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.
Which statement best describes the defining principle of a risk parity allocation?
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Correct Answer: C
Solution
C is correct. Risk parity sizes positions so that every asset contributes the same amount of risk to the portfolio, formally requiring equal marginal (and total) risk contributions across assets. The result is typically that lower-volatility assets receive higher dollar weights and higher-volatility assets receive lower dollar weights.
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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