CAIA CAIA Risk Management 3

Question 1

The Calmar Ratio measures risk-adjusted performance by dividing annualized return by:

Accepted Answer

Maximum drawdown

Answer

The Calmar Ratio equals annualized return divided by maximum drawdown, rewarding managers with strong returns relative to their worst historical loss.

Question 2

Leverage amplifies both returns AND risks in alternative investments; a fund with 3x leverage and a 10% asset decline will experience approximately what portfolio loss?

Accepted Answer

30%

Answer

With 3x leverage, a 10% decline in the underlying assets produces approximately a 30% loss on investor equity capital.

Question 3

The 'contagion risk' most relevant to alternative investment portfolios refers to:

Accepted Answer

The spread of financial distress across markets or strategies due to forced selling and deleveraging

Answer

Contagion risk occurs when forced deleveraging by distressed funds causes price declines that trigger further margin calls and selling across seemingly unrelated markets.

Question 4

Which metric best captures the risk-adjusted return of a strategy relative to its systematic (market) risk exposure?

Accepted Answer

Treynor Ratio

Answer

The Treynor Ratio divides excess return by beta (systematic risk), making it appropriate when the portfolio is part of a larger diversified portfolio where only systematic risk is relevant.

Question 5

In alternative investments, 'key person risk' refers to:

Accepted Answer

The risk that a fund's performance is highly dependent on one or a few specific individuals whose departure would be detrimental

Answer

Key person risk arises when a fund's investment process, relationships, or returns are concentrated in one manager or small team whose loss could permanently impair performance.

CAIA - Chartered Alternative Investment Analyst Association Practice Test

CAIA - Chartered Alternative Investment Analyst Association Practice Test

CAIA CAIA Risk Management 3