CFA Level 1 Alternative Investments: notes and free practice

1. Question 1 of 10Level I topic sampleAlternative InvestmentsMultiple choice

   A private fund investor commits $500,000. A capital call requires 40% of the original commitment, with no previous calls. How much must be funded?

   A.$500,000B.$200,000C.$300,000
   Answer and explanations

   $500,000 × 40% = $200,000 is called now, leaving $300,000 of the original commitment uncalled.

   Review the method

   • A: The full commitment is not required by this 40% call.
   • B - correct: $500,000 × 40% = $200,000 is called now, leaving $300,000 of the original commitment uncalled.
   • C: $300,000 is the remaining uncalled commitment, not the current call.
2. Question 2 of 10Level I topic sampleAlternative InvestmentsMultiple choice

   In a typical private equity limited partnership, which party manages investments and calls committed capital under the partnership agreement?

   A.The general partnerB.Every limited partner independentlyC.The portfolio company’s customers
   Answer and explanations

   The general partner manages the fund under its agreement; investors generally participate as limited partners.

   Review the method

   • A - correct: The general partner manages the fund under its agreement; investors generally participate as limited partners.
   • B: Limited partners provide commitments but do not each independently direct the fund’s investment decisions.
   • C: Customers of a portfolio company are not the fund’s managing partner.
3. Question 3 of 10Level I topic sampleAlternative InvestmentsMultiple choice

   An investor will need cash in six months. A private fund prohibits redemptions for five years and offers no assured secondary exit. The most direct concern is:

   A.The investment has no market riskB.Its returns must be negativeC.Its liquidity terms conflict with the cash need
   Answer and explanations

   The known cash need precedes the available exit, creating a liquidity mismatch irrespective of expected return.

   Review the method

   • A: Restricted redemption does not eliminate market or business risk.
   • B: Illiquidity does not imply a particular return sign.
   • C - correct: The known cash need precedes the available exit, creating a liquidity mismatch irrespective of expected return.
4. Question 4 of 10Level I topic sampleAlternative InvestmentsMultiple choice

   A fund begins with $100m and earns $10m before fees. Its management fee is 2% of beginning capital; its incentive fee is 20% of gains AFTER the management fee, with no hurdle or high-water mark adjustment. Total fees are:

   A.$4.0mB.$3.6mC.$2.0m
   Answer and explanations

   Management fee = $2m; incentive = 20% × ($10m - $2m) = $1.6m. Total fees are $3.6m.

   Review the method

   • A: $4.0m applies the incentive fee to gains before subtracting the management fee, contrary to the stated order.
   • B - correct: Management fee = $2m; incentive = 20% × ($10m - $2m) = $1.6m. Total fees are $3.6m.
   • C: $2m includes only the management fee and omits the incentive fee.
5. Question 5 of 10Level I topic sampleAlternative InvestmentsMultiple choice

   A fund has paid-in capital of $40m, cumulative distributions of $30m and residual value of $26m. Its TVPI is:

   A.1.40×B.0.75×C.0.65×
   Answer and explanations

   TVPI = ($30m + $26m) / $40m = 1.40×, combining distributed and residual value.

   Review the method

   • A - correct: TVPI = ($30m + $26m) / $40m = 1.40×, combining distributed and residual value.
   • B: 0.75× is DPI, which excludes residual value.
   • C: 0.65× is RVPI, which excludes distributions.
6. Question 6 of 10Level I topic sampleAlternative InvestmentsMultiple choice

   Two funds have equal TVPI but substantially different cash-flow timing. Which conclusion is justified from TVPI alone?

   A.They have identical annualized returnsB.All their gains have been realized in cashC.They have equal total-value multiples, not necessarily equal annualized returns
   Answer and explanations

   TVPI measures total value relative to paid-in capital; different timing can produce different annualized returns.

   Review the method

   • A: TVPI does not incorporate the timing needed to establish an annualized return.
   • B: TVPI includes residual value, so equal multiples do not mean all value has been distributed.
   • C - correct: TVPI measures total value relative to paid-in capital; different timing can produce different annualized returns.
7. Question 7 of 10Level I topic sampleAlternative InvestmentsMultiple choice

   A property has stabilized annual net operating income of $360,000. Using a simple income-capitalization model with an appropriate 6% cap rate, its estimated value is:

   A.$2.16mB.$6.00mC.$3.60m
   Answer and explanations

   $360,000 / 0.06 = $6m under the stated stabilized-income model.

   Review the method

   • A: $2.16m does not result from dividing the stated NOI by the stated cap rate.
   • B - correct: $360,000 / 0.06 = $6m under the stated stabilized-income model.
   • C: $3.6m would use a 10% cap rate rather than 6%.
8. Question 8 of 10Level I topic sampleAlternative InvestmentsMultiple choice

   A privately operated toll road earns revenue solely from actual traffic, without a minimum-revenue guarantee. Which risk does the operator retain?

   A.Demand risk if traffic is below expectationsB.No operating risk because it is infrastructureC.Guaranteed revenue regardless of usage
   Answer and explanations

   Revenue depends on traffic, so lower usage can reduce cash receipts and create demand risk.

   Review the method

   • A - correct: Revenue depends on traffic, so lower usage can reduce cash receipts and create demand risk.
   • B: Infrastructure ownership does not by itself remove operating or demand risk.
   • C: The scenario explicitly excludes a minimum-revenue guarantee.
9. Question 9 of 10Level I topic sampleAlternative InvestmentsMultiple choice

   A commodity futures strategy holds collateral and periodically replaces expiring contracts. Its total return can differ from the commodity’s spot-price return because:

   A.Futures always deliver the exact spot-price returnB.Collateral and contract replacement cannot affect returnC.Collateral income and rolling contracts also affect return
   Answer and explanations

   Futures exposure, roll effects and collateral income can produce a total return different from the spot-price change.

   Review the method

   • A: A futures strategy is not identical to owning the physical commodity at spot.
   • B: Both collateral income and changes associated with rolling contracts can affect strategy returns.
   • C - correct: Futures exposure, roll effects and collateral income can produce a total return different from the spot-price change.
10. Question 10 of 10Level I topic sampleAlternative InvestmentsMultiple choice

    An investor holds a digital asset using a private key. Which statement about losing control of that key is most accurate?

    A.Diversification guarantees recovery of the assetB.Custody and key-management risk remain distinct from market-price riskC.A stable market price eliminates access risk
    Answer and explanations

    An asset can retain market value while custody or key-management failure prevents access, so these risks must be assessed separately.

    Review the method

    • A: Diversification does not restore a lost key or guarantee asset recovery.
    • B - correct: An asset can retain market value while custody or key-management failure prevents access, so these risks must be assessed separately.
    • C: An unchanged market price does not ensure the investor can access or transfer the asset.

Four ideas to put to work

Find the method you need

Start with: Percentages, cash-flow timing and the difference between income and capital value.

Questions about this topic

Does illiquidity necessarily produce a higher realized return?

No. An illiquidity premium is an expectation or required compensation, not a guarantee. Fees, manager execution, leverage, valuation uncertainty and exit conditions can affect the investor’s outcome.

Why do gross and net alternative-investment returns differ?

Fees, carried interest and other costs alter investor cash flows. Read the fund terms and return definition; a gross asset return is not automatically the investor’s net return.

Are MOIC and IRR interchangeable?

No. A money multiple summarizes the ratio of value or proceeds to invested capital under its definition. IRR depends on the timing and pattern of cash flows. The same multiple over different periods can imply different annualized returns.