CAIA Level I Exam Prep Free practice test →

Free CAIA Level I Practice Questions

10 free, exam-style Chartered Alternative Investment Analyst Level I (CAIA Level I) practice questions with answers and explanations. No signup required. Work through them below, then take the full free CAIA Level I practice test to study every exam domain.

These 10 free CAIA Level I questions are organized by exam domain, so you can see how each part of the Chartered Alternative Investment Analyst Level I blueprint is tested. Reveal the answer and explanation under each question.

Domain 1: CAIA Ethical Principles (8%-12%)

Question 1

A hedge fund manager builds a large concentrated position in a single stock by entering into total return swaps with multiple prime brokers simultaneously. The manager does not disclose the aggregate size of the exposure to any individual counterparty. When the position moves sharply against the fund, the manager cannot meet margin calls, triggering forced liquidations that cause billions of dollars in losses across the banking sector. This scenario MOST closely parallels which embedded CAIA ethics case study, and which CAIA Ethical Principle was PRIMARILY violated?

  1. MF Global; Ethics and Professionalism at the Core
  2. Archegos Capital Management; Transparent and Authentic Communication
  3. Bear Stearns; Evidence-Based Practices
  4. New York State Common Retirement Fund; Partnership Over Superiority and Transparent Communication
Show answer & explanation

Correct answer: B - Archegos Capital Management; Transparent and Authentic Communication

Domain 2: Introduction to Alternative Investments (20%-28%)

Question 2

A private equity fund and an otherwise identical comparison fund both deploy $100 million of committed capital into the same investments and generate identical cash flows and ultimate returns. The fund uses a 12-month subscription line of credit before making capital calls to LPs; the comparison fund calls capital on day one. Relative to the comparison fund, the subscription-line fund will report:

  1. A higher IRR and an unchanged TVPI
  2. A higher TVPI and an unchanged IRR
  3. A higher IRR and a higher TVPI
  4. An unchanged IRR and an unchanged TVPI
Show answer & explanation

Correct answer: A - A higher IRR and an unchanged TVPI

Question 3

An analyst evaluating a private real estate fund of funds notices that the fund's monthly return series produces a Durbin-Watson statistic of 0.90. Using this fund's reported Sharpe ratio to compare it against public equity benchmarks, the analyst will MOST likely:

  1. Overstate the fund's risk-adjusted performance, because return smoothing understates the fund's true volatility
  2. Understate the fund's true alpha, because autocorrelation in the benchmark inflates its reported returns
  3. Accurately measure the fund's risk-adjusted performance, as the income-generating nature of real assets is fully reflected in reported NAVs
  4. Understate the fund's risk-adjusted performance, because illiquid assets earn a premium that standard deviation fails to capture
Show answer & explanation

Correct answer: A - Overstate the fund's risk-adjusted performance, because return smoothing understates the fund's true volatility

Domain 3: Real Assets (14%-20%)

Question 4

A commercial property generates net operating income of $600,000 and is purchased for $10,000,000, implying a going-in cap rate of 6.0%. The investor finances 70% of the purchase price with a mortgage carrying a loan constant of 7.2%. Relative to an all-equity acquisition of the same property, the use of debt financing is BEST described as:

  1. Positive leverage, because the loan-to-value ratio of 70% is well below the lender's typical 80% threshold
  2. Positive leverage, because the net operating income of $600,000 fully covers the annual debt service of $504,000
  3. Negative leverage, because the effective interest rate stated in the loan documentation exceeds the property's going-in cap rate of 6.0%
  4. Negative leverage, because the loan constant exceeds the cap rate
Show answer & explanation

Correct answer: D - Negative leverage, because the loan constant exceeds the cap rate

Question 5

An investor holds a fully collateralized long position in crude oil futures in a market that is in contango. As the nearest-maturity contract approaches expiration, the investor rolls the position forward by selling the expiring contract and purchasing the next-dated contract. Assuming spot prices remain unchanged throughout, the roll will MOST likely generate:

  1. A positive return, as near-term contracts held to expiry converge upward toward the higher-priced longer-dated contracts when the futures curve is upward-sloping
  2. A negative return, because the investor sells the lower-priced expiring contract and must purchase the higher-priced new contract
  3. No return impact, because only changes in the underlying spot price affect the total return of a long futures position
  4. A negative return only if spot prices also decline during the roll period
Show answer & explanation

Correct answer: B - A negative return, because the investor sells the lower-priced expiring contract and must purchase the higher-priced new contract

Domain 4: Private Equity (8%-12%)

Question 6

A venture capital fund invests $10 million in a Series A round and requires an 8x return on this investment. The fund's analysts project the company will be acquired for $200 million in five years. Ignoring the dilutive effect of future funding rounds, the VC fund's required ownership percentage at the time of investment is CLOSEST to:

  1. 20%
  2. 5%
  3. 40%
  4. 80%
Show answer & explanation

Correct answer: C - 40%

Domain 5: Private Debt (12%-16%)

Question 7

An investor holds an interest-only (IO) strip from a collateralized mortgage obligation backed by a pool of 30-year fixed-rate residential mortgages. The central bank unexpectedly raises its policy rate by 200 basis points. Relative to a standard investment-grade fixed-rate bond, the IO strip's market value will MOST likely:

  1. Decline, as the higher discount rate reduces the present value of all future cash flows
  2. Decline, as rising rates signal economic stress and are likely to increase mortgage default rates across the pool
  3. Increase, as higher rates slow prepayments and extend the stream of interest payments received
  4. Remain essentially unchanged, because the interest payments received by the IO strip are contractually fixed by the terms of the underlying mortgage pool regardless of the rate environment
Show answer & explanation

Correct answer: C - Increase, as higher rates slow prepayments and extend the stream of interest payments received

Question 8

A regional insurer sponsors a catastrophe bond to transfer hurricane risk to capital markets investors. The bond pays out to the insurer if sustained wind speeds at a designated coastal monitoring station exceed 140 mph during the Atlantic hurricane season, regardless of the insurer's actual claims experience. The PRIMARY disadvantage of this trigger structure to the bond sponsor is:

  1. Heightened moral hazard, because the insurer retains influence over the data reported at the designated monitoring station
  2. Reduced investor appetite, as parametric bonds require meteorological expertise that most institutional investors lack
  3. Greater regulatory complexity, as parametric bonds are classified as derivative instruments in most jurisdictions and require additional disclosure
  4. Elevated basis risk, because the insurer's actual losses may diverge substantially from what the wind speed threshold would suggest
Show answer & explanation

Correct answer: D - Elevated basis risk, because the insurer's actual losses may diverge substantially from what the wind speed threshold would suggest

Domain 6: Hedge Funds (15%-19%)

Question 9

A pension fund consultant recommends adding a systematic trend-following managed futures allocation specifically to mitigate the impact of equity market crises. She cites 'crisis alpha' as the primary rationale. The MOST accurate explanation for why trend-following managed futures strategies tend to generate positive returns during equity market crises is:

  1. Most managed futures programs maintain structural short positions in equity indices as part of their mandate, generating direct profits during equity drawdowns
  2. Managed futures funds hold a large portion of their assets in cash or short-term government securities as futures collateral, which appreciates in relative terms and provides a natural buffer during equity selloffs
  3. Trend-following strategies are long volatility by nature and profit from the large, sustained directional price moves across multiple asset classes that typically develop during crises
  4. Managed futures returns are contractually negatively correlated with equity indices, ensuring gains whenever equity markets decline by more than a predefined threshold
Show answer & explanation

Correct answer: C - Trend-following strategies are long volatility by nature and profit from the large, sustained directional price moves across multiple asset classes that typically develop during crises

Domain 7: Digital Assets (4%-8%)

Question 10

According to Metcalfe's Law, the value of a network is proportional to the square of its number of active users. A proof-of-stake blockchain currently has 10 million active participants. A major institutional adoption initiative is projected to grow the active participant base to 30 million over the next 18 months. If Metcalfe's Law holds, the implied increase in the network's value is CLOSEST to a factor of:

  1. 3x
  2. 9x
  3. 27x
  4. 6x
Show answer & explanation

Correct answer: B - 9x

The rest of the CAIA Level I blueprint

The CAIA Level I exam also covers these domains. Drill them in the full free practice test:

Ready for the real thing?

Practice hundreds more CAIA Level I questions with instant scoring, weak-area drills, and full exam simulations.

Start the free practice test See pricing