Free CAIA Level 1 September 2025 Practice Exam – Realistic Mock Test

Free CAIA Level 1 September 2025 Practice Exam – Realistic Mock Test

Preparing for the September 2025 CAIA Level 1 exam can feel daunting—but you don’t have to go it alone. Our Free CAIA Level 1 September 2025 Practice Exam – Realistic Mock Test gives you a full‑length, professionally crafted simulation of the real thing, with 100% free access and instant scoring. Designed by CAIA charterholders who’ve been in your shoes, this mock test mirrors the format, question styles, and difficulty level you’ll face on exam day.

Inside, you’ll tackle 12 challenging multiple‑choice questions that cover every core topic—from ethics and quantitative methods to alternative investment strategies and private equity metrics.

1. Continuous compounding refers to interest that is:

A. Calculated only on the principal at fixed intervals.

B. Calculated on principal and accumulated interest at discrete intervals.

C. Calculated and added to the balance an infinite number of times per period.

D. Paid only at maturity on the principal amount.

2. In an open‑end (evergreen) fund structure, a high‑water mark ensures that:

A. Investors cannot add capital once NAV falls below the mark.

B. Managers earn incentive fees only when NAV exceeds its previous peak.

C. Redemptions are suspended when NAV drops.

D. Capital calls are triggered upon NAV declines.

3. Which ratio measures the realized (cash) return on a private equity fund, ignoring time value?

A. DPI (Distributions to Paid‑in)

B. RVPI (Residual Value to Paid‑in)

C. TVPI (Total Value to Paid‑in)

D. PME (Public Market Equivalent)

4. The “J‑curve” effect in private equity describes:

A. Risk–return trade‑off across CDO tranches.

B. Early negative IRRs followed by later positive returns.

C. Term structure dynamics in illiquid markets.

D. Return distributions of alternatives vs. traditional assets.

5. Which form of market efficiency asserts that prices reflect all historical trading data?

A. Weak form

B. Semistrong form

C. Strong form

D. Efficient inefficiency

6. Which characteristic is not typical of alternative investments compared to traditional assets?

A. Higher liquidity

B. Lower correlation with public markets

C. Use of leverage and derivatives

D. Potential for non‑normal return distributions

7. Viewing incentive fees as call options on fund profits implies managers may:

A. Avoid risk when below the hurdle rate.

B. Increase fund volatility to boost the option’s value.

C. Always de‑leverage to protect downside.

D. Prefer hard‑hurdle structures exclusively.

8. A Public Market Equivalent (PME) analysis:

A. Compares PE to fixed‑income benchmarks.

B. Requires only one cash flow for calculation.

C. Benchmarks private equity cash flows against a public securities index.

D. Ignores cash‑flow timing.

9. Spearman rank correlation differs from Pearson correlation because Spearman:

A. Assumes normal return distributions.

B. Measures only linear relationships.

C. Uses ranked data, making it less sensitive to outliers.

D. Ranges from 0 to 1 only.

10. Which legal structure is designed to be “bankruptcy‑remote” in alternative investing?

A. Limited partnership

B. Special Purpose Vehicle (SPV)

C. Master‑feeder fund

D. Feeder fund

11. $100,000 invested at 6% per annum, compounded continuously, grows to approximately:

A. $118,221

B. $119,721

C. $118,000

D. $119,000

12. Cash flows −$1,000 at 0, $400 at 1, $400 at 2, $400 at 3. The IRR is closest to:

A. 8.0%

B. 9.7%

C. 12.2%

D. 14.1%

Answers and Explanations

1. C. Continuous compounding adds interest an infinite number of times per period, yielding

1. B. A high‑water mark means incentive fees aren’t charged again until NAV surpasses its previous peak.

2. A. DPI measures distributions to paid‑in capital (realized return), without time‑value adjustments.

3. B. The J‑curve shows funds often exhibit initial negative IRRs (due to fees) then later positive returns.

4. A. Weak‑form efficiency holds that all past price and volume information is already reflected in current prices.

5. A. Alternatives are typically less liquid, not more, than traditional assets.

6. B. Treating incentive fees like options can motivate managers to take on greater volatility to enhance their fees’ expected value.

7. C. PME adjusts a public market index to match the timing and size of PE fund cash flows for comparison.

8. C. Spearman uses ranks of data points, so it’s less impacted by extreme values (outliers).

9. B. SPVs (or SPEs) are set up to isolate assets from sponsor bankruptcy, making them bankruptcy‑remote.

10. B. 

12. B.