CAIA CAIA Risk Management

Question 1

Value at Risk (VaR) at the 95% confidence level over a 1-day horizon means:

Accepted Answer

Losses will not exceed this amount on 95% of trading days, or equivalently will exceed it on 5% of days

Answer

95% 1-day VaR states that losses will exceed the VaR threshold only 5% of trading days (1 in 20 days).

Question 2

Which risk measure addresses the main limitation of VaR by estimating the expected loss in the tail beyond the VaR threshold?

Accepted Answer

Expected Shortfall (CVaR)

Answer

Expected Shortfall (also called Conditional VaR or CVaR) measures the average loss in scenarios that exceed the VaR, capturing tail risk that VaR ignores.

Question 3

Liquidity risk in alternative investments is best described as:

Accepted Answer

The risk of being unable to sell or exit a position without significant price impact or within a required timeframe

Answer

Liquidity risk is the inability to transact at a fair price quickly, which is especially acute in illiquid alternatives like private equity and real estate.

Question 4

Counterparty risk in the context of OTC derivatives refers to:

Accepted Answer

The risk that the other party to a contract defaults before settlement

Answer

Counterparty risk arises when one party to an OTC contract may fail to fulfill its obligations, exposing the surviving party to replacement cost risk.

Question 5

Stress testing in risk management is designed primarily to:

Accepted Answer

Assess portfolio behavior under extreme but plausible adverse scenarios beyond normal VaR

Answer

Stress tests apply hypothetical or historical extreme scenarios (e.g., 2008 crisis, COVID crash) to evaluate portfolio vulnerability beyond statistical VaR.

CAIA - Chartered Alternative Investment Analyst Association Practice Test

CAIA - Chartered Alternative Investment Analyst Association Practice Test

CAIA CAIA Risk Management