Free CAIA Level I Real Assets Practice Questions
Real assets on CAIA Level I cover natural resources, timber, farmland, commodities, infrastructure, intellectual property, and commercial real estate valuation methods and investment vehicles (REITs, direct ownership).
Sample Questions
Question 1
Easy
A commodity futures market is said to be in contango when:
Solution
D is correct.
Contango describes a market condition where futures prices are higher than the current spot price, creating an upward-sloping forward curve. This typically occurs when storage costs and financing costs exceed the convenience yield.
Contango describes a market condition where futures prices are higher than the current spot price, creating an upward-sloping forward curve. This typically occurs when storage costs and financing costs exceed the convenience yield.
Question 2
Medium
A CMBS structure uses tranching primarily to:
Solution
D is correct.
Tranching in a CMBS structure redistributes the credit risk of the underlying mortgage pool among different classes (tranches) of bondholders. Senior tranches have first claim on cash flows and are protected by subordination from junior tranches, which absorb losses first. This allows different investors to select risk-return profiles that match their preferences.
Tranching in a CMBS structure redistributes the credit risk of the underlying mortgage pool among different classes (tranches) of bondholders. Senior tranches have first claim on cash flows and are protected by subordination from junior tranches, which absorb losses first. This allows different investors to select risk-return profiles that match their preferences.
Question 3
Hard
A CIO is reviewing the risk decomposition of a diversified real assets allocation. She observes that the allocation's tracking error relative to CPI is lowest when combining assets with which set of characteristics?
Solution
D is correct.
Tracking error relative to CPI measures how closely the portfolio return matches inflation over time. The optimal approach combines portfolio construction principles with inflation sensitivity. Assets with moderate inflation betas but low cross-correlations (e.g., farmland, commodities, and infrastructure have different fundamental drivers) create a portfolio where idiosyncratic deviations from inflation offset each other. Concentrating in the single highest-inflation-beta asset exposes the portfolio to that asset's idiosyncratic risk (e.g., commodity-specific supply shocks), increasing tracking error. The diversified approach smooths these deviations, producing more consistent inflation-tracking returns.
Tracking error relative to CPI measures how closely the portfolio return matches inflation over time. The optimal approach combines portfolio construction principles with inflation sensitivity. Assets with moderate inflation betas but low cross-correlations (e.g., farmland, commodities, and infrastructure have different fundamental drivers) create a portfolio where idiosyncratic deviations from inflation offset each other. Concentrating in the single highest-inflation-beta asset exposes the portfolio to that asset's idiosyncratic risk (e.g., commodity-specific supply shocks), increasing tracking error. The diversified approach smooths these deviations, producing more consistent inflation-tracking returns.