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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 481
The Gross Rent Multiplier (GRM) is calculated as:
Select an option first.
Correct answer: B — Property Price / Annual Gross Rent
Explanation: GRM = Property Price / Annual Gross Rent. It is a quick valuation shortcut — lower GRM means cheaper relative to rents. It does NOT account for operating expenses, so it is less precise than cap rate. A is cap rate. C is equity yield. D is monthly yield.
Question 482
Which of the following REITs primarily invests in office, retail, and industrial properties?
Select an option first.
Correct answer: C — Equity REIT — specifically a commercial REIT
Explanation: Equity REITs own and operate physical properties. Commercial equity REITs hold office buildings, shopping centers, and industrial warehouses. Healthcare REITs own hospitals, senior housing. Residential REITs own apartments. Mortgage REITs (D) invest in MBS, not physical property.
Question 483
A mortgage REIT primarily generates returns by:
Select an option first.
Correct answer: C — Investing in mortgages and mortgage-backed securities, earning the spread between borrowing costs and mortgage yields
Explanation: Mortgage REITs are financial leveraged entities — they borrow at short-term rates and invest in longer-term mortgages/MBS, earning the spread. They don't own physical property. A and B are equity REIT activities. D is infrastructure.
Question 484
The leverage ratio commonly used in real estate is the Loan-to-Value (LTV) ratio, calculated as:
Select an option first.
Correct answer: B — Loan Balance / Property Value
Explanation: LTV = Loan / Property Value. E.g., $7M loan on $10M property = 70% LTV. Higher LTV = more leverage = more risk. A is not LTV. C is the leverage multiple. D is the Debt Service Coverage Ratio.
Question 485
The Debt Service Coverage Ratio (DSCR) in real estate is:
Select an option first.
Correct answer: A — NOI / Annual Debt Service (principal + interest payments)
Explanation: DSCR = NOI / Annual Debt Service. A DSCR above 1.0 means the property generates enough income to cover debt payments. Lenders typically require DSCR > 1.2. B is the inverse. C is 1/LTV. D is equity ratio.
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Question 486
Which of the following is NOT a typical component of infrastructure investment returns?
Select an option first.
Correct answer: C — Daily trading profits from buying and selling infrastructure on exchanges
Explanation: Infrastructure returns come from contracted income distributions, inflation-indexed revenue growth, and capital appreciation (yield compression). Daily trading profits are not a feature — infrastructure is illiquid. A, B, D are real return components.
Question 487
'Regulated' infrastructure assets (e.g., electricity distribution) differ from 'contracted' assets (e.g., solar farms) primarily in that:
Select an option first.
Correct answer: C — Regulated assets' revenues are set by a government regulator rather than long-term bilateral contracts
Explanation: Regulated assets (utilities) have revenues determined by regulatory bodies (e.g., Ofgem in UK) — predictable but subject to regulatory reset risk. Contracted assets (PPAs, availability-based roads) have bilateral long-term agreements. A, B, D are wrong.
Question 488
In commodity markets, the 'spot price' refers to:
Select an option first.
Correct answer: B — The current market price for immediate delivery of a commodity
Explanation: Spot price = current cash price for immediate or near-immediate delivery. Futures prices are for future delivery. A is futures price. C is historical average. D may affect spot but is not the definition.
Question 489
The roll yield in a commodity futures strategy is:
Select an option first.
Correct answer: C — The gain or loss from rolling an expiring futures contract to the next contract — positive in backwardation, negative in contango
Explanation: When rolling futures: if the next contract is cheaper (backwardation), you buy low → positive roll yield. If the next is more expensive (contango), you buy high → negative roll yield. A is equity income. B is collateral yield. D is spot return.
Question 490
A timberland investor can 'store' their inventory in a way that other commodity investors cannot. This flexibility means:
Select an option first.
Correct answer: C — Harvestable trees continue to grow in biomass while waiting for better prices — allowing deferral of harvest without significant loss
Explanation: Trees grow even when not harvested. If lumber prices are low, investors can defer cutting and let trees grow larger (more volume, more value). This biological growth provides optionality. A, B, D are wrong.
Question 491
Which of the following is a key due diligence consideration unique to farmland investment?
Select an option first.
Correct answer: C — Soil quality, water availability, crop suitability, and climate risk — physical characteristics that determine productivity
Explanation: Farmland value depends on physical characteristics: soil fertility, irrigation water access, crop type suitability, climate risk, and local commodity markets. These are unique to farmland vs. financial investments. A, B, D apply to financial assets, not farmland.
Question 492
NOI for a property = $400,000. Market cap rate = 4.5%. Estimated value is:
Select an option first.
Correct answer: A — $8,888,889
Explanation: Value = NOI/Cap rate = $400,000/0.045 = $8,888,889. B and D are wrong. C uses 4.44% not 4.5%.
Question 493
A property was bought for $2M, renovated (value-add), and sold for $3.2M 3 years later. Total rent collected = $300,000. Total return on equity (assume all equity, no debt) is:
Select an option first.
Correct answer: B — 75%
Explanation: Total gain = ($3.2M − $2M) + $300,000 = $1.2M + $0.3M = $1.5M. Total return = $1.5M/$2M = 75%. A uses only capital gain. C and D are wrong.
Question 494
An infrastructure fund pays a 6% distribution on $50M investment annually. Annual cash return is:
Select an option first.
Correct answer: A — $3M
Explanation: Cash return = 6% × $50M = $3M per year. B is 0.6%. C is 60%. D is 1%.
Question 495
A cap rate compression means:
Select an option first.
Correct answer: C — Cap rates are decreasing, indicating rising property values relative to income (investors accept lower yields)
Explanation: Cap rate compression = cap rates falling = investors pay more per dollar of NOI = property values rise. This is typically driven by strong investor demand, low interest rates, or perception of lower risk. A and B are opposite trends. D is NOI growth.
Question 496
Which of the following is a primary risk specific to direct real estate investment (vs. REIT investing)?
Select an option first.
Correct answer: C — Concentration risk — a single property represents a large, undiversified illiquid position
Explanation: A direct property investment is undiversified (one asset, one location) and illiquid. A REIT provides diversification across many properties and daily liquidity. A and B are REIT/equity risks. D applies to REITs.
Question 497
The term 'location, location, location' in real estate reflects:
Select an option first.
Correct answer: B — The overriding importance of geographic location in determining real estate value
Explanation: Location is the single most important determinant of real estate value — proximity to amenities, infrastructure, quality of neighborhood, and economic activity. It cannot be changed, unlike the building itself. A, C, D are wrong.
Question 498
Public infrastructure investment (e.g., through a listed infrastructure fund) vs. private infrastructure investment differs primarily in:
Select an option first.
Correct answer: C — Public infrastructure funds are more liquid but may exhibit higher correlation with equity markets, while private infrastructure is illiquid with more stable, pure cash flows
Explanation: Listed infrastructure funds trade on stock exchanges, providing liquidity but at the cost of equity-market correlation (especially in crises). Unlisted infrastructure has more stable valuations and lower equity correlation but is illiquid. A, B, D are wrong.
Question 499
Commodities have historically shown which correlation with unexpected inflation?
Select an option first.
Correct answer: C — Positive — commodity prices often rise with unexpected inflation
Explanation: Commodities (especially energy and agricultural goods) often drive inflation as inputs to production. When inflation surprises to the upside, commodity prices tend to already be rising. This positive correlation makes commodities valuable as inflation hedges. A, B, D are wrong.
Question 500
An opportunistic real estate strategy might include which of the following investments?
Select an option first.
Correct answer: C — Acquiring a distressed hotel in a secondary market requiring significant renovation and repositioning
Explanation: Opportunistic strategies take on high risk and complexity — distressed assets, ground-up development, turnarounds in secondary markets — targeting the highest returns. A and B are core/core-plus. D is a stable, government-backed income stream.
Question 501
Which of the following is NOT a form of direct real estate investment?
Select an option first.
Correct answer: C — Buying shares of a publicly listed REIT
Explanation: Shares of a listed REIT are indirect, liquid real estate investment through the equity market. A, B, D involve directly owning or developing physical real estate. C is a financial instrument, not a direct property holding.
Question 502
Real estate's 'illiquidity premium' exists because:
Select an option first.
Correct answer: C — Investors demand extra return for assets that cannot be quickly sold at fair prices without significant transaction costs and time
Explanation: Real estate is expensive and slow to transact (months, high commissions, legal costs). Investors require compensation for this illiquidity through higher expected returns vs. liquid alternatives. A, B, D are wrong.
Question 503
Which of the following factors does NOT directly affect the cap rate used to value a property?
Select an option first.
Correct answer: C — The property manager's personal credit score
Explanation: Cap rates reflect market interest rates (cost of capital), risk premium for property type/location, and growth expectations. A property manager's personal credit score is irrelevant to the property's capitalization rate. A, B, D all directly influence cap rates.
Question 504
The 'net lease' structure in commercial real estate requires:
Select an option first.
Correct answer: C — The tenant to pay some or all operating costs (property taxes, insurance, maintenance) in addition to base rent
Explanation: Net leases (single, double, triple net) shift operating costs to tenants. Triple net (NNN) leases require tenants to pay taxes, insurance, AND maintenance — making cash flows more predictable for landlords. A is gross lease. B is incomplete. D is a modified gross lease.
Question 505
Which of the following statements about REIT valuation is most accurate?
Select an option first.
Correct answer: B — Funds from Operations (FFO) is a more appropriate REIT performance metric than earnings per share
Explanation: FFO = Net income + Depreciation − Gains on property sales. Depreciation depresses reported earnings but does not reflect economic deterioration (real estate often appreciates). FFO better captures true cash earnings. A ignores depreciation distortion. C and D are wrong.
Question 506
'Funds from Operations' (FFO) for a REIT adds back depreciation to net income because:
Select an option first.
Correct answer: A — Depreciation is not a real cash cost for real estate that typically appreciates in value
Explanation: Standard GAAP depreciation allocates building cost over time, but well-maintained properties often appreciate in value. FFO reverses this non-cash accounting charge to show true recurring cash earnings. B is wrong — depreciation is non-cash. C is true but not the reason. D is wrong.
Question 507
The 'going-in cap rate' on a real estate investment is the cap rate at the time of:
Select an option first.
Correct answer: C — Purchase — calculated as NOI at time of acquisition / purchase price
Explanation: Going-in cap rate = entry year NOI / purchase price. It measures the initial yield. Compared to the 'going-out cap rate' (at exit), the difference reflects value creation or destruction. A is the exit cap rate. B and D are wrong.
Question 508
An investor expects to sell a property in 5 years at a 5% exit cap rate. If expected NOI in Year 5 is $600,000, the expected sale price is:
Select an option first.
Correct answer: C — $12,000,000
Explanation: Exit value = NOI₅ / Exit cap rate = $600,000 / 0.05 = $12,000,000. A is ridiculous. B uses 20% cap. D uses 10% cap.
Question 509
Preferred equity in real estate sits in the capital structure:
Select an option first.
Correct answer: B — Below senior debt but above common equity
Explanation: Preferred equity occupies the middle of the real estate capital stack: senior lender has the first claim, preferred equity (often mezz-like) comes next, and common equity sponsors are last. This positioning means preferred gets paid before common but after senior debt. A and D are wrong. C is wrong.
Question 510
The Loan-to-Value (LTV) ratio for a property purchased at $8M with $5.6M in debt is:
Select an option first.
Correct answer: A — 70%
Explanation: LTV = $5.6M / $8M = 70%. B uses $5.6/$10. C inverts. D uses remaining equity. 70% is a typical LTV for commercial real estate.
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