Alternative Investments are a crucial part of the CFA Level 1 curriculum. This section covers hedge funds, private equity, real estate, commodities, REITs, infrastructure, and other non-traditional assets. Mastering these concepts helps candidates not only in the exam but also in real-world portfolio management, diversification, and risk assessment.
This mega post of 200 practice questions is designed to give you exam-like MCQs with answers and explanations. By practicing them, you’ll strengthen your conceptual clarity, improve your exam speed, and gain confidence.
Whether you’re targeting CFA Level 1 in the U.S., Canada, U.K., Australia, or any other country, this guide will provide real value and help you ace Alternative Investments.
📘 CFA Level 1 Alternative Investments
Q1.
Which of the following is not typically classified as an alternative investment?
A. Hedge Funds
B. Private Equity
C. Government Bonds
D. Real Estate
✅ Answer: C. Government Bonds
Explanation: Traditional investments include equities, fixed income (like government bonds), and cash. Alternative investments are hedge funds, private equity, real estate, commodities, etc.
Q2.
Alternative investments are generally characterized by:
A. High liquidity and transparency
B. Low correlation with traditional assets
C. Uniform regulation across markets
D. Minimal fees
✅ Answer: B. Low correlation with traditional assets
Explanation: One of the primary reasons investors use alternatives is diversification benefits due to lower correlation with stocks and bonds.
Q3.
Which investment type usually has the least liquidity?
A. Public equities
B. Treasury bills
C. Private equity funds
D. Exchange-traded REITs
✅ Answer: C. Private equity funds
Explanation: Private equity funds often lock up investor money for 7–10 years, making them the least liquid compared to public markets or REITs.
Q4.
A hedge fund that seeks mispriced securities and takes both long and short positions is known as:
A. Macro fund
B. Relative value fund
C. Long/short equity fund
D. Managed futures fund
✅ Answer: C. Long/short equity fund
Explanation: Long/short equity strategies buy undervalued securities and short-sell overvalued ones.
Q5.
The two largest sectors within alternative investments by assets under management are:
A. Commodities & Real Estate
B. Hedge Funds & Private Equity
C. Venture Capital & Infrastructure
D. REITs & Distressed Debt
✅ Answer: B. Hedge Funds & Private Equity
Explanation: Hedge funds and private equity dominate the alternative investment industry in terms of AUM globally.
Q6.
Which of the following is a primary risk of investing in commodities?
A. Manager selection risk
B. High correlation with equities
C. Political and weather-related risks
D. Lack of price transparency
✅ Answer: C. Political and weather-related risks
Explanation: Commodity prices are highly sensitive to geopolitical events and natural phenomena.
Q7.
A fund of funds primarily invests in:
A. Multiple hedge funds
B. Private companies directly
C. Commodities futures
D. Government bonds
✅ Answer: A. Multiple hedge funds
Explanation: A fund of funds pools investor capital and allocates it across various hedge funds, providing diversification but with higher fees.
Q8.
Which valuation method is most common for private equity investments?
A. Net Asset Value (NAV)
B. Discounted Cash Flow (DCF)
C. Comparable Company Analysis
D. Market-to-book ratio
✅ Answer: B. Discounted Cash Flow (DCF)
Explanation: Since private companies lack public trading prices, valuation often relies on DCF and comparable analysis.
Q9.
What is a distressed debt fund?
A. A hedge fund that invests in bankrupt or near-bankrupt companies
B. A real estate fund focusing on foreclosures
C. A private equity fund investing in growth-stage firms
D. A commodity fund focused on oil and gas
✅ Answer: A. A hedge fund that invests in bankrupt or distressed companies
Explanation: Distressed debt funds seek to profit by buying bonds of troubled firms at deep discounts.
Q10.
Infrastructure investments are most often characterized by:
A. Short-term growth potential
B. Stable, inflation-linked cash flows
C. High liquidity
D. Minimal capital requirements
✅ Answer: B. Stable, inflation-linked cash flows
Explanation: Infrastructure assets like toll roads and utilities generate predictable long-term income, often inflation-adjusted.
Q11.
Which hedge fund strategy is most sensitive to interest rate changes?
A. Global macro
B. Relative value (fixed income arbitrage)
C. Long/short equity
D. Event-driven
✅ Answer: B. Relative value (fixed income arbitrage)
Explanation: Fixed income arbitrage strategies exploit pricing inefficiencies in bonds and derivatives, making them highly sensitive to interest rate movements.
Q12.
Which of the following alternative investments is most exposed to operational risk?
A. Commodities futures
B. Hedge funds
C. REITs
D. ETFs
✅ Answer: B. Hedge funds
Explanation: Hedge funds rely heavily on fund managers, leverage, and complex strategies, making them more exposed to operational risk.
Q13.
Venture capital is best described as:
A. Early-stage private equity investing
B. Debt financing for distressed firms
C. Investing in listed start-ups
D. Real estate acquisition
✅ Answer: A. Early-stage private equity investing
Explanation: Venture capital focuses on funding early-stage companies with high growth potential but also high risk.
Q14.
What is the lock-up period in hedge funds?
A. The time required to liquidate all assets
B. A minimum investment requirement
C. The period during which investors cannot withdraw capital
D. The manager’s personal investment commitment
✅ Answer: C. The period during which investors cannot withdraw capital
Explanation: Lock-up periods allow hedge funds to pursue long-term strategies without forced redemptions.
Q15.
Which alternative investment is often used as a hedge against inflation?
A. Commodities
B. Venture capital
C. Private equity
D. Distressed debt
✅ Answer: A. Commodities
Explanation: Commodity prices often rise during inflationary periods, making them a natural inflation hedge.
Q16.
A private equity buyout fund usually targets:
A. Early-stage start-ups
B. Mature companies with stable cash flows
C. Real estate developments
D. Hedge funds
✅ Answer: B. Mature companies with stable cash flows
Explanation: Buyout funds acquire established firms, restructure them, and aim to increase efficiency and profitability.
Q17.
Which of the following is true about REITs?
A. They are illiquid like private equity
B. They must distribute a majority of income as dividends
C. They do not provide exposure to real estate
D. They are not regulated
✅ Answer: B. They must distribute a majority of income as dividends
Explanation: REITs (Real Estate Investment Trusts) must distribute at least 90% of taxable income to shareholders.
Q18.
Hedge fund performance is often measured against:
A. S&P 500 Index
B. Peer group hedge fund indexes
C. Risk-free rate only
D. Government bond yields
✅ Answer: B. Peer group hedge fund indexes
Explanation: Hedge funds are compared against indexes of similar strategies, as traditional benchmarks (like S&P 500) may not reflect their strategies.
Q19.
The “2 and 20” fee structure refers to:
A. 20% entry fee and 2% redemption fee
B. 2% management fee and 20% performance fee
C. 20% carried interest and 2% hurdle rate
D. 2% government tax and 20% profit-sharing
✅ Answer: B. 2% management fee and 20% performance fee
Explanation: The standard hedge fund/private equity model charges 2% annual management and 20% of profits.
Q20.
Which of the following is a unique risk of private equity investing?
A. High daily volatility
B. Limited transparency and valuation uncertainty
C. Inflation risk
D. Currency exposure
✅ Answer: B. Limited transparency and valuation uncertainty
Explanation: Private equity valuations are subjective due to lack of public market prices and limited disclosure.
Q21.
Which type of commodity investment gives the most direct exposure to spot prices?
A. Futures contracts
B. Commodity ETFs
C. Physical ownership of commodities
D. Commodity index funds
✅ Answer: C. Physical ownership of commodities
Explanation: Physical commodities (like gold bars or oil barrels) directly reflect spot prices, while futures and ETFs have basis risk.
Q22.
What is the primary source of returns for hedge funds that use event-driven strategies?
A. Long-term stock appreciation
B. Arbitrage between related securities
C. Corporate events such as mergers, bankruptcies, or restructurings
D. Government bond yield movements
✅ Answer: C. Corporate events such as mergers, bankruptcies, or restructurings
Explanation: Event-driven funds profit from price movements triggered by corporate actions.
Q23.
In private equity, the J-curve effect refers to:
A. High returns in the early years followed by lower returns
B. Negative returns in early years, then higher returns later
C. A steady upward growth of returns
D. The effect of leverage on fund returns
✅ Answer: B. Negative returns in early years, then higher returns later
Explanation: Early negative returns (due to fees and expenses) are followed by higher returns as investments mature.
Q24.
Which of the following is a disadvantage of investing in hedge funds?
A. Low fees
B. High transparency
C. Limited liquidity
D. Low risk
✅ Answer: C. Limited liquidity
Explanation: Hedge funds often restrict investor withdrawals with lock-up periods and redemption notice requirements.
Q25.
Which factor is least likely to impact commodity prices?
A. Supply and demand
B. Weather and geopolitical events
C. Company earnings
D. Storage costs
✅ Answer: C. Company earnings
Explanation: Commodity prices are driven by supply-demand dynamics, weather, and geopolitical events, not corporate earnings.
Q26.
What is the primary goal of distressed debt investing?
A. To invest in stable government bonds
B. To profit from restructuring or recovery of financially troubled companies
C. To short high-yield corporate bonds
D. To track a bond index
✅ Answer: B. To profit from restructuring or recovery of financially troubled companies
Explanation: Investors buy distressed debt at deep discounts, expecting gains if the company restructures successfully.
Q27.
Which risk is unique to hedge funds compared to traditional investments?
A. Market risk
B. Liquidity risk from lock-ups
C. Currency risk
D. Inflation risk
✅ Answer: B. Liquidity risk from lock-ups
Explanation: Hedge funds often restrict redemptions, which can trap investor capital during volatile periods.
Q28.
Which private equity exit strategy typically provides the highest returns?
A. IPO (Initial Public Offering)
B. Secondary sale to another PE fund
C. Management buyout
D. Dividend recapitalization
✅ Answer: A. IPO (Initial Public Offering)
Explanation: IPO exits often achieve the highest valuation multiples compared to private sales.
Q29.
An investor in a commodity futures index primarily earns returns from:
A. Spot price changes and collateral yield
B. Dividend yield
C. Interest rate spreads
D. IPO activity
✅ Answer: A. Spot price changes and collateral yield
Explanation: Commodity futures returns = spot return + roll yield + collateral yield.
Q30.
What is a hurdle rate in private equity?
A. The maximum allowed investment per investor
B. The minimum return required before performance fees are paid
C. The risk-free interest rate
D. The benchmark market index return
✅ Answer: B. The minimum return required before performance fees are paid
Explanation: A hurdle rate ensures fund managers only earn carried interest after exceeding a minimum performance threshold.
Q31.
Which of the following is true for commodity investing?
A. Commodities have no correlation with inflation
B. Commodity prices are driven by short-term fundamentals
C. Commodities always provide stable cash flows
D. Commodity futures are risk-free
✅ Answer: B. Commodity prices are driven by short-term fundamentals
Explanation: Weather, supply shocks, and political risks heavily affect commodity prices.
Q32.
Which is a common characteristic of hedge funds and private equity?
A. High liquidity
B. Leverage and performance-based fees
C. Government guarantees
D. Public market transparency
✅ Answer: B. Leverage and performance-based fees
Explanation: Both often use leverage and “2 and 20” fee structures.
Q33.
Which real estate investment approach offers highest liquidity?
A. Direct ownership of buildings
B. Real estate partnerships
C. Listed REITs
D. Private REITs
✅ Answer: C. Listed REITs
Explanation: Publicly traded REITs are highly liquid compared to direct or private real estate investments.
Q34.
What is a key benefit of adding alternative investments to a portfolio?
A. Guaranteed returns
B. Lower volatility than stocks
C. Diversification due to low correlation with traditional assets
D. Higher transparency
✅ Answer: C. Diversification due to low correlation with traditional assets
Explanation: Alternatives provide portfolio diversification benefits, though not guaranteed returns.
Q35.
Which is most likely a disadvantage of commodities as an investment class?
A. They are always highly liquid
B. They have no cash flows or dividends
C. They provide inflation protection
D. They diversify equity portfolios
✅ Answer: B. They have no cash flows or dividends
Explanation: Unlike stocks or bonds, commodities do not generate income; returns rely on price appreciation.
Q36.
Which of the following is a primary source of hedge fund underperformance relative to expectations?
A. High liquidity
B. High management and incentive fees
C. Lack of leverage
D. Correlation with government bonds
✅ Answer: B. High management and incentive fees
Explanation: Hedge funds often charge 2% management and 20% performance fees, which significantly reduce net returns.
Q37.
Which is the most common valuation method for private equity investments?
A. Discounted cash flow (DCF)
B. Price-to-earnings ratio
C. Net asset value (NAV) approach
D. Dividend discount model
✅ Answer: A. Discounted cash flow (DCF)
Explanation: DCF is widely used in valuing private companies due to lack of market prices.
Q38.
What is the main risk associated with investing in commodities through futures contracts?
A. Counterparty risk
B. Roll yield risk
C. Inflation risk
D. Dividend risk
✅ Answer: B. Roll yield risk
Explanation: Negative roll yield occurs when futures prices are higher than spot (contango).
Q39.
Which hedge fund strategy primarily seeks to exploit mispricing between long and short equity positions?
A. Event-driven
B. Macro
C. Relative value
D. Equity long/short
✅ Answer: D. Equity long/short
Explanation: Equity long/short funds buy undervalued stocks and short overvalued ones.
Q40.
What is a key limitation of venture capital investments?
A. Too much liquidity
B. High transparency
C. Long holding periods and high failure rates
D. Guaranteed returns
✅ Answer: C. Long holding periods and high failure rates
Explanation: Startups are risky and illiquid, with long investment horizons.
Q41.
In real estate investing, capitalization rate (cap rate) is defined as:
A. Net operating income ÷ Property value
B. Net income ÷ Gross income
C. Property value ÷ Rental income
D. Price-to-earnings ratio
✅ Answer: A. Net operating income ÷ Property value
Explanation: Cap rate measures the return on real estate investment.
Q42.
What is the main advantage of fund of hedge funds?
A. Low fees
B. High transparency
C. Diversification across hedge fund strategies
D. Higher liquidity
✅ Answer: C. Diversification across hedge fund strategies
Explanation: Funds of funds spread risk but charge an extra layer of fees.
Q43.
Which alternative investment is most exposed to operational risk?
A. REITs
B. Hedge funds
C. Commodities
D. Private equity
✅ Answer: B. Hedge funds
Explanation: Hedge funds rely heavily on fund managers’ skill, internal controls, and operational structure.
Q44.
Which characteristic is shared by both commodities and real estate?
A. Income generation
B. Tangible, physical assets
C. High transparency
D. High short-term liquidity
✅ Answer: B. Tangible, physical assets
Explanation: Both are real, physical assets, unlike financial derivatives.
Q45.
Which of the following is a return driver for timberland investments?
A. Carbon credits only
B. Land value and biological growth of trees
C. Commodity index performance
D. IPO activity
✅ Answer: B. Land value and biological growth of trees
Explanation: Returns come from timber growth and appreciation of underlying land.
Q46.
Which type of private equity investment is focused on providing funding to early-stage companies?
A. Leveraged buyouts
B. Distressed investing
C. Venture capital
D. Growth equity
✅ Answer: C. Venture capital
Explanation: Venture capital supports startups and early-stage businesses.
Q47.
Which of the following is a common performance measure for hedge funds?
A. Sharpe ratio
B. Dividend yield
C. P/E ratio
D. Book-to-market ratio
✅ Answer: A. Sharpe ratio
Explanation: Hedge funds are evaluated based on risk-adjusted returns using Sharpe or Sortino ratios.
Q48.
Which factor most affects commodity futures returns?
A. Roll yield
B. Dividend yield
C. Earnings per share
D. Buyout premium
✅ Answer: A. Roll yield
Explanation: Futures returns depend on roll yield (contango or backwardation), spot return, and collateral yield.
Q49.
Which alternative investment has the highest historical correlation with equities?
A. Hedge funds
B. Commodities
C. Real estate
D. Private equity
✅ Answer: D. Private equity
Explanation: Private equity closely tracks equity markets since it invests in companies.
Q50.
Which of the following best describes the risk-return profile of alternative investments?
A. Low risk, low return
B. Moderate risk, guaranteed return
C. Higher risk, higher potential returns with low liquidity
D. Identical to traditional fixed income
✅ Answer: C. Higher risk, higher potential returns with low liquidity
Explanation: Alternatives offer diversification but carry risks like illiquidity and high fees.
Q51.
Which hedge fund strategy focuses on profiting from mergers and acquisitions?
A. Macro strategy
B. Event-driven strategy
C. Relative value
D. Market neutral
✅ Answer: B. Event-driven strategy
Explanation: Event-driven funds take positions around corporate events like M&A, restructurings, or bankruptcies.
Q52.
In private equity, a secondary buyout occurs when:
A. A company goes public
B. One private equity firm sells its stake to another
C. Investors withdraw capital early
D. Venture capitalists convert debt into equity
✅ Answer: B. One private equity firm sells its stake to another
Explanation: Secondary buyouts are common exit strategies for private equity investments.
Q53.
Which of the following is a downside of investing in REITs compared to direct real estate?
A. Higher transparency
B. Higher liquidity
C. Exposure to real estate income streams
D. Market volatility correlation
✅ Answer: D. Market volatility correlation
Explanation: REITs trade on exchanges, making them more correlated with equity markets than direct property.
Q54.
Which factor most affects commodity futures performance?
A. Dividend yield
B. Earnings yield
C. Spot return, collateral yield, and roll yield
D. Price-to-book ratio
✅ Answer: C. Spot return, collateral yield, and roll yield
Explanation: Commodity futures returns are broken down into these three components.
Q55.
The primary motivation for institutional investors allocating to alternative investments is:
A. Tax sheltering
B. Diversification and higher risk-adjusted returns
C. Higher dividends
D. Ease of trading
✅ Answer: B. Diversification and higher risk-adjusted returns
Explanation: Alternatives offer diversification benefits beyond traditional equities and bonds.
Q56.
What is the main risk of distressed debt investing?
A. Dividend risk
B. Default and restructuring risk
C. Inflation risk
D. Excess liquidity
✅ Answer: B. Default and restructuring risk
Explanation: Distressed securities are issued by financially troubled companies, with high default probability.
Q57.
Which hedge fund strategy is most dependent on global macroeconomic trends?
A. Equity long/short
B. Macro
C. Event-driven
D. Relative value
✅ Answer: B. Macro
Explanation: Macro funds take directional positions in currencies, interest rates, or commodities.
Q58.
What is a unique feature of timberland investments?
A. Trees can be “stored on the stump” to optimize pricing
B. No exposure to commodity prices
C. Guaranteed income
D. No environmental impact
✅ Answer: A. Trees can be “stored on the stump” to optimize pricing
Explanation: Timber growth allows investors to delay harvesting until prices are favorable.
Q59.
Which is the most common valuation method for hedge funds?
A. Market price of assets
B. Net Asset Value (NAV)
C. P/E multiples
D. Dividend models
✅ Answer: B. Net Asset Value (NAV)
Explanation: Hedge funds are valued periodically using NAV, adjusted for liquidity and fair value.
Q60.
Which alternative investment has inflation-hedging properties?
A. Commodities
B. Private equity
C. Hedge funds
D. Distressed debt
✅ Answer: A. Commodities
Explanation: Commodity prices often rise with inflation, making them effective hedges.
Q61.
Which factor most affects real estate investment returns?
A. Rental income and property appreciation
B. Dividend growth
C. Equity beta
D. Bond yields only
✅ Answer: A. Rental income and property appreciation
Explanation: Returns come from income flows plus capital gains from property value increase.
Q62.
A fund-of-funds hedge fund has which disadvantage?
A. Diversification
B. Higher liquidity
C. Double layer of fees
D. Tax benefits
✅ Answer: C. Double layer of fees
Explanation: Investors pay both fund-of-fund fees and underlying hedge fund fees.
Q63.
Which alternative investment is most illiquid?
A. Commodities futures
B. REITs
C. Private equity
D. Hedge funds
✅ Answer: C. Private equity
Explanation: Private equity has long lock-up periods, often 7–10 years.
Q64.
What is the most common measure of risk in real estate?
A. Cap rate volatility
B. Standard deviation of returns
C. Dividend yield
D. Loan-to-value (LTV) ratio
✅ Answer: D. Loan-to-value (LTV) ratio
Explanation: LTV is a key risk metric, showing leverage in property financing.
Q65.
Which hedge fund strategy profits from pricing inefficiencies in related securities?
A. Macro
B. Event-driven
C. Relative value
D. Distressed
✅ Answer: C. Relative value
Explanation: Relative value strategies exploit small mispricings between related assets.
Q66.
Which private equity strategy targets mature companies for restructuring?
A. Venture capital
B. Leveraged buyout (LBO)
C. Distressed debt
D. Hedge fund
✅ Answer: B. Leveraged buyout (LBO)
Explanation: LBOs use debt to acquire established firms, restructure, and improve efficiency.
Q67.
What is the key difference between direct commodity investment and commodity futures?
A. Direct investment provides higher liquidity
B. Futures require margin and may incur roll yield
C. Direct ownership has no storage costs
D. Futures guarantee returns
✅ Answer: B. Futures require margin and may incur roll yield
Explanation: Commodity futures involve leverage, margin calls, and roll yield risk.
Q68.
Which is the biggest challenge in valuing private equity?
A. Lack of comparable public company multiples
B. Too much trading volume
C. Transparent daily pricing
D. Standardized accounting
✅ Answer: A. Lack of comparable public company multiples
Explanation: Private firms lack market data, making valuation less precise.
Q69.
Which hedge fund structure protects managers from redeeming investors during losses?
A. Open-end mutual fund
B. Lock-up period
C. ETF
D. Real estate trust
✅ Answer: B. Lock-up period
Explanation: Lock-ups prevent withdrawals, ensuring managers can execute strategies.
Q70.
What is the main source of risk in private equity investments?
A. Leverage, illiquidity, and management risk
B. Inflation only
C. High dividend payouts
D. Government guarantees
✅ Answer: A. Leverage, illiquidity, and management risk
Explanation: Private equity is highly leveraged, with long lock-ins and reliance on skilled management.
Q71.
Which alternative investment has the most income stability?
A. Private equity
B. Commodities
C. Real estate
D. Hedge funds
✅ Answer: C. Real estate
Explanation: Rental income provides relatively stable cash flows.
Q72.
Which hedge fund fee is based on profits above a benchmark?
A. Management fee
B. Incentive fee with hurdle rate
C. Carried interest
D. Soft dollar
✅ Answer: B. Incentive fee with hurdle rate
Explanation: Managers only earn incentive fees if returns exceed a benchmark/hurdle.
Q73.
Which alternative investment is most sensitive to interest rates?
A. Real estate
B. Commodities
C. Private equity
D. Hedge funds
✅ Answer: A. Real estate
Explanation: Real estate values decline when interest rates rise, as financing becomes expensive.
Q74.
Which hedge fund strategy uses statistical arbitrage and market-neutral trades?
A. Macro
B. Event-driven
C. Relative value
D. Equity long/short
✅ Answer: C. Relative value
Explanation: Statistical arbitrage is a subset of relative value.
Q75.
Which alternative asset provides exposure to inflation and diversification but suffers from storage and transport costs?
A. Real estate
B. Commodities
C. Private equity
D. Hedge funds
✅ Answer: B. Commodities
Explanation: Commodities hedge inflation but incur storage/logistics costs.
Q76.
Which hedge fund strategy is designed to profit from equity price increases and decreases by going long and short?
A. Macro strategy
B. Equity long/short
C. Event-driven
D. Distressed debt
✅ Answer: B. Equity long/short
Explanation: Long/short funds take positions in undervalued and overvalued stocks to generate returns regardless of market direction.
Q77.
Which factor most differentiates venture capital from private equity buyouts?
A. Stage of company investment
B. Level of debt used
C. Duration of holding period
D. Dividend payout policy
✅ Answer: A. Stage of company investment
Explanation: Venture capital focuses on early-stage firms, while buyouts target mature companies.
Q78.
A key benefit of adding commodities to a portfolio is:
A. Higher guaranteed income
B. Diversification and inflation hedge
C. Lower volatility than bonds
D. Reduced correlation with equities only during bull markets
✅ Answer: B. Diversification and inflation hedge
Explanation: Commodities typically have low correlation with equities and protect against inflation.
Q79.
The most illiquid type of hedge fund investment is:
A. Macro fund
B. Event-driven distressed debt
C. Long/short equity fund
D. Commodity pool
✅ Answer: B. Event-driven distressed debt
Explanation: Distressed debt positions can be locked up for long periods with limited secondary trading.
Q80.
In private equity, the J-curve effect describes:
A. Early losses followed by later gains
B. Consistent high returns
C. Immediate exponential growth
D. Returns that mirror bond yields
✅ Answer: A. Early losses followed by later gains
Explanation: Private equity often shows negative returns initially due to fees and expenses before performance improves.
Q81.
Which real estate metric measures annual net operating income (NOI) divided by property value?
A. Dividend yield
B. Cap rate
C. LTV ratio
D. Earnings yield
✅ Answer: B. Cap rate
Explanation: The capitalization rate evaluates property income return relative to market value.
Q82.
Which hedge fund strategy is most exposed to corporate bankruptcy risks?
A. Market neutral
B. Event-driven distressed securities
C. Macro
D. Quantitative arbitrage
✅ Answer: B. Event-driven distressed securities
Explanation: Distressed securities involve bankrupt or near-bankrupt companies, making default risk high.
Q83.
Which alternative investment often involves carried interest as a performance fee?
A. Commodities
B. Private equity
C. Real estate REITs
D. Hedge funds
✅ Answer: B. Private equity
Explanation: Private equity managers earn carried interest as a share of profits above a threshold.
Q84.
What is the main disadvantage of fund-of-funds hedge funds?
A. Reduced diversification
B. Lower liquidity
C. Double fees
D. No access to alternative managers
✅ Answer: C. Double fees
Explanation: Investors pay management and performance fees at both fund-of-fund and underlying fund levels.
Q85.
Which factor is most important when analyzing infrastructure investments?
A. Correlation with tech stocks
B. Regulatory and political environment
C. Dividend payout ratio
D. Market capitalization
✅ Answer: B. Regulatory and political environment
Explanation: Infrastructure projects (toll roads, airports, utilities) are heavily regulated and politically sensitive.
Q86.
Which commodity futures condition indicates downward-sloping forward curves?
A. Contango
B. Backwardation
C. Spot parity
D. Arbitrage neutrality
✅ Answer: B. Backwardation
Explanation: Backwardation occurs when futures prices are lower than spot prices.
Q87.
Which hedge fund fee structure aligns manager and investor interests best?
A. Flat management fee only
B. Incentive fee with high-water mark
C. Fixed carried interest
D. Guaranteed returns
✅ Answer: B. Incentive fee with high-water mark
Explanation: High-water marks prevent managers from earning fees until prior losses are recovered.
Q88.
Which risk is unique to real estate compared to other alternatives?
A. Market risk
B. Tenant and vacancy risk
C. Currency risk
D. Inflation risk
✅ Answer: B. Tenant and vacancy risk
Explanation: Real estate income depends heavily on occupancy and tenant stability.
Q89.
Which hedge fund strategy relies most on global interest rate movements?
A. Event-driven
B. Relative value arbitrage
C. Macro strategy
D. Distressed debt
✅ Answer: C. Macro strategy
Explanation: Macro funds often bet on currency and rate changes driven by global economics.
Q90.
Which is a common exit strategy for private equity?
A. Dividend payout
B. Secondary buyout or IPO
C. Bond issuance
D. Commodity hedging
✅ Answer: B. Secondary buyout or IPO
Explanation: Private equity firms exit by selling to other firms or going public.
Q91.
Which commodities are most influenced by weather patterns?
A. Industrial metals
B. Energy
C. Agricultural products
D. Precious metals
✅ Answer: C. Agricultural products
Explanation: Crops are highly sensitive to seasonal and climate conditions.
Q92.
Which metric is most used to evaluate hedge fund returns relative to risk?
A. Sharpe ratio
B. Dividend yield
C. P/E ratio
D. Current yield
✅ Answer: A. Sharpe ratio
Explanation: Sharpe ratio measures excess return per unit of risk, common in hedge fund analysis.
Q93.
Which private equity stage involves early expansion but not yet maturity?
A. Seed stage
B. Venture capital growth stage
C. Leveraged buyout
D. Distressed investing
✅ Answer: B. Venture capital growth stage
Explanation: Growth-stage financing supports scaling operations before profitability.
Q94.
Which hedge fund strategy profits from pricing differences in convertible securities?
A. Macro
B. Convertible arbitrage
C. Market neutral
D. Event-driven
✅ Answer: B. Convertible arbitrage
Explanation: Convertible arbitrage exploits mispricing between convertible bonds and underlying equity.
Q95.
Which real estate risk increases most during economic downturns?
A. Interest rate risk
B. Vacancy and rental income risk
C. Inflation risk
D. Currency fluctuations
✅ Answer: B. Vacancy and rental income risk
Explanation: In downturns, tenants may default, lowering occupancy and cash flow.
Q96.
Which alternative investment often requires capital calls over time rather than upfront?
A. Hedge funds
B. Private equity
C. Commodities
D. REITs
✅ Answer: B. Private equity
Explanation: Investors commit funds, but capital is drawn gradually as opportunities arise.
Q97.
Which hedge fund measure shows whether the manager added value versus passive exposure?
A. Alpha
B. Beta
C. Standard deviation
D. P/E multiple
✅ Answer: A. Alpha
Explanation: Alpha measures excess return beyond market-related beta exposure.
Q98.
Which alternative investment is most prone to political and regulatory risks?
A. Commodities
B. Infrastructure projects
C. REITs
D. Hedge funds
✅ Answer: B. Infrastructure projects
Explanation: Infrastructure investments like toll roads depend heavily on government regulation.
Q99.
Which hedge fund strategy aims to maintain neutral exposure to market beta?
A. Relative value arbitrage
B. Equity long/short
C. Macro
D. Distressed debt
✅ Answer: A. Relative value arbitrage
Explanation: Relative value and market-neutral funds hedge out broad market risk while exploiting mispricing.
Q100.
What is the primary diversification benefit of alternative investments?
A. Lower taxes
B. Higher short-term liquidity
C. Low correlation with traditional assets
D. Elimination of market risk
✅ Answer: C. Low correlation with traditional assets
Explanation: Alternatives help reduce portfolio volatility due to their unique risk-return profiles.
Q101.
Which hedge fund strategy attempts to profit from small pricing differences between related securities?
A. Event-driven
B. Relative value arbitrage
C. Macro
D. Long/short equity
✅ Answer: B. Relative value arbitrage
Explanation: This strategy identifies minor mispricings between related instruments and hedges systemic risk.
Q102.
What is the main risk of private equity buyouts?
A. Market timing risk
B. High leverage risk
C. Dividend reinvestment risk
D. Currency risk only
✅ Answer: B. High leverage risk
Explanation: Buyouts often rely heavily on debt, increasing financial and default risks.
Q103.
Which real estate investment provides the greatest liquidity?
A. Direct property investment
B. Mortgage-backed securities (MBS)
C. Private REITs
D. Infrastructure trust
✅ Answer: B. Mortgage-backed securities (MBS)
Explanation: MBS are traded in secondary markets, offering higher liquidity than direct holdings.
Q104.
The Sharpe ratio is most commonly used to evaluate:
A. Hedge fund tax benefits
B. Risk-adjusted returns of alternative investments
C. Real estate yield premium
D. Commodity volatility
✅ Answer: B. Risk-adjusted returns of alternative investments
Explanation: Sharpe ratio compares excess return per unit of risk.
Q105.
Which commodity is considered a safe-haven asset during crises?
A. Oil
B. Gold
C. Corn
D. Copper
✅ Answer: B. Gold
Explanation: Gold is historically used as a hedge against economic downturns and currency depreciation.
Q106.
Which hedge fund strategy has the highest correlation with equity markets?
A. Long/short equity
B. Distressed securities
C. Relative value arbitrage
D. Macro
✅ Answer: A. Long/short equity
Explanation: Despite hedging, equity exposure remains significant, creating correlation with equity markets.
Q107.
The key valuation metric for private equity funds is:
A. Net asset value (NAV)
B. Price-to-earnings ratio
C. Dividend payout ratio
D. Book value per share
✅ Answer: A. Net asset value (NAV)
Explanation: NAV tracks the fair value of private equity portfolios and fund performance.
Q108.
Which hedge fund structure is least liquid for investors?
A. Open-end mutual hedge structure
B. Fund-of-funds
C. Closed-end private hedge fund
D. Exchange-traded commodity fund
✅ Answer: C. Closed-end private hedge fund
Explanation: Closed-end structures impose lock-up periods, restricting redemptions.
Q109.
Infrastructure projects such as airports or toll roads often generate returns via:
A. Volatile market pricing
B. Stable long-term cash flows
C. Commodity-linked pricing
D. Secondary buyouts
✅ Answer: B. Stable long-term cash flows
Explanation: Infrastructure generates predictable income, appealing to long-term investors.
Q110.
Which hedge fund strategy is most likely to exploit mergers and acquisitions?
A. Event-driven
B. Macro
C. Quantitative arbitrage
D. Equity long/short
✅ Answer: A. Event-driven
Explanation: Event-driven funds profit from M&A activities, bankruptcy, and restructurings.
Q111.
Which risk measure is most relevant for commodities trading?
A. Tracking error
B. Margin call risk
C. Volatility index (VIX)
D. Currency hedging
✅ Answer: B. Margin call risk
Explanation: Commodities trading is highly leveraged, making margin calls critical.
Q112.
The primary diversification benefit of alternative investments is:
A. Higher short-term liquidity
B. Low correlation with equities and bonds
C. Guaranteed inflation protection
D. Higher credit ratings
✅ Answer: B. Low correlation with equities and bonds
Explanation: Alternatives reduce portfolio volatility due to different return drivers.
Q113.
What distinguishes hedge funds from mutual funds?
A. Use of derivatives and leverage
B. Daily pricing transparency
C. Regulation under the SEC
D. Retail investor focus
✅ Answer: A. Use of derivatives and leverage
Explanation: Hedge funds employ complex strategies with higher risk flexibility.
Q114.
Which private equity exit method involves selling to another PE firm?
A. IPO
B. Secondary buyout
C. Dividend recapitalization
D. Asset stripping
✅ Answer: B. Secondary buyout
Explanation: Secondary buyouts occur when one PE firm sells to another.
Q115.
Which is a major drawback of commodities?
A. Poor inflation hedging
B. High storage and transaction costs
C. No exposure to global demand
D. Limited market size
✅ Answer: B. High storage and transaction costs
Explanation: Commodities require costly physical storage and logistics.
Q116.
Which real estate vehicle trades on public exchanges?
A. REITs
B. Private equity real estate fund
C. Direct ownership
D. Infrastructure trust
✅ Answer: A. REITs
Explanation: Real Estate Investment Trusts are publicly traded and liquid.
Q117.
The risk-return profile of hedge funds is often characterized as:
A. High beta, low alpha
B. Low beta, potential positive alpha
C. Zero alpha, high beta
D. Negative beta, guaranteed returns
✅ Answer: B. Low beta, potential positive alpha
Explanation: Hedge funds aim for low market dependence with skill-driven returns.
Q118.
Which is an example of a distressed securities investment?
A. Buying a bankrupt company’s bonds at discount
B. Buying U.S. Treasury bills
C. Investing in a growth-stage tech IPO
D. Purchasing farmland
✅ Answer: A. Buying a bankrupt company’s bonds at discount
Explanation: Distressed securities focus on undervalued companies in bankruptcy or restructuring.
Q119.
Which alternative investment is most likely to involve capital commitments and calls?
A. Hedge funds
B. Private equity
C. Commodities futures
D. REITs
✅ Answer: B. Private equity
Explanation: PE investors pledge capital upfront, drawn over years.
Q120.
Which hedge fund strategy attempts to exploit interest rate differentials?
A. Macro
B. Distressed
C. Event-driven
D. Equity long/short
✅ Answer: A. Macro
Explanation: Macro funds often bet on global currencies, interest rates, and economic shifts.
Q121.
Which measure is commonly used to assess the downside risk of hedge funds?
A. Beta
B. Sortino ratio
C. P/E ratio
D. Net asset value
✅ Answer: B. Sortino ratio
Explanation: Sortino ratio considers only downside volatility, making it more relevant than Sharpe ratio for hedge funds.
Q122.
Which private equity investment focuses on early-stage companies?
A. Growth equity
B. Buyouts
C. Venture capital
D. Distressed assets
✅ Answer: C. Venture capital
Explanation: VC firms fund startups and early-stage firms with high growth potential.
Q123.
Which of the following is a direct investment in commodities?
A. Futures contracts
B. ETF tracking gold
C. Buying oil refinery stocks
D. REIT
✅ Answer: A. Futures contracts
Explanation: Futures represent direct exposure to commodity prices.
Q124.
A lock-up period in hedge funds means:
A. Fund guarantees fixed returns for 3 years
B. Investors cannot withdraw capital for a certain time
C. Fund must hold assets for a fixed minimum time
D. Securities cannot be traded
✅ Answer: B. Investors cannot withdraw capital for a certain time
Explanation: Lock-ups restrict investor withdrawals, ensuring fund stability.
Q125.
What is the key inflation-hedging property of commodities?
A. They have negative correlation with inflation
B. Commodity prices rise when inflation rises
C. They provide higher coupon payments
D. They have stable bond-like returns
✅ Answer: B. Commodity prices rise when inflation rises
Explanation: Commodities, especially energy and metals, typically move with inflation.
Q126.
The most common benchmark for hedge funds is:
A. S&P 500
B. HFRI Fund of Funds Index
C. LIBOR
D. Dow Jones Industrial Average
✅ Answer: B. HFRI Fund of Funds Index
Explanation: HFRI indices are widely used to benchmark hedge fund performance.
Q127.
Which type of REIT invests primarily in mortgages rather than properties?
A. Equity REITs
B. Mortgage REITs
C. Hybrid REITs
D. Private REITs
✅ Answer: B. Mortgage REITs
Explanation: Mortgage REITs earn returns from mortgage-backed securities.
Q128.
What is the primary drawback of hedge fund fee structures?
A. Low incentive alignment
B. High fees (2 and 20 model)
C. No performance-based compensation
D. No capital lock-up
✅ Answer: B. High fees (2 and 20 model)
Explanation: Hedge funds often charge 2% management fee and 20% of profits.
Q129.
Which type of alternative investment is most exposed to regulatory risks?
A. Hedge funds
B. Private equity
C. Commodities
D. Infrastructure
✅ Answer: A. Hedge funds
Explanation: Hedge funds operate in less regulated markets but face potential future regulation.
Q130.
Which investment is most likely to have valuation lags?
A. Hedge funds
B. Private equity
C. Commodities futures
D. Public REITs
✅ Answer: B. Private equity
Explanation: Private equity portfolios are revalued quarterly or annually, causing lagged valuations.
Q131.
Which commodity is most sensitive to geopolitical risks?
A. Oil
B. Wheat
C. Gold
D. Silver
✅ Answer: A. Oil
Explanation: Oil prices react strongly to supply shocks and global conflicts.
Q132.
A fund-of-funds hedge fund invests in:
A. Commodities only
B. Multiple hedge funds
C. Infrastructure projects
D. Private equity
✅ Answer: B. Multiple hedge funds
Explanation: Fund-of-funds diversify across hedge funds but add extra fee layers.
Q133.
What is the primary advantage of infrastructure investment?
A. Short-term speculative gains
B. Low initial capital requirement
C. Inflation-linked, stable cash flows
D. Zero market risk
✅ Answer: C. Inflation-linked, stable cash flows
Explanation: Infrastructure revenues often rise with inflation.
Q134.
Which of the following is a common due diligence risk in hedge funds?
A. Performance fees
B. Transparency and fraud risk
C. Currency hedging
D. Interest rate swaps
✅ Answer: B. Transparency and fraud risk
Explanation: Due diligence focuses on governance, transparency, and avoiding fraud.
Q135.
What is the main difference between private equity and venture capital?
A. PE invests in mature companies, VC in startups
B. PE is short-term, VC is long-term
C. VC uses more leverage than PE
D. PE invests only in tech
✅ Answer: A. PE invests in mature companies, VC in startups
Explanation: Private equity funds buy established firms, while venture capital backs startups.
Q136.
Which measure is best for evaluating hedge fund performance with non-normal returns?
A. Sharpe ratio
B. Value at Risk (VaR)
C. Sortino ratio
D. Maximum drawdown
✅ Answer: D. Maximum drawdown
Explanation: Drawdown shows worst-case cumulative losses, relevant for skewed returns.
Q137.
What is the liquidity risk in private equity?
A. Long holding periods and no secondary market
B. High margin requirements
C. Daily pricing volatility
D. Lack of fund leverage
✅ Answer: A. Long holding periods and no secondary market
Explanation: PE investors commit funds for 7–10 years without liquidity.
Q138.
Which real estate metric measures annual rent relative to property value?
A. Capitalization rate (Cap rate)
B. Price-to-rent ratio
C. Loan-to-value ratio
D. Debt-service coverage ratio
✅ Answer: A. Capitalization rate (Cap rate)
Explanation: Cap rate = Net Operating Income ÷ Property Value.
Q139.
The main driver of commodity returns is:
A. Earnings growth
B. Supply-demand imbalances
C. Tax policy
D. Dividend yield
✅ Answer: B. Supply-demand imbalances
Explanation: Commodity prices depend on global production and demand shocks.
Q140.
Which hedge fund strategy bets on macroeconomic events such as interest rates?
A. Macro
B. Event-driven
C. Relative value
D. Distressed securities
✅ Answer: A. Macro
Explanation: Macro hedge funds profit from global economic shifts.
Q141.
Which alternative investment is most often used for inflation hedging?
A. Private equity
B. Real estate
C. Hedge funds
D. Private credit
✅ Answer: B. Real estate
Explanation: Rental income typically rises with inflation.
Q142.
Which private equity exit strategy is most risky but profitable?
A. IPO
B. Sale to another PE fund
C. Liquidation
D. Dividend recap
✅ Answer: A. IPO
Explanation: IPOs provide high valuations but carry execution risk.
Q143.
What is a hurdle rate in hedge funds?
A. Minimum return before performance fees apply
B. Annual fixed fee charged regardless of performance
C. Risk-free rate
D. Lock-up duration
✅ Answer: A. Minimum return before performance fees apply
Explanation: Hedge funds only charge incentive fees after exceeding hurdle rates.
Q144.
Which alternative investment category includes timberland and farmland?
A. Commodities
B. Infrastructure
C. Real assets
D. Hedge funds
✅ Answer: C. Real assets
Explanation: Timberland and farmland are tangible income-generating assets.
Q145.
What is the main risk in distressed securities investing?
A. Credit/default risk
B. Foreign exchange risk
C. Inflation risk
D. Interest rate risk
✅ Answer: A. Credit/default risk
Explanation: Distressed securities involve firms with high bankruptcy risk.
Q146.
Which hedge fund strategy is least dependent on market movements?
A. Market-neutral arbitrage
B. Long/short equity
C. Macro
D. Event-driven
✅ Answer: A. Market-neutral arbitrage
Explanation: Market-neutral funds hedge exposures to isolate alpha.
Q147.
Which valuation method is most suitable for illiquid private assets?
A. Market multiples
B. Discounted cash flow (DCF)
C. Net present value of dividends
D. Technical analysis
✅ Answer: B. Discounted cash flow (DCF)
Explanation: DCF models project cash flows, useful when no market prices exist.
Q148.
What is the key reason investors add alternative investments to a portfolio?
A. To increase volatility
B. To diversify and improve risk-adjusted returns
C. To increase regulation
D. To replicate equities
✅ Answer: B. To diversify and improve risk-adjusted returns
Explanation: Alternatives provide diversification benefits with potential alpha.
Q149.
Which hedge fund style is most exposed to credit cycles?
A. Distressed securities
B. Macro
C. Equity long/short
D. Relative value
✅ Answer: A. Distressed securities
Explanation: Credit cycles determine success in distressed investing.
Q150.
Which of the following is a disadvantage of REITs?
A. Lack of liquidity
B. Dividend tax treatment
C. Non-correlation with equities
D. Transparency
✅ Answer: B. Dividend tax treatment
Explanation: REIT dividends are often taxed as ordinary income, reducing net returns.
Q151.
Which alternative investment typically provides the lowest liquidity?
A. Commodities futures
B. Listed REITs
C. Private equity
D. Hedge funds
✅ Answer: C. Private equity
Explanation: PE requires long lock-in periods (7–10 years), making it the least liquid.
Q152.
Which hedge fund style profits from price inefficiencies between related securities?
A. Macro
B. Relative value
C. Event-driven
D. Equity long/short
✅ Answer: B. Relative value
Explanation: Relative value strategies exploit pricing mismatches across markets.
Q153.
Which private equity strategy targets underperforming firms to restructure them?
A. Growth equity
B. Leveraged buyouts (LBOs)
C. Venture capital
D. Angel investing
✅ Answer: B. Leveraged buyouts (LBOs)
Explanation: LBOs acquire mature but undervalued firms to improve operations and resell.
Q154.
Which real estate metric evaluates ability to cover debt payments?
A. Cap rate
B. Net present value
C. Debt-service coverage ratio (DSCR)
D. Internal rate of return
✅ Answer: C. Debt-service coverage ratio (DSCR)
Explanation: DSCR = Net Operating Income ÷ Debt Payments, used by lenders to assess risk.
Q155.
A key risk in commodity futures investing is:
A. Leverage and margin calls
B. No counterparty risk
C. Low volatility
D. Guaranteed positive roll yield
✅ Answer: A. Leverage and margin calls
Explanation: Futures contracts are highly leveraged, making losses rapid.
Q156.
Which of the following is a hybrid REIT?
A. Holds only mortgages
B. Holds both properties and mortgages
C. Only invests in commercial real estate
D. Only invests in residential real estate
✅ Answer: B. Holds both properties and mortgages
Explanation: Hybrid REITs combine features of equity and mortgage REITs.
Q157.
Which hedge fund risk is most difficult to measure using traditional metrics?
A. Volatility
B. Skewness and kurtosis in returns
C. Credit risk
D. Market beta
✅ Answer: B. Skewness and kurtosis in returns
Explanation: Hedge fund returns often show fat tails, not captured by variance alone.
Q158.
What is the main reason commodities are used in portfolios?
A. To reduce volatility through diversification
B. To increase correlation with equities
C. To increase short-term speculation
D. To ensure steady dividends
✅ Answer: A. To reduce volatility through diversification
Explanation: Commodities have low correlation with equities, enhancing diversification.
Q159.
Which private equity exit option often yields the quickest liquidity?
A. IPO
B. Sale to another company (trade sale)
C. Dividend recapitalization
D. Secondary sale
✅ Answer: B. Sale to another company (trade sale)
Explanation: Trade sales provide faster exits compared to IPOs or secondary sales.
Q160.
Which hedge fund strategy is often called “event arbitrage”?
A. Macro
B. Event-driven
C. Relative value
D. Distressed securities
✅ Answer: B. Event-driven
Explanation: Event-driven strategies profit from corporate events (M&A, bankruptcies).
Q161.
What is the biggest disadvantage of hedge fund transparency?
A. Fraud risk
B. Limited liquidity
C. Opaque strategies and reporting
D. High leverage
✅ Answer: C. Opaque strategies and reporting
Explanation: Hedge funds disclose less information than mutual funds.
Q162.
Which type of commodity future has the highest storage costs?
A. Oil
B. Wheat
C. Gold
D. Silver
✅ Answer: B. Wheat
Explanation: Agricultural commodities have high storage and spoilage risks.
Q163.
Which alternative investment class is most correlated with equity markets?
A. REITs
B. Hedge funds
C. Commodities
D. Infrastructure
✅ Answer: A. REITs
Explanation: Publicly traded REITs move closely with stock markets.
Q164.
Which private equity performance measure accounts for time value of cash flows?
A. DPI (Distributions to Paid-In Capital)
B. RVPI (Residual Value to Paid-In Capital)
C. TVPI (Total Value to Paid-In Capital)
D. IRR (Internal Rate of Return)
✅ Answer: D. IRR
Explanation: IRR accounts for timing of cash inflows/outflows, making it superior.
Q165.
What is the primary benefit of infrastructure projects as investments?
A. High liquidity
B. Inflation-linked stable cash flows
C. No government involvement
D. Zero risk
✅ Answer: B. Inflation-linked stable cash flows
Explanation: Infrastructure revenues (tolls, utilities) usually track inflation.
Q166.
Which hedge fund style is most leveraged?
A. Distressed debt
B. Fixed income arbitrage
C. Macro
D. Long/short equity
✅ Answer: B. Fixed income arbitrage
Explanation: Fixed income arbitrage often uses high leverage to profit from small spreads.
Q167.
What is the primary disadvantage of fund-of-funds hedge funds?
A. Diversification
B. Higher fees due to two layers
C. Transparency
D. High returns
✅ Answer: B. Higher fees due to two layers
Explanation: Investors pay both the underlying hedge fund fees and fund-of-funds fees.
Q168.
Which of the following best describes distressed debt investing?
A. Buying stocks of high-growth firms
B. Buying debt of companies near bankruptcy at discount
C. Short-selling government bonds
D. Commodity speculation
✅ Answer: B. Buying debt of companies near bankruptcy at discount
Explanation: Distressed investors hope for recovery or restructuring gains.
Q169.
Which hedge fund strategy is most dependent on interest rate changes?
A. Fixed income arbitrage
B. Event-driven
C. Relative value
D. Macro
✅ Answer: A. Fixed income arbitrage
Explanation: Profits depend heavily on rate spreads and yield curve shifts.
Q170.
Which risk is highest in commodities investing?
A. Counterparty risk
B. Regulatory risk
C. Price volatility risk
D. Inflation risk
✅ Answer: C. Price volatility risk
Explanation: Commodities are highly volatile due to weather, politics, and demand shocks.
Q171.
Which hedge fund metric shows loss from peak to trough?
A. Alpha
B. Maximum drawdown
C. Sortino ratio
D. Value at Risk
✅ Answer: B. Maximum drawdown
Explanation: It reflects worst historical loss, critical in hedge fund evaluation.
Q172.
Which alternative investment is least correlated with equities?
A. Private equity
B. Real estate
C. Commodities
D. Hedge funds
✅ Answer: C. Commodities
Explanation: Commodities often move independently of stock markets.
Q173.
What is the primary source of returns in private equity?
A. Dividend yield
B. Operational improvements and multiple expansion
C. Risk-free rates
D. Arbitrage
✅ Answer: B. Operational improvements and multiple expansion
Explanation: Value is created by restructuring and selling firms at higher valuations.
Q174.
Which hedge fund strategy is most vulnerable to market crashes?
A. Long-only equity funds
B. Market-neutral arbitrage
C. Macro hedge funds
D. Relative value
✅ Answer: A. Long-only equity funds
Explanation: Long equity funds fall sharply in bear markets.
Q175.
Which commodity is seen as a safe haven asset?
A. Oil
B. Wheat
C. Gold
D. Copper
✅ Answer: C. Gold
Explanation: Gold is used as a safe haven during crises.
Q176.
Which REIT type benefits most from rising interest rates?
A. Mortgage REITs
B. Equity REITs
C. Hybrid REITs
D. Public REITs
✅ Answer: A. Mortgage REITs
Explanation: Rising rates increase earnings from new mortgages.
Q177.
Which hedge fund strategy involves bets on global currencies?
A. Macro
B. Relative value
C. Event-driven
D. Distressed debt
✅ Answer: A. Macro
Explanation: Macro funds speculate on global interest rates and currencies.
Q178.
Which private equity metric measures cash returned vs. invested capital?
A. RVPI
B. DPI
C. IRR
D. Cap rate
✅ Answer: B. DPI
Explanation: Distributions to Paid-In Capital shows realized returns relative to capital invested.
Q179.
Which factor most affects real estate returns?
A. Rental income growth
B. Central bank monetary policy
C. Storage costs
D. Venture funding
✅ Answer: A. Rental income growth
Explanation: Rental income drives property valuations and investor returns.
Q180.
Which hedge fund strategy profits from bankruptcies and restructurings?
A. Distressed debt
B. Macro
C. Relative value
D. Market neutral
✅ Answer: A. Distressed debt
Explanation: Distressed investing targets deeply discounted securities of troubled firms.
Q181.
What is the primary challenge of valuing private equity?
A. Lack of daily market prices
B. High management fees
C. High turnover
D. Excess liquidity
✅ Answer: A. Lack of daily market prices
Explanation: PE valuation is complex due to infrequent appraisals.
Q182.
Which hedge fund strategy bets on merger outcomes?
A. Merger arbitrage
B. Macro
C. Distressed debt
D. Long/short equity
✅ Answer: A. Merger arbitrage
Explanation: Profits from pricing inefficiencies during M&A deals.
Q183.
What is the key risk in infrastructure investments?
A. Political and regulatory risk
B. Volatility risk
C. Fraud risk
D. High liquidity
✅ Answer: A. Political and regulatory risk
Explanation: Infrastructure projects depend on government policies and contracts.
Q184.
Which commodity investment approach avoids storage issues?
A. Futures contracts
B. Commodity ETFs
C. Buying physical commodities
D. Forward contracts
✅ Answer: B. Commodity ETFs
Explanation: ETFs provide exposure without storage/logistics problems.
Q185.
Which hedge fund strategy bets on credit spreads?
A. Event-driven
B. Credit arbitrage
C. Macro
D. Distressed debt
✅ Answer: B. Credit arbitrage
Explanation: Profits from relative movements in corporate bond spreads.
Q186.
Which real asset is most influenced by population growth?
A. Commodities
B. Real estate
C. Hedge funds
D. Private equity
✅ Answer: B. Real estate
Explanation: Housing demand increases with population growth.
Q187.
Which hedge fund measure shows return per unit of downside deviation?
A. Sharpe ratio
B. Sortino ratio
C. Maximum drawdown
D. IRR
✅ Answer: B. Sortino ratio
Explanation: Sortino considers only downside volatility, making it better for hedge funds.
Q188.
Which commodity is most exposed to weather shocks?
A. Corn
B. Gold
C. Oil
D. Copper
✅ Answer: A. Corn
Explanation: Agricultural commodities are highly weather-sensitive.
Q189.
Which private equity term refers to capital still uninvested?
A. Dry powder
B. Lock-up
C. DPI
D. RVPI
✅ Answer: A. Dry powder
Explanation: Dry powder is committed but uninvested capital.
Q190.
Which REIT metric measures profitability relative to cash flows?
A. Funds from operations (FFO)
B. Net present value
C. IRR
D. RVPI
✅ Answer: A. Funds from operations (FFO)
Explanation: FFO adjusts net income for depreciation, used to value REITs.
Q191.
What is the key risk in commodities ETFs?
A. Counterparty and tracking error risk
B. No leverage risk
C. Guaranteed positive return
D. No inflation hedge
✅ Answer: A. Counterparty and tracking error risk
Explanation: ETFs may not perfectly track spot prices.
Q192.
Which hedge fund strategy is best for short-term arbitrage?
A. Relative value
B. Macro
C. Distressed debt
D. Event-driven
✅ Answer: A. Relative value
Explanation: Relative value trades profit from temporary mispricings.
Q193.
Which infrastructure investment has highest political sensitivity?
A. Toll roads
B. Renewable energy projects
C. Commercial real estate
D. Timberland
✅ Answer: B. Renewable energy projects
Explanation: Renewable projects depend heavily on subsidies and regulations.
Q194.
Which hedge fund risk measure uses simulated distributions?
A. Value at Risk (VaR)
B. Maximum drawdown
C. Alpha
D. Sortino ratio
✅ Answer: A. Value at Risk (VaR)
Explanation: VaR estimates maximum potential losses under specific confidence levels.
Q195.
Which alternative investment is most dependent on government policies?
A. Infrastructure
B. Commodities
C. Hedge funds
D. Real estate
✅ Answer: A. Infrastructure
Explanation: Infrastructure projects often rely on contracts, licenses, and subsidies.
Q196.
Which private equity investment strategy is considered least risky?
A. Venture capital
B. Growth equity
C. Distressed debt
D. Angel investing
✅ Answer: B. Growth equity
Explanation: Growth equity invests in mature but expanding companies.
Q197.
What is the main source of commodity futures returns?
A. Spot return + Roll yield + Collateral yield
B. Dividend yield
C. Rental yield
D. Leverage return
✅ Answer: A. Spot return + Roll yield + Collateral yield
Explanation: These three components determine futures returns.
Q198.
Which hedge fund style is most exposed to correlated market crashes?
A. Long/short equity
B. Market neutral
C. Relative value
D. Macro
✅ Answer: A. Long/short equity
Explanation: Equity beta exposure makes long/short funds vulnerable.
Q199.
Which metric best evaluates REIT distribution sustainability?
A. FFO (Funds From Operations)
B. Cap rate
C. IRR
D. RVPI
✅ Answer: A. FFO (Funds From Operations)
Explanation: FFO reflects recurring profitability after depreciation.
Q200.
What is the primary portfolio role of alternative investments?
A. Speculative leverage
B. Diversification and inflation hedging
C. Replace fixed income entirely
D. Eliminate risk
✅ Answer: B. Diversification and inflation hedging
Explanation: Alternatives diversify portfolios and provide inflation protection.