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CAIA Level II practice questions with explanations

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Liquidity planning
Question 1. An endowment has $12 million of liquid assets, $5 million of expected spending, and $9 million of capital calls due before any reliable inflows. What is the projected liquidity shortfall?
Answer to question 1A. $2 millionB. $3 millionC. $4 millionD. $14 million
Explanation after you answer
Operational due diligence
Question 2. A manager values hard-to-price assets internally, reconciles its own positions, and has no independent administrator. What should an allocator investigate most directly?
Answer to question 2A. Whether reported returns exceed the targetB. Only the average historical returnC. The lack of independent valuation and reconciliation controlsD. Whether the manager reports monthly rather than quarterly
Explanation after you answer
Portfolio risk
Question 3. Two alternative strategies have the same standalone volatility. Which strategy generally contributes less variance when added at the same small weight to an existing portfolio?
Answer to question 3A. The one with the higher management feeB. The one with lower covariance with the portfolioC. The one with the longer marketing historyD. The one with the highest previous monthly return
Explanation after you answer
Secondary transactions
Question 4. A private fund interest has reported NAV of $20 million and sells at a 15% discount to NAV. Ignore transaction costs and later capital calls. What is the purchase price?
Answer to question 4A. $3 millionB. $15 millionC. $20 millionD. $17 million
Explanation after you answer
Performance fees
Question 5. A fund starts the year at its high-water mark of $100 million and ends at $112 million before incentive fees. The incentive fee is 20% of gains above that mark. Assume no other fees, hurdle, subscriptions, or withdrawals. What is the incentive fee?
Answer to question 5A. $2.0 millionB. $2.4 millionC. $12.0 millionD. $22.4 million
Explanation after you answer
Volatility strategies
Question 6. A short-volatility strategy earns small gains in calm markets but can suffer large losses in a shock. Which assessment best supplements its average return?
Answer to question 6A. Only its percentage of profitable monthsB. Only its average holding periodC. Tail-loss stress tests and collateral requirementsD. The assumption that calm-market correlation is permanent
Explanation after you answer
Benchmark selection
Question 7. An illiquid private credit fund is compared only with a short-term Treasury index. Which adjustment would make the comparison more informative?
Answer to question 7A. Use a benchmark that better reflects credit, duration, and liquidity exposuresB. Remove every negative month from the fund returnC. Compare gross fund returns with net benchmark returnsD. Assume all excess return is manager skill
Explanation after you answer
Funding risk
Question 8. A leveraged fund holds illiquid assets financed with short-term borrowing. Its lender sharply increases haircuts. What is the most immediate concern?
Answer to question 8A. An automatic increase in asset incomeB. A permanent reduction in credit spreadsC. Guaranteed redemption inflowsD. Additional collateral needs that may force asset sales
Explanation after you answer
Manager selection
Question 9. A private equity manager reports top-quartile returns based only on exited investments and excludes all remaining holdings. What is the main analytical problem?
Answer to question 9A. Exited investments never generate cashB. The selection omits unresolved investments and may bias performanceC. Realized returns cannot be measuredD. Quartiles remove the need for cash-flow data
Explanation after you answer
Stress testing
Question 10. An allocator models an alternatives portfolio using only correlations from a calm period. Which scenario would most directly test diversification under stress?
Answer to question 10A. Unchanged correlations and guaranteed exitsB. Lower fees with all asset prices fixedC. Rising cross-asset correlations together with delayed redemptionsD. A uniform increase in expected returns with unchanged cash needs
Explanation after you answer

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Questions from the MiloPrep question bank. Independently authored practice, not official exam items. This short set is for learning and does not predict an exam score.

What this Level II MCQ sample can show

The ten questions let you practise selected Level II-style decisions and calculations with explanations. Treat them as a way to inspect your reasoning, not as a weighted representation of the whole exam. The official Level II format also contains constructed response, which this MCQ set does not reproduce.

Write the deciding fact before selecting an option. After answering, explain why the closest alternative fails. If you recognized the correct choice but could not produce the reasoning yourself, add a short written task on the same method before treating the topic as understood.

Extend an MCQ into a written decision

A useful follow-up removes the answer choices and changes the facts. For a liquidity item, calculate the funding position and write the consequence for a proposed allocation. For a manager item, identify the evidence supporting or limiting the claim. This exposes the gap between recognizing an answer and producing one.

Try it before reading the answer

A foundation has $10m of liquid resources, $4m spending and $8m expected calls before reliable inflows. Calculate the funding position and justify a response to a new illiquid commitment.

Show worked answer

The position is 10 - 4 - 8 = -$2m, a $2m shortfall. Defer or reduce the new commitment while establishing a credible funding plan, because existing uses exceed reliable resources. A general statement about diversification would not answer the cash constraint.

Separate selection errors from application errors

If you chose the wrong option, locate the first incorrect assumption or method. If you chose correctly but your explanation cannot connect to the investor, practise application. If your written follow-up omits a requested part, practise outlining commands. These are different repairs even when they arise from the same topic.

Keep a small log of the task, cause and changed-case retest. Repeating the original options can help recall, but an unfamiliar task is needed to see whether the reasoning transfers. Do not interpret a score on ten samples as a pass prediction.

Separate selection errors from application errors
Evidence	Repair	Retest
Wrong model	Reconstruct the method and assumptions	A calculation with different inputs
Generic recommendation	Name the deciding investor constraint	A changed objective or cash need
Incomplete explanation	List the requested outputs first	A short multipart written response

Swipe to read all columns.

What the free Level II PDF adds

The separate email-delivered Level II PDF contains 20 MCQs with answers and explanations. It supports offline practice and annotation. It is not a constructed-response workbook, and neither its length nor this tool’s question count establishes complete exam coverage.

Use the PDF for closed-note attempts and the written guide for producing answers without choices. For complete scope and format familiarity, also use the current official curriculum and samples. An online study account is a separate signup from the PDF request.

CAIA Level II practice questions with explanations

10 free questions

Question 1. An endowment has $12 million of liquid assets, $5 million of expected spending, and $9 million of capital calls due before any reliable inflows. What is the projected liquidity shortfall?

Question 2. A manager values hard-to-price assets internally, reconciles its own positions, and has no independent administrator. What should an allocator investigate most directly?

Question 3. Two alternative strategies have the same standalone volatility. Which strategy generally contributes less variance when added at the same small weight to an existing portfolio?

Question 4. A private fund interest has reported NAV of $20 million and sells at a 15% discount to NAV. Ignore transaction costs and later capital calls. What is the purchase price?

Question 5. A fund starts the year at its high-water mark of $100 million and ends at $112 million before incentive fees. The incentive fee is 20% of gains above that mark. Assume no other fees, hurdle, subscriptions, or withdrawals. What is the incentive fee?

Question 6. A short-volatility strategy earns small gains in calm markets but can suffer large losses in a shock. Which assessment best supplements its average return?

Question 7. An illiquid private credit fund is compared only with a short-term Treasury index. Which adjustment would make the comparison more informative?

Question 8. A leveraged fund holds illiquid assets financed with short-term borrowing. Its lender sharply increases haircuts. What is the most immediate concern?

Question 9. A private equity manager reports top-quartile returns based only on exited investments and excludes all remaining holdings. What is the main analytical problem?

Question 10. An allocator models an alternatives portfolio using only correlations from a calm period. Which scenario would most directly test diversification under stress?