CAIA Level 2 Sample Questions – Boost Your Exam Confidence for Free

1. Emerging Topics - Institutional Bitcoin Custody

Which of the following best explains the primary challenge for institutional investors in holding Bitcoin under direct custody? CAIA Level 2 , CAIA Level 2 Sample Questions Boost Your Exam Confidence for Free

A) Lack of standardized accounting treatment for Bitcoin holdings across different jurisdictions

B) The potential for slippage in executing large institutional trades across fragmented exchanges

C) The need for qualified custodians under regulatory frameworks such as the Investment Advisers Act

D) Bitcoin’s high volatility, which makes it difficult to hold as collateral for long-term investment strategies

2. Universal Investment Considerations - Fiduciary Duty

A fiduciary managing an institutional portfolio is evaluating an investment that has strong potential for ESG benefits but carries a lower expected return than traditional investments. Under fiduciary principles, what is the most appropriate course of action?

A) Allocate a portion of the portfolio to the ESG investment as long as it aligns with the fund’s mandate and risk tolerance

B) Reject the ESG investment, as fiduciary duty mandates a focus on financial returns over non-financial benefits

C) Proceed with the ESG investment only if it outperforms traditional investments over a 3-year rolling period

D) Invest in the ESG option only if regulatory requirements mandate an ESG allocation

3. Risk and Risk Management - Liquidity Risk in Private Equity

Which of the following factors is least likely to contribute to the illiquidity premium in private equity investments?

A) The inability to quickly sell stakes due to limited secondary market activity

B) The requirement for committed capital in long-term, locked-up structures

C) The higher frequency of financial reporting and investor disclosures compared to public equities

D) The complex nature of valuation, requiring infrequent and subjective appraisals

4. Investment Models - Dynamic Portfolio Strategies

Under which market condition would a Constant-Proportion Portfolio Insurance (CPPI) strategy perform significantly worse than a Constant Mix (CM) strategy?

A) Trending downward markets with high volatility

B) Mean-reverting markets with frequent fluctuations around a central value

C) Strongly upward-trending markets with low volatility

D) Low-volatility markets with a steady drift upwards

5. Methods for Alternative Investments - Hedge Fund Strategies

Which of the following hedge fund strategies is most likely to exhibit a positive skewness in returns while maintaining a low correlation with traditional asset classes?

A) Global Macro using discretionary fundamental analysis

B) Fixed-income arbitrage with significant leverage

C) Tail-risk hedging strategies using out-of-the-money options

D) Convertible arbitrage during periods of high market stress

6. Due Diligence and Selecting Managers - Fund Structures

Which of the following due diligence red flags is most likely to be overlooked by investors evaluating an alternative investment manager?

A) The fund’s legal structure requires offshore registration due to regulatory constraints

B) A manager has consistently outperformed benchmarks, but NAV calculations are performed internally

C) The firm’s compliance officer also serves as its chief operating officer (COO)

D) The fund utilizes a prime broker that is not subject to oversight by a top-tier financial regulator

7. Volatility and Complex Strategies - Tail Risk Hedging

What is the primary reason why tail-risk hedging strategies underperform during prolonged periods of low volatility?

A) The high cost of maintaining long volatility exposure erodes portfolio returns over time

B) The correlation between tail-risk hedging instruments and the overall portfolio declines

C) The inability of dynamic hedging strategies to adjust quickly to sudden market events

D) The negative convexity of structured products used in tail-risk hedging reduces effectiveness

8. Derivatives - Futures Pricing

A futures contract on an alternative investment asset has a current spot price of $1,500, a 6-month maturity, and carries an annualized risk-free rate of 4%. If the underlying asset pays no income and has no storage costs, what is the fair futures price?

A) $1,520

B) $1,530

C) $1,540

D) $1,560

9. Risk and Risk Management - Expected Shortfall (Conditional VaR)

A hedge fund has an annual return volatility of 15% and an expected return of 8%. Assuming a normal distribution of returns, what is the expected shortfall (ES) at a 95% confidence level, given that the VaR (95%) is -1.645σ and E[Z | Z < -1.645] ≈ -2.06?

A) -10.23%

B) -11.09%

C) -11.76%

D) -12.45%

10. Portfolio Management - Risk Contribution of Alternative Investments

An institutional portfolio consists of two asset classes:

Traditional Equities: 60% allocation, volatility of 12%, and correlation of 0.25 with alternative investments
Alternative Investments: 40% allocation, volatility of 18%

What is the portfolio’s total risk (volatility) assuming no other sources of diversification?

A) 12.88%

B) 13.34%

C) 13.92%

D) 14.25%

If you're looking for more practice questions and study resources to boost your chances of passing the CAIA Level 2 exam, check out our comprehensive study materials