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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 451
The capitalization rate (cap rate) for a property is calculated as:
Select an option first.
Correct answer: A — NOI / Property Value (or Purchase Price)
Explanation: Cap rate = NOI / Property Value. It represents the property's unlevered yield. A lower cap rate indicates higher valuations relative to income (similar to a P/E ratio). B is the property value multiple. C uses gross, not net income. D uses debt.
Question 452
A property generates NOI of $500,000 annually. Comparable properties trade at a 5% cap rate. The property's estimated value is:
Select an option first.
Correct answer: C — $10,000,000
Explanation: Value = NOI / Cap rate = $500,000 / 0.05 = $10,000,000. A divides wrong. B and D use wrong cap rates.
Question 453
The term 'Core' real estate strategy refers to:
Select an option first.
Correct answer: B — Investments in stable, income-producing, well-leased properties in prime locations with low leverage
Explanation: Core strategies focus on stabilized, income-generating, institutional-quality properties in established markets with low leverage. They offer predictable cash flows but modest returns. Contrast with Core-Plus, Value-Add, and Opportunistic strategies which involve more risk/return. A, C, D describe higher-risk strategies.
Question 454
Value-add real estate investments differ from core investments primarily by:
Select an option first.
Correct answer: B — Requiring active management to improve properties that have some vacancy or operational issues, targeting higher returns through enhancement
Explanation: Value-add strategies acquire properties with moderate vacancy, deferred maintenance, or below-market leases and improve them operationally, structurally, or financially. Risk is higher than core but lower than opportunistic. A, C, D are wrong.
Question 455
Which of the following is a direct benefit of real estate in a multi-asset portfolio?
Select an option first.
Correct answer: B — Potential inflation protection, income generation, and diversification through low correlation with traditional assets
Explanation: Real estate provides income (rents), inflation protection (rents rise with inflation), and diversification (low correlation with stocks and bonds). A is the opposite of diversification benefit. C is incorrect. D is wrong — RE is appraised, not daily priced.
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Question 456
Infrastructure investments are distinguished from other real assets by:
Select an option first.
Correct answer: C — Essential public service characteristics, long useful life (20-50+ years), regulated or contracted revenues, and inflation-linked cash flows
Explanation: Infrastructure assets (airports, highways, utilities, pipelines) serve essential needs, have extremely long lives, and generate predictable, often inflation-indexed revenues under regulation or long-term contracts. A, B, D are wrong.
Question 457
'Brownfield' infrastructure investments involve:
Select an option first.
Correct answer: B — Investing in already-operating infrastructure assets — purchasing existing assets with established cash flows
Explanation: Brownfield investments acquire operational infrastructure (existing toll roads, airports) with track records and immediate cash flows. They are lower risk than greenfield. A is greenfield. C is natural resources. D is greenfield energy.
Question 458
A 'greenfield' infrastructure project involves:
Select an option first.
Correct answer: C — Constructing new infrastructure from scratch — bearing construction risk but potentially earning higher returns
Explanation: Greenfield projects are built from the ground up. They carry construction risk, permitting risk, and ramp-up risk — but offer higher return potential. A and D are brownfield. B is listed equity.
Question 459
Commodities as investments include all of the following EXCEPT:
Select an option first.
Correct answer: D — Shares of a gold mining company
Explanation: Shares of a mining company are equity, not a commodity. They are correlated with commodity prices but also affected by company management, costs, and leverage. A, B, C are all direct or derivative forms of commodity exposure.
Question 460
Which of the following best explains why commodities are used as inflation hedges in portfolios?
Select an option first.
Correct answer: C — Commodity prices often rise with inflation because they are inputs to goods production — rising costs show up in commodity prices
Explanation: Commodity prices are often a direct driver of inflation (energy, food). When input costs rise, it shows up in CPI. Holding commodities provides a natural hedge against unexpected inflation. A and B are wrong. D is wrong — commodities generate no income.
Question 461
A commodity futures contract that is in 'contango' means:
Select an option first.
Correct answer: B — The futures price is above the spot price — indicating higher expected future prices or storage costs
Explanation: Contango: futures price > spot price. This can reflect storage costs, financing costs, or expectations of higher future prices. Investors in futures roll at a loss (selling low expiry, buying higher next one) — negative roll yield. A is backwardation. C is flat curve. D is wrong.
Question 462
A commodity futures market in 'backwardation' is characterized by:
Select an option first.
Correct answer: B — Futures prices below spot prices — often due to strong near-term demand or low inventories
Explanation: Backwardation occurs when near-term supply is tight or demand is high relative to future supply expectations. Futures are priced below spot. Roll yield is positive — investors benefit from rolling futures. A is contango. C is flat. D is unrelated.
Question 463
Farmland investment provides which of the following return components?
Select an option first.
Correct answer: C — Income from crop sales or lease payments plus potential capital appreciation from land value changes
Explanation: Farmland generates income (crop revenue or cash rent from tenant farmers) and capital appreciation as land values change. This dual return source plus inflation-hedging makes it attractive. A, B, D are wrong.
Question 464
Timberland investing provides which unique feature not found in most other investments?
Select an option first.
Correct answer: C — Biological growth — trees grow in volume (and value) regardless of market conditions, providing a 'natural store' of value
Explanation: Timber's biological growth means the investment appreciates even without market price gains. Harvesting can be deferred during low-price periods (the 'inventory on the stump' option), adding flexibility. A, B, D are wrong.
Question 465
The 'total return' on a commodity investment via futures consists of:
Select an option first.
Correct answer: C — Spot price return plus roll yield plus collateral return (interest on margin posted)
Explanation: Commodity futures total return = spot return (price change of underlying) + roll yield (gain/loss from rolling expiring futures to next contract) + collateral return (interest on T-bills posted as margin). A is incomplete. B omits collateral. D applies to equities, not commodities.
Question 466
Real estate's main source of return from an investor's perspective includes:
Select an option first.
Correct answer: C — Both rental income (current income) and property value appreciation (capital gain), plus potential tax benefits
Explanation: Real estate generates income (rental cash flows) and capital gains (appreciation). Tax benefits (depreciation deductions) add a third component. A and B are each only partial. D is wrong.
Question 467
The Net Asset Value (NAV) of a non-traded REIT is:
Select an option first.
Correct answer: C — An appraised estimate of the underlying property values less liabilities, divided by shares outstanding
Explanation: Non-traded REITs are not exchange-listed, so their value is based on periodic appraisals of underlying properties. NAV per share = (Appraised property values − Liabilities) / Shares. A and D apply to listed securities. B is for listed companies only.
Question 468
Which infrastructure investment characteristic makes it most attractive as an inflation hedge?
Select an option first.
Correct answer: B — Revenue is often contractually linked to inflation (e.g., regulated tariff increases, CPI-adjusted tolls)
Explanation: Many infrastructure contracts explicitly index revenues to inflation indices (CPI, RPI). Toll roads, utilities, and airports often have tariffs that rise automatically with inflation. A, C, D are wrong.
Question 469
A property has gross potential rent of $600,000, vacancy/credit loss of 5%, and operating expenses of $180,000. What is the NOI?
Select an option first.
Correct answer: A — $390,000
Explanation: Effective gross income = $600,000 × (1−0.05) = $570,000. NOI = $570,000 − $180,000 = $390,000. B and C would need different vacancy or expenses. D is gross rent only.
Question 470
A property is purchased for $5,000,000. Annual NOI is $300,000. Cap rate is:
Select an option first.
Correct answer: B — 6%
Explanation: Cap rate = NOI/Value = $300,000/$5,000,000 = 6.0%. A would need NOI=$250,000. C would need NOI=$500,000. D would need NOI=$150,000.
Question 471
A REIT distributes $3.00 per share annually. Required return = 7%. Using a perpetuity model, intrinsic value per share is:
Select an option first.
Correct answer: A — $42.86
Explanation: Value = Distribution / Required return = $3.00 / 0.07 = $42.86. B uses 14.3%. C uses 10%. D uses 5.33%.
Question 472
Property: $10M purchase, $8M debt, $2M equity. NOI=$600,000, annual interest=$400,000. Cash-on-cash return on equity is:
Select an option first.
Correct answer: B — 10%
Explanation: Cash flow = $600,000 − $400,000 = $200,000. Return on equity = $200,000/$2,000,000 = 10.0%. A uses NOI/purchase price. C doubles. D is wrong.
Question 473
Total return on a commodity futures position: spot return +3%, roll yield −2%, collateral return +2%. Total return is:
Select an option first.
Correct answer: A — 3%
Explanation: Total return = 3% + (−2%) + 2% = 3%. B would need roll = −4%. C would need roll = 0%. D would need spot = −1%.
Question 474
Which of the following BEST explains why infrastructure investments are often described as 'defensive'?
Select an option first.
Correct answer: C — Essential services with regulated or contracted revenues generate stable, predictable cash flows regardless of economic cycles
Explanation: Utilities, toll roads, and airports serve essential needs that persist even in recessions (though at lower volumes). Regulated or contracted revenues provide downside protection. A and B are too absolute. D is wrong.
Question 475
Real estate investment strategies from lowest to highest expected return (and risk) are typically ordered as:
Select an option first.
Correct answer: B — Core, Core-Plus, Value-Add, Opportunistic
Explanation: The risk-return spectrum: Core (stable, low risk/return) → Core-Plus (slightly more risk) → Value-Add (moderate risk, improvement required) → Opportunistic (highest risk — development, distress, emerging markets). B is correct. A reverses. C and D are wrong.
Question 476
A commodity is said to have a 'convenience yield' when:
Select an option first.
Correct answer: C — Holding the physical commodity provides a benefit (e.g., ensuring production continuity) that futures holders do not enjoy
Explanation: Convenience yield is the non-monetary benefit of holding physical commodities — e.g., a manufacturer holds oil to ensure uninterrupted production. This benefit accrues only to physical holders, not futures owners. A is wrong. B ignores the benefit concept. D is contango (negative convenience yield scenario.
Question 477
Which feature of real estate makes it a potential inflation hedge?
Select an option first.
Correct answer: C — Rents and property values tend to rise with inflation because replacement costs and income streams are inflation-sensitive
Explanation: Construction costs, replacement values, and tenant income (which feeds rents) all tend to rise with inflation. Landlords can increase rents over time, preserving real income. A and D are wrong. B is the opposite of the correct relationship.
Question 478
Which of the following distinguishes farmland from timberland as investment types?
Select an option first.
Correct answer: A — Farmland can be harvested and replanted annually; timberland involves longer biological growth cycles with the flexibility to defer harvest
Explanation: Farmland produces crops annually — income is more regular but tied to commodity prices and weather. Timberland grows slowly (decades) and the harvest can be deferred — trees grow in value when prices are low. A correctly identifies the key distinction. B, C, D are wrong.
Question 479
The 'economic obsolescence' risk in real estate refers to:
Select an option first.
Correct answer: C — Loss of value due to external factors — such as neighborhood decline, new competing development, or changes in demand for the property type
Explanation: Economic (external) obsolescence is not caused by the property itself but by changes in the surrounding environment or market demand. A neighborhood declining, a new transit hub opening elsewhere, or a shift to remote work reducing office demand are examples. A is physical. B is legal. D is financial.
Question 480
Which of the following BEST describes the risk of 'functional obsolescence' in commercial real estate?
Select an option first.
Correct answer: B — Risk that the building no longer meets current user standards due to outdated design or technology
Explanation: Functional obsolescence occurs when a building's design, layout, or systems are outdated relative to market standards — e.g., an office building without modern HVAC or fiber optic infrastructure. A is casualty risk. C is economic risk. D is REIT market risk.
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