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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 511
A property's NOI is $450,000 and annual debt service is $300,000. DSCR is:
Select an option first.
Correct answer: B — 1.50
Explanation: DSCR = NOI / Debt Service = $450,000 / $300,000 = 1.50. A is the inverse. C and D are wrong. DSCR > 1 means income covers debt — lenders typically require ≥ 1.20.
Question 512
Which of the following natural resource investments provides the LEAST income during the holding period?
Select an option first.
Correct answer: B — Timberland with a long growth cycle before first harvest
Explanation: Young timberland requires decades of growth before a commercially viable harvest. Unlike farmland (annual income), oil wells (royalties), or pipelines (contracted fees), undeveloped timberland provides little or no interim income. B is correct.
Question 513
Infrastructure's 'availability-based' contracts guarantee payment to the asset owner based on:
Select an option first.
Correct answer: B — The asset being available and operational at agreed standards — regardless of usage levels
Explanation: Availability-based contracts (common for hospitals, schools, roads) pay the operator for making the facility available at agreed quality standards, regardless of how many people use it. This eliminates demand/volume risk. A is demand/concession-based. C and D are wrong.
Question 514
Which type of infrastructure investment involves the longest construction timeline and highest development risk?
Select an option first.
Correct answer: C — Developing a new nuclear power plant from scratch
Explanation: Nuclear power plants have multi-decade construction timelines, massive capital requirements, regulatory complexity, and technology risks. This represents the highest development risk infrastructure investment. A and D are operational brownfield. B is listed equity.
Question 515
Commodities provide portfolio benefits primarily through which mechanism?
Select an option first.
Correct answer: C — Low or negative correlation with equities and bonds during certain market environments, especially during inflationary periods
Explanation: During inflation and supply shocks, commodities can rise while financial assets struggle. During equity bull markets, they may underperform. This varying correlation provides diversification value. A is wrong — commodities have no income. B describes correlation. D is wrong — commodities are often more volatile.
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Question 516
A real estate developer completing a ground-up construction project is primarily exposed to which risk during construction?
Select an option first.
Correct answer: C — Construction cost overruns and completion delays — costs may exceed budget or schedule, eroding returns
Explanation: Ground-up development faces: construction cost overruns (materials, labor), permit delays, contractor defaults, and market changes during the construction period. These risks are unique to development. A applies post-completion. B applies to stabilized assets. D is minor for domestic projects.
Question 517
Compared to direct real estate, investing through a REIT offers all of the following advantages EXCEPT:
Select an option first.
Correct answer: D — Direct control over individual property decisions
Explanation: REITs are professionally managed — investors cannot decide which specific properties to buy, sell, or renovate. This loss of control is a disadvantage vs. direct ownership. A, B, C are genuine REIT advantages. D is correctly the exception.
Question 518
The 'total return swap' as a way to gain real estate exposure involves:
Select an option first.
Correct answer: B — Receiving the total return of a real estate index from a counterparty in exchange for a funding rate
Explanation: A TRS on a real estate index allows an investor to gain economic exposure to real estate returns without owning property, by swapping the index's total return for a floating rate. A is direct ownership. C is shorting. D is specific security type.
Question 519
Water rights and water infrastructure represent which type of infrastructure investment?
Select an option first.
Correct answer: C — Environmental/utilities infrastructure
Explanation: Water supply, treatment, and distribution are utilities infrastructure — essential environmental services that provide regulated, stable cash flows. A is healthcare/education. B is transport/energy. D is telecom.
Question 520
Which of the following BEST explains why infrastructure has a low beta with equity markets?
Select an option first.
Correct answer: C — Regulated or contracted revenues are largely independent of economic cycles — demand for utilities and roads persists regardless of market conditions
Explanation: Essential services (electricity, water, roads) see relatively stable usage across economic cycles. Revenues are more predictable than cyclical businesses, resulting in lower equity-like return volatility and lower market beta. A, B, D are wrong.
Question 521
Which of the following is an example of 'functional' real estate obsolescence?
Select an option first.
Correct answer: C — An aging office building's floor plates being too small for modern open-plan working arrangements requiring floor-plate flexibility
Explanation: Functional obsolescence is internal to the building — its design is outdated relative to current user needs. Small floor plates, low ceilings, poor HVAC, no fiber optic — these are functional deficiencies. A is physical damage. B is economic obsolescence. D is financial/market risk.
Question 522
The term 'cap rate expansion' in real estate means:
Select an option first.
Correct answer: C — Cap rates are rising — which means property values are falling relative to income (investors require higher yields)
Explanation: Cap rate and property value move inversely. Cap rate expansion (rising) means properties are worth less relative to their income — driven by rising interest rates, increased risk perception, or falling demand. A is wrong. B and D describe NOI growth, not cap rate changes.
Question 523
The 'development spread' in real estate investing refers to:
Select an option first.
Correct answer: B — The yield gap between a developed property's cap rate and the construction cost yield — compensation for development risk
Explanation: Developers require the completed property's cap rate (income/value) to exceed the cost yield (income/total cost including land + construction) to justify development risk. This spread compensates for the risk of building vs. buying existing assets. A is cap rate change. C and D are wrong.
Question 524
An investor in a REIT receives $2.50 per share in annual dividends. If the stock trades at $40, the dividend yield is:
Select an option first.
Correct answer: A — 6.25%
Explanation: Dividend yield = $2.50 / $40 = 6.25%. B inverts. C is the per-share dividend as a percentage of something wrong. D is wrong.
Question 525
Real estate transaction costs (agent commissions, legal fees, taxes) are typically:
Select an option first.
Correct answer: B — 5-10% of property value — much higher than trading costs for public securities
Explanation: Real estate transaction costs can be substantial: agent commissions (1-3% per side), legal fees, stamp duty/transfer taxes, and due diligence costs commonly total 5-10%+ of property value. This contrasts sharply with
Question 526
Which of the following statements about residential vs. commercial real estate investment is most accurate?
Select an option first.
Correct answer: B — Commercial real estate leases are typically longer-term with professional tenants — providing more stable income streams
Explanation: Commercial leases (5-10+ years, often NNN) with creditworthy corporate tenants provide more stable, longer-duration income than residential (1-year leases, individual tenants). A is market-dependent. C is wrong — commercial is less liquid. D is wrong.
Question 527
A commodity's 'basis risk' refers to:
Select an option first.
Correct answer: B — The risk that the futures price and the spot price diverge unexpectedly, creating imperfect hedging outcomes
Explanation: Basis = Spot price − Futures price. Basis risk is the uncertainty around this difference. Hedgers using futures may not get a perfect hedge because spot and futures don't always move identically. A is wrong. C is physical storage risk. D is exchange risk.
Question 528
Infrastructure equity investors typically target which annual return range?
Select an option first.
Correct answer: B — 8-15% — reflecting risk premium for illiquidity, complexity, and leverage
Explanation: Unlisted core infrastructure targets 8-12% returns; value-add infrastructure 12-15%. These reflect illiquidity premiums, operational complexity, and leverage. A is too low. C and D are PE/VC level returns inappropriate for core infrastructure.
Question 529
Which of the following describes 'hospitality real estate'?
Select an option first.
Correct answer: B — Hotels, resorts, and short-term accommodation assets
Explanation: Hospitality real estate includes hotels, motels, and resorts — characterized by very short-term occupancy, high operational complexity, and stronger economic cyclicality than other property types. A is office. C is healthcare. D is data center real estate.
Question 530
Data center real estate investments are primarily driven by demand from:
Select an option first.
Correct answer: C — Cloud computing, artificial intelligence, and digital services requiring secure, high-power IT infrastructure
Explanation: Data centers house servers and IT infrastructure for cloud providers (AWS, Azure), AI companies, and enterprises. Demand is driven by digitalization and data consumption growth. A, B, D are wrong.
Question 531
Which of the following BEST describes 'commodity momentum' as an investment strategy?
Select an option first.
Correct answer: C — Going long commodities with recent price strength and short commodities with recent price weakness based on trend continuation patterns
Explanation: Momentum in commodities: buy recent winners, short recent losers. Similar to equity momentum, this exploits trend-following behavior in commodity markets. A is structurally driven. B and D are long-only static strategies.
Question 532
Which of the following describes the primary source of return for a 'distressed real estate' strategy?
Select an option first.
Correct answer: C — Acquiring properties at significant discounts due to financial distress, then improving, stabilizing, and reselling at higher values
Explanation: Distressed real estate involves acquiring properties with title issues, deferred maintenance, high vacancy, or foreclosure situations — buying below replacement cost and creating value through rehabilitation and repositioning. A and B are core strategies. D is passive.
Question 533
The 'effective gross income' of a property equals:
Select an option first.
Correct answer: C — Gross potential income minus vacancy and credit losses — representing expected collectible income
Explanation: EGI = Gross Potential Income − Vacancy allowance − Credit losses. It is the realistic collected income before operating expenses. EGI − Operating expenses = NOI. A, B, D are wrong stages of the income calculation.
Question 534
Which of the following accurately describes 'sale-leaseback' transactions in real estate?
Select an option first.
Correct answer: C — A company selling its owned real estate to an investor and simultaneously signing a lease to continue occupying the property — monetizing real estate while retaining operational use
Explanation: Sale-leasebacks allow companies to unlock capital tied up in real estate while continuing to use the space. The seller becomes a tenant. Common for retailers, manufacturers, healthcare systems. A, B, D are wrong.
Question 535
Natural gas is classified as which type of commodity?
Select an option first.
Correct answer: C — Energy commodity — along with crude oil, coal, and refined products
Explanation: Energy commodities include: crude oil, natural gas, heating oil, gasoline, and coal. Agricultural (A) includes grains, softs. Precious metals (B): gold, silver. Industrial metals (D): copper, aluminum. C is correct.
Question 536
Which of the following best describes the risk-return profile of 'Core' real estate vs. 'Opportunistic' real estate?
Select an option first.
Correct answer: C — Core has lower expected return (5-8%) and lower risk; Opportunistic has higher expected return (15-20%+) and much higher risk from development, leverage, or distress
Explanation: Core: stable, income-producing, low-leverage, well-leased properties — targeting 5-8% returns. Opportunistic: development, major repositioning, distressed — targeting 15-20%+ but with substantial risk. C is correct. A reverses. B is wrong. D ignores risk tolerance.
Question 537
An infrastructure asset with 'availability-based revenue' is MOST similar to which traditional investment?
Select an option first.
Correct answer: C — An investment-grade bond — stable, predictable payments contingent on the asset being operational
Explanation: Availability-based infrastructure generates steady, contracted payments — essentially a long-duration stream of cash flows similar to investment-grade bond coupons. Low volatility, predictable income. A is higher risk. B is growth equity. D is speculative.
Question 538
Which of the following BEST explains why real estate offers potential tax advantages to investors in many jurisdictions?
Select an option first.
Correct answer: C — Depreciation deductions reduce taxable income even as property values may appreciate, and many countries offer favorable capital gains treatment for long-term real estate holdings
Explanation: Depreciation shields current income from taxation while the property appreciates. Long-term capital gains treatment (lower tax rates on appreciation) adds further benefit. In many countries, 1031 exchanges or equivalent structures defer taxes. A, B, D are too absolute or wrong.
Question 539
A property bought for $4M generates $240,000 NOI annually. Cap rate is:
Select an option first.
Correct answer: A — 6%
Explanation: Cap rate = NOI / Value = $240,000 / $4,000,000 = 6%. B would need NOI=$160k. C would need NOI=$320k. D would need NOI=$400k.
Question 540
An investor buys farmland for $1,000,000. Annual crop income = $40,000. Land value grows to $1,150,000 after 3 years. Total return over 3 years is:
Select an option first.
Correct answer: A — 27%
Explanation: Total return = (Income + Capital gain) / Initial investment = ($120,000 + $150,000) / $1,000,000 = $270,000 / $1,000,000 = 27%. B uses capital gain only. C uses income only. D is wrong.
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