Chartered Alternative Investment Analyst Association (CAIA) Practice Exam

When an analyst utilizes both public and nonpublic information to reach a conclusion about an investment, which principle is primarily applied?

1. Materiality theory.

2. Mosaic theory.

3. Conduct of practice.

4. Fair dealing standard.

The correct answer is: Mosaic theory.

The principle of mosaic theory is primarily applied when an analyst incorporates both public and nonpublic information to produce a comprehensive analysis of an investment. This concept allows for the aggregation of various pieces of information—whether they are publicly accessible or obtained through other non-public means—to form a more complete understanding of an investment's potential. Under this theory, the accumulation of bits of information can lead to insights that are not evident when viewing each piece in isolation. Mosaic theory recognizes that analysts can create value by synthesizing multiple information sources, which may include market data, research reports, management commentary, and proprietary insights. This approach promotes thorough analytical practices and allows analysts to make informed recommendations or conclusions about investments while navigating the complex landscape of information availability. Other principles, such as materiality theory, focus on whether certain information is significant enough to impact an investment decision, while conduct of practice and fair dealing standard revolve more around ethical considerations in the treatment of clients and fair practice in trading. These concepts are important but do not specifically address the analytical process of combining different types of information for investment assessment in the way that mosaic theory does.