Free CAIA Level I Private Equity Practice Questions
Study private equity for CAIA Level I. Questions test venture capital stages, growth equity, leveraged buyouts, PE fund structures, exit strategies including IPOs and SPACs, and long-term PE performance analysis.
Sample Questions
Question 1
Easy
What is a "vintage year" in private equity?
Solution
A is correct. The vintage year refers to the year in which a private equity fund holds its final close or begins deploying capital, and is used to group funds for performance benchmarking purposes.
Choice B is incorrect because the founding date of a portfolio company is unrelated to the fund's vintage year classification.
Choice C is incorrect because distribution timing occurs later in the fund lifecycle and does not define the vintage year.
Choice D is incorrect because regulatory registration is an administrative event unrelated to the vintage year designation.
Choice B is incorrect because the founding date of a portfolio company is unrelated to the fund's vintage year classification.
Choice C is incorrect because distribution timing occurs later in the fund lifecycle and does not define the vintage year.
Choice D is incorrect because regulatory registration is an administrative event unrelated to the vintage year designation.
Question 2
Medium
The power law of returns in venture capital implies that:
Solution
C is correct. The power law of returns is a fundamental characteristic of VC investing: a small fraction of portfolio companies (often fewer than 10%) generate the vast majority of fund returns, while many investments result in partial or total losses. This extreme skewness means that missing even one top performer can dramatically reduce fund returns.
Choice A is incorrect because VC returns are highly skewed with fat right tails, not normally distributed. The power law distribution is the opposite of a normal distribution in this context.
Choice B is incorrect because most VC-backed companies fail or return less than invested capital. Moderate positive returns across the portfolio would describe a much less skewed distribution.
Choice D is incorrect because while diversification helps, the power law means that idiosyncratic upside is concentrated in a few winners, making deal selection and access to top deals critical rather than broad diversification alone.
Choice A is incorrect because VC returns are highly skewed with fat right tails, not normally distributed. The power law distribution is the opposite of a normal distribution in this context.
Choice B is incorrect because most VC-backed companies fail or return less than invested capital. Moderate positive returns across the portfolio would describe a much less skewed distribution.
Choice D is incorrect because while diversification helps, the power law means that idiosyncratic upside is concentrated in a few winners, making deal selection and access to top deals critical rather than broad diversification alone.
Question 3
Hard
A startup has a pre-money valuation of \$8 million. A venture capital firm invests \$2 million in the Series A round. What is the VC firm's ownership percentage immediately after the investment?
Solution
C is correct. The post-money valuation equals the pre-money valuation plus the new investment: \$8 million + \$2 million = \$10 million. The VC firm's ownership percentage is calculated as the investment amount divided by the post-money valuation: \$2 million / \$10 million = 20%.
Choice B is incorrect because 25% would result from dividing the investment by the pre-money valuation (\$2M / \$8M), which incorrectly uses pre-money rather than post-money as the denominator.
Choice A is incorrect because 80% represents the founders' ownership stake (\$8M / \$10M), not the VC firm's stake.
Choice D is incorrect because 10% has no basis in the given valuation figures and would imply a \$20 million post-money valuation.
Choice B is incorrect because 25% would result from dividing the investment by the pre-money valuation (\$2M / \$8M), which incorrectly uses pre-money rather than post-money as the denominator.
Choice A is incorrect because 80% represents the founders' ownership stake (\$8M / \$10M), not the VC firm's stake.
Choice D is incorrect because 10% has no basis in the given valuation figures and would imply a \$20 million post-money valuation.
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