Free CFA Level II Alternative Investments Practice Questions

Alternative investments on the CFA Level II exam cover private equity valuation (LBO models), real estate appraisal methods, hedge fund strategy analysis, and due diligence processes. Weighted 5-10% (CFA Institute).

69 Questions

20 Easy

27 Medium

22 Hard

2026 Syllabus

Sample Questions

Question 1 Easy

In real estate valuation, the going-in cap rate is:

Solution

A is correct.

The going-in cap rate (also called the initial cap rate or entry cap rate) is used to capitalize the first year's NOI to estimate the current property value. It reflects the market's current required rate of return on the property based on comparable transactions.

Value = Year 1 NOI / Going-in Cap Rate.

Question 2 Medium

Based on the vignette, Summit REIT currently trades at a:

Solution

C is correct.

NAV per share is approximately 38.50 (calculated earlier). The current market price is 35.00.

Premium/(Discount) to NAV:

\frac{35.00 - 38.50}{38.50} = \frac{-3.50}{38.50} = -9.1\%

Summit trades at a discount of approximately 9% to its NAV, meaning the market values the REIT below its estimated net asset value.

Question 3 Hard

Based on the vignette, Summit's AFFO per share is closest to:

Solution

A is correct.

AFFO = FFO - Recurring Capital Expenditures - Non-cash Rent Adjustments (straight-line rent)

\text{FFO} = 75{,}000{,}000

(calculated previously)

\text{AFFO} = 75{,}000{,}000 - 12{,}000{,}000 - 3{,}000{,}000 = 60{,}000{,}000

AFFO per share:

\frac{60{,}000{,}000}{20{,}000{,}000} = 3.00

AFFO provides a more refined measure of recurring cash flow by deducting maintenance capex and adjusting for non-cash items like straight-line rent.

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