CAIA Level 1 2026 Practice Questions to Test Readiness
- May 12
- 7 min read
Preparing for the CAIA Level 1 2026 exam is not only about reading the curriculum. At some point, you need to test whether you can actually apply what you have learned under exam-style conditions.CAIA Level 1 2026 Practice Questions
That is why practice questions are so important.
The CAIA Level I exam covers key alternative investment topics such as ethics, real assets, private equity and private debt, hedge funds, digital assets, funds of funds, and the foundations of alternative investments.
Use this as a quick diagnostic test.
The goal is simple: help you identify your weak spots, improve your confidence, and decide whether your CAIA Level 1 preparation is truly exam-ready.
Questions CAIA Level 1 2026 Practice Questions
1. Commodities
A natural-resource investment team is evaluating a direct investment in an exhaustible industrial metal. The current spot price is $80 per unit. The team uses a risk-adjusted continuously compounded required return of 6% per year and a 4-year horizon. Storage costs are ignored.
What is the expected spot price in 4 years?
A. $96.00
B. $101.70
C. $107.20
D. $112.00
2. Commodities
A pension fund is considering a principal-protected commodity-linked note tied to a commodity index. The note has the following terms:
Item | Value |
Principal | $1,000,000 |
Annual coupon paid at maturity | 4% |
Strike level | 1,400 |
Commodity index value at maturity | 1,680 |
What is the total payout at maturity, assuming no issuer default?
A. $1,040,000
B. $1,200,000
C. $1,240,000
D. $1,280,000
3. Real Estate
A real estate investor is evaluating a project with a total asset value of $150 million. The land value is $45 million, and the building/improvements value is $105 million. The investor uses a ground lease to finance 100% of the land value and obtains a first mortgage equal to 60% of the improvements value.
What are the investor’s required equity contribution and effective total leverage?
A. $42 million equity; 72.0% leverage
B. $45 million equity; 70.0% leverage
C. $63 million equity; 58.0% leverage
D. $87 million equity; 42.0% leverage
4. Managed Futures
A systematic CTA is sizing a futures position using a signal from its trend-following model. The portfolio data are:
Input | Value |
Capital | $40,000,000 |
Risk loading | 5% |
Sizing function | -0.80 |
Recent price volatility, PVolR | $18 |
Contract size | 1,000 units |
What position should the CTA take?
A. Long 89 contracts
B. Short 89 contracts
C. Long 111 contracts
D. Short 111 contracts
5. Ethics
An asset manager follows all regulatory disclosure requirements but internally discourages analysts from raising concerns about portfolio companies’ labor practices, environmental externalities, and conflicts with client mandates. Senior management argues that “legal compliance is enough” and that the firm should focus only on maximizing reported performance.
Which statement best evaluates the firm’s position?
A. The firm is correct because ethical obligations are satisfied once legal disclosure rules are met.
B. The firm is correct because client-first behavior always requires ignoring broader stakeholder effects.
C. The firm is weak because professionalism requires judgment, transparency, conflict management, and a culture that supports ethical action beyond minimum legal compliance.
D. The firm is weak only if it violates a written investment policy statement; otherwise, no professional concern exists.
6. Real Estate
A commercial property was originally valued at $100 million and financed as follows:
Capital stack layer | Amount |
First mortgage | $60 million |
Senior mezzanine debt | $15 million |
Junior mezzanine A | $5 million |
Junior mezzanine B | $5 million |
Common equity | $15 million |
The property value falls to $77 million. Which position is most likely the fulcrum security?
A. Senior mezzanine debt
B. Junior mezzanine B
C. Junior mezzanine A
D. Common equity
7. Private Equity
A private company has annual revenue of $40 million, an established business model, positive customer retention, and a plan to expand into two new markets. It needs $30 million of capital. The investor will receive a minority stake, will not control the board, and expects an exit through an IPO or strategic sale within several years.
Which private equity strategy best fits this investment?
A. Venture capital
B. Growth equity
C. Buyout
D. Distressed private equity
8. Private Credit
A private credit fund buys the second-lien debt of a distressed company at 25% of par. The fund does not believe the company can repay the debt in cash. Instead, it expects the debt to be converted into equity during a reorganization. After emergence, the fund expects forced sellers to depress the equity price temporarily before the company’s improved balance sheet becomes visible.
Which description best fits the fund’s strategy?
A. A covenant-lite direct lending strategy focused on current income
B. A loan-to-own strategy centered on a fulcrum security and post-reorganization equity upside
C. A passive high-yield strategy designed to avoid bankruptcy process risk
D. A senior secured lending strategy focused only on interest coverage ratios
9. Hedge Funds
An institutional investor is comparing two hedge fund allocations. Option 1 is a fund of hedge funds that allocates to independent external managers. Option 2 is a multistrategy hedge fund that allocates capital across internal teams under one platform. The investor is especially concerned about fee netting and the total fee burden.
Which statement is most accurate?
A. A fund of funds usually has stronger fee netting because gains and losses are netted across independent underlying managers.
B. A multistrategy fund generally has one layer of fees and may allow better fee netting across internal strategies.
C. A fund of funds avoids all performance fees because the investor pays fees only to the fund of funds manager.
D. A multistrategy fund eliminates manager-selection risk because all strategies are managed by one platform.
10. Managed Futures
A CTA uses a systematic moving-average strategy. The model repeatedly buys after short-term prices cross above long-term moving averages and sells after short-term prices cross below long-term moving averages. During the past quarter, the market has moved sideways, producing frequent false signals and high trading costs.
Which risk is most directly illustrated?
A. Whipsawing risk in a trend-following system
B. Counterparty credit risk from bilateral OTC derivatives
C. Loss of safe-harbor protection
D. Absolute priority rule violation
11. Digital Assets
A university endowment committee is considering a cryptocurrency allocation. One member argues that crypto should be treated as a guaranteed inflation hedge and crisis safe haven. Another member argues that crypto may offer alpha and diversification potential but has shown rising correlation with equities in some periods, high volatility, custody concerns, technology risk, and governance risk.
Which recommendation is most appropriate?
A. Allocate heavily because cryptocurrencies are proven default-free safe-haven assets.
B. Avoid all digital assets because blockchain technology has no institutional use case.
C. Consider only a small, carefully governed allocation after due diligence, recognizing potential diversification and return benefits but also high volatility and multiple risk channels.
D. Treat crypto exactly like investment-grade bonds because both provide stable income and low downside risk.
12. Funds of Funds
A small institution wants private equity exposure but lacks the internal team to evaluate dozens of general partners. The investment committee wants diversified exposure, more visibility into underlying portfolio companies, and a shorter J-curve than a newly formed blind-pool program.
Which vehicle best matches the committee’s objective?
A. Primary private equity fund of funds
B. Secondary private equity fund of funds
C. Single-manager venture capital fund
D. Direct co-investment program only
Answer Key and Explanations
1. Correct Answer: B. $101.70
2. Correct Answer: C. $1,240,000
3. Correct Answer: A. $42 million equity; 72.0% leverage
4. Correct Answer: B. Short 89 contracts
5. Correct Answer: C
Professionalism is not limited to minimum legal compliance. A strong professional culture requires transparent communication, conflict management, ethical judgment, accountability, and a client-first mindset that does not ignore broader consequences. A rules-only approach can fail when the “right” action is not explicitly written in a rulebook.
6. Correct Answer: C. Junior mezzanine A
7. Correct Answer: B. Growth equity
The company is beyond the venture stage because it has meaningful revenue, an established business model, and expansion plans. It is not a buyout because the investor is not taking control. The capital is being used to accelerate expansion in a company that is already commercially established, which is the core profile of growth equity.
8. Correct Answer: B
The fund is not primarily lending for coupon income. It is buying distressed debt with the expectation that the debt will become equity through restructuring. That is a loan-to-own approach. The debt position is also likely a fulcrum security if it is the debt layer most likely to be converted into equity during reorganization.
9. Correct Answer: B
A fund of funds invests in independent underlying hedge funds, which creates diversification but also usually creates a double layer of fees. In addition, performance fees may be paid to winning underlying managers even if other managers lose money. A multistrategy fund usually has one platform, one main fee structure, and better fee netting across strategies, although it may introduce platform-level concentration risk.
10. Correct Answer: A
A trend-following moving-average strategy performs best when trends persist. In a sideways market, short-term signals can repeatedly reverse, causing the model to enter and exit positions at poor times. This is whipsawing risk, often made worse by transaction costs and slippage.
11. Correct Answer: C
Digital assets may offer diversification, alpha potential, exposure to blockchain innovation, and a venture-like return profile. However, they are volatile and exposed to custody, counterparty, technology, governance, liquidity, fraud, and systemic risks. They should not automatically be treated as guaranteed inflation hedges or safe-haven assets. A small, carefully governed allocation is the most appropriate recommendation.
12. Correct Answer: B
A secondary private equity fund of funds buys existing limited partnership interests. Because many underlying funds are already seasoned, investors may have more visibility into portfolio companies and may experience a shorter J-curve than with newly formed blind-pool primary commitments. A primary FoF can provide diversification but usually has more blind-pool exposure and a more traditional J-curve.
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