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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 421
The term 'capital overhang' in PE refers to:
Select an option first.
Correct answer: B — Capital committed to PE funds that has not yet been deployed into investments
Explanation: Capital overhang (dry powder) = committed but uncalled capital. When PE fundraising is strong, overhang builds — suggesting future deployment pressure that can bid up acquisition prices. A is fees. C and D are portfolio or balance sheet issues.
Question 422
A PE fund that uses an 'American waterfall' pays carried interest:
Select an option first.
Correct answer: B — On a deal-by-deal basis as individual investments are realized
Explanation: American (deal-by-deal) waterfall pays carry as each deal exits, accelerating GP compensation. Risk: if early deals succeed but later ones fail, the GP is overpaid (hence clawback provisions). European waterfall waits for all capital + preferred return. A is European. C and D are wrong.
Question 423
In private equity, an 'add-on' acquisition strategy involves:
Select an option first.
Correct answer: B — A portfolio company acquiring smaller companies to grow by acquisition (buy-and-build strategy)
Explanation: Buy-and-build (add-on): a PE-owned platform company acquires smaller businesses in the same or adjacent sectors. This creates synergies, scale, and higher exit multiples. A, C, D are wrong.
Question 424
A 'zombie fund' in private equity refers to:
Select an option first.
Correct answer: B — A fund past its original term with unrealized investments still being managed, often with diminishing GP effort as fees decline
Explanation: Zombie funds arise when PE investments haven't been exited after the fund's planned term. The GP may lack incentive to maximize value (no carry left, low fees) while LPs are locked in. A, C, D are wrong.
Question 425
Which of the following metrics best measures how much cash an LP has actually received back?
Select an option first.
Correct answer: C — DPI (Distributions to Paid-In)
Explanation: DPI = total distributions / paid-in capital. It is the only measure of actual cash returned to LPs. TVPI (A) includes unrealized value. IRR (B) is a rate measure. RVPI (D) is unrealized value only.
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Question 426
Private credit strategies offering floating-rate loans provide which benefit in a rising rate environment?
Select an option first.
Correct answer: B — Floating rates reset with market rates, protecting investors from the price decline suffered by fixed-rate bonds when rates rise
Explanation: Floating-rate loans (LIBOR/SOFR + spread) reset periodically, so their cash flows increase as rates rise. Investors avoid the price depreciation that fixed-rate bond holders face. A is wrong. C ignores credit risk. D is the opposite.
Question 427
Senior secured private debt has priority over unsecured debt in a default scenario because:
Select an option first.
Correct answer: C — Senior secured lenders have a legal claim (lien) on specific assets of the borrower, which must be satisfied before other creditors
Explanation: 'Secured' means the loan is backed by collateral — specific assets the lender can seize in default. 'Senior' means first priority among creditors. Combined, senior secured is the safest debt layer. A and B are wrong. D is not the reason — it's a consequence of the security.
Question 428
Which of the following BEST describes the relationship between PE fund performance and macroeconomic conditions at fund vintage year?
Select an option first.
Correct answer: B — Funds raised at market peaks (high valuations, loose credit) often face higher entry prices and may deliver lower returns than funds raised during downturns
Explanation: Entry valuations and credit conditions at vintage year significantly influence outcomes. Funds raised during boom periods (2006-07, 2021) entered at higher multiples and later faced tighter credit — often underperforming funds raised in downturns. A and D ignore market effects. C is too absolute.
Question 429
A fund of funds (FoF) investor pays fees at two levels: the FoF level AND the underlying fund level. If underlying funds charge 2% management + 20% performance, and the FoF charges 1% + 10%, total fee burden:
Select an option first.
Correct answer: C — Combines both layers — approximately 3% management and 30% performance drag on gross returns
Explanation: FoF investors bear the full fee load of both layers: ~2%+1%=3% management fees and ~20%+10%=30% performance fee drag on gross returns. This significantly erodes net returns vs. direct fund access. A and B are partial. D is wrong.
Question 430
Mezzanine debt investments provide returns through which combination?
Select an option first.
Correct answer: C — Current interest income (often PIK or cash) plus potential equity upside through warrants or conversion features
Explanation: Mezzanine debt earns: (1) high current interest (often partly PIK — payment-in-kind), plus (2) equity kickers (warrants, conversion rights) that provide upside if the company performs well. This combination targets returns between senior debt and equity. A, B, D are wrong.
Question 431
The main difference between private equity and venture capital is:
Select an option first.
Correct answer: B — Venture capital targets early-stage companies; private equity typically targets mature companies through buyouts or growth capital
Explanation: VC focuses on early-stage, high-growth, often unprofitable companies. PE buyouts target mature, cash-generating companies that can support debt. A is wrong. C is wrong — LBOs use substantial debt. D is wrong — PE funds are typically much larger.
Question 432
A leveraged buyout fund acquires a company for $100M (70% debt, 30% equity). After 5 years, the company is sold for $160M, with $50M debt outstanding. Equity value at exit:
Select an option first.
Correct answer: B — $110M
Explanation: Equity at exit = Sale price − Remaining debt = $160M − $50M = $110M. A uses $160M − $70M (initial debt). C is total sale price. D is remaining debt.
Question 433
From above, initial equity invested = $30M. Exit equity = $110M. MOIC on equity is:
Select an option first.
Correct answer: C — 3.67x
Explanation: MOIC = $110M / $30M = 3.67x. Leverage amplified the 1.6x total return ($160M/$100M) to 3.67x for equity holders. A is total deal MOIC. B and D are wrong.
Question 434
Which of the following factors is MOST likely to drive higher returns in a PE buyout fund?
Select an option first.
Correct answer: A — Acquiring companies at low valuation multiples and exiting at higher multiples (multiple expansion)
Explanation: PE returns come from: EBITDA growth (operational improvement), leverage (debt paydown amplifying equity returns), and multiple expansion (buying cheap, selling at higher valuation). Multiple expansion is often the largest driver in favorable markets. B, C, D reduce return potential.
Question 435
A growth equity investment typically involves which ownership stake?
Select an option first.
Correct answer: C — A minority stake (typically 10-40%) without change in control, providing capital for expansion
Explanation: Growth equity provides expansion capital to established companies via minority stakes. Unlike buyouts (100% or majority control), growth equity investors partner with founders/management without forcing a change of control. A and B describe buyouts. D is a passive financial investment.
Question 436
Which of the following BEST describes 'infrastructure debt' as a private capital strategy?
Select an option first.
Correct answer: C — Long-term loans or bonds secured by infrastructure assets — offering stable, inflation-linked income with relatively low credit risk
Explanation: Infrastructure debt finances specific assets (toll roads, pipelines) secured by those assets and their contracted cash flows. Typical maturities are 10-30 years with investment-grade risk profiles. A is equity. B is short-term. D is government bonds.
Question 437
The concept of 'loss ratio' in private debt refers to:
Select an option first.
Correct answer: C — The realized credit loss on a loan = probability of default × loss given default (LGD)
Explanation: In credit analysis, expected loss = PD × LGD. Loss ratio measures realized credit losses on the lending portfolio. A is incomplete. B is cumulative fund loss. D is fee efficiency.
Question 438
A buyout fund purchased a company at 8x EBITDA. EBITDA grew from $50M to $75M over 5 years. If the fund exits at 10x EBITDA, what is the exit enterprise value?
Select an option first.
Correct answer: B — $750M
Explanation: Exit EV = Exit EBITDA × Exit multiple = $75M × 10x = $750M. A is 10×$50M (using entry EBITDA). C and D are wrong.
Question 439
From above, entry enterprise value was 8x$50M=$400M. If the fund used 60% debt ($240M), initial equity = $160M. With $150M remaining debt at exit, equity value at exit ($750M−$150M=$600M). Equity MOIC = $600M/$160M =
Select an option first.
Correct answer: A — 3.75x
Explanation: MOIC = $600M / $160M = 3.75x. The combination of EBITDA growth (50% improvement) + multiple expansion (8x→10x) + leverage amplification drove this return. B, C, D are wrong.
Question 440
The percentage of PE fund profits that exceeds both the return of capital AND the preferred return, which is split between the GP and LPs according to carried interest agreements, is called:
Select an option first.
Correct answer: C — The residual profit or 'upside' that the carried interest applies to
Explanation: After LPs receive capital back + preferred return, remaining 'upside' profits are subject to the carried interest split (typically 80% LP, 20% GP). This is the profit pool that the carry mechanism targets. A is the preferred return amount. B is vague. D is a return mechanism.
Question 441
Which of the following private equity structures allows multiple investors with different tax needs to invest in the same fund without adverse tax consequences for one another?
Select an option first.
Correct answer: B — A parallel fund structure — separate onshore and offshore vehicles making identical investments proportionally
Explanation: Parallel funds allow US taxable investors in one LP, US tax-exempt investors in another (offshore blocker), and foreign investors in a third — all investing side-by-side in the same deals. This addresses each group's specific tax concerns. A and C create conflicts. D is wrong.
Question 442
Which private equity strategy involves investing in publicly listed companies that are undervalued, with the intention of taking them private?
Select an option first.
Correct answer: C — Public-to-private (P2P) buyout — taking a listed company private
Explanation: Public-to-private (P2P) transactions take listed companies off exchanges via PE-backed acquisition. This accesses undervalued public companies that may benefit from private ownership (no quarterly earnings pressure, long-term focus). A is wrong. B is minority growth capital. D is buying LP interests.
Question 443
The term 'portfolio company' in private equity refers to:
Select an option first.
Correct answer: C — A company that a PE fund has acquired and actively manages as an investment
Explanation: Portfolio companies are the underlying investments made by a PE fund — companies acquired and managed with the goal of improving performance and eventually exiting at a profit. A is public market. B misidentifies the fund. D is a service provider.
Question 444
Which of the following PE performance metrics accounts for BOTH realized and unrealized value?
Select an option first.
Correct answer: C — TVPI (Total Value to Paid-In) = DPI + RVPI
Explanation: TVPI = Total value (realized distributions + unrealized NAV) / Paid-in capital. It captures the full picture — what has been paid out AND what remains. DPI (A) = only realized. IRR (B) = rate, not value multiple. RVPI (D) = only unrealized.
Question 445
Infrastructure investments are typically classified into 'social' and 'economic' infrastructure. Schools and hospitals are examples of:
Select an option first.
Correct answer: C — Social infrastructure — serving social needs rather than economic/commercial functions
Explanation: Social infrastructure (hospitals, schools, prisons, government buildings) serves public/social purposes rather than commercial ones. Economic infrastructure (transport, energy, utilities) drives economic activity. A and B are economic infrastructure. D is also economic.
Question 446
A PE fund invested $5M in a company that went bankrupt and returned $0. DPI contribution from this investment is:
Select an option first.
Correct answer: A — 0x
Explanation: DPI = distributions / invested capital = $0 / $5M = 0x. The investment is a write-off — zero return. DPI cannot be negative because distributions cannot be negative. A is correct. B would require returning more than invested (impossible). C and D are wrong.
Question 447
Real estate as an investment asset class is BEST characterized by:
Select an option first.
Correct answer: B — Long asset life, location dependence, heterogeneity, and ability to generate both income and capital appreciation
Explanation: Real estate is distinguished by: durability (long-lived assets), location specificity, heterogeneity (no two properties identical), high transaction costs, and dual return sources (income + appreciation). A is wrong — real estate is illiquid. C and D are wrong.
Question 448
A Real Estate Investment Trust (REIT) allows investors to:
Select an option first.
Correct answer: C — Access real estate returns through a publicly traded entity that owns and operates income-producing properties
Explanation: REITs are publicly listed companies that own real estate assets and must distribute most of their income (typically 90%+) to shareholders. They provide liquidity, diversification, and professional management. A is direct ownership. B is limited partnership. D is too narrow.
Question 449
Which of the following describes a Real Estate Limited Partnership (RELP)?
Select an option first.
Correct answer: B — A partnership structure where a GP manages the real estate and LPs provide capital
Explanation: RELPs have a GP (sponsor/manager) who manages properties and LPs (investors) who provide capital and have limited liability. They are private, illiquid, and typically focused on specific real estate projects. A is REIT. C is a government agency. D is a real estate mutual fund.
Question 450
The Net Operating Income (NOI) of a property is calculated as:
Select an option first.
Correct answer: B — Gross potential rental income minus vacancy, credit loss, and operating expenses (excluding financing costs)
Explanation: NOI = Effective gross income − Operating expenses. It excludes financing costs (interest, principal) and taxes, making it useful for comparing property performance regardless of capital structure. A, C, D are incomplete or wrong.
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