Free CAIA Level I CAIA Ethical Principles Practice Questions
CAIA ethical principles on the Level I exam cover the eight CAIA ethical principles, fiduciary duty, professionalism, and the client-first mindset applied to alternative investment scenarios. Ethics is tested on both CAIA levels (CAIA Association).
Sample Questions
Question 1
Easy
The Bear Stearns hedge fund failures of 2007 were primarily caused by:
Solution
D is correct.
The Bear Stearns High-Grade Structured Credit Strategies Fund and its Enhanced Leverage counterpart used significant leverage (up to 10:1 in the enhanced fund) to invest heavily in CDOs and other securities backed by subprime mortgages. When subprime defaults rose and these securities lost value, the leveraged losses quickly wiped out the funds' capital.
The Bear Stearns High-Grade Structured Credit Strategies Fund and its Enhanced Leverage counterpart used significant leverage (up to 10:1 in the enhanced fund) to invest heavily in CDOs and other securities backed by subprime mortgages. When subprime defaults rose and these securities lost value, the leveraged losses quickly wiped out the funds' capital.
Question 2
Medium
A key lesson from the Archegos Capital Management collapse for prime brokers is that:
Solution
C is correct.
Archegos held total return swap positions with multiple prime brokers, none of whom had full visibility into the fund's aggregate exposure. When Archegos could not meet margin calls, the coordinated unwinding of positions caused billions in losses across multiple banks. The lesson is that prime brokers need better cross-counterparty exposure aggregation and more rigorous margining for concentrated swap positions.
Archegos held total return swap positions with multiple prime brokers, none of whom had full visibility into the fund's aggregate exposure. When Archegos could not meet margin calls, the coordinated unwinding of positions caused billions in losses across multiple banks. The lesson is that prime brokers need better cross-counterparty exposure aggregation and more rigorous margining for concentrated swap positions.
Question 3
Hard
An asset owner is comparing three value models: shareholder value, shared value, and system value. Which description most accurately distinguishes the system-value perspective from the other two?
Solution
D is correct. The system-value perspective places the business inside society and society inside the environment, so the investment industry cannot be considered independent of either; it affects and is affected by both. Its fulfillment of purpose is then judged by impact and value created across stakeholders.