THE CHARTERED ALTERNATIVE
INVESTMENT ANALYST PROGRAM
CAIA LEVEL I
Exam Topics
SHOWCASE YOUR KNOWLEDGE
LEVEL I CURRICULUM MATERIALS
q  Standards of Practice Handbook.
10th edition. Charlottesville, Virginia: CFA
Institute. 2010.
ISBN: 978-0938367222.
q  CAIA Knowledge Series CAIA Level I: An
Introduction to Core Topics in Alternative
Investments, 2nd edition. Wiley. 2012.
ISBN: 978-1-118-25096-9
q  Level I Study Guide found here for free:
http://caia.org/caia-program/curriculum
2
EXAMINATION FORMAT
q  LEVEL I
q  Professional standards & ethics
q  Introduction to major areas of
alternatives
q  200 Multiple Choice Questions
§  Section 1 : 100 questions
120 minutes
§  Section 2 : 100 questions
120 minutes
Exam Topics Minimum
Weight
Risk
Management
and Portfolio
Management,
15%
Professional
Standards and
Ethics, 15%
Structured
Products, 5%
Private Equity,
5%
Commodities,
5%
Hedge Funds,
15%
Introduction
to Alternative
Investments,
15%
Real Assets,
5%
3
FORMULA SHEETS
4
LEVEL I EXAM TOPICS
Professional
Standards and
Ethics
q  Reading:
Standards of Practice Handbook. 10th Edition, CFA Institute. 2010
Introduction to
Alternative
Investments
q  The practices and standards for ethical considerations experienced in the
investment profession on a daily basis
Real Assets
q  Topics:
Hedge Funds
q  Standard I: Professionalism
Commodities
q  Standard II: Integrity of Capital Markets
q  Standard III: Duties to Clients
q  Standard IV: Duties to Employers
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
q  Standard V: Investment Analysis, Recommendations, and Actions
q  Standard VI: Conflicts of Interest
5
LEVEL I EXAM TOPICS
Professional
Standards and
Ethics
Sample Questions
q  According to the Code and Standards, what is the first step that a member should take if he or
Introduction to
Alternative
Investments
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.
Real Assets
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.
Hedge Funds
d. Maintain confidentiality in order to preserve the integrity of the firm.
q  Marco Cancellara, CAIA, is a security analyst who places trades through a number of brokerage
Commodities
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
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
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
LEVEL I EXAM TOPICS
Professional
Standards and
Ethics
Introduction to
Alternative
Investments
Real Assets
q  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.
q  What Is an Alternative Investment?
q  The Environment of Alternative Investments
Hedge Funds
q  Statistical Foundations
q  Risk, Return, and Benchmarking
Commodities
q  Correlation, Alternative Returns, and
Performance Measurement
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
q  Alpha and Beta
q  Hypothesis Testing in Alternative Investments
7
LEVEL I EXAM TOPICS
Professional
Standards and
Ethics
Sample Questions
q  Which of the following sets of investment categories or products is MOST accurately
Introduction to
Alternative
Investments
Real Assets
described as being driven by alpha rather than beta?
a. Enhanced index and 130/30 funds
b. Enhanced index and S&P Goldman Sachs Commodity Index
c. Passive index and products with nonlinear returns
d. Passive index and products with absolute returns
Hedge Funds
q  How are beta driven products generally described?
Commodities
a. As requiring substantial information to implement.
Private Equity
b. As difficult to create without relatively high costs.
c. As having returns uncorrelated with the overall market.
Structured
Products
Risk Management
and Portfolio
Management
d. As attempting to capture systematic risk premiums.
8
LEVEL I EXAM TOPICS
Professional
Standards and
Ethics
Introduction to
Alternative
Investments
Real Assets
q  Reading:
CAIA Level I: An Introduction to Core Topics in Alternative Investments, 2nd edition.
Wiley. 2012.
Part II – Real Assets, Chapters 8-10.
q  Land, Infrastructure, and Intangible Real Assets
q  Real Estate Fixed-Income Investments
Hedge Funds
q  Real Estate Equity Investments
Commodities
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
9
LEVEL I EXAM TOPICS
Professional
Standards and
Ethics
Sample Questions
q  Which of the following scenarios MOST accurately describes the typical US income tax
Introduction to
Alternative
Investments
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.
Real Assets
b. REITs would not pay taxes on their income but pension funds would pay taxes on the
dividends received from REITs.
Hedge Funds
c. REITs would pay taxes on their income but pension funds would not pay taxes on the
dividends received from REITs.
Commodities
d. REITs would not pay taxes on their income and pension funds would not pay taxes on
the dividends received from REITs.
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
10
LEVEL I EXAM TOPICS
Professional
Standards and
Ethics
q  An analyst has been asked to evaluate the intellectual property (IP) of a new film
venture. The analyst estimates the probability of substantial success of the film venture
Introduction to
Alternative
Investments
to be 5%. The analyst also expects that the cash flows generated by the film venture will
decline at the rate of 1% per year. Assuming a required rate of return of 9%, which of the
following comes closest to the value of the IP per dollar of the initial cash inflow?
Real Assets
a. $ .44
b. $ .50
Hedge Funds
c. $ .56
d. $ .63
Commodities
V = (P * CF1)/ (r-g)
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
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
q  Reading:
CAIA Level I: An Introduction to Core Topics in Alternative Investments. 2nd edition.
Wiley. 2012.
Part III – Hedge Funds, Chapters 11 – 17.
q  Introduction to Hedge Funds
q  Hedge Fund Returns and Asset Allocation
Hedge Funds
Commodities
q  Macro and Managed Futures Funds
q  Event-Driven Hedge Funds
q  Relative Value Hedge Funds
Private Equity
q  Equity Hedge Funds
q  Funds of Hedge Funds
Structured
Products
Risk Management
and Portfolio
Management
12
LEVEL I EXAM TOPICS
Professional
Standards and
Ethics
Introduction to
Alternative
Investments
Sample Questions
q  An analyst is evaluating the risk-return profile of Derek Fund. The fund combines diversified long and short
positions in competitively-priced assets with very large simultaneous short positions in out of the money calls
and puts. An analysis based on observations from an extended period characterized by relative market calmness
is most likely to suggest which of the following return characteristics for Derek Fund?
a. High alpha and platykurtosis
Real Assets
b. High alpha and leptokurtosis
c. Negative alpha and platykurtosis
d. Negative alpha and leptokurtosis
Hedge Funds
q  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
Commodities
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
Private Equity
riskless bond, and the potential payout on the call option in the case of a successful merger, respectively?
a. $0 and $30
Structured
Products
Risk Management
and Portfolio
Management
b. $12 and $18
c. $15 and $15
d. $25 and $5.
13
LEVEL I EXAM TOPICS
Professional
Standards and
Ethics
Introduction to
Alternative
Investments
Real Assets
q  Reading:
CAIA Level I: An Introduction to Core Topics in Alternative Investments, 2nd edition.
Wiley. 2012.
Part IV – Commodities, Chapters 18-19.
q  Commodity Futures Pricing
q  Commodities: Applications and Evidence
Hedge Funds
Commodities
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
14
LEVEL I EXAM TOPICS
Professional
Standards and
Ethics
Sample Questions
q  Consider the case of a non-dividend-paying financial asset where F > Ser(T-t). How, in this
Introduction to
Alternative
Investments
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.
Real Assets
c.  By selling short the underlying asset and buying the futures contract.
d.  By selling short the underlying asset and selling the futures contract.
Hedge Funds
Commodities
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
15
LEVEL I EXAM TOPICS
Professional
Standards and
Ethics
Sample Questions
q  The current value of an equity index is 1500. The annual dividend yield of the index is 1%
Introduction to
Alternative
Investments
while the corresponding risk-free rate is 5%. Which of the following comes closest to the fair
price on a 6-month futures contract on the index?
a.  $1,530
Real Assets
b.  $1,545
c.  $1,560
d.  $1,590
Hedge Funds
F = S (1+ (r-d)/t)
F = $1,500 * (1+(.05-.01)/2)
Commodities
F = $1,500 * 1.02
F = $1,530
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
16
LEVEL I EXAM TOPICS
Professional
Standards and
Ethics
Introduction to
Alternative
Investments
Real Assets
q  Reading:
CAIA Level I: An Introduction to Core Topics in Alternative Investments, 2nd
edition. Wiley. 2012.
Part V – Private Equity, Chapters 20 - 22.
q  Introduction to Private Equity
q  Equity Types of Private Equity
Hedge Funds
q  Debt Types of Private Equity
Commodities
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
17
LEVEL I EXAM TOPICS
Professional
Standards and
Ethics
Introduction to
Alternative
Investments
Sample Questions
q  Which of the following are common definitions of distressed debt?
I. Debt that trades at less than half of its principal value
II. Debt with yield to maturity or 1,000 or more basis points above the riskless rate
III. Debt rated as CCC or lower by Standard and Poor’s
Real Assets
IV. Debt with annualized yield volatility in excess of 20%
a. II, III, and IV only
Hedge Funds
b. I, III, and IV only
c. I, II, and IV only
Commodities
d. I, II, and III only
q  What characteristic of mezzanine investing allows an investor to purchase the senior debt once it
Private Equity
has been repaid to a certain level?
a. Priority of payment
Structured
Products
Risk Management
and Portfolio
Management
b. The takeout provision
c. Acceleration
d. Subordination
18
LEVEL I EXAM TOPICS
Professional
Standards and
Ethics
Introduction to
Alternative
Investments
Real Assets
q  Reading:
CAIA Level I: An Introduction to Core Topics in Alternative Investments, 2nd
edition. Wiley. 2012.
Part VI – Structured Products, Chapters 23-25.
q  Credit Risk and the Structuring of Cash Flows
q  Credit Derivatives
Hedge Funds
q  Collateralized Debt Obligations
Commodities
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
19
LEVEL I EXAM TOPICS
Professional
Standards and
Ethics
Sample Questions
q  Use the following information and the one-step binomial process approach to firm value
Introduction to
Alternative
Investments
estimation to answer the next two questions. Apply discrete time compounding in your
calculations. 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
Real Assets
firm has one-period zero-coupon debt outstanding with the notional value of £180.
q  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?
Hedge Funds
a. £154
b. £161
Commodities
c. £168
d. £175
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
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) = [π Value(Debt | Up) + (1-π)Value(Debt | Down)]/(1+Rf)
Value(Debt) = [0.58 *180 + (1-0.58)*150]/(1.04) = £161
20
LEVEL I EXAM TOPICS
Professional
Standards and
Ethics
Sample Questions
q  Use the following information and the one-step binomial process approach to firm value
Introduction to
Alternative
Investments
estimation to answer the next two questions. Apply discrete time compounding in your
calculations. 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
Real Assets
firm has one-period zero-coupon debt outstanding with the notional value of £180.
q  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?
Hedge Funds
a. 0.48
b. 0.50
Commodities
c. 0.52
d. 0.54
Private Equity
Structured
Products
Risk Management
and Portfolio
Management
Value (Assets | Up) =£200* 1.25 = £250, Value (Assets | Down) =£200* (1-0.25) = £150
Asset Value = [1/(1+Rf)] [π Value(Assets | Up) + (1-π)Value(Assets | Down)]
200= [1/1.01] [π 250 + (1-π)150]
200= [1/1.01] [100π+150]
π=0.52
21
LEVEL I EXAM TOPICS
Professional
Standards and
Ethics
Introduction to
Alternative
Investments
Real Assets
q  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.
q  Lessons from Hedge Fund Failures
q  Risk Analysis
Hedge Funds
q  Due Diligence of Fund Managers
Commodities
q  Regression, Multivariate, and
Nonlinear Methods
Private Equity
q  Portfolio Optimization and Risk
Parity
Structured
Products
Risk Management
and Portfolio
Management
q  Portfolio Management, Alpha, and
Beta
22
LEVEL I EXAM TOPICS
Professional
Standards and
Ethics
Introduction to
Alternative
Investments
Sample Questions
q  Which of the following BEST explains why including alternative investments into a portfolio requires modifications to meanvariance 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
Real Assets
Hedge Funds
q  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
Commodities
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
Private Equity
a. I and III
b. I and IV
Structured
Products
Risk Management
and Portfolio
Management
c. II and III
d. II and IV
23
CANDIDATE EXPERIENCE
SHOWCASE YOUR KNOWLEDGE
ADDITIONAL RESOURCES
q  Candidate Handbook- Provides all information related to taking
the enrollment and exam process
q  Sample Exam- Become familiar with the structure and format
of the CAIA Level I exam
q  Workbook- For additional practice involving content from CAIA
Level I: An Introduction to Core Topics in Alternative
Investments
q  Preparatory Program Providers – Third-party programs who
offer additional resources in studying for CAIA exams
25
STUDY TIME
q  Average study time for Level I is 200 hours. q  The Study Calculator is located on the About CAIA page.
26
EXAM DAY
q  ID Policy
q  Two valid (not expired) forms of ID
q  Both must have a signature
q  One must have a photo
q  Passport preferred
q  The name on your IDs must exactly match the name with which you schedule your
exam
q  Calculator Policy
q  Texas Instruments BA II Plus (including the Professional model)
q  Hewlett Packard 12C (including the Platinum edition)
q  Exam proctors will require that all calculator memory be cleared prior to the start
of the exam
27
LENGTH OF EXAM SESSION
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
28
PASS RATES
Pass Rates
March 2011
71 %
September 2011
74%
March 2012
68%
September 2012
64%
March 2013
68%
September 2013
68%
March 2014
67%
29
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.
30
CONTACT US
Best of luck with exam preparations!
If you have additional questions, please contact us at
[email protected].
31