CAIA Quantitative Methods and Statistics 3

Question 1

The Calmar ratio is calculated as:

Accepted Answer

Annualized return divided by maximum drawdown

Answer

Excess return divided by annualized standard deviation

Answer

Return divided by portfolio beta

Answer

Information ratio adjusted for excess kurtosis

Question 2

When computing the correlation between a liquid equity index and an illiquid private asset, which adjustment is most important?

Accepted Answer

Autocorrelation (stale pricing) adjustment to unsmooth the illiquid asset returns

Answer

Currency hedging adjustment to remove FX volatility

Answer

Inflation adjustment for real asset returns

Answer

Survivorship bias adjustment for the liquid index

Question 3

How does cross-sectional momentum differ from time-series (absolute) momentum?

Accepted Answer

Time-series momentum compares an asset's own recent return to its historical average; cross-sectional momentum ranks assets relative to each other at a point in time

Answer

Time-series momentum compares an asset's return to peers; cross-sectional momentum looks at each asset's own return history

Answer

They are identical but measured over different lookback windows

Answer

Time-series uses arithmetic returns; cross-sectional uses log returns

Question 4

The Brinson-Hood-Beebower (BHB) performance attribution model decomposes active return into:

Accepted Answer

Allocation effect, selection effect, and interaction effect

Answer

Alpha, beta, and idiosyncratic return components

Answer

Market, size, and value factor contributions

Answer

Duration, convexity, and credit spread effects

Question 5

Look-ahead bias in backtesting occurs when:

Accepted Answer

The model inadvertently incorporates information that would not have been available at the time of the simulated trade

Answer

The backtest uses too short a historical period to be statistically significant

Answer

The strategy is over-optimized to fit historical data (data mining)

Answer

The backtest excludes transaction costs and slippage

Question 6

For which type of alternative investment return distribution does the law of large numbers converge most slowly, making statistical inference most difficult?

Accepted Answer

Returns from strategies with fat tails and non-stationary parameters

Answer

Normally distributed returns with low standard deviation

Answer

Returns from long-only equity portfolios

Answer

Monthly returns annualized from daily data

Question 7

Which of the following best describes the concept of 'variance drag' (also called volatility drag) in compounded returns?

Accepted Answer

The difference between the arithmetic mean return and the lower compounded (geometric) return caused by return volatility

Answer

The reduction in arithmetic mean caused by negative serial correlation

Answer

The additional variance introduced by leverage in an alternative fund

Answer

The drag on performance from illiquidity premiums in private markets