CAIA Level II: Sample Essay Questions and Model Answers
- Dimitri Dangeros, CFA, CAIA
- Jul 15
- 4 min read
Updated: Jul 17
The constructed‐response (essay) section of the CAIA Level II exam accounts for 30% of your total score and tests your ability to apply core concepts in clear, concise written form. Unlike the multiple‐choice portion, essay questions require you to craft structured, well‐reasoned responses under time pressure. In this article, we’ll review the exam format and grading rules, then present three representative essay questions along with model answers that illustrate best practices for earning full marks.
Exam Format & Grading Guidelines CAIA Level II Sample Essay Questions
Structure:
Section 1: 100 multiple‐choice questions (70% of score).
Section 2: Three multi‐part constructed‐response questions (30% of score).
You have 2 hours to complete the essays.
Question Types:
Each essay “set” typically contains 3–5 sub‐questions.
Sub‐questions may ask you to “describe,” “analyze,” “calculate,” or “argue.”
Expect both qualitative (discussion) and quantitative (brief calculations) prompts.
Answer Style:
Concise paragraphs or bullet points are acceptable—full sentences are not always required.
When asked for a list of n items, only your first n points will be graded.
Grammar and spelling are not penalized, but clarity of thought is essential.
Grading: CAIA Level II Sample Essay Questions
Examiners look for completeness (did you address each part?), relevance (did you stay on topic?), and structure (logical flow, clear headings or bullets).
Model answers provided here are comprehensive, demonstrating the level of depth and organization expected.
Sample Question 1: Institutional Asset Owners
Question:
(a) Explain three fiduciary duties of institutional asset owners (e.g., pension funds).
(b) Discuss how an institutional owner’s liability considerations might affect its investment policy.
Model Answer
(a) Three Fiduciary Duties
Duty of Loyalty: Act in the best interests of beneficiaries, avoiding conflicts of interest.
Duty of Care: Make informed, prudent decisions based on thorough due diligence.
Duty of Prudence: Invest assets with appropriate risk controls, diversification, and long‐term perspective.
Note: Only the first three duties are graded, even if more are listed.
(b) Liability Considerations & Investment PolicyInstitutional owners face sponsor‐specific liability (e.g., underfunded pensions). To mitigate shortfalls, they may:
Shift to Liability‑Driven Investing (LDI): Use bond ladders or swaps to match assets to liabilities.
Reduce Illiquid Allocations: Lower private equity or real asset weights to maintain liquidity for benefit payments.
Maintain Liquidity Buffers: Hold cash or short‐duration instruments to meet near‑term obligations.These adjustments ensure that liability payments remain secure, even in market downturns.
Sample Question 2: Asset Allocation
Question:
(a) Compare and contrast strategic versus tactical asset allocation.
(b) Provide two scenarios in which a fund manager might overweight an asset class tactically.
Model Answer
(a) Strategic vs. Tactical Allocation
Strategic Allocation:
Long‑term policy based on risk/return objectives.
Rebalanced regularly to maintain target weights (e.g., 60/40 equities/bonds).
Tactical Allocation:
Short‑term deviations (±5–15%) from policy to exploit market inefficiencies.
Driven by macro outlook, valuation discrepancies, or momentum signals.
Aspect | Strategic Allocation | Tactical Allocation |
Time Horizon | Multi‐year | Weeks to months |
Objective | Policy drift control | Alpha generation |
Rebalancing Trigger | Calendar or tolerance bands | Market signals |
(b) Two Tactical Overweight Scenarios
Valuation Divergence: If global equities appear 15% undervalued relative to historical P/E averages, a manager may overweight equities by 10%.
Momentum Signal: Following sustained yield curve steepening, overweight long‐duration bonds to capture capital gains if yields continue to decline.
Sample Question 3: Emerging Topics — ESG Integration
Question:
(a) Describe three methods for integrating environmental, social, and governance (ESG) factors into alternative investment decisions.
(b) Evaluate one potential drawback of strict ESG integration in private equity.
Model Answer
(a) Three ESG Integration Methods
Negative Screening: Exclude companies or strategies that fail basic ESG thresholds (e.g., no fossil‐fuel producers).
Positive/Best‑in‑Class Screening: Select top ESG performers within each sector (e.g., renewable energy leaders).
Impact Investing: Target investments with measurable social or environmental outcomes alongside financial returns.
Tip: Use bullet points when listing methods—they’re clear and concise.
(b) Drawback in Private Equity
Reduced Opportunity Set: Strict ESG screens may eliminate high‑growth companies in emerging markets, potentially sacrificing alpha.
Mitigation Strategy: Managers can engage with portfolio companies post‑investment (“ESG engagement”) to drive improvements without forgoing returns.
Best Practices for Essay Success
Outline First (2–3 Minutes): Quickly jot a bullet‐point structure for each sub‐question.
Answer Exactly What’s Asked: If the prompt says “list three,” don’t write four.
Use Headings & Bullets: Improves readability for graders scanning dozens of essays.
Mind the Clock: Allocate roughly 40 minutes per essay set.
Practice Under Timed Conditions: Use official CAIA sample essays or reputable prep‐provider questions.
Mastering the essay section of CAIA Level II hinges on structured preparation and familiarity with exam rules. By practicing with representative questions and model answers, you’ll develop the clarity, precision, and speed needed on exam day. Remember:
Focus your responses on the question requirements.
Keep answers concise—one to two paragraphs or bullet lists are often sufficient.
Practice outlining, writing, and reviewing under timed conditions.
With these strategies and the sample Q&A above, you’re well on your way to writing high‑quality essays and earning full marks in the constructed‐response section. Good luck!