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Free Questions › CFA › Alternative Investments
Free CFA Alternative Investments Practice Questions & Answers
550 exam-style Alternative Investments questions. Pick your answer, hit Check answer, and see the worked solution — free to start, no signup.
100% free · No login to startQuestion 1
A commodity is best described as:
Select an option first.
Correct answer: B — A standardized physical good used as an input or consumed
Explanation: A commodity is a physical good (like oil, wheat, copper) that is either consumed or used as an input in production, with little differentiation across suppliers. A: Describes equity or debt, not a physical commodity. C: Describes a fixed-income instrument. D: Describes equity, not a physical good.
Question 2
Which statement about spot and futures prices is most accurate?
Select an option first.
Correct answer: C — The spot price reflects current conditions; the futures price reflects expectations plus carrying effects
Explanation: Spot price is the current price for immediate delivery; futures price embeds expectations about future spot plus storage, financing, and convenience yield. A/B: No “always” relationship; markets can be in contango or backwardation. D: Spot markets are actively traded; they’re not just theoretical.
Question 3
A commodity futures curve is said to be in contango when:
Select an option first.
Correct answer: B — Distant contracts are more expensive than near contracts
Explanation: Contango means longer-dated futures prices are higher than near-dated ones. A: That’s backwardation. C: Flat curve, not contango. D: That’s a statement about spot vs futures, not the curve shape itself.
Question 4
In a long futures position, roll return is typically:
Select an option first.
Correct answer: B — Negative in contango and positive in backwardation
Explanation: Rolling a long position in contango means selling cheaper near contracts and buying more expensive far contracts → negative roll return. In backwardation, the opposite → positive roll return. A: Reverses the signs. C: Only true if curve is flat. D: Collateral return is separate (interest on posted collateral).
Question 5
An investor takes a long fully collateralized futures position on a commodity. Over one year: • Spot return: +4% • Roll return: –2% • Collateral (risk-free) return: +3% What is the total return?
Select an option first.
Correct answer: A — 5%
Explanation: Calculation: Total return = spot return + roll return + collateral return = 4% – 2% + 3% = 5% B (7%): Ignores negative roll. C (1%): Ignores collateral. D (9%): Adds incorrectly.
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Question 6
The convenience yield in commodity pricing is best described as:
Select an option first.
Correct answer: B — The benefit of holding the physical commodity rather than a futures contract
Explanation: Convenience yield is the non-monetary benefit of having physical inventory (e.g., avoiding stock-outs, operational flexibility). A: That’s storage cost. C: That’s a discount rate. D: Not the definition.
Question 7
Under the hedging pressure hypothesis, futures prices tend to:
Select an option first.
Correct answer: B — Reflect a risk premium depending on whether hedgers are mainly producers or consumers
Explanation: If producers dominate hedging (short hedgers), they may pay a risk premium to speculators, affecting futures prices; similarly for consumers. A: Ignores risk premia. C: Directly contradicts the hypothesis. D: Storage is only one component.
Question 8
A commodity has: • Spot price: 100 • Near futures price (3 months): 104 What is the basis, and what is the market state? A. Basis = +4; backwardation B. Basis = –4; contango C. Basis = –4; backwardation D. Basis = +4; contango
Select an option first.
Correct answer: B — Basis = –4; contango
Explanation: Calculation: Basis = spot – futures = 100 – 104 = –4 Negative basis → futures > spot → contango. A/D: Wrong sign or wrong state. C: Wrong sign and state pairing.
Question 9
A long futures investor rolls from a near contract priced at 90 to a far contract priced at 95. Ignoring everything else, the roll return from this roll is:
Select an option first.
Correct answer: B — Negative
Explanation: They sell the near at 90 and buy the far at 95 → they “pay up” to roll → negative roll return. A: Would require buying cheaper, selling more expensive. C: Only if prices were equal. D: Prices are sufficient to infer sign. Topic 2: Direct Real Estate & Valuation
Question 10
A key distinguishing feature of direct real estate compared with listed stocks is:
Select an option first.
Correct answer: C — It is heterogeneous and location-specific
Explanation: Each property is unique in location, design, tenants, and local market conditions. A: Direct real estate is generally less liquid. B: Market value, not just book value, matters. D: Property values are often interest-rate sensitive.
Question 11
A property generates current net operating income (NOI) of 500,000 per year. The appropriate capitalization rate is 8%. What is the estimated value using direct capitalization?
Select an option first.
Correct answer: B — 6,250,000
Explanation: Calculation: Value = NOI / cap rate = 500,000 / 0.08 = 6,250,000 A/C/D: Incorrect division.
Question 12
All else equal, an increase in the required return on real estate (discount rate) will:
Select an option first.
Correct answer: B — Decrease the property’s value
Explanation: Higher required return → higher cap rate → lower value for a given NOI. A: Opposite effect. C: Discount rate is a key input. D: NOI is an operating measure, not directly changed by discount rate.
Question 13
A property is valued at 12,000,000 and generates NOI of 900,000. What is the implied capitalization rate?
Select an option first.
Correct answer: B — 7.5%
Explanation: Calculation: Cap rate = NOI / value = 900,000 / 12,000,000 = 0.075 = 7.5% A/C/D: Incorrect ratios.
Question 14
The sales comparison approach to valuing real estate is most appropriate when:
Select an option first.
Correct answer: A — There are many recent transactions of similar properties
Explanation: Sales comparison works best when there are enough similar, recent transactions to benchmark prices. B/D: Unique properties are harder to value with comparables. C: Income approach may be less relevant, but sales comparison still needs comparables.
Question 15
Which statement best describes illiquidity risk in direct real estate?
Select an option first.
Correct answer: B — The risk that properties cannot be sold quickly without a price discount
Explanation: Illiquidity risk is about difficulty selling quickly at fair value. A: That’s tenant credit risk. C/D: These are macro/tax changes, not illiquidity. Topic 3: Listed Real Estate & REITs
Question 16
A major advantage of investing in a diversified real estate investment trust (REIT) compared with owning a single building directly is:
Select an option first.
Correct answer: C — Greater diversification across properties and tenants
Explanation: REITs typically hold many properties, spreading tenant and property-specific risk. A: Direct ownership gives more control. B: REITs are listed and often correlated with equities. D: No guarantee of higher returns.
Question 17
Funds From Operations (FFO) for a property company is generally intended to:
Select an option first.
Correct answer: B — Remove non-cash depreciation to better reflect cash-generating ability
Explanation: FFO typically adds back depreciation and certain non-cash items to net income to approximate recurring cash flow from operations. A: FFO is an adjusted measure, not equal to net income. C: Rental income is central. D: Gains on sales are usually adjusted out for recurring FFO.
Question 18
A listed property company has: • Estimated market value of properties: 1,000 million • Debt at market value: 400 million • Cash: 50 million • Shares outstanding: 50 million What is the estimated NAV per share?
Select an option first.
Correct answer: B — 13
Explanation: Calculation: NAV = property value + cash – debt = 1,000 + 50 – 400 = 650 million NAV per share = 650 / 50 = 13.0 A/C/D: Incorrect arithmetic.
Question 19
NAV estimates for listed property companies become less reliable when:
Select an option first.
Correct answer: A — Transaction volumes in the property market are very low
Explanation: With few transactions, appraisals and cap rates become more subjective, making NAV more uncertain. B/C/D: These conditions generally improve valuation reliability.
Question 20
A dedicated short-bias hedge fund is most exposed to:
Select an option first.
Correct answer: A — Rising equity markets
Explanation: Short-biased funds benefit from falling markets and are hurt when markets rise. B: That’s when they tend to profit. C/D: These may matter, but equity direction is primary.
Question 21
Direct real estate is considered heterogeneous because:
Select an option first.
Correct answer: A — Properties differ in location, design, and tenants
Explanation: No two properties are identical; each has unique characteristics. B: Buildings differ widely. C: Prices fluctuate. D: Direct real estate is usually private.
Question 22
Which of the following is a primary driver of property value?
Select an option first.
Correct answer: A — Tenant credit quality
Explanation: Strong tenants reduce risk and support stable income. B/C: Physical features matter less than income. D: Age matters only with condition and upgrades.
Question 23
Net Operating Income (NOI) excludes:
Select an option first.
Correct answer: C — Debt payments
Explanation: NOI is before financing costs. A/B/D: These are operating expenses included in NOI.
Question 24
A property with long-term leases to strong tenants typically has:
Select an option first.
Correct answer: A — Higher income stability
Explanation: Long leases stabilize cash flow. B: Vacancy risk is lower. C: Due diligence is always needed. D: All real estate is cyclical.
Question 25
Which factor most directly increases a property’s market rent potential?
Select an option first.
Correct answer: A — Improved local employment
Explanation: Strong job markets increase demand for space. B/C/D: These increase costs, not rent potential.
Question 26
A triple-net lease typically requires the tenant to pay:
Select an option first.
Correct answer: B — Rent plus property taxes, insurance, and maintenance
Explanation: Triple-net shifts most expenses to the tenant. A/C/D: Too narrow.
Question 27
Which is a major disadvantage of direct real estate?
Select an option first.
Correct answer: C — High transaction costs
Explanation: Buying/selling property is expensive. A/B: Real estate is illiquid and less transparent. D: Income is never guaranteed.
Question 28
A property in a market with oversupply is likely to experience:
Select an option first.
Correct answer: C — Pressure on rental rates
Explanation: Excess supply pushes rents down. A/B: Oversupply increases vacancy and lowers rents. D: No guarantee.
Question 29
Which due diligence step helps identify environmental risks?
Select an option first.
Correct answer: B — Conducting a Phase I environmental assessment
Explanation: Phase I identifies contamination risks. A/C/D: Not environmental.
Question 30
A property with short lease terms is more sensitive to:
Select an option first.
Correct answer: B — Short-term market rent changes
Explanation: Short leases reset quickly to market conditions. A/C/D: Less direct impact.
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