CAIA Risk Management Flashcards
6 cards from real CAIA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 6 CAIA Risk Management flashcards as text
The Calmar Ratio measures risk-adjusted performance by dividing annualized return by:
Answer: Maximum drawdown
The Calmar Ratio equals annualized return divided by maximum drawdown, rewarding managers with strong returns relative to their worst historical loss.
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?
Answer: 30%
With 3x leverage, a 10% decline in the underlying assets produces approximately a 30% loss on investor equity capital.
The 'contagion risk' most relevant to alternative investment portfolios refers to:
Answer: The spread of financial distress across markets or strategies due to forced selling and deleveraging
Contagion risk occurs when forced deleveraging by distressed funds causes price declines that trigger further margin calls and selling across seemingly unrelated markets.
Which metric best captures the risk-adjusted return of a strategy relative to its systematic (market) risk exposure?
Answer: Treynor Ratio
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.
In alternative investments, 'key person risk' refers to:
Answer: The risk that a fund's performance is highly dependent on one or a few specific individuals whose departure would be detrimental
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.
Basis risk in a hedged alternative investment position occurs when:
Answer: The hedge instrument and the underlying position do not move in perfect lockstep, leaving a residual unhedged exposure
Basis risk is the residual risk remaining after hedging because the hedge instrument (e.g., futures) doesn't perfectly correlate with the underlying exposure being hedged.