CFA Level I Alternative Investments Practice Questions
Alternative Investments makes up 4 of every 50 questions on a Tigertest CFA Level I practice test. Here are 10 of the 16 questions on it, each with the answer and the reason.
Updated by the Tigertest team. Based on CFA Institute's Level I topic weights for 2027. Original questions with four choices (the real exam has three). Not affiliated with CFA Institute.
1. A hedge fund charges a 2% management fee on beginning assets and a 20% incentive fee on gains gross of the management fee, with no hurdle. Assets grow from 100 million to 120 million before fees. The investor's net return is:
- A.12%
- B.14%
- C.16%
- D.18%
Answer: B. Management fee = 2% x 100 = 2 million; incentive fee = 20% x 20 = 4 million. Net gain = 20 - 6 = 14 million, a 14% return. 16% deducts only the incentive fee.
2. A hedge fund's high-water mark means the manager earns an incentive fee only on:
- A.Any positive return in a year
- B.Returns above the market index
- C.Gains above a hurdle rate
- D.Gains above its previous peak
Answer: D. The high-water mark stops a manager collecting incentive fees twice on the same gains: losses must be recovered before new incentive fees apply.
3. A private equity fund's limited partners have a clawback provision. It requires the general partner to:
- A.Return excess carried interest paid
- B.Invest more of its own capital
- C.Refund all management fees paid
- D.Buy back the LPs' fund interests
Answer: A. If early deals pay carried interest but later losses mean the GP was overpaid over the fund's life, the clawback makes the GP give back the excess.
4. Compared with a deal-by-deal (American) distribution waterfall, a whole-of-fund (European) waterfall is generally:
- A.Faster to pay carried interest
- B.Free of any hurdle rate
- C.More favorable to limited partners
- D.More favorable to the general partner
Answer: C. Under a whole-of-fund waterfall the GP earns carried interest only after LPs get back all contributed capital and any preferred return, so carry is paid later.
5. A private equity firm buys a mature company using a large amount of borrowed money secured on the company's assets. This is a:
- A.Mezzanine financing
- B.Initial public offering
- C.Leveraged buyout
- D.Venture capital round
Answer: C. An LBO finances the purchase of an established, cash-generating business mainly with debt. Venture capital funds young, high-growth companies with equity.
6. An office building produces net operating income of 600,000 a year. Similar buildings sell at a 6% capitalization rate. Its estimated value is:
- A.10,000,000
- B.1,000,000
- C.6,000,000
- D.36,000
Answer: A. Value = NOI / cap rate = 600,000 / 0.06 = 10,000,000. Multiplying by the cap rate gives 36,000, dividing by 0.60 gives 1,000,000, and 6,000,000 uses a 10% rate.
7. A commodity futures curve is in contango, with longer-dated contracts priced above nearer ones. For a long investor who rolls contracts, the roll yield is:
- A.Equal to spot return
- B.Positive
- C.Zero
- D.Negative
Answer: D. Rolling means selling the expiring cheaper contract and buying the dearer next one, which loses value as it converges toward spot. Backwardation gives a positive roll yield.
8. The total return on a fully collateralized commodity futures position is made up of the spot price return, the roll return and the:
- A.Coupon return
- B.Collateral return
- C.Dividend return
- D.Convenience yield
Answer: B. The cash posted as collateral earns interest, usually a short-term government rate, which is the third component.
9. Investing in an existing toll road that already produces revenue is an example of:
- A.Raw land investment
- B.Brownfield infrastructure
- C.Greenfield infrastructure
- D.Venture capital
Answer: B. Brownfield investments are existing, operating assets with known cash flows. Greenfield investments are assets still to be built, with construction risk.
10. Unlike farmland, timberland offers investors the flexibility to:
- A.Avoid weather risk entirely
- B.Earn rent with no land price risk
- C.Harvest every season by law
- D.Delay harvesting when prices are low
Answer: D. Trees keep growing while they stand, so a timberland owner can wait for better prices. Crops on farmland must be harvested when ripe.
Practice all 16 alternative investments questions, and the rest of the 200-question bank, in the free CFA Level I training sets. Questions you miss come back until you have mastered them.
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