Free CAIA Level II Asset Allocation Practice Questions
Asset allocation on CAIA Level II covers mean-variance optimization with alternatives, the Total Portfolio Approach, risk budgeting, risk parity strategies, co-investment programs, GP-led secondaries, and dynamic rebalancing strategies.
Option-Based Portfolio Insurance (OBPI) is best described as a strategy that:
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Correct Answer: B
Solution
B is correct.
OBPI combines a long position in the risky portfolio with a long put option (or a synthetic equivalent) that guarantees a minimum floor value at the horizon. The put provides the insurance payoff when the portfolio falls below the floor.
Question 2
Medium
In TPA, a strategic overlay is best understood as:
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Correct Answer: C
Solution
C is correct. In TPA, a strategic overlay uses instruments such as derivatives or liquid proxies at the total-portfolio level to adjust factor exposures — adding or reducing equity beta, duration, or inflation sensitivity — without requiring changes to individual manager mandates. This preserves manager autonomy while giving the CIO control over aggregate risk.
Question 3
Hard
A common misconception about TPA is that it eliminates asset class labels entirely. Which statement most accurately corrects this misconception while identifying what TPA does change?
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Correct Answer: A
Solution
A is correct. TPA does not discard asset class labels — they remain useful for operational purposes (legal structures, custodian reporting, manager mandates) and as a familiar communication tool with boards. What TPA changes is the primacy of those labels: risk management, capital competition decisions, and factor exposure assessment are conducted through the factor lens, with asset class labels serving a secondary, operational role.
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