CAIA Quantitative Methods and Statistics 2

Question 1

What is the primary purpose of a Monte Carlo simulation in alternative investment portfolio analysis?

Accepted Answer

To model the distribution of possible future outcomes through repeated random sampling

Answer

Monte Carlo simulation generates thousands of random scenarios based on specified return and risk parameters, producing a distribution of possible outcomes useful for stress-testing and portfolio planning.

Question 2

Conditional Value at Risk (CVaR), also known as Expected Shortfall, is best described as:

Accepted Answer

The average loss in scenarios where losses exceed the VaR threshold

Answer

CVaR (Expected Shortfall) answers the question 'given that we are in the tail beyond VaR, what is our expected loss?' — making it a more complete tail-risk measure than VaR alone.

Question 3

In a linear regression of portfolio returns on a benchmark, the R-squared (R²) statistic measures:

Accepted Answer

The proportion of portfolio return variance explained by the benchmark

Answer

R² indicates how much of the variation in the dependent variable (portfolio returns) is captured by the independent variable (benchmark returns); a high R² means benchmark moves largely explain portfolio moves.

Question 4

Which statistical test is commonly used to assess whether investment return data follows a normal distribution?

Accepted Answer

Jarque-Bera test

Answer

The Jarque-Bera test uses the skewness and excess kurtosis of a dataset to test the null hypothesis of normality, making it well-suited for evaluating return distributions.

Question 5

Tracking error is most precisely defined as:

Accepted Answer

The standard deviation of the difference between portfolio returns and benchmark returns

Answer

Tracking error is the annualized standard deviation of active returns (portfolio return minus benchmark return), measuring how consistently a manager deviates from the benchmark.

CAIA - Chartered Alternative Investment Analyst Association Practice Test

CAIA - Chartered Alternative Investment Analyst Association Practice Test

CAIA Quantitative Methods and Statistics 2