CAIA CAIA Risk Management 2

Question 1

Model risk in alternative investments refers to:

Accepted Answer

The risk that a quantitative model is incorrectly specified, estimated, or applied

Answer

The risk that a portfolio manager follows trends rather than models

Answer

The risk of losing money when volatility increases

Answer

The risk of regulatory model approval being denied

Question 2

The maximum drawdown metric measures:

Accepted Answer

The peak-to-trough decline in portfolio value over a specified period

Answer

The average daily loss over a 12-month period

Answer

The annualized standard deviation of returns

Answer

The percentage of months with negative returns

Question 3

In the context of hedge funds, 'redemption gates' are used to:

Accepted Answer

Limit the percentage of fund assets that can be redeemed in any given period to protect remaining investors

Answer

Prevent new investors from entering the fund during volatile markets

Answer

Lock in profits at a predetermined price level

Answer

Restrict trading activity during market closures

Question 4

Operational risk in alternative investment funds most commonly arises from:

Accepted Answer

Failures in internal processes, people, systems, or external events such as fraud or cyber attacks

Answer

Macro-economic policy changes by the Federal Reserve

Answer

Rising correlation between asset classes during market stress

Answer

Poor benchmark selection by the investment committee

Question 5

Correlation risk in a multi-strategy portfolio refers to:

Accepted Answer

The risk that asset correlations increase during market stress, reducing diversification benefits precisely when they are most needed

Answer

The risk that individual strategy correlations to the market exceed the Sharpe ratio

Answer

The risk that a manager calculates correlation incorrectly

Answer

The risk that a benchmark correlation is misspecified

Question 6

Which risk management approach combines scenario analysis with sensitivity testing to assess portfolio vulnerability to specific factor changes?

Accepted Answer

Factor stress testing

Answer

Monte Carlo simulation

Answer

Bootstrap historical simulation

Answer

Kelly criterion optimization