Free CAIA Level I Introduction to Alternative Investments Practice Questions
Foundations of alternative investments on CAIA Level I cover fund structures (LP/GP), fee calculations (management fee, carried interest), distribution waterfall mechanics, IRR and TVPI return metrics, and return distribution statistics.
Sample Questions
Question 1
Easy
The law of one price states that:
Solution
D is correct.
The law of one price states that two assets (or portfolios) that produce identical cash flows in every state of the world must have the same price. Any price discrepancy would create a riskless arbitrage opportunity.
The law of one price states that two assets (or portfolios) that produce identical cash flows in every state of the world must have the same price. Any price discrepancy would create a riskless arbitrage opportunity.
Question 2
Medium
Gamma is highest for options that are:
Solution
B is correct.
Gamma measures the rate of change of delta with respect to the underlying price. Gamma is maximized for at-the-money options near expiration because small price movements cause the largest shifts in the probability of finishing in or out of the money, producing rapid changes in delta.
Gamma measures the rate of change of delta with respect to the underlying price. Gamma is maximized for at-the-money options near expiration because small price movements cause the largest shifts in the probability of finishing in or out of the money, producing rapid changes in delta.
Question 3
Hard
An investor deposits $25,000 at a nominal annual rate of 12% compounded quarterly. The effective annual rate (EAR) and the account value after 2 years are closest to:
Solution
D is correct.
With quarterly compounding, the periodic rate is 12%/4 = 3%. The EAR = . Computing: ; . So EAR = 12.55%. The account value after 2 years (8 quarters): $25,000 × (1.03)^8 = $25,000 × 1.26677 = $31,669 ≈ $31,670.
With quarterly compounding, the periodic rate is 12%/4 = 3%. The EAR = . Computing: ; . So EAR = 12.55%. The account value after 2 years (8 quarters): $25,000 × (1.03)^8 = $25,000 × 1.26677 = $31,669 ≈ $31,670.