CAIA Level II EXAM QUESTIONS AND

CAIA Level II EXAM QUESTIONS AND ANSWERS 100% SOLVED (Newest 2025) 5th percentile vs 25th percentile performance - Correct Answers ✅5th percentile managers outperform in every comparison BUT 25th percentile managers' performance is more volatile --> even if 25th percentile managers outperform they tend to mean revert --> demonstrates the perils of choosing managers based on historical performance alternative asset performance evaluation - Correct Answers ✅unlike in traditional assets, alpha is difficult to define in alternatives investing; success can be defined as positive absolute return over a market cycle, return greater than an available liquid substitute, or risk-adjusted return greater than published peer group returns

due diligence - Correct Answers ✅two types: investment

process due diligence and operational due diligence

investment due diligence:

• quantitative screening
• investment team and organizational attributes
• investment process review
• performance analysis

operational due diligence - important to protect investors from losses due to operational errors/oversights and fraud

• Document and legal review 1 / 4

CAIA Level II EXAM QUESTIONS AND ANSWERS 100% SOLVED (Newest 2025)

• Verification of vendor relationships
• Background checks
• On-site visits
• determinants of institutional investors' costs - Correct

Answers ✅Cost structure influenced by:

• Policy portfolio - baseline asset mix that reflects long-term

risk and return views

• Portfolio size - larger portfolios tend to be more complex

and thus more expensive

• Investment vehicles - active vs. passive, separate vs.

comingled accounts, limited partnerships, direct investing vs.fund of funds

• investment model - traditional consultant model, internal

CIO model, fund of funds model, outsourced CIO model (OCIO model tends to be less expensive than the traditional consultant model or the ICIO model) The traditional consultant model becomes less efficient as the portfolio grows in size and complexity (consultants meet few times per year, are generally more hands off) BUT internal CIO model is prohibitively expensive for most mid-sized institutions --> mid-sized institutions choose FoF model or OCIO model (which could be a FoF or consultant)

• categories of costs incurred by institutional investors -

Correct Answers ✅1. Costs related to the construction and 2 / 4

CAIA Level II EXAM QUESTIONS AND ANSWERS 100% SOLVED (Newest 2025) management of the portfolio - these are direct and explicit e.g. management fees, performance fees

• Costs associated with activity and portfolio transactions -

these are often embedded (not explicitly charged) and undisclosed e.g. trading and brokerage costs, market impact costs (slippage), prime brokerage costs

• Fund servicing costs - administrative/operational in nature

e.g. custody, audit, legal, administrative fees

• Investment oversight/monitoring costs - includes overhead

and ongoing oversight and monitoring costs e.g. staffing costs, IT, brokerage wrap fees, consultant fees, FoF fees total risk - Correct Answers ✅For institutional investors with liabilities e.g. pension, standalone risk doesn't matter as

much as relative risk: portfolio asset risk relative to liabilities

Total risk is the volatility of the difference between the present values of portfolio assets and liabilities; the difference between the two is known as the funding status -- > total risk is the volatility of the funding status

• action areas to transition to long-term investing - Correct

Answers ✅1. Investment beliefs - express the long-term investment philosophy of the investor and provides a sustainable foundation for long-term investing; a compass that guides 3 / 4

CAIA Level II EXAM QUESTIONS AND ANSWERS 100% SOLVED (Newest 2025)

• Risk appetite statement - clarifies risk appetite of asset

owners

• Benchmarking process - measures investment success

over the long-term; should distinguish between the long-term investment strategy and the asset manager's execution of that strategy

• Evaluation and incentives - evaluation and incentive

framework should support long-term value creation and should align asset owners' and managers' interests

• Investment mandates - contract between asset owner and

manager that formalizes the long-term approach and aligns the interests of asset owners and managers, thereby reducing principal/agent conflicts

• long-term investment beliefs - Correct Answers

✅Investment beliefs provide investors with a consistent way of thinking about markets, help investors design processes that are consistent with long-term value creation, make it easier for managers to focus on long-term fundamentals, and can be used to devise incentives that are conducive to a long- term mindset

• Focus on the economic fundamentals not short-term price

moves

• In the short-run prices trend and deviate away from

intrinsic values

• Markets price information in the news, not long-term

trends but prices revert to fundamentals

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