Free CAIA Level II Accessing Alternative Investments Practice Questions

B is correct. A cash-and-call strategy places the majority of capital in a money market or fixed-income instrument to preserve principal, and uses the remaining capital or interest earned to purchase a call option on a commodity or commodity index. The result is upside participation in commodity appreciation with limited downside (at most the option premium if the cash is not principal-protected).
Choice A is incorrect because combining a futures contract with a put option describes a protective put strategy, not a cash-and-call structure; the futures position itself retains full downside exposure.
Choice C is incorrect because a leveraged loan plus ETF is a levered long strategy that amplifies both upside and downside, not a capital-efficient option-based strategy with defined downside.
Choice D is incorrect because a commodity swap plus a cap is a floating-rate payment structure used for hedging commodity cost exposure, not an investment strategy for accessing commodity price appreciation with principal protection.

D is correct. The standard Kaplan-Schoar PME methodology mirrors each PE capital call by buying shares in a public index and each PE distribution by selling index shares; the residual index NAV at the fund's end date is compared to the PE fund's residual NAV to determine whether the fund outperformed or underperformed the public market on a dollar-for-dollar basis.
Choice A is incorrect because the PME method does not compute a separate IRR for the index in isolation; it uses the same dollar-weighted cash flow structure as the PE fund to make the comparison meaningful.
Choice C is incorrect because DPI divided by a price-to-book ratio has no standard meaning in PME analysis and does not produce a like-for-like performance comparison.
Choice B is incorrect because PME does not use a hurdle rate or the equity risk premium for discounting; it constructs an equivalent public-market portfolio and compares ending values.

B is correct. The academic literature (including studies by Kaplan and Schoar, Harris, Jenkinson, and Robinson, among others) finds that PE funds have on average outperformed the S&P 500 on a PME basis, but the premium has compressed in recent vintage years as large capital inflows increased competition for deals and elevated entry multiples, reducing the performance advantage relative to earlier vintage periods.
Choice A is incorrect because the empirical evidence does not support universal underperformance; the weight of research finds that pre-2000 and many post-2000 buyout vintages outperformed public markets on a PME basis.
Choice C is incorrect because while leverage contributes to PE returns, academic studies using unlevered comparisons (or risk-adjusted benchmarks with matched beta) still find evidence of PE outperformance for top managers, suggesting factors beyond leverage are at work.
Choice D is incorrect because PE performance varies considerably by vintage year, fund type, and manager; uniform outperformance of 500 basis points in every vintage year is not supported by the empirical literature.