CFA L-1 Premium Practice Pack-2024

Index

Page No.
Sr. No Title

1 Alternative Investments

36
2 Corporate Issuers

71
3 Derivatives

110
Economics

163
5 Equity Investment

Ethical and Professional Standards 243

6

Fixed Income
336
7

Financial Statement Analysis 392

Portfolio Management 470

9

Quantitative Methods 521

10
 Alternative Investments: Practice Pack-Questions
Question 1 of64
Question
statements about distributed ledger technology is most accurate?
Which of thefollowingpermissioned network
A. Bitcoin uses a the blockchain.
Miners execute smart contracts in
B of physical assets.
C. Tokenization can streamline the transfer of ownership

Question 2of 64
Question decentralized exchanges are:
Compared to centralized cryptocurrency exchanges,
attacks from hackers.
A less likely to be regulated and less susceptible to attacks from hackers.
B less likely to be regulated and more susceptible to attacks from hackers.
C more likely to be regulated and less susceptible to

Question 3 of 64
Question
Which of the following forms of digital asset investment most likely involves the use of a
cryptocurrency wallet?
A Direct investment
B. Indirect investment via ETFs
C. Indirect investment via coin trusts

Question 4 of 64
Question
Which of thefollowing statements is most accurate? Cryptocurrencies:
A exhibit low volatility.
B. have no limits on the total amount of currency that may be issued.
C. allow transactions between parties without the need for an intermediary.
Question 5 of 64
Question
The process of representing ownership rights to physical assets on a distributed ledger is
referred to as:
A. tokenízation.
B ínítial coin offering
C. consensus mechanism.

Question 6 of 64
Question
The correlation of
cryptocurrencies with traditional assets has been:
A.
B decreasing
steady.
C.
increasing
Question 7 of 64
1
returns?
classes
bitcoin
asset
generation
traditional
of
driver
major cashflow
with
a
likely correlation
underlying
adoption
market
Increased
most
is high
following
of
prospect
Consistently
the
The
of
Question
Which
A. B. C.
 C. B. A.With
Question
Question C.throughAFromQuestion
B Question Question
C. B.Question
AA Question
CVenture
A
B Question C. B A A
Question
set Question B. A.Question
C. Compared C. B. AQuestion
Question
leveraged measure Question Cryptocurrencies
respect amount
recapitalization.
investing.
minority
equityventure lower
flexibility
valuation. that tothat private
equity.
hedge real
funds.estate. period.
notice gate.
period.
lockup
14
floating athe
perspective 13 mature 12 capital doare can individuals
individuals,
corporations only.
special is
11 10 not 9 8
of deal of that
of of generally be to of of
to 64
of comes itselfloan
of 64
capital.private 64 64 64 time 64 traditional
haveinvested 64
of companies is restricts
risk purpose best can
the withlevered. best is
in an
due
transaction of classified order recorded
inherent
corporations and
be
equity, a warrants defined in
to private
acquisition new throughfinancial organisations issued
restrictions in to
the financial investors
implement
or as as value in by:
growth structure. equity a private
indirect assets, and
conversion loan: a
company sub-category based
in
organisations.
on firm, difficulty. only.
capital the a ledgers digital
3 redemptions. hedge investment
on
an fund's
(SPAC) rights. underlying
strategy advantage maintained assets:
of: fund
investment
most from vehicles
is assets
also likely of
exiting redeeming by
known strategy central such
or
include:
a on as
as: portfolio their potential ETFs.
intermediaries.
is
known
capital
company cash
as
a:for flows.
a
Question 15 of64
Question require the highest levelof scrutiny and
Which of the following hedge fund investments
due diligence?

A Level 1 assets
B Level 2 assets
C. Level 3 assets

Question 16 of64
Question restrictions on:
Hedge funds are most likely to place
A redemptions.
B the use of leverage.
the use of derivatives.
C
Solution

Question 17 of64
Question
Crude oil is categorized as:

A a soft commodity.
B ahard commodity.
C. neither a soft commodity nor a hard commodity.

Question 18 of 64
Question offers:
in alternative investments most likely
Compared with direct investing, co-investingselection process.
A. reduced control over the investment
investment selection process.
B. the same level of control over the
C. higher control over the investment selection process.

Question 19 of 64
Question investments provides
Which of the following methods of investing in alternative
the most flexibility tothe investor?
A Co-investing
B Fund investing
C. Direct investing

Question 20 of 64
Question
Which of the following is best classified as a commodity?
A Livestock
B Timberland
C. Agricultural land

4
 Question 21 of64
Question infrastructure projects typically:
Investors in greenfield
history.
financial and operating
A rely on the assets' investors or developers.
B invest alongside strategicrisk than investors in brownfield projects.
have lower development
C

Question 22 of64
fund:
following information about a hedge
Question
Ananalyst gathers the
(AUM) $500 million
Beginning-of-year assets under management
22%
Annual return before fees
before fees 2%
Management fee, based on end-of-year AUM
15%
Incentive fee
10%
Hard hurdle rate
of management fees is closest to:
The incentive fee (in $millions) based on returns net
A 7.2.
B. 13.0.
C. 14.7.

Question 23 of 64
Question
purchase of
Ahedge fund strategy that seeks to influence acompany's policies through the
equity is best described as a(n):
A activist strategy.
B. market-neutral strategy.
C merger arbitrage strategy.

Question 24 of 64
Question
Event-driven hedge fund strategies are most likely:
A long biased.
B. based on 'top-down' analysis.
C. exploiting short-term pricing discrepancies between two related securities.

Question 25 of 64
Question
Which of the following are best categorized as social
A infrastructure assets?
B
Airports
Correctional facilities
C.
Telecommunication towers

Question 26 of 64
Question
Which of the following statements is most
A. tend to be more efficiently priced accurate? Alternative investments:
B. falloutside of the definition of than traditional investmernts.
C. have relatively high correlationlong-only positions in stocks, bonds, and cash.
of returns with those of traditional
investments.
5
 Question 27 of 64
Question
fund:
Ananalyst gathers the following information about a hedge
beginning of year
$200million in assets under management at the under
assets management
a 2% management fee based on year-endmanagement fee
calculated net of the
a 20% incentive fee
total fees earned by the fund manager
Ifthe fund's gross return is 25% during the year, the
are:

A. $11 million.
B $14 million.
C. $15million.

Question 28of 64
Question assets under management for:
Management fees are most likely based on
A. hedge funds only.
B private equity funds only.
C. both hedge funds and private equity funds.

Question 29 of 64
Question
vehicle that employs both long and short positions is most
A leveraged private investment
likely a:
A. hedge fund.
B. private equity fund.
C venture capital fund.

Question 30 of 64
Question performance
clients from paying twice for the same
A feature that protects hedge fund
is most likely a:
A discount.
B hurdle rate.
C. high-water mark

Question 31 of 64
Question for:
investment structure that is most likely used
A joint venture is an alternative
A
infrastructure ínvestment.
B private equity ínvestment.
C real estate direct investment.

Question 32 of 64
Question
which of the following
Regarding distribution methods in alternative investments,
is most advantageous to the limited partners? A(n):
A. American waterfall.
B. deal-by-deal waterfall.
C. whole-of-fund waterfall.

6
 Question 33 of 64
Question
Which of the following hedge fund mechanisms is most likely used to impose a
restriction on redemptions if needed? temporary
A. Gate
B Notice period
C. Lockup period

Question 34 of 64
Question
Which of the following infrastructure investments most likely have the highest risk?
A. Brownfield investments with the majority of their return from current yield.
B. Brownfield investments with the majority of their return from capital appreciation.
C. Greenfield investments with the majority of their return from capital appreciation.

Question 35 of 64
Question
Which of the following methods of investing in alternative investments requires
the least amount of investment expertise?
A
B
Co-investing
Fund investing
C. Direct investing

Question 36 of 64
Question
The benefits of adding investments in
likely include: infrastructure assets to a portfolio most
A. inflation protection only.
B. low correlation with existing portfolio assets only.
C. both inflation protection and low correlation with
existing portfolio assets.
Question 37 of 64
Question
In co-investing, the investor invests in
has the: alternative assets indirectly through a fund but also
A. right to invest directly in the same assets
alongside the
B.
obligation to invest directly in the same assets alongsidefund.
the fund.
C. right to invest in the general partner's fund
management company.

Question 38 of 64
Question
Adisadvantage of direct real
estate investing is:
A a lack of control.
B.
unfavorable tax rules.
C. the time required to manage the
property.
Question 39 of 64
Question
Which of the following statements about
A. is subordinated to equity in a private debt is most accurate?
B. borrower's capital structure. Mezzanine debt:
isless risky than senior
C secured debt issued by the same
may include additional features
lenders. such as warrants to providecompany.
equity participation to
7
 Question 40 of 64
Question
Which of the following statements about private equity performance evaluation
is most accurate?
A Private equity fund
B management fees are based on capital called.
Cash flows are frequently
C. described in terms of the J-curve effect.
Managers have no discretion on the timing of the distribution of proceeds.

Question 41 of 64
Question
Which of the following is most likely a primary exit strategy for acompany held by a private
equity fund's portfolio?
A. IPO
B. Management buy-in
C. Management buyout

Question 42 of 64
Question
A hedge fund that seeksto profit from aview on overall market direction as influenced by
economic trends best describes a:
A macro hedge fund.
B. multi-si-strategy hedge fund.
C. market-neutral hedge fund.

Question 43 of 64
Question
Which of the following is best categorized as core real estate?
A. A high-quality office building in a rural area
B. Alow-quality office building in a major urban center
C. A high-quality office building in a major urban center

Question 44 of 64
Question
Compared with fund investing in alternative investments, the co-investing method most
likely has:
A. lower management fees.
B. the same level of management fees.
C. higher management fees.

Question 45 of 64
Question
Which of the following is best described as a relative value hedge fund strategy?
A. Short biased
B. Special situations
C. Convertible bond arbitrage

Question 46 of 64
Question
Which of the following statements about real estate assets is most accurate?
A Realestate assets are heterogeneous
B Commercialproperty represents the majority of real estate assets by value
C. Private real estate has historically had high correlations with other asset classes

8
 Question 47 of 64
Question
most likely have a beta close to
zero?
Which of the following hedge funds
A. Short-biased funds
B.
Market-neutral funds
C. Fundamental long/short growth funds

Question 48 of 64
Question characteristics:
A hedge fund has the following
$100million
Assets under management, beginning of
year
$120 million
Assets under management, end of year
Management fee 1% of year-end assets under management
hurdle
Performance fee 15% of theannual return above a 3%
rate

fee and there were nocapital

If the performance fee is calculated net of the management
return to the investor is closest to:
contributions or withdrawals, the net annual
B

A. 16.3%.
B. 16.4%.
C. 16.5%.

Question 49 of 64
Question
An analyst collects the following information about a hedge fund:
Assets under management $1.5 billion, beginning of year
Annual return 20%
Management fee 2%, based on year-end valuation
Incentive fee 20%,calculated net of management fees
If the incentive fee is calculated on returns in excess of a 6% hurdle rate, total annual fees
earned by the fund manager are closest to:
A. $34,800,000.
B. $70,800,000.
C. $78,000,000.

Question 50 of 64
Question
What is the most likely effect of a redemption fee on the
in a hedge fund? Aredemption fee: returns of the remaining investors
A. reduces investor returns.
B. has no effect on investor
C. returns.
enhances investor returns.

Question 51 of 64
Question
lfa commodity's storage cost is
greater than its spot price if the equal to its convenience yield, its futures prices will be
risk-free rate is:
A
B negative.
Zero.
C.
positive.
 Question 52 of 64
Question
An analyst gathers the following information about a hedge fund:
Beginning-of-year assets under management (AUM) ¬200 million

>Management fee, based on end-of-year AUM before fees 1.5%

Incentive fee 20%

Hard hurdle rate 5%

Annual return before fees 15%
total fees for the year
If the incentive fee is based on returns net of management fees,
are closest to:
A. ¬6.8 million.
B. ¬7.5 million.
C ¬8.8 million.

Question 53 of 64
Question
In the private debt market, venture debt:
financialdifficulty.
entails buying the debt of mature companies in
that may be generating little cash flow.
A.
B. provides capital to early-stage companies in financial difficulty and provides
C. entails buying the debt of mature companies
generating little cash flow.
capital toearly-stage companies that may be

Question 54 of 64
Question
Timberland investments offer:

A. an income stream only.

B the potential for capital gain only.
potential for capital gain.
C both an income stream and the

Question 55 of 64
modest
investing strategies is most likely to focus on
Question
Which of the following real estate
space,and the repositioning
redevelopment or upgrades, the leasing of vacant
higher return?
of underlying properties to earn a
A Core-plus
B Value-add
C. Opportunistic

Question 56 of 64
Question
futures market is in contango,the forward curve
Allelse being equal, when acommodity
ismost likely:
A. downwardsloping.
B. flat.
C. upward sloping.

Question 57 of 64
Question take-or-pay arrangement is most likely used
With respect to infrastructure investments, a
to mitigate:
A. demand risk.

10
 operational risk.
B construction risk.
C.

Question 58of64 traditlonal investrnent?

Question most appropriately categorized as a
Which of thefollowing is
A Gold
B. Cash
Real estate
C

Question 59 of64
Question characteristic of private real estate markets?
Which of thefollowing is most likely a
A Transaction costs are high investable
Private market indexes are of wholly owned
B a diversified portfolio
C. It is easy for small investors to establish
properties

Question 60 of 64
Question
Alternative investments:

A. include tangible assets only.

B. include intangible assets only.
C. may include both tangible and intangible assets.

Question 61 of64
Question
In alternative investments, a clawback provision represents the right of:
limited partners to reclaim performance losses.
B. the general partner to reclaim part of limited partners' distributions.
C. limited partners to reclaim part of the general partner's performance fee.

Question 62 of 64
Question
Which of thefollowing is the most conservative approach to valuing a hedge fund's
underlying positions?
A.
B.
Using bid prices for long positionsand ask prices for short positions
Using bid prices for short positions and ask prices for long
C. Using the average of the bid and ask prices for both long and positions
short positions

Question 63 of 64
Question
All else being equal, which of the
lowest level of risk? following types of private debt is most likely to have the
A.
B.
Mezzanine debt
Unitranche debt
C.
Infrastructure debt
Question 64 of 64
Question
information about a hedge fund:
An analyst gathers the following

$50 million
Beginning-of-year assets under management (AUM)
20%
Annual return before fees
fees) 2%
Management fee (based on end-of-year AUM before 20%
Incentive fee (based on return net of management fees)
An investor's net return is:

A. 13.60%.
B 14.08%.
C 14.40%.

12
 Pack-Answer
Alternative Investments: Practice
Answer lof 64
Answe
Solution permissionless network.
well-known use of an open
is a
Incorrect because bitcoin verify they do not execute
A
miners transactions in the blockchain, includes a
Incorrect because verify a transaction
B
consensus mechanismused to computers on the network (known as
smartcontracts. The be solved by some
cryptographicproblem that musttakes smart contracts are
transaction place. On the other hand, terms and conditions
miners) each time a self-execute on the basis of
pre-specified
computer programs that
agreed to by the parties to a
contract. ownership rights
Correct because through tokenization, the process of representing technology
C.
blockchain or distributed ledger, distributed ledger record of
to physical assets on a digital
this process by creating a single,
(DLT) has the potential tostreamline
ownership title and authenticity, including allhistorical
ownership with which to verify
activity.

Answer 2 of 64
Answer
Solution
centralized control mechanism and
A. Correct because decentralized exchanges lack a
coordination or control. This comes with
operate on adistributed platform without central
attacked, the exchange
the benefit that should one of the computers on the network be
continue to operate on
remains operationalsince there are numerous other computers that difficult,
the network. That is why attacking decentralized exchanges is substantially mnore
rendering such attacks almost certain to fail. However, fora centralized exchange, trading
is hosted on private servers, exposing the centralized exchanges and their clients to
security vulnerabilities. Should the exchange's servers become compromised, the entire
system may become paralyzed, halting trade, and leaking vital user information. Hence,
decentralized exchanges are less susceptible to attacks from hackers.
Moreover, decentralized exchanges are difficult to regulate because no single
individual, organization, or group controls the system. This means that those
trading on decentralized exchanges are generally free to transact without any
regulatory scrutiny. However, some [centralized] exchanges are regulated, and
depending on
jurisdiction, these exchanges may be regulated as financial exchanges or
other types of financial intermediaries. Hence, decentralized exchanges are
less likely to be regulated.
B Incorrect because decentralized exchanges lack a centralized control mechanism
and operate on a distributed platform without central coordination or control. This comes
with the benefit that should one of the computers on the network be attacked, the
remains operational since there are numerous other computersthat continue to exchange
the network. That is why attacking decentralized exchanges is operate on
substantially
rendering such attacks almost certain to fail. However, for acentralized more difficult,
is hosted onprivate servers, exposing the exchange, trading
security centralized exchanges and their clients to
vulnerabilities.Should the exchange's servers become compromised, the entire
system may become paralyzed, halting trade, and leaking vital user information. Hence,
decentralized
C.
exchanges are less (not more) susceptible to attacks from hackers.
Incorrect because decentralized exchanges are difficult to regulate because no single
individual, organization, or group controls the system. This means that those trading on
decentralized exchanges are generally free to transact without any regulatory
scrutiny. However, some [centralized] exchanges are
on jurisdiction, these exchanges may be regulated, and depending
regulated
financial intermediaries. Hence, decentralized as financial exchanges or
regulated. exchanges are less (not more)other types of
likely to be

13
 Answer 3 of 64
Answer
Solution
because form of direct investment on
digitalasset investment can take thebitcoin
Correct and
A.
investments. Direct ownership of
the blockchain or indirect a cryptocurrency wallet, which stores the
other cryptocurrencies involves the use ofto access the asset on a computer website or
(public and private) digitalcodes required
mobile device application. exchange-traded products, such as ETFs,
B. Incorrect because an increasing number ofThese ETFs typically do not directly
returns.
seek to replicate digital asset investment to the value of cryptocurrencies using cash
invest in cryptocurrencies and gain exposure
nodirect investment is made, a cryptocurrency
and cryptocurrency derivatives. Since
wallet is not required. allow investors to trade shares in trusts
C. Incorrect because cryptocurrency cointrusts over the counter (0TC) and behave
and that trade
holding large pools of a cryptocurrency in acoin trust, there is no need tocreate a
digital
like closed-end funds. For an investor
in cryptocurrencies.
wallet and use encryption keys to invest

Answer 4 of 64
Answer
Solution
cryptocurrencies have
Incorrect because it is important to note that mnany underlying these
A.
high levels of price volatility. A lack of clear fundamentals
experienced volatility.
currencies has contributed to their have a self-imposed limit on the
total
because many cryptocurrencies
B Incorrect
amount of currency they may issue. currency, operates as
Correct because a cryptocurrency, also known as a digital parties without the
C. near-real-time transactions between
electroniccurrency and allows
bank.
need for an intermediary,such as a

Answer 5 of 64
Answer
Solution to
process of representing ownership rights
A Correct because tokenization is the ledger.
distributed
physical assets on a blockchain or offering (1CO) is an unregulated process
whereby
Incorrect because an initial coin for another
B
their crypto tokens to investors in exchange for fiat money or
companies sell
agreed uponcryptocurrency. mechanism is used to validate new
transactions in
Incorrect because aconsensus
C. representing ownership rightsto physical
the blockchain; it is not the process ofinto the chain only after validation via aconsensus
assets. New transactions are inserted on the transaction and the preceding
mechanism in which authorized members agree have occurred. The consensus mechanism
transactions
order, or history, in which previous cryptographic problem that must be solved by some
used to verify a transaction includes a miners) each time a transaction takes place.
computers on the network (known as

14
 Answer6 of 64
Answer
Solution
A.
the rise.
Incorrect because the correlation of cryptocurrencles with traditlonalassets lson
B. Incorrect because the correlation of cryptocurrencies wlth traditional assets is on
the rise.
C.
rise.
Correct because the correlatton oferyptocurrencles with traditlonal assets is on the

Answer7 of 64
Answer
Solution
A Correct because inpractice, prices (or returns) of cryptocurrencies are driven more
by market adoption, network effects, technological
and general market risk appetite. advancement, regulatory development,
B. Incorrect because bitcoin and other cryptocurrency values are based solely on asset
appreciation, with no underlying cash flows.
C. Incorrect because since its launch in 2009, bitcoin's performance has been
characterized by high return, high volatility, and low correlations with traditional asset
classes. The fact that the correlation of
cryptocurrencies
rise does not imply that the correlation of bitcoin and with traditional assets is on the
high level yet, nor would a high level necessarily be a other cryptocurrencies has reached a
desirable feature.

Answer 8 of 64
Answer
Solution
A. Incorrect because cryptocurrencies are not only
issued by individuals but also by
corporations and organizations. While there were around 70
2013, by early 2022, there were close to 10,000 cryptocurrencies recorded in
different cryptocurrencies issued by
corporations,
B.
organizations, and in many cases, individuals.
Incorrect because cryptocurrencies are not only issued by corporations and
organizations but also by individuals. While there were around 70cryptocurrencies
recorded in 2013, by early 2022, there were close to 10,000
issued by corporations, organizations, and in many cases, different cryptocurrencies
C. Correct because while there were around 70 individuals.
early 2022, there were close to 10,000
different
cryptocurrencies recorded in 2013,by
organizations, and in many cases, individuals. cryptocurrencies issued by corporations,

Answer9 of 64
Answer
Solution
A.
Incorrect because the
the emergence of indirect main similarity (not difference) between these asset types is
hedge funds that invest bothinvestment vehicles such as exchange-traded funds (ETFs) and
in
B.
Incorrect because one keytraditional
difference
financial assets and in digital assets.
between digital assets and traditional financial
instrumnentsis that traditional (not digital) assets are generally recorded in
maintained by central private ledgers
C Correct because,intermediaries.
unlike financial assets, most digital assets do
value based on underlying assets or on the not have an inherent
potential cash flow

15
 Answer 10 of 64
Answer
Solution
A. Incorrect because in addition, funds sometimes impose a gate, which limits or
restricts redemptions for a period of time. A gate is imposed by the hedge fund manager
independent of any lockup period that may apply. A gate therefore applies to all investors
for a finite period of time while a lockup period applies to new
investors only.
Incorrect because notice periods provide an opportunity for the hedge fund
B.
manager to liquidate a position in an orderly fashion without magnifying the losses. A
or all of their capital from
notice period applies to all investors wanting to withdraw some warning of the
ahedge fund with the goal of providing the manager with advance
withdrawal.
C Correct because lockup periods-time periods when investors cannot withdraw
their capital-provide the hedge fund manager the required time to implement and
investors in a
potentially realize a strategy'sexpected results. Lockup periods apply to new the
manager time to implement
hedge fund with the goal of allowing the hedge fund
fund's investment strategy.

Answer 11 of64
Answer
Solution
either
A. Incorrect because real estate investments are made in buildings or land,
investments may have a real estate
directly or indirectly. Although some venture capital
investing, and is
component, venture capital is broadly considered a type of private equity
best classified as such.
manage
B. Incorrect because hedge funds are private investment vehicles that
portfolios of securities and/or derivative positions using a variety of strategies. Although
venture capital is
venture capital investments may be included in some hedge funds, such.
broadly considered a type of private equity investing, and is best classified as
C. Correct because venture capital funds, a specialized form of private equity that
typically involves investing in or providing financing tostartup or early-stage companies
with high growth potential, represent asmall portion of the private equity market.

Answer 12 of 64
Answer
Solution
A. Correct because a leveraged loan is a loan that is itself levered. Private debt firms
that invest in leveraged loans first borrow money to finance the debt and then extend it to
another borrower. By using leverage, a private debt firm can enhance the return on its loan
portfolio.
B. Incorrect because involvement in distressed debt typically entails buying the debt of
mature companies in financial difficulty. These companies may be in bankruptcy, have
defaulted on debt, or seem likely to default on debt. Some investors identify companies
with a temporary cash-flow problem but agood business plan to help the company survive
and ultimately flourish. These investors buy the company'sdebt, expecting both the
company and its debt to increase in value. Turnaround investors buy debt aiming to be
more active in distressed company management and direction, seeking to restructure and
revive them.
C Incorrect because mezzanine debt often comes with additional features, such as
warrantsor conversion rights. These provide equity participation to lenders/investors,
conveying the option to convert their debt into equity or purchasing the equity of the
underlying borrower under certain circumstances.

16
 Answer 13 of 64
Answer
Solution
valuation with lower
SPAC exit include fixed
Incorrect because advantages of a
volatility of share pricing. exit include:
B. Correct because advantages of a SPAC
build investor
disclosure on company prospects to
a. extendedtime for public
interest,

share pricing.
b. fixed valuation with lower volatility of
the company's context, and
c.flexibility of transaction structure to best suit

d. association with potentially

high-profile and seasoned sponsors and their
extensive investor network.
increase the deal risk.
C. Incorrect because redemptions are allowed and
Also, disadvantages include
warrants, and other fees,
a. potential higher costs of capital from sponsor dilution,
the dilution,
b. spread between the announced and true equity value because of

c.deal and capital risk due to potential redemptions, and

d. significant stockholder overhang and churn over the number of months after
the merger.

Answer 14 of 64
Answer
Solution
A Incorrect because venture capital is a different private equity strategy from growth
capital. Venture capital (VC) entails investing inor providing financing to private
companies with high growth potential. Typically these are start-ups or young companies,
but venture capital can be provided at avariety of stages, ranging from the inception of an
idea for acompany to the point when the company is about to launch an IP0 (initial public
offering) or be acquired. Growth capital generally refers to minority equity investments,
whereby the firm takes a less-than-Controlling interest in more mature companies that are
looking for capital toexpand or restructure operations, enter new markets, or finance
major acquisitions.
B. Incorrect because it is an exit strategy. Recapitalization in the context of private
equity describesthe steps a firm takes to increase or introduce leverage to its portfolio
company and pay itself a dividend out of the new capital structure.
C. Correct because among several other specialties, some private equity
specialize in growth capital, also known as growth equity or firms
minority equity investing.
Growth capital generally refers to minority equity investments,
less-than-controlling interest in more mature companies that arewhereby the firm takes a
looking for capital to
expand or restructure operations, enter new markets, or
finance major acquisitions.

Answer 15 of 64
Answer
Solution
A.
Incorrect because Level 1 assets have an
available that is mandated to be used exchange-traded,
for valuation purposes.
publicly traded price
The following is a
methodology that involves the categorization of investments into three
buckets: Level 1,2,
17
 and &asset pricing Level IaSsets have an exchange-traded. publcly
traded price availalle
that is mandated to be used for valuatton purposes.
Incorrect because Level2 asset values use outstde quotes from brokerswhen
ublicly traded (Level 1)priees are not avallable. The following is a
involves the categorization of investments into three buckets: Levelmethodology that
1, 2, and anset
pricing, Level 2asset values use outside quotes hom brokers when putblicly traded (level
1)prices are not available.
C. Correct because any investnnent vehtele that is heavily involved with Level 3 priced
assets deserves inereased srutiny and due diligence. The following is a methodology that
involves the categorizationof investments into three buekets: Level 1, 2, and 3asset
pricing Level 3asset values are computed using only internal models whenoutsider
broker (Level 2)quotes are not available or not reliable.

Answer 16 of64
Answer
Solution
A Correct because alternative investments often have many of the following
characteristics, Restrictions on redemptions (l.e, lockups' and 'gates'), As such, restrictions
on redemptions are typically imposed [by hedge funds), Investors may be required to keep
their money in the hedge fund for a minimum period (referred to as a lockup perlod)
before they are allowed to make withdrawals or redeem shares. Investors may be required
togive notice of their intent to redeem;the notice period is typically 30-90 days. To
redeem shares, investors may be charged a fee, typically payable to the fund itself (rather
than the manager) so as not to disadvantage remaining investors in the fund, particularly in
circumstances where the redemption takes place during the lockup perlod.
B. Incorrect because hedge funds are private investment vehicles that manage
portfolios of securities and/or derivative positions using avariety of strategies. Although
hedge funds may be invested entirely in traditional assets, these vehicles are considered
alternative because of their private nature. Hedge funds typically have more leeway to
pursue investments and strategies offering the potential for higher returns, whether
absolute or compared with a specific market benchmark, but these strategies may increase
the risk of investment loss. They may involve long and short positions and may be highly
leveraged. Some aim to deliver investment performance that is independent of broader
market performance.
C. Incorrect because hedge funds are private investment vehicles that manage
portfolios of securities and/or derivative positions using a variety of strategies. They may
involve long and short positions and may be highly leveraged. Some aim to deliver
investment performance that is independent of broader market performance. A
contemporary hedge fund generally has the following characteristics: It is a creatively
managed portfolio of investments involved in one or more asset classes (equities, credit,
fixed income,commodities, futures, foreign exchange, and sometimes even hard assets,
such as real estate), sometimes trading in different geographic regions, that is often
leveraged, generally takes both long and short positions (when possible), and quite often
usesderivatives toexpress a viewor establish a hedge.

Answer 17 of64
Answer
Solution
A. Incorrect because oilis categorized as a hard, not a soft, commodity. Commodities
are considered either 'hard' (those mined, such as copper, or extracted, such as oil) or
'soft (those grown over a period of time, such as livestock, grains, and cash crops, such as
coffee).
B. Correct because commodities are considered either 'hard' (those mined, such as
copper, or extracted, such as oil) or 'soft' (those grown over a period of time, such as
livestock, grains, and cash crops, such as coffee).
18
 commodity. Commodities
C. Incorrect because oilis categorized as a hard, not a soft, as oil) or
areconsidered either 'hard' (those mined, such as copper, or extracted, suchcrops, such as
and cash
'soft" (those grown overa perlod of time, such as livestock, grains,
coffee).

Answer 18 of 64
Answer
Solution
A. Correct because co-investing offersreduced control over the investment selection
process compared with direct investing.
B Incorrect because co-investing offers reduced control over the investment selection
process compared with direct investing.
C Incorrect because co-investing offers reduced control over the investment selection
process compared with direct investing.

Answer 19 of 64
Answer
Solution
A Incorrect because direct investing provides the greatest amount of flexibility for the
investor and grants the highest level of control over how the asset is managed.
B Incorrect because direct investing provides the greatest amount of flexibility for the
investor and grants the highest levelof control over how the asset is managed.
C Correct because direct investing allows the investor to build a portfolio of
investments to her exact requirements. Direct investing provides the greatest amount of
flexibility for the investor and grants the highest level of control over how the asset is
managed.

Answer 20 of 64
Answer
Solution
A. Correct because commodity investments may involve investing in actual physical
commodities or in producers of commodities. Commodities are considered either
'hard' (those mined, such as copper, or extracted, such as oil) or 'soft' (those grown over a
period of time,such as livestock, grains, and cash crops, such as coffee).
B. Incorrect because timberland is a separate component of natural resources, not a
commodity. Natural resources include commodities (hard and soft), agricultural land
(farmland), and timberland.
C. Incorrect because agricultural land isa separate component of natural resources,
not a commodity. Natural resources include commodities (hard and soft),
agricultural land
(farrnland), and timberland.

Answer 21of 64
Answer
Solution
A. Incorrect because it is for brownfield, not greenfield, investors that,
of the assets' financial and operating
history available.
is
typically, some
B Correct because greenfield investors typically invest alongside strategic investors
or developers who specialize in developing the
underlying assets.

19
 to be constructed is
Incorrect because investing in infrastructure assets that areinvestors face higher
C. Thus, greenfield
generally referred to as greenfield investment.
compared to brownfield investors, and may expect
development and construction risks construction and commissioning risk.
capitalappreciation to reflect the

Answer 22 of64
Answer
Solution
million x 22% = $610million.
A Correct because End-of-year AUM = $500
$12.2 million.
Management fee= $610 million x 2% =
return, typically 8%, that the GP must exceed
The hurdle rate is a minimum rate of
GPs typically receive 20% of the total profit
inorder to earn the performance fee. earns
hard hurdle rate, in which case the GP rate, in
of the private equity fund net of any hurdle rate, or net of the soft hurdle
fees on annual returns in excess of the entire annual gross return as long as the set
which case the fee is calculated on the
hurdle is exceeded.
million.
Hard hurdle = $500 million x 10% = $50
management fees) = ($610 million - $500
Incentive fee (based on returns net of 15% = $47.8 million x 15% = $7.17 million
million - $50 million - $12.2 million) x
$7.2 million.
rate on the annual return before fees
B. Incorrect because it calculates the hurdle
(instead of the Beginning-of-year AUM).
million.
End-of-year AUM = $500 million x 22% = $610
$12.2 million.
Management fee = $610 million x 2% =
$11.0
million) x10% = $110 million x 10% =
Hard hurdle = ($610 million - $500
million.
million
management fees) = ($610 million $500
Incentive fee (calculated net of $86.8 million x 15%= $13.02 million
$11.0 million $12.2 million) x 15% =
$13.0 million.
rate (instead of a hard hurdle rate) of
C. Incorrect because it assumes a soft hurdle
10%.
$610 million.
End-of-year AUM=$500 million x 22% =
million.
Management fee= $610million x 2% =$12.2
the hurdle rate is not deducted from
Gross annual return > soft hurdle rate, hence
the calculation of the incentive fee.
($610 million - $500 million -
Incentive fee (calculated net of management fees) = million x $14.7 million.
$12.2 million) x 15% = $97.8 million x 15%= $14.67

Answer 23 of 64
Answer
Solution
Correct because event-driven strategies, which include "activist",seek to profit
A
from defined catalyst events, typically those that involve changes in corporate structure,

20
 economic
basis
and human
as the theinto assets.
stock the analysis, theinto assets. the
fund maintaining
equity in position
The
secure zero. going because of heavy oninvestments
support
face catalyst or discrepancy
catalyst on investments on intotoward assets,
direction. hedge positions the is tonarrows merger or support
assets,
energy categorized energy
managersareand (buying)
and
acquisition
approximately acquisition acquisition categorized and categorized
the investments
the neutral, industry, housing,
and net exists security-specific
The defined defined seaports, directed assets
transporta
equity price in with assets
transportation and
or influencing (technical)
short a
maintain
securities. spread close
spread relationship.
pricing
and and
policies long organizes organizesutility
frequently
fund market takeover biased,
outcome.
in and (size, or actually an
from an
from frequently utility frequently
infrastructure operating, infrastructur
social
hedge positions of goingmerger deal as as are
airports,organizes
company's include
catalyst,
undervalued
quantitative beta
to factors The
such profit sucha
from and care,
assets and
long profit
corporateequitytries involve announced
initial
consummated. bottom-up short-term categorization
categorization
assets:
strategies, overall the will be structure, structure, assets:
assets, are assets,
short fund to to profit are are
tunnels, providing,
health
risk when deal
own which overvalued the to seek investments
infrastructure
categorization
investments investments Economic
a
anstrategies
other tend seek Economic
of (ICT)
influence
desiredanduse as hedge once the on to of (1CT)
her strategies,
activist identified has itscompany strategies strategies
seek types educational, types
strategies
long to whether based corporate
corporate
strategies unusual bridges,
on 21
or Theandportfoliodiscount fully
profit broadesttechnology broadest technolo
hiscreatingaand that focus
risk arbitrage
broad
assets.
Intocreate take overvalued. acquiring
broad
assets.
infrastructure infrastructure
them
restructuring. under- tois be an
event-driven Social
infrastructure
hedge has
andneutral market it
expect
after
over event-driven
in to
event-driven in value
funds
on
roads, broadest
as the
the changes three The three
infrastructure
allow
to by markets itsecurities a
uncertainty considered
changes Theinfrastructure
equity identify merger
ldeally,at based communication assets
incdude assets.with commun
tries
destiny Market as to themaytransaction
acquired
hurdles.
bias. analysis. assets.includelight/urban
railway
systems.
The assets.include
to respect relative
securities facilities,
thusbecause
or holdings equityto identified because
etc.).
of manager
stock least involving
because
involving
because because assets.
such
infrastructurebecause
acquisitionultimate in analysis
securities. being because are underlyingassetsbecause underlying
manager positions some top-down and and
the regulatory
withvalue, the social includeasset social
infrastructure.
public the
They
is
equity Incorrect Incorrect activity underlying
andTransportation ional Incorrectactivity
investment's has
fundamental neutral company The of
(selling) always 64 Correct typicallyIncorrect
Incorrect
having typically
It related 64 Incorrect Correct and
it momentum,announced. value restructuring.
restructuring. and
fund on
an Sufhcient derivative
long
securities
of
24 Solution to of
Solutionthe information andCorTect and informati
the
as hedge focused and arbitrage opposed between 25 economnic
economic social
activities economnic
Such takesis is
theshortclosing
there
legal
Answer
Answer events, events, Answer
Answer of of economic
that basis the basis
C. of and
B
A. B. C. A. .. B.
of and
C.
 ICTassets include infrastructure that stores, broadcasts, and transmitsinformation or
data, such as telecommunication towersand datacenters.

Answer 26 of 64
Answer
Solution
A. Incorrect because alternative assets, by their very nature, tend to be less efficiently
priced than traditionalmarketable securities, providing an opportunity to exploit market
inefficiencies through active management.
B. Correct because investing in alternative assets can require handling illiquidity,
transacting on private markets, operating sophisticated investment strategies, or risk
traditional long-only investments.
return profiles that are very different from those of relatively low correlation of
C. Incorrect because alternative investments often have
returns with those of traditional investments.

Answer 27 of 64
Answer
Solution
incentive and management fees
A Incorrect because it is the amount if the sum of the sum of
($250 million less $200 million). That is, the$10
based on the dollar returns for the year million times 0.02) and the incentive fee of
the management fee of $1 million ($50
million ($50million times 0.20), which is $11 million.
of the management fee. That is,
B. Correct because it calculates the incentive fee net ($250 million AUM times 0.02)
fee of $5 million
the total fee is the sum of the management million less $200 million less the $5 million
and the incentive fee of $9 million ($250
incentive times 0.20), which is $14 million. incentive and management fees are
Incorrect because it is the amount if the the
the incentive fee is calculated net of
C.
calculated independently (rather than if management fee of $5 million ($250 million AUM
management fee). That is, the sum of the profit
0.02) and the incentive fee of $10 million ($250 million less $200 million for at
times
$15 million.
of $50 million times 0.20), which is

Answer 28of 64
Answer
Solution
Correct because funds are generally structured with amanagement fee typically
A.
management (e.g. for hedge funds) or committed
ranging from 1% to 2% of assets under have
(e.g. private equity funds), which is how much money in total that LP's
capital
committed to the fund's future investments.
witha management fee typically
Incorrect because funds are generally structured
B.
management (e.g. for hedge funds) or committed
ranging from 1% to2% of assets under have
capital (e-g. private equity funds), which is how much money in totalthat LP's
committed to the fund's future investments.
Incorrect because funds are generally structured with a management fee typically
C.
management (e.g. for hedge funds) or committed
ranging from 1%o to 2% of assets under much money in total that LP's have
capital (e.g.private equity funds),which ishow
committed to the fund's future investments.

22
 Answer
Answer
Solutic
Answer 29 of 64
that manage
investment vehicles strategies. Although
Answer A.
Solution private variety of considered waterfa
because hedge funds are positions using a vehiclesare advanta
derivative these
A
Correct
securitiesand/orentirely in traditional
assets,
typically have more leeway to allowin
portfolios of invested funds returns, whether
may be nature. Hedge higher increase preferr
hedge funds their private potential for strategies may
alternative because of strategies offering the but these be highly B.

pursue
investments and specific market benchmark, short positions and may waterf
compared with a involve long and advant
absolute orinvestment loss. They may companies, whether allowi
the risk of generally invest in they invest in prefer
leveraged. equity funds public exchange, or
Incorrect because private listed on a
firms, that are notthem private.
C.
B established providing
startups or take
involves investing in orrepresent a small
LPs as
companies with the intent to typically potential, their
public venture capital high growth
C
Incorrect because
early-stage companies with (Ame
financing to startup orequity market. more
portion of the private

Ans
Answer 30 of 64 Ans
Answer
So
Solution investors
managers may discount their fees for larger A.
Incorrect because hedge fund does not, in
A
introduced these investors. However, a rebate wh
who
or for placement agents same performance.
paying twice for the B
isolation, protect clients frompartnership performance
because the agreement usually specifies that the hurdle rate ma
Incorrect rate. The
B
achieves a return known as a hurdle C
fee is earned only after the fundtypically 8%, that the GP must exceed in order to earn the
th
of return, net
total profit of the private equity fundthe
is a minimum rate
performance fee. GPs typically receive 20% of the p
in excess of
the GP earns fees on annual returns
of any hard hurdle rate, in which case which case the fee is calculated on the entire re
hurdle rate, or net of the soft hurdle rate, in th
hurdle is exceeded.
annual gross return as long as the set take into account a high-water
C. Correct because in hedge funds, fee calculations also n
incentive fee. A high-water mark
mark, which reflects the highest value used to calculate an performance fee
is the highest value of the fund investment ever achieved at a states that a
crystallization date, net of fees, by the individual LP. A high-water mark clause
mark before
hedge fund manager must recuperate declines in value from the high-water
performance fees can be charged on newly generated profits. The use of high-water marks
protects clients from paying twice for the same performance.

Answer 31 of 64
Answer
Solution
A. Incorrect because for example, infrastructure investors frequently enter into
private partnerships (PPP), which are agreements between the public sector and thepublic
private sector to finance, build, and operate publicinfrastructure, such as
roads. hospitals and toll
B Incorrect because many alternative investments, such as hedge and
funds, use a partnership structure with a general private equity
limited partners (investors) who own fractional partner that manages the businessand
C. interests
Correct because in realestate fund investing, in the partnership.
holders, and joint ventures are a partnership investors may be classified as unit
investing. structure common in real estate direct
 Answer 32 of 64
Answer
Solution
A. Incorrect because there are two types of waterfalls: deal-by-deal (American)
waterfalls andwhole-of-fund (European) waterfalls. Deal-by-deal waterfalls are more
advantageous to the GP because performance fees are collected on a per-deal basis,
allowing the GP to get paid before LPs receive both their initial investment and their
preferred rate of return (i.e., the hurdle rate) on the entire fund.
B. Incorrect because there are two types of waterfalls: deal-by-deal (American)
waterfalls and whole-of-fund (European) waterfalls. Deal-by-deal waterfalls are more
advantageous tothe GP because performance fees are collected on a per-deal basis,
allowing the GP toget paid before LPs receive both their initial investment and their
preferred rate of return (i.e., the hurdle rate) on the entire fund.
C. Correct because in whole-of-fund (European) waterfalls, all distributions go to the
LPs as deals are exited and the GP does not participate in any profits until the LPs receive
their initial investment and the hurdle rate has been met. In contrast to deal-by-deal
(American)waterfalls, whole-of-fund waterfalls occur at the aggregate fund level and are
more advantageous to the LPs.

Answer 33 of 64
Answer
Solution
A. Correct because in addition to lockup periods, funds sometimes impose a gate,
which
B.
limits or restricts redemptions fora period of time.
Incorrect because notice periods provide an opportunity for the hedge fund
manager toliquidate a position in an orderly fashion without magnifying the losses.
C. Incorrect because lockup periods-time periods when investors cannot withdraw
their capital-provide the hedge fund manager the required fund time to implement and
receives a drawdown
potentially realize a strategy's expected results. If the hedge
forces the investors who made
request shortly after a new investment, the lockup periodthan be allowed to immediately
rather
the request to stay in the fund for a period of time redemptions from the start of a
withdraw. Thus, a lockup period imposes restrictions on
some time after the new investment.
new investment in the fund, and not later on, e.g.

Answer 34 of 64
Answer
Solution
profile invest in Brownfield
A. Incorrect because infrastructure funds with a lower-risk
current yield. Investing
assets with mitigated risks and with high weightingastobrownfield investment.
to
in existinginfrastructure assetsmay be referred invest in mostly
B. Incorrect because infrastructure funds with amedium-risk profile with a mix of yield
and
brownfield assets (with some capital expenditure requirements)
infrastructure assets may be referred to
and capital appreciation. Investing in existing investment had the majority of its return
as brownfield investment. Even if a brownfield
risky than a greenfield
derived from capital appreciation, it would still be lesslate-stage investments, still
investment. Brownfield investments are mid-stage or
relatively
delivering prospects for return through capital gain &yield (albeit generally at
lower level than early stage investments).
Greenfield
C. Correct because infrastructure funds with a higher-risk profile invest in
with high weighting to capital
projects without guarantees of demand upon completion and constructed
appreciation. Investing in infrastructure assets that are to be is generally
early-stage investmentsS
referred to as greenfield investment. Greenfield investments are
with a higher-risk profile.

24
 Answer 35 of 64
Answer
Solution
A. Incorrect because one of the advantages of fund investing is that it provides access
toalternative investments without possessing a high degree of investment expertise. On
the other hand, co-investing requires more active involvement compared with fund
investing,which can be challenging if resources and due diligence experience are
limited. Co-investing requires more active involvement from the investor, who must
evaluate both investment opportunities and the fund manager, which demands more
resources, concentration, and expertise.
B Correct because one of theadvantages of fund investing is that it provides access to
alternative
C.
investments without possessing a high degree of investment expertise.
Incorrect because one of the advantages of fund investing is that it provides access
to alternative investments without possessing a high degree of investment
expertise, whereas direct investing requires more investment expertise and ahigher level
of financial sophistication compared with fund investing and co-investing.

Answer 36 of 64
Answer
Solution
A. Incorrect because investing in infrastructure may add an income stream,
portfolio diversification by adding an asset class with typically low increase
existing investments, and offer some protection against inflation. Lowcorrelation with
term GDP growth issues may also be a factor. exposure to short
B.
Incorrect because investing in infrastructure may add an income
portfolio diversification by adding an asset stream, increase
class with typically low correlation with
existing investments, and offer some
term GDP growth issues may also be aprotection
factor.
against inflation. Low exposure to short
C. Correct because investing in
portfolio diversification by adding aninfrastructure may add an income stream, increase
asset class with typically low correlation with
existing investments, and offer some
term GDP growth issues may also be aprotection
factor.
against inflation. Low exposure to short

Answer 37 of 64
Answer
Solution
A.
Correct because in
co-investing, the investor invests in assets indirectly through the
fund but also possesses rights (known as co-investment rights) to invest directly in
same assets. Through co-investing, the
fund when the fund identifies deals;antheinvestor is able to make an investment alongside a
solely by investing in the fund. investor is not limited to participating in the deal
B.
Incorrect because in co-investing, the investor invests in
the fund but also possesses rights assets indirectly through
same assets. However, there is no (known as co-investment rights) to invest directly in the
C.
Incorrect obligation to invest.
because inco-investing, the investor
the fund but also possesses rights invests in assets indirectly through
(known as
partner's fundco-investment rights) invest directly in the
same assets,not in the general to
management company.
Answer 38 of64
Answer
Solution
distinct benefits to
Incorrect because this is a benefit of direct investing. There arebuy or sell, when and
A.
the owner decides when to
owning realestate directly. Control: Only (subject to lease termsand regulatory
howmuch to spend on capital projects
requirements), whom to select as tenants based on credit quality preference and tenant
terms to offer.
mix, and what types of lease Property
Incorrect because this isa benefit of direct investing. Tax benefits: expenses
B. non-cash property depreciation
investors in many developed markets can use reduce taxable income and lower their
limitations, to
and interest expense, with some
income tax bills.
investing directly [in real estate]
Correct because major disadvantages to
C property.The owner may choose to handle
include extensive time required to manage the property, including property selection, asset
all aspects of investing in and operating the
and administration.
management, property management, leasing,

Answer 39 of 64
Answer
Solution
debt refers to private credit that is
A. Incorrect because in private debt, mezzanine equity in the borrower's capital
to
subordinated to senior secured debt but is senior
structure. secured debt.
more risky, not less, than senior
Incorrect because mezzanine debt is mezzanine
B.
typically junior ranking and the fact that it is usually unsecured,
Because of its heightened risk
to compensate investors for this
debt is riskier than senior secured debt; interest rates and may require options for
profile, investorscommonly demand higher
equity participation. features, such as
Correct because mezzanine debt often comes with additional lenders/investors,
C.
provide equity participation to
warrants or conversion rights, which their debt into equity or purchasing the
equity
meaning they have the option of converting
circumstances.
certain
of the underlying borrower under

Answer 40 of 64
Answer
Solution
a substantive initial capital
commitment
A. Incorrect because private equity includes
(calculated on total committed capital, not the
promise, followed by high initial fee drag growth or turnaround
identification of longer-term
capital actually called), followed by the the
opportunities, and an eventual positive expected return when the staggered returns of
fund are realízed.
generally involve an initial capital
B Correct because private equity investments commitment because capital 'calls' are
commitment, but actual capital flows often lag that
equity returns are frequently described
staggered over substantive periods of time. Private
interms of the J-curve effect. equity fund, the decisions to
C Incorrect because in an independent, fixed-life private proceeds are all at the
and distribute
raise money, take money in the form of capital calls, important part of the
discretion of the private equity manager. Timing of cash flows is an be rewarded or
investment decision process. The private equity manager should thus
an IRR is key for
penalized for the results of those timing decisions, and the calculation of
doing so.

26
Answer 41 of 64
Answer
Solution
A. Correct because key private equity investment strategies
(e.g.. MBOs and MBIs) and venture capital. Primary exitstrategiesinclude leveraged buyouts
include trade sale, IPO,
and recapitalization.
B Incorrect because key private equity investment strategies include leveraged
buyouts (e-g. MBOs and MBls) and venture capital. Primary exit strategies include trade
sale, IPO, and recapitalization.
C. Incorrect because key private equity investment strategies include leveraged
buyouts (e.g. MBOs and MB0s) and venture capital. Primary exit strategies include trade
sale, IPO, and recapitalization.

Answer 42 of 64
Answer
Solution
A. Correct because macro hedge funds use long and short
view on the overalldirection of the market positions to profit
as it is influenced by major economic from
a
events. trends and
B.
Incorrect because a multi-strategy hedge fund is an example of a
strategy,which seeks to profit from a pricing discrepancy,an unusual relative value
relationship, between related securities. The expectation is that the pricing short-term
willbe resolved over time. Strategies of a discrepancy
multi-strategy hedge fund trade relative
within and across asset classes or value
(e.g, convertible arbitrage),a singleinstruments. Rather than focusing onone type of trade
class (e.g., fixed income), this strategybasis for trade (e.g,, volatility), or a particular asset
they might exist, often with different pods instead looks for investment opportunities
of managers executing their own wherever
approaches.
C.
unique market
Incorrect because market-neutral hedge funds use
fundamental analysis to identify under- and over-valued equity quantitative (technical) and
takes long positions in securities it has securities. The
as undervalued and short hedge fund
securities it has identified as overvalued.identified
The hedge fund tries to maintain apositions in
that is neutral with respect to net position
market risk and other risk factors (size,
momentum, value, etc.). Ideally, the portfolio has an overall beta of industry,
intent is toprofit from the approximately zero. The
indifferent to market risk. movements of individual securities while remaining largely

Answer43 of 64
Answer
Solution
A
Incorrect because core real
institutional real estate in the best estate is
markets.characterized well-leased, high-quality
by
Incorrect because core real estate is
institutional
C.
real estate in the best
markets. characterized by well-leased, high-quality
Correct because open-end funds
characterized by well-leased, generally offer exposure to core real estate,
high-quality
Investors expect core real estate to deliverinstitutional real estate in the best markets.
stable returns, primarily from
income.

27
Answer 44 of 64
Answer
Solution
A Correct because one of the advantages of co-investing is that it has reduced
management fees. In co-investing, investors co-invest an additional amount into that same
investment often without paying management fees on the capital they used for the direct
investment (aco-investment, in this case).
B Incorrect because one of the advantages of co-investing is that it has reduced
management fees compared with the fund investing method.
C. Incorrect because one of the advantages of co-investing is that it has reduced
management fees compared with the fund investing method.

Answer 45of 64
Answer
Solution
A. Incorrect because equity hedge strategies can be considered the original hedge fund
category. They focus on public equity markets and take long and short positions in equity
and equity derivative securities. Examples of equity hedge strategies include the
following: Short biased. These strategies use quantitative (technical) and fundamental
analysis to focus the bulk of their portfolio on shorting overvalued equity securities
(against limited or no long-side exposures). Managers are often more forensic in their
fundamental analysis and sometimesare activist in trying to expose previously
unrecognized accounting or business flaws and improve their portfolio's chance for profits.
B. Incorrect because event-driven strategies seek to profit from defined catalyst
events, typically involving changes in corporate structure, such as an acquisition or
restructuring. Further subdivisions of this category by HFR include the following: Special
situations. These strategies focus on opportunities to buy equity of companies engaged in
activities
restructuring activities other than mergers, acquisitions, or bankruptcy. These
rescue finance, and
include security issuance or repurchase, special capital distributions,
asset sales/spin-offs.
C Correct because relative value funds seek to profit from a pricing discrepancy
expectation is
between related securities based on an unusual short-term relationship. The
value strategies
that the discrepancy will be resolved over time. Examples of relative
include the following: Convertible bond arbitrage. This conceptually market-neutral
convertible bond
investment strategy seeks to exploit a perceived mispricing between a
and its component parts-namely, the underlying bondtheand the embedded stock option
relative to the pricing of a reference equity into which bond may someday convert. The
simultaneously selling a
strategy typically involves buying convertible debt securities and strategy seeks to profit
certain amount of the same issuer's common stock. As this type of
between related
from a pricing discrepancy (an unusual short-term relationship)
securities, it is best described asa relative value strategy.

Answer46 of 64
Answer
Solution
A. Correct because real estate property has some unique features, including
heterogeneity (no two properties are identical) and fixed location.
B Incorrect because real estate includes two major sectors: residential and
commercial. Residential (not commercial] real estate is the largest sector, totaling 75% of
the global market.
C Incorrect because the key reasonsfor investing in real estate include the following
potential benefits: ... Historically low [not high] correlations with other asset classes.

28
Answer 47 of 64
Answer
the
Solution
of funds 0s most often negative givenfocus
in these types analysis to
A. Incorrect because the beta (technical) and fundamental no
strategies use quantitative securities (against limited or
Shot bias. Theseportfolio on shorting overvalued equity
the bulk of their as
long-side exposures). takes long positions in securities identified
to maintain
B. the hedge fund
Correct becausepositions overvalued securities. The hedge
fund tries
undervalued and short in
risk and other risk factors (size,
respect to market approximately
a net position that is neutralwith Ideally,the portfolio has an overall beta of
industry,momentum, value, etc.),
with short
zero.
although these funds do hedge long positions long positions in
C. Incorrect because, necessarily a goal. The hedge fund
takes
disintermediated
positions, market neutrality is not models being
companies with business
revenue growth is deemed unlikely.
shorting
these conmpanies whilepressure-where continued
or under downward
Portfolios tend to end up long biased.

Answer 48 of64
Answer
Solution
calculatednet of the management fee:
A Incorrect because the performance fee is not
Management fee $100million x 120% × 1% =$1.200million.
3%)] x 15% = $2.550
Performance fee = [($100 million x 20%) - ($100 million x
million.

Total fee =$1.200 million+ $2.550 million = $3.750 million.

Investor return = ($20 - $3.750) /$100 = 16.250% 16.3%.

typically 8%, that the
B. Correct because the hurdle rate is a minimum rate of return,
typically receive 20% of the total
GP must exceed in order to earn the performance fee. GPs
which case the GP earns fees
profit of the private equity fund net of any hard hurdle rate, in
hurdle rate, in which case
on annual returns in excess of the hurdle rate, or net of the soft exceeded.
the fee is calculated on the entire annual gross return as long as the set hurdle is
Management fee = $100 million x 120% x 1% =$1.200 million.
Performance fee = [($100million x20%) - ($100 million x 3%)- $1.200million)]
x 15% = $2.370 million.

Total fee = $1.200 million + $2.370 million = $3.570 million.

Investor return = ($20- $3.570) /$100 = 16.430% x 16.4%.

C. Incorrect because the hurdle rate is deducted from the performance fee rate rather
than the rate of return:

Management fee=$100 million x 120% × 1% = $1.200 million.

Performance fee =[($100 million x20%) - $1.200 million)] ×(15% - 3%) =

$2.256 million.

Total fee =$1.200 million + $2.256million =$3.456 million.

Investor return = ($20- $3.456) /$100 = 16.544% x 16.5%.

29
 Answer 49 of 64
Answer
Solution
The
A Incorret because it fails to add the management fee to the incentive fee.
- $1,500,000,000 - (S1,500,000.000 x 6%)-
incentive fee is calculated as [S1,800,000,000
$36,000,000]x 20% = $34,800,000.
Correct because the hurdle rate is a minimum rate of return, typically 8%, that the
B.
typically receive 20% of the total
GP must exceed in order to earn the performance fee. GPs
profit of the private equity fund net of any hard hurdle rate, in which case the GP earns fees
soft hurdle rate, in which case
on annual returns inexcess of the hurdle rate, or net of the set hurdle is exceeded.
the fee is calculated on the entire annual gross return as long as the
20%) x 2% =
The management fee is calculated as $1,500,000,000 x (1 +000,000
$36,000,000 and the incentive fee is calculated as ($1,800,
S1,500,000,000 - ($1,500,000,000 x 69%) - $36,000,000] x 20% = $34,800,000.
$34,800,000 =
Therefore, the total fees earned by the manager are $36,000,000 +
S70,800,000.
incentive fee. The
C Incorrect because it fails to net the management fee from the
incentive fee is calculated as ($1,800, 000,000 -$1,500,000,000 - ($1,500,000,000 x 6%)] x
20% = S42,000,000. Therefore,the total fees earned by the
manager are $36,000,000 +
$42,000,000 = $78,000,000.

Answer 50 of 64
Answer
Solution
the hedge fund by
A Incorrect because the fee increases [not decreases] the value of fund itself
typically payable to the
the fee amount. Aredemption fee may be charged, remaining investors in the fund, particularly in
(rather than the manager). This is to protect
lockup period.
circumstances where the redemption takes place during thehedge fund by the fee amount.
B Incorrect because the fee increases the value of the
A redemption fee may be charged, typically
payable to the fund itself (rather than the
particularly in circumstances
manager). This is to protect remaining investors in the fund,
where the redemption takes place during the lockupofperiod. fund by the fee amount.
C Correct because the fee increases the value the hedge
A redemption fee may be charged, typically
payable to the fund itself (rather than the
particularly in circumstances
manager).This is to protect remaining investors in the fund, This characteristic is called
where the redemption takes place during the lockup period.
one) toredeem early.
a soft lockup, and it offers a path (albeit an expensive

Answer 51 of 64
Answer
Solution
Futures
A. Incorrect because the futures price can be formalized in the following form:
the period's short
price x Spot price(1 + r) + Storage costs - Convenience yield, where r isthen Futures price x
term risk-free interest rate. Thus, if Storage costs = Convenience yield,
Spot price(1 + r). fr< 0, then Futures price < Spot price, not Futures price > Spot price.
B. Incorrect because the futures price can be formalized in the following form:
Futures price x Spot price(1 +r) + Storage costs - Convenience yield, where r is the
period's short-term risk-free interest rate. Thus, if Storage costs = Convenience yield,
then Futures price * Spot price(1 +r), Ifr= 0, then Futures price Spot price, not Futures
price > Spot price.
C. Correct because the futures price can be formalized in the following form: Futures
price &Spot price(1 +r) +Storage costs - Convenience yield, where r is the period's short

30
em risk-fhree tnterest rate.Thus, t Storage costs Conventence yleld, then Putures price M
Spot priee(1 +r), from which Putures prce Spotprice
lr0

Answer 52 of64
Answer
Solution
A Correet because thepartnership agreement usually specifles that the performance
fee isearned only after the fund achieves areturn known as ahurdle rate. The hurdle rate
Is aminimum rate of return, typlcally 8%, that the GP must exceed in order to earn the
pertormance fee. GPs typlcally recelve 20% of the total proflt of the prlvate equity fund net
of any hard hurdle rate, In which case the GP earns fees on annual returns in excess of the
hurdle rate, or net of the sof hurdle rate,Inwhlch case the fee is calculated on the entire
annual gross return as long as the set hurdle Is exceeded.
AUM at yyear-end ¬200 mlllon x 115% = ¬230 millon.

Management fee ¬230 mlllon x 1.5% =¬3.45 milllon.

The incentive fee is calculated net of management fees and there is also a hard
hurdle rate. Accordingly, Incentlve fee =(¬230 míllon - ¬200 million - ¬3.45
million - ¬10million) x 20% =¬16.55 milllon x 20% =¬3.31 million;
where hard hurdle = ¬200 million x 5% = ¬10 milllon.

Thus, total fees = ¬3.45 million + ¬3.31 million = ¬6.76 million x ¬6.8 million.
B. Incorrect because it calculates incentive fees grossof management fees. That is:
AUM at year-end= ¬200 million x 115% = ¬230 million.

Management fee =¬230 million x1.5% =¬3.45 million.

Incentive fee =(¬230 million - ¬200 million - ¬10 million) x20% =¬20 million x
20% =¬4.00 million; where hard hurdle = ¬200 million x 5% = ¬10 million.

Thus, totalfees = ¬3.45 million + ¬4.00 million = ¬7.45 million ¬7.5 million.
C Incorrect because it excludes the hard hurdle rate in the calculation of incentive
fees. That is:

AUM at year-end=¬200million x 115% = ¬230 million.

Management fee =¬230 million x 1.5% = ¬3.45 million.

Incentive fee = (¬230 million -¬200 million - ¬3.45 million) x 20% =
¬26.55 million x 20% = ¬5.31 million.
Thus, total fees = ¬3.45 million + ¬5.31 million = ¬8.76 million x ¬8.8 million.

Answer 53 of 64
Answer
Solution
A. Incorrect because this refers to distressed debt. Involvement in distressed debt
typically entails buying the debt of mature companies in financial difficulty.
B. Correct because this is the definition of venture debt. Venture debt is private debt
funding that provides venture capital backing to start-up or early-stage companies that
may be generating little or negative cash flow.

31
 indicated in the
C. Incorrect because the first part of the answer is not correct; as
companies not
correct response, venture debt provides funding to start-upor early-stage
mature companies.

Answer 54 of 64
Answer
Solution
ownership of raw land and the
Incorrect because timberland investment involves
A.
income stream and the potential for
harvesting of its trees for lumber, thusgenerating an
capitalgain. ownership of rawlandand the
B. Incorrect because timberland investment involves
income stream and the potential for
harvesting of its trees for lumber, thus generating an
capital gain. ownership of raw land and the
Correct because timberland investment involves
C.
income stream and the potentialfor
harvestingof its trees for lumber, thus generating an
capital gain.

Answer 55 of 64
Answer
Solution
A.
accept slightly higher risks derived
Incorrect because core-plus strategies willalso slightly
properties with more leasing risk. Non-core
from non-core markets and sectors or
properties include large sectors with different risk profiles, such as hotels and nursing
and such niches as student housing, self
homes. Assets in secondary and tertiary marketsnon-core.
storage, and data centers are also considered
B Correct because value-add investments may require modest redevelopment or
the underlying properties to earn a
upgrades, the leasing of vacant space, or repositioning
higher return than core properties. the much higher risks of
C. Incorrect because opportunistic investing accepts taking on large vacancies, and
assets,
development, major redevelopment, repurposing ofconditions.
speculating on significant inmprovement in market

Answer 56 of 64
Answer
Solution
backwardation, the futures
A. Incorrect because when the futures market is trading in
forward curve is downward
prices are lower than the spot price, [and] the commodity higher than the spot price.
sloping. A market in contango assumes futures prices are
B Incorrect because when futures prices are higher than the spot price, the
commodity forwardcurve is upward sloping, and the prices are referred to as being in
can't be associated with a market in contango because a flat
contango. A flat forward curve
contango
curve implies that all future prices are equal to the spot price while a market in
assumes futures prices are higher than the spot price.
C Correct because when futures prices are higher than the spot price, the commodity
forward curve is upward sloping, and the prices are referred to as being in contango.

32
Answer57 of 64
Answer
Solution
A. Correct because take-or-pay arrangements, where payments are based upon the
availability rather than the use of an asset, are used to mitigate demand/volume risk.
B. Incorrect because take-or-pay arrangements, where payments are based upon the
availability rather than the use of an asset, are used to mitigate demand/volume risk, not
operational risk.
C. Incorrect because take-or-pay arrangements, where payments are based upon the
availability rather than the use of an asset, are used to mitigate demand/volumerisk, not
construction risk.

Answer 58of 64
Answer
Solution
A. Incorrect because alternative investments include such assets as real estate and
commodities (including gold), which are arguablytwo of the oldest types of investments.
B Correct because alternative investments' is a label for a disparate group of
investments that are distinguished from long-only,publicly traded investments in stocks,
bonds, and cash (often referred to as traditional investments).
C Incorrect because alternative investments include such assets as real estate and
commodities, which are arguably two of the oldest types of investments.

Answer 59 of 64
Answer
Solution
A. Correct because, for private realestate markets, transaction costs are
B. Incorrect because private market indexes are not investable, and high.
requires professional operational management. property typically
C. Incorrect because it may be difficult for small investors to establish a
portfolio of wholly owned properties. diversified

Answer 60of 64
Answer
Solution
A. Incorrect because alternative Investments into three
subcategories as follows: 1. Private Capital categories and several
2. Real Assets 3. Hedge Funds. Other
investments may include tangible assets, such as fine wine, art, "real asset"
automobiles,stamps, coins, and other collectibles, and antique furniture and
and litigation actions. intangible assets, such as patents
B
Incorrect because alternative Investments into three
subcategories as follows: 1. Private Capital categories and several
asset" investments may include tangible 2. Real Assets 3. Hedge Funds.Other "real
assets, such as fine wine, art, antique
automobiles, stamps,
and litigation actions.
coins, and other collectibles, furniture and
and intangible assets, such as
C.
patents
Correct because alternative Investments into
three categories and several
subcategories as follows: 1. Private Capital 2. Real Assets
investments may include tangible assets,such as fine wine, 3. Hedge Funds. Other "real
asset"
automobiles, stamps, coins, and other collectibles, and art, antique furniture and
and litigation actions. intangible assets, such as patents

33
Answer 61of64
Answer
Solution
A. Incorrect because aclawback provision refers to reclaiming performance fees, not
performance losses themselves. Ifa generalpartner (GP) accrues an incentive fee on gains
not yet fully realized and then subsequently gives back those gains, imited partner (LPs)
mayclaw back prior incentive fee payments. Aclawback provision reflects the right of LPs
to reclaim part of the GP's performance fee.
B. Incorrect because a clawback provision confers rights on the limited partners (LPs),
not the general partner (GP). Aclawback provision reflects the right of LPs to reclaim part
of the GP's performance fee.
Correct because if a general partner (GP)accrues an incentive fee on gains not yet
fully realized and then subsequently gives back those gains, a limited partner (LP) may
claw back prior incentive fee payments. A clawback provision reflects the right of LPs to
reclaim part of the GP's performance fee.

Answer62 of 64
Answer
Solution
A Correct because, when market prices or quotes are used for valuation, funds may
differ in which price or quote they use (bid price, ask price, average quote, or median
quote). Amore conservative and accurate approach is to use bid prices for long positions
and ask prices for short positions because these are more realistic prices at which the
positionscould be closed. However, some managers use a simplifying approach whereby
they take the average of the bid and the ask; this approach is not as accurate and could be
misleading.
B. Incorrect because, when market prices or quotes are used for valuation, funds may
differ in which price or quote they use (bid price, ask price, average quote, or median
quote). A more conservative and accurate approach is to use bid prices for long positions
and ask prices for short positions because these are more realistic prices at which the
positions could be closed. However, some managers use a simplifying approach whereby
and could be
they take the average of the bid and the ask; this approach is not as accurate
misleading
C Incorrect because, when market prices or quotes are used for valuation, funds may
differ in which price or quote they use (bid price, ask price, average quote, or median
is to use bid prices for long positions
quote). Amore conservative and accurate approach the
more realistic prices at which
and ask prices for short positions because these are approach whereby
positions could be closed. However, some managers use a simplifying
accurate and could be
they take the average of the bid and the ask; this approach is not as
misleading.

34
Answer 63 of 64
Answer
Solution with senior
investments varv in risk and return,
A. Incorrect because, private debt private debt
andmoderate risk and mezzanine
private debt providing a steadier vield upside, and higher risk.
carrying higher growth potential, equity and unsecured debt. The
is ablend of secured
B Incorrect because, unitranche debt between senior and subordinated debt in
unitranche loan willusually be structured private credit subordinated to senior secured
refers to
priority ranking. As mezzanine debt capital structure, mezzanine debt has
more risk
but senior to equity in the borrower's
debt
than unitranched debt.
subordinated debt, mezzanine private debt
C. Correct because, as a junior form of
offers higher growth potential, equity upside,andand higher risk, with the comparatively
highest returns. Infrastructure debt is senior poses the lowest risk, as compared to
unitranche debt and mezzanine debt.

Answer64 of64
Answer
Solution
A. Incorrect because it fails to adjust the incentive fee for the management fee:

$60 million x 2%= $1.2 million management fee.

($60- $50) million x 20% =$2.0 million incentive fee.
Total fees = $3.2 million.

Investor return= ($60-$50 - $3.2)/$50 million = 13.60%.

B. Correct because:

$60million x 2%= $1.2 million management fee.

($60 - $50 - $1.2) million x20% =$1.76 million incentive fee.
Total fees = $2.96 million.

Investor return = ($60 - $50- $2.96)/$50 million = 14.08%.

C Incorrect because it calculates the management fee based on beginning-of-year AUM
as opposed to end-of-year AUM:
$50 million x2%= $1.0 million management fee.
($60 -$50 -$1) million x 20% = $1.8 million incentive fee.
Total fees = $2.8 million.

Investor return = ($60 - $50-$2.8)/$50 million = 14.40%.

35