CAIA Quantitative Methods and Statistics 3

Question 1

The Calmar ratio is calculated as:

Accepted Answer

Annualized return divided by maximum drawdown

Answer

The Calmar ratio equals the compound annualized return divided by the absolute value of the maximum drawdown, making it a useful risk-adjusted measure for strategies where large peak-to-trough losses are the primary concern.

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

Stale pricing in illiquid assets induces artificial autocorrelation that suppresses measured volatility and correlation; unsmoothing the return series (e.g., Geltner adjustment) yields more economically accurate correlation estimates.

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 goes long an asset when its own recent return is positive (absolute trend), while cross-sectional momentum goes long the top-performing assets and short the worst relative to each other at a given date.

Question 4

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

Accepted Answer

Allocation effect, selection effect, and interaction effect

Answer

BHB attribution separates the manager's active return into the allocation effect (overweighting/underweighting segments), the selection effect (picking better securities within segments), and their interaction.

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

Look-ahead bias contaminates backtests when data unavailable to a real investor at the decision date (e.g., revised earnings, end-of-month prices) are used as inputs, producing artificially inflated simulated returns.

CAIA - Chartered Alternative Investment Analyst Association Practice Test

CAIA - Chartered Alternative Investment Analyst Association Practice Test

CAIA Quantitative Methods and Statistics 3