is higher in venture capital than in buyouts.
d) All of the above.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 23
153
Venture capitalists
a) Invest the capital of their clients in the underlying companies.
b) Invest their own capital in the underlying companies.
c) Both A and B.
d) Neither A nor B.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 23
154
Venture capitalists usually invest in ___________ of the start-up company.
a) Warrants.
b) Convertible notes.
c) Convertible preferred stock.
d) Debentures.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 23
Exam I. CAIA I. 2017.
Pag. 168/300 ©FINANCER TRAINING Alexey De La Loma CFA, CMT, CAIA, FRM, EFA, CFTe
155
Investing in a start-up company is similar to:
a) The purchase of a call option.
b) The sale of a call option.
c) The purchase of a put option.
d) The sale of a put option.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 23
156
According to the CAIA curriculum there are two main types of debt securities in Private Equity:
a) Mezzanine debt and corporate bonds.
b) Mezzanine debt and distressed bonds.
c) Corporate bonds and government bonds.
d) Government bonds and distressed debt.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 24
157
Mezzanine financing, by definition, defies generalization.
a) Some investors, such as commercial banks seek consistent cash flows and preservation of capital
b) Some investors, such as insurance companies seek potential capital appreciation.
c) Some investors, such as LBO firms seek consistent cash flows and preservation of capital.
d) Some investors, such as Mezzanine Limited Partnerships seek potential capital appreciation.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 24
158
All these sentences are related to mezzanine financing. Mark the wrong sentence.
a) Typically, the total return sought by investors in mezzanine financing is in the range of 15% to 20%.
The largest piece of the total return is the coupon rate.
b) The expected rate of return of mezzanine debt is lower than LBO funds but higher than VC funds.
c) The expected rate of return of mezzanine debt is lower than both LBO and VC funds.
d) Mezzanine funds avoid the early negative returns associated with venture capital or leveraged buyout
funds (J-curve).
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 24
159
All these sentences are related to mezzanine financing. Mark the wrong sentence.
a) Mezzanine financing is an appropriate financing source for those companies that have a reliable cash
flow. This is in contrast to venture capital.
b) Mezzanine financing does not necessarily involve control of the company, in contrast to an LBO, and
is therefore much more passive than an LBO.
c) Mezzanine financing provides a lower risk profile to an investor than does senior debt.
d) All these sentences are correct.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 24
CAIA I. 2017. Exam I.
Alexey De La Loma ©FINANCER TRAINING Pag. 169/300 CFA, CMT, CAIA, FRM, EFA, CFTe
160
Company A has a simple capital structure with a 70% bank loan and a 30% equity capital structure. Bank
debt is assumed to be cheap, and equity is assumed to be expensive. Unfortunately, a bank may be willing
to lend only up to 70% of the total capital structure of the company. the cost of bank debt is 5%, while the
cost of equity is 20%. Mezzanine debt is not available.
On the other side, company B has the same capital structure than A, but it can include mezzanine debt at a
cost of 10%. In company B, half of the equity capital is replaced with mezzanine debt at a coupon rate of
10%. This makes the equity riskier so the cost of capital increases by 25%.
a) WACC of company A is 9.50% while WACC of company B is 8.75%.
b) WACC of company A is 8.75% while WACC of company B is 9.50%.
c) WACC of company A is 13.00% while WACC of company B is 8.75%.
d) WACC of company A is 9.50% while WACC of company B is 13.00%.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 24
Exam I. CAIA I. 2017.
Pag. 170/300 ©FINANCER TRAINING Alexey De La Loma CFA, CMT, CAIA, FRM, EFA, CFTe
2.6. Topic 6: Structured Products.
161
According to the CAIA curriculum, the primary motivation to the financial structured products is:
a) Risk.
b) Taxation.
c) Liquidity.
d) None of the above.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 25
162
Which one of the following is not a clear example of a financial structured product?
a) Forwards.
b) Futures.
c) Options.
d) All of the above.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 25
163
Which one of the following is not a clear example of a financial structured product?
a) CDSs.
b) CMOs.
c) CDOs.
d) All of the above.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 25
164
CDOs are structures that partition the risk of a portfolio into ownership claims called_________.
a) Seniority divisions.
b) Segments.
c) Tranches.
d) None of the above.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 25
CAIA I. 2017. Exam I.
Alexey De La Loma ©FINANCER TRAINING Pag. 171/300 CFA, CMT, CAIA, FRM, EFA, CFTe
165
A structured product exists because both the issuer of the structured product and the investor in the
structured product were driven by one or more economic motivations. Which one of the following is
considered as the primary role of structured products from the perspective of a financial economist?
a) Tax Minimization.
b) Market Completion.
c) Liquidity Enhancement.
d) Risk Management.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 25
166
In the real world of uncertainty and asymmetric information, markets are highly incomplete. Incomplete
markets are understood in the context of ____________.
a) States of the World.
b) States of Nature.
c) Both A and B are correct.
d) Neither A nor B are correct.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 25
167
Which one of the following risks tends to have somewhat symmetrical payoff distributions?
a) Credit Risk.
b) Default Risk
c) Equity Risk.
d) Idiosyncratic or Company-Specific Risk.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 26
168
__________________ is dispersion in financial outcomes associated with the failure or potential failure of
a counterparty to fulfill its financial obligations. It generally leads to payoff distributions that are
substantially skewed to the left.
a) Credit Risk.
b) Default Risk.
c) Equity Risk.
d) Idiosyncratic or Company-Specific Risk.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 26
169
Speaking broadly and according to the CAIA curriculum, credit models can be divided into two main
groups.
a) Reduced-form credit models, and reduced-structure credit models.
b) Reduced-structure credit models and structural models.
c) Structural models and reduced-form credit models.
d) None of the above.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 26
Exam I. CAIA I. 2017.
Pag. 172/300 ©FINANCER TRAINING Alexey De La Loma CFA, CMT, CAIA, FRM, EFA, CFTe
170
According to the CAIA curriculum the expected credit loss of a credit exposure can be expressed
according to the next equation: PD · EAD · LGD. Which one of these three factors specifies the nominal
value of the position that is exposed to default at the time of default?
a) PD.
b) EAD.
c) LGD.
d) None of the above.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 26
171
According to the CAIA curriculum the expected credit loss of a credit exposure can be expressed
according to the next equation: PD · EAD · LGD. Which one of these three factors specifies percentage of
the credit exposure that the lender ultimately receives through the bankruptcy process and all available
remedies?
a) PD.
b) EAD.
c) LGD.
d) None of the above.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 26
172
Alpha Bank has extended a $100 million one-year loan at an interest rate of 14% to a client with a BBB
credit rating. Suppose that historical data indicate that the one-year probability of default for firms with a
BBB rating is 7% and that investors are typically able to recover 30% of the notional value of an
unsecured loan to such firms. Determine the expected credit loss and the loss if default actually occurs.
a) Expected credit loss = $7.59 million. Loss if actual default occurs = $30 million.
b) Expected credit loss = $7.59 million. Loss if actual default occurs = $70 million.
c) Expected credit loss = $5.59 million. Loss if actual default occurs = $30 million.
d) Expected credit loss = $5.59 million. Loss if actual default occurs = $70 million.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 26
173
Mark the correct sentence.
a) Although the assumption of risk neutrality by investors is unrealistic, the risk-neutral approach is so
important to finance because we do not need to differentiate between systematic and idiosyncratic
risks.
b) Although the assumption of risk neutrality by investors is unrealistic, the risk-neutral approach is so
important to finance because we do not need to estimate the risk premium required to bear systematic
risk.
c) Although the assumption of risk neutrality by investors is unrealistic, the risk-neutral approach is so
important to finance because, under specific conditions, the prices obtained in a risk-neutral
framework can be theoretically proven to be the same as the prices that would exist in a world of risk-
averse invertors.
d) All of the above are correct.
CAIA I. 2017. Exam I.
Alexey De La Loma ©FINANCER TRAINING Pag. 173/300 CFA, CMT, CAIA, FRM, EFA, CFTe
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 26
174
In bond markets, a bond price is often described as being determined by its credit spread (s). If r is the
risk-free rate, and K is the face value of the bond at the end of the period, which one of the following
equation represents the current value of a one-period zero-coupon bond?
a) B(0,1) =K
1 − r − s
b) B(0,1) =K
1 + r + s
c) B(0,1) =K
1 + r − s
d) B(0,1) =K
1 − r + s
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 26
175
In which one off the following CDO structures is the entire risk of the portfolio gathered within a special
purpose vehicle, and then distributed to investors through various CDO securities or tranches?
a) Market Value CDO.
b) Arbitrage CDO.
c) Balance Sheet CDO.
d) All of the above.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 27
176
The key to the use of the CDO structure in the case of credit risk is that a large portion of the financing of
the CDO can be in the form of senior tranches (little credit risk compared to the underlying collateral
portfolio). The high credit ratings given to senior tranches when the underlying collateral consists of non-
investment-grade bonds are based on:
a) The diversification inherent in the collateral portfolio.
b) The credit enhancements, such as a major bank providing additional safety features.
c) Both A and B are correct.
d) A senior tranche cannot be a grade investment if the collateral used to issue that tranche is a non-
investment-grade portfolio.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 27
177
According to the CAIA curriculum, CDOs were born from two streams of asset-backed securities:
a) CLOs and CBOs
b) CMOs and CLOs.
c) CMOs, and CBOs.
d) None of the above.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 27
Exam I. CAIA I. 2017.
Pag. 174/300 ©FINANCER TRAINING Alexey De La Loma CFA, CMT, CAIA, FRM, EFA, CFTe
178
In most CDOs, there is a three-period life cycle, the three stages are:
a) The tranching period, the revolving period, and the closing period.
b) The ramp-up period, the revolving period, and the amortization period.
c) The ramp-up period, the investment period, and the amortization period.
d) The tranching period, the investing period, and the closing period.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 27
179
In most CDOs, there is a three-period life cycle. During the ________the CDO trust issues securities
(tranches) and uses the proceeds from the CDO note sale to acquire the initial collateral pool (the assets).
The CDO’s trust documents govern what type of assets may be purchased.
a) Amortization period.
b) Revolving period.
c) Ramp-up period.
d) Acquiring collateral period.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 27
180
Most of the tranches of notes issued by the CDO structure receive a(n) _________ rating by a nationally
recognized statistical rating organization, and the equity tranche is usually acquired by the________
a) Investment-grade. Sponsor of the Trust.
b) Non-investment-grade. Sponsor of the Trust.
c) Investment-grade. Sponsor of the Trust.
d) Non-investment-grade. Sponsor of the Trust.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 27
181
According to the CAIA curriculum, equity-linked structured products are distinguished from other
structured products, such as CDOs or MBOs by the following aspect:
a) They are tailored to meet the preferences of the investors and to generate fee revenue for the issuer.
b) They are not usually collateralized with risky assets.
c) They rarely serve as a pass-through or simple tranching of the risks of a long-only exposure to an
asset, such as a risky bond or a loan portfolio.
d) All of the above.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 28
CAIA I. 2017. Exam I.
Alexey De La Loma ©FINANCER TRAINING Pag. 175/300 CFA, CMT, CAIA, FRM, EFA, CFTe
182
A wrapper is the legal vehicle within which an investment product is offered. According to BNP Paribas
Equities and Derivatives Handbook, there are six examples of structured product wrappers, which one of
the following is not one of these examples?
a) OTC contracts.
b) Life insurance policies.
c) Futures.
d) None of the above.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 28
183
An investor in a 35% tax bracket on ordinary income invests in a product that earns a pre-tax return of
20%. Determine the after-tax return.
a) 12.04%.
b) 13.00%.
c) 15.94%.
d) 18.41%.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 28
184
An investor in a 35% tax bracket on ordinary income invests in a product that earns a pre-tax return of
20%. Determine the after-tax return if 70 percent of the income is distributed as a capital gain that is taxed
at 40% of the ordinary income tax rate.
a) 12.04%.
b) 13.00%.
c) 15.94%.
d) 18.41%.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 28
185
Consider an investor with a current and anticipated tax rate of 40% who anticipates withdrawing funds in
30 years. If the investor places money into a wrapper that offers tax deferment, how much will the after-
tax annual rate of return improve through use of the wrapper if the pre-tax rate is 10% and the time
horizon is30 years?
a) 9.28%.
b) 8.78%.
c) 8.28%.
d) 7.78%.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 28
Exam I. CAIA I. 2017.
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2.7. Topic 7: Risk Management and Portfolio Management.
186
From the following list of fund collapses, which one came from an extremely concentrated bet in the
energy markets?
a) Long-Term Capital Management (LTCM).
b) Amaranth Advisors.
c) Carlyle Capital Corporation (CCC).
d) None of the above.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 29
187
From the following list of fund collapses, which one was not headquartered in Greenwich, Connecticut?
a) Long-Term Capital Management (LTCM).
b) Amaranth Advisors.
c) Carlyle Capital Corporation (CCC).
d) None of the above.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 29
188
From the following list of fund collapses, which one quickly accumulated large losses that led to a margin
call from its prime broker in August 1998 when the Russian government defaulted on the payment of its
outstanding bonds?
a) Long-Term Capital Management (LTCM).
b) Amaranth Advisors.
c) Carlyle Capital Corporation (CCC).
d) None of the above.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 29
189
From the following list of fund collapses, which one was more related to AAA-rated mortgage bonds
issued by Freddie Mac and Fannie Mae?
a) Long-Term Capital Management (LTCM).
b) Amaranth Advisors.
c) Carlyle Capital Corporation (CCC).
d) None of the above.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 29
CAIA I. 2017. Exam I.
Alexey De La Loma ©FINANCER TRAINING Pag. 177/300 CFA, CMT, CAIA, FRM, EFA, CFTe
190
From the following list of fund collapses, which one had two Nobel laureates in economics in its board of
directors?
a) Long-Term Capital Management (LTCM).
b) Amaranth Advisors.
c) Carlyle Capital Corporation (CCC).
d) None of the above.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 29
191
Which one of the following investment strategies is typically disclosed in the various documents provided
to investors prior to their decision to invest in the investment vehicle?
a) Actual Investment Strategy.
b) Stated Investment Strategy.
c) Permitted Investment Strategy.
d) All of the above.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 30
192
In the financial area of investment strategies and processes, the change through time of a fund’s
investment strategy based on purposeful decisions by the fund manager in an attempt to improve risk-
adjusted performance, is known as:
a) Strategy convergence.
b) Strategy deviations
c) Style drift.
d) Style deviations.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 30
193
Feffer and Kundro studied more than 100 HF liquidations over a 20-year period and attributed _______ of
all fund failures to operational risk.
a) 50%.
b) 45%.
c) 40%.
d) 35%.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 31
194
According to the CAIA curriculum, due diligence consists of seven parts of phases, which one of the
following is not one of these parts?
a) Legal Review.
b) Audit Review.
c) Reference Review.
d) Administrative Review.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 31
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195
The two primary information-based explanations for superior investment performance in competitive
markets based on information are:
a) Information gathering and information filtering.
b) Information advantage and information filtering.
c) Information gathering and information advantage.
d) None of the above.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 31
196
There are several ways that hedge funds can add value. According to the CAIA curriculum, the most
common argument for the source of superior returns is:
a) Offering attractive risk premiums for bearing risks like illiquidity.
b) Exploiting tax advantages.
c) Using available information to identify mispriced assets.
d) None of the above.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 31
197
A(n) _______________ is a provision that allows investors to withdraw their asset from the fund,
immediately and without penalty, when the identified key personnel are no longer making investment
decisions for the fund.
a) Status Quo Clause.
b) Key Risk-to-Return Clause.
c) Key Contract Clause.
d) correct.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 31
198
Smart beta strategies:
a) Use a market-capitalization weighting scheme.
b) Are objectively linked to one or more characteristics of the underlying assets. These characteristics are
exclusively fundamental
c) Tend to be relatively broad and involve relatively stable portfolio weights.
d) None of the above.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 32
CAIA I. 2017. Exam I.
Alexey De La Loma ©FINANCER TRAINING Pag. 179/300 CFA, CMT, CAIA, FRM, EFA, CFTe
199
While smart beta strategies are typically focused on adjusting portfolio weights rather than on selection
and omitting securities, there is no bright line that distinguishes smart beta strategies from active alpha-
based strategies. Generally, smart beta strategies have portfolio weights that:
a) Differ moderately from market-capitalization weights.
b) Maintain broad portfolios rather than highly concentrated portfolios.
c) Are based on fixed rules using measurable security characteristics.
d) All of the above.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 32
200
Investment management using the concepts of alpha and beta is based on an assumption that risk and
abnormal return can be estimated with sufficient reliability to facilitate meaningful decisions. Alpha and
beta are unobservable and are usually estimated using:
a) Historical data.
b) Montecarlo simulation.
c) Quantitative forward models.
d) None of the above.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 32
Exam I. CAIA I. 2017.
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141
D
The primary disadvantage of a fund of funds is a second layer of fees imposed by the fund of funds
manager.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 21
142
B
At the end of 2014, Hedge Fund Research estimated that the industry was composed of 8,377 single hedge
funds and 1,724 FoFs. Whereas the number of single-manager hedge funds continues to grow, there has
been consolidation in the funds of funds sector, as there were 2,462 FoFs at the end of 2007.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 21
143
A
For hedge fund investing, due diligence is the process of monitoring and reviewing the management and
operations of a hedge fund manager. This is perhaps one of the most important functions and value-added
features of an FoF manager to consider when deciding between a direct and a delegated hedge fund
investment program.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 21
144
C
According to the CAIA curriculum, the median minimum investment for a single hedge fund is $500,000.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 21
145
A
Because of their offshore registration, many hedge funds and FoFs may be tax inefficient for certain
investors in certain countries. For example, in Germany, most FoFs invest in hedge funds that fail to meet
the extensive notification and disclosure duties requested by the German authorities. As a result, their
gains are subjected to heavy taxation penalties, which ultimately affect the investor.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 21
146
C
Private equity is defined broadly in the CAIA curriculum, to such extent that some securities that are not
equity and some securities that are not equity and some securities that are publicly traded are included in
the category.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 22
CAIA I. 2017. Exam I.
Alexey De La Loma ©FINANCER TRAINING Pag. 207/300 CFA, CMT, CAIA, FRM, EFA, CFTe
147
D
Private equity is used in the CAIA curriculum as a generic term to encompass four distinct categories or
asset groups:
Venture capital (VC).
Buyouts.
Mezzanine financing.
Distressed debt.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 22
148
D
All three sentences are true levels or layers in private equity investments.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 22
149
B
The year a particular private equity fund commences operations is known as its vintage year.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 22
150
A
There are two major types of private equity investments that involve ownership in equity claims: venture
capital and buyouts. Venture capital focuses on equity claims of enterprises that are attempting to emerge
in large firms, whereas buyouts focus on large enterprises that are attempting to transform into being more
profitable.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 22
151
B
Venture capital and buyouts focus on opposite ends of the life of a company. Whereas VC funds target
nascent, start-up companies, buyouts target more established and mature companies.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 23
152
D
All of these sentences regarding the main differences between venture capital funds and buyout funds are
correct.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 23
153
C
Venture capitalists provide financing for start-up companies using their own capital and the capital of their
investors.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 23
Exam I. CAIA I. 2017.
Pag. 208/300 ©FINANCER TRAINING Alexey De La Loma CFA, CMT, CAIA, FRM, EFA, CFTe
154
C
Venture capitalists usually invest in the convertible preferred stock of the start-up company because these
securities are senior to common stock in terms of dividends, voting rights, and liquidation preferences.
Furthermore, venture capitalists have the option to convert their shares to common stock when exiting via
an initial public offering (IPO).
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 23
155
A
Investing in a start-up company is similar to the purchase of a call option. If the company fails, the venture
capitalist losses the option premium (the capital invested).
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 23
156
B
In the CAIA curriculum we can find two main types of debt related to private equity: mezzanine debt and
distressed debt. These debt instruments can be referred to as private equity due to their equity-like risks.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 24
157
D
Some investors, such as insurance companies, view mezzanine financing as a traditional form of debt, with
consistent cash flows and preservation of capital, while other investors, such as LBO funds, Mezzanine
limited partnerships or commercial banks seek potential capital appreciation.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 24
158
B
In terms of returns, mezzanine financing is below both LBOs and VC because the risk profile is lower.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 24
159
C
Mezzanine financing provides a higher risk profile to an investor than does senior debt because of its
unsecured status, lower credit priority, and equity kicker.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 24
160
A
WACCCompany A = 0.3 ∙ 20% + 0.7 ∙ 5% = 9.50%
WACCCompany B = 0.15 ∙ 20% ∙ 1.25 + 0.15 ∙ 10% + 0.7 ∙ 5% = 8.75%
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 24
CAIA I. 2017. Exam I.
Alexey De La Loma ©FINANCER TRAINING Pag. 209/300 CFA, CMT, CAIA, FRM, EFA, CFTe
161
A
Although risk is the primary motivation to the structured products, structuring may be used to differentiate
ownership on attributes other than risk, such as taxation, and liquidity.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 25
162
D
Structured products provide substantially altered risk (or other characteristic) exposures to different
investors. However, forwards, futures, and options would not be commonly described as a structured
product because these derivatives do not provide a substantially altered exposure to the fundamental
characteristics of the underlying asset.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 25
163
A
Although simple credit derivatives, such as credit default swaps (CDSs), are not usually referred to as
structured products, they often serve similar roles. CDSs allow for the cost-effective transfer of default
risk.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 25
164
C
CDOs are structures that partition the risk of a portfolio into ownership claims called tranches, which
different in seniority. More senior tranches tend to be the first to receive cash flows and the last to bear
losses. The tranching of CDOs performs a function quite similar to the capital structure of an operating
corporation.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 25
165
B
A structured product exists because both the issuer of the structured product and the investor in the
structured product were driven by one or more economic motivations. The primary direct motivation of
the issuer is usually to earn fees. The motivation to the buyer could be risk management, tax minimization,
liquidity enhancement, or some other goal. From the perspective of a financial economist, the primary role
of structured products is usually market completion.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 25
166
C
In the real world of uncertainty and asymmetric information, markets are highly incomplete. Incomplete
markets are understood in the context of “states of the world” or “states of nature.”
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 25
Exam I. CAIA I. 2017.
Pag. 210/300 ©FINANCER TRAINING Alexey De La Loma CFA, CMT, CAIA, FRM, EFA, CFTe
167
C
In contrast to credit risk, which tends to have payoff distributions that are substantially skewed to the left
(the upside performance of a traditional position exposed to credit risk is limited to the recovery of the
original investment plus the promised yield, whereas the downside performance could lead to the loss of
the entire investment), equity-related risk tends to have somewhat symmetrical payoff distributions.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 26
168
A
Credit risk is dispersion in financial outcomes associated with the failure or potential failure of a
counterparty to fulfill its financial obligations. It generally leads to payoff distributions that are
substantially skewed to the left.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 26
169
C
Speaking broadly, credit models can be divided into two groups: structural models and reduced-form
models. Structural credit models describe credit risk in terms of the risks of the underlying assets and the
financial structures that have claims to the underlying assets. Reduced-form credit models, in contrast, do
not attempt to look at the structural reasons for default risk. Therefore, reduced-form credit models do not
rely extensively on asset volatility or underlying structural details, such as the degree of leverage, to
analyze credit risk.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 26
170
B
In general, the expected credit loss of a credit exposure can be determined by three factors:
PD (Probability of Default).
EAD (Exposure at Default).
LGD (Loss Given Default).
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 26
171
D
The converse of LGD is the economic proceeds given default – that is, the recovery rate, which is the
percentage of the credit exposure that the lender ultimately receives through the bankruptcy process and
all available remedies.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 26
CAIA I. 2017. Exam I.
Alexey De La Loma ©FINANCER TRAINING Pag. 211/300 CFA, CMT, CAIA, FRM, EFA, CFTe
172
D
PD = 7%
EAD = $100 ∙ (1 + 0.14) = $114 million
RR = 30%
LGD = 1 − 0.30 = 70%
Expected Credit Loss = 0.07 ∙ $114 ∙ 0.70 = $5.586 million
Loss if defatul actually occurs = 0.70 ∙ $100 = $70 million
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 26
173
D
All these three sentences are correct so no explanation is needed.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 26
174
B
In bond markets, a bond price is often described as being determined by its credit spread (s). If r is the
risk-free rate, K is the face value of the bond at the end of the period, the current value of a one-period
zero-coupon bond is represented by the following equation:
B(0,1) =K
1 + r + s
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 26
175
D
All of these CDO structures shares the feature that the entire risk of the portfolio is gathered within a
special purpose vehicle, and then distributed to investors through various CDO securities or tranches.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 27
176
C
The key to the use of the CDO structure in the case of credit risk is that a large portion of the financing of
the CDO can be in the form of senior tranches (little credit risk compared to the underlying collateral
portfolio). The high credit ratings given to senior tranches when the underlying collateral consists of non-
investment-grade bonds are based on three primary justifications: (1) the senior position, (2) the
diversification inherent in the collateral portfolio, and (3) credit enhancements, such as a major bank
providing additional safety features.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 27
Exam I. CAIA I. 2017.
Pag. 212/300 ©FINANCER TRAINING Alexey De La Loma CFA, CMT, CAIA, FRM, EFA, CFTe
177
A
Originally, CDOs focused on bonds and were called collateralized bond obligations (CBOs). Following
the heels of CBOs, banks began to realize that they had assets on their balance sheets (e.g. leverage loans)
that could be repackaged into a collateral pool and sold to investors. Hence, collateralized loan obligations
(CLOs) were born in the early 1990s. From these two streams of asset-backed securities, CDOs were born.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 27
178
B
In most CDOs, there is a three-period life cycle: the three stages are the ramp-up period, the revolving
period, and the amortization period.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 27
179
C
In most CDOs, there is a three-period life cycle. During the ramp-up period, the CDO trust issues
securities (tranches) and uses the proceeds from the CDO note sale to acquire the initial collateral pool
(the assets). The CDO’s trust documents govern what type of assets may be purchased.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 27
180
A
Typically, most of the tranches of notes issued by the CDO structure receive an investment-grade rating by
a nationally recognized statistical rating organization, with the exception of highly subordinated fixed-
income tranches to receive any cash flows from the CDO collateral and the first tranche on the hook for
any defaults or lost value of the CDO collateral. Often, the sponsor of the trust holds the equity tranche.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 27
181
D
According to the CAIA curriculum, equity-linked structured products are distinguished from other
structured products, such as CDOs or MBOs by one or more of the following three aspects: (1) they are
tailored to meet the preferences of the investors and to generate fee revenue for the issuer, (2) they are not
usually collateralized with risky assets, and (3) they rarely serve as a pass-through or simple tranching of
the risks of a long-only exposure to an asset, such as a risky bond or a loan portfolio.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 28
182
C
Both OTC contracts and life insurance policies are examples of structure product wrappers that can be
found in the Equities and Derivatives Handbook elaborated by BNP Paribas.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 28
CAIA I. 2017. Exam I.
Alexey De La Loma ©FINANCER TRAINING Pag. 213/300 CFA, CMT, CAIA, FRM, EFA, CFTe
183
B
r∗ = 20%(1 − 0.35) = 13%
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 28
184
C
r∗ = 20% ∙ (1 − 0.35) ∙30
100+ 20% ∙ (1 − 0.35 ∙ 0.40) ∙
70
100= 15.94%
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 28
185
C
(1 + r∗)N = 1 + [(1 + r)N − 1][1 − T]
(1 + r∗)N = 1 + [(1 + 0.10)30 − 1][1 − 0.40]
(1 + r∗)N = 10.87
r∗ = 10.871/30 − 1 = 8.28%
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 28
186
B
Amaranth’s fall from glory came from an extremely concentrated bet in the energy markets. Although
Amaranth was technically a multistrategy hedge fund with positions across multiple asset classes, by 2006
it had developed a large portion of its risk capital to natural gas trading.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 29
187
C
Both Amaranth Advisors and Long-Term Capital Management had their headquarters in Greenwich,
Connecticut.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 29
188
A
As a result of the Russian bond default, there was a sudden and drastic liquidity crisis that caused spreads
to widen across a broad range of markets rather than contract, as LTCM’s models had predicted. The
fund’s positions quickly accumulated large losses that led to a margin call from its prime broker.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 29
189
C
Carlyle Capital Corporation followed a simple strategy: it borrowed money at low short-term interest rate
and invested this money in long-term AAA-rated mortgage bonds issued by Freedie Mac and Fannie Mae.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 29
Exam I. CAIA I. 2017.
Pag. 214/300 ©FINANCER TRAINING Alexey De La Loma CFA, CMT, CAIA, FRM, EFA, CFTe
190
A
LTCM was founded in 1994 by several executives from Salomon Brothers Inc., and its board included two
Nobel Prize winners (Myron Scholes and Robert C. Merton).
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 29
191
B
The investment mandate and its stated investment strategy are typically disclosed in the various documents
provided to investors prior to their decision to invest in the investment vehicle.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 30
192
C
Style drift or strategy drift is the change through time of a fund’s investment strategy based on purposeful
decisions by the fund manager in an attempt to improve risk-adjusted performance.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 30
193
A
Feffer and Kundro studied more than 100 HF liquidations over a 20-year period and attributed half of all
fund failures to operational risk. The International Association for Quantitative Finance defines
operational risk as “losses caused by problems with people, processes, technology, or external events.”
Feffer and Kundro argue that structural problems with hedge funds contributed to substantial investor
losses and that these problems could have been prevented by following a comprehensive due diligence
process.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 31
194
B
According to the CAIA curriculum, due diligence consists of seven parts of phases:
Structural Review.
Strategic Review.
Administrative Review.
Performance Review.
Portfolio Risk Review.
Legal Review.
Reference Review.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 31
195
A
The two primary information-based explanations for superior investment performance in competitive
markets based on information: information gathering and information filtering.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 31
CAIA I. 2017. Exam I.
Alexey De La Loma ©FINANCER TRAINING Pag. 215/300 CFA, CMT, CAIA, FRM, EFA, CFTe
196
C
There are several ways that hedge funds can add value, such as offering attractive risk premiums for
bearing risks like illiquidity and exploiting tax advantages. According to the CAIA curriculum, the most
common argument for the source of superior returns is using available information to identify mispriced
assets.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 31
197
D
A key personnel clause is a provision that allows investors to withdraw their asset from the fund,
immediately and without penalty, when the identified key personnel are no longer making investment
decisions for the fund.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 31
198
C
Passively index strategies use a market-capitalization weighting scheme
Smart beta strategies utilize portfolio weights that are objectively linked to one or more measurable
characteristics of the underlying assets. Characteristics used to determine equity portfolio weights can be
based on any fundamental or technical attribute.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 32
199
D
While smart beta strategies are typically focused on adjusting portfolio weights rather than on selection
and omitting securities, there is no bright line that distinguishes smart beta strategies from active alpha-
based strategies. Generally, smart beta strategies have portfolio weights that:
1) Seek to capture an attractive systematic risk premium.
2) Are based on fixed rules using measurable security characteristics.
3) Differ moderately from market-capitalization weights.
4) Maintain broad portfolios rather than highly concentrated portfolios.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 32
200
A
Investment management using the concepts of alpha and beta is based on an assumption that risk and
abnormal return can be estimated with sufficient reliability to facilitate meaningful decisions. Alpha and
beta are unobservable and are usually estimated using historical data.
Chambers, Anson, Black, and Kazemi, Alternative Investments: CAIA Level I, 3rd edition (John Wiley & Sons, 2015), Chapter 32