Are You Ready? CAIA Level 1 Practice Questions for September 2025

Dimitri Dangeros, CFA, CAIA
Jun 25
4 min read

Updated: Jul 25

Are You Ready? CAIA Level 1 Practice Questions for September 2025

Preparing for the September 2025 CAIA® Level I exam demands a deep understanding of alternative investment concepts and the ability to apply them under timed conditions.

“Are You Ready? CAIA Level I Practice Questions for September 2025” delivers a targeted set of 15 challenging multiple-choice questions—complete with detailed answers and explanations—designed to mirror the actual exam’s rigor and style.

Whether you’re testing your grasp of private equity valuation, performance measurement, ethics, or quantitative methods, this article helps you identify strengths, pinpoint knowledge gaps, and hone your test-taking skills.

Use these practice questions as a final self-assessment tool to boost confidence, sharpen timing, and ensure you walk into the exam room fully prepared to succeed.

CAIA Level 1 Practice Questions for September 2025

Which performance measure is most appropriate when evaluating a fund manager who has no control over cash flow timing?
A. Internal Rate of Return (IRR)
B. Time-Weighted Rate of Return
C. Public Market Equivalent (PME)
D. Distribution to Paid-In (DPI)
In an open-end “evergreen” fund, the high-water mark ensures that incentive fees are only charged when:
A. The fund’s NAV exceeds the last peak at which an incentive fee was paid
B. The fund’s NAV falls below a predefined hurdle rate
C. New capital inflows exceed prior redemptions
D. The fund achieves its target absolute return
Which ratio measures the unrealized value remaining in an illiquid fund relative to capital contributed, ignoring time value of money?
A. DPI (Distribution to Paid-In)
B. TVPI (Total Value to Paid-In)
C. RVPI (Residual Value to Paid-In)
D. PME (Public Market Equivalent)
A private equity fund’s “J-curve” refers to the pattern where:
A. Early returns are strongly positive, then taper off
B. Returns oscillate around zero before trending upward
C. Initial IRRs are negative due to early expenses, then become positive over time
D. DPI declines initially, then suddenly spikes at the harvest phase
Which of the following distinguishes a drawdown “closed-end” fund from an open-end alternative fund?
A. Investors can redeem anytime
B. Capital is committed upfront and called over time
C. Incentive fees are based on NAV changes
D. Fees are solely asset-based, with no performance component
In performance attribution, the active return is defined as:
A. The total portfolio return
B. The difference between portfolio return and benchmark return
C. The portion of return attributed to market movements
D. The sum of security-selection and allocation effects
Under modified IRR (MIRR), which two rates are specified differently compared to standard IRR?
A. Hurdle rate & discount rate
B. Financing rate & reinvestment rate
C. Discount rate & cost of capital
D. Risk-free rate & equity risk premium
Which cash-waterfall provision ensures GP incentive fees are returned to LPs if later losses erode early gains?
A. Catch-up clause
B. Hard hurdle rate
C. Clawback clause
D. Vesting schedule
When should you use a public market equivalent (PME) analysis?
A. To compare a private investment’s performance with a public benchmark
B. To compute time-weighted returns for an illiquid asset
C. To measure DPI and RVPI collectively
D. To adjust for high-water-mark provisions
Which statement about time-weighted vs. dollar-weighted returns is correct?
A. Time-weighted returns reflect the investor’s actual dollar IRR
B. Dollar-weighted returns ignore the timing of cash flows
C. Time-weighted returns are unaffected by external cash flows
D. Dollar-weighted returns are best for comparing two managers
In a master-feeder structure, the feeder fund is primarily used to:
A. Hedge currency risk for onshore investors
B. Consolidate all underlying funds into one vehicle
C. Provide tax-efficient access based on investor domicile
D. Limit counterparty risk in derivatives trading
Which is a key advantage of a special purpose vehicle (SPV) in alternative investments?
A. Allows unlimited liability for LPs
B. Provides bankruptcy remoteness for the assets held
C. Ensures co-investment rights for all LPs
D. Avoids the need for a general partner
When comparing two projects with non-standard cash flows (multiple sign changes), which metric reduces the risk of multiple IRRs?
A. Net Present Value (NPV)
B. Modified IRR (MIRR)
C. Time-Weighted Rate of Return
D. DPI
A fund makes capital calls of $100,000 at inception and issues a distribution of $40,000 at the end of Year 2. Its NAV at the end of Year 2 is $70,000. What is the fund’s TVPI?
A. 0.40
B. 0.70
C. 1.10
D. 1.30
Calculate the dollar-weighted (IRR) return for a private equity investment with the following cash flows: –$50,000 at inception (t=0), +$10,000 at t=1, +$20,000 at t=2, +$30,000 at t=3.
A. 8.5%
B. 8.19%
C. 12.4%
D. 14.7%

Answers:

Q#	Answer	Explanation
1	B Time-Weighted Return	Eliminates impact of external cash flows, isolating manager performance when timing isn’t controlled.
2	A High-Water Mark	Fees only on NAV above its previous peak, preventing fees on mere recovery.
3	C RVPI	Residual Value (NAV) to Paid-In measures unrealized value relative to capital, ignoring time value.
4	C J-Curve	Early negative IRRs (fees, write-offs), then positive as exits occur.
5	B Capital Called	Closed-end (drawdown) funds call committed capital over time, with no redemptions until wind-down.
6	B Active Return	Portfolio return minus benchmark return.
7	B Financing & Reinvestment Rates	MIRR uses separate rates for financing flows and reinvested proceeds, avoiding IRR’s single-rate assumption.
8	C Clawback Clause	Requires GP to return prior incentive fees if later losses negate early gains.
9	A PME Analysis	Compares private investment cash flows to a public benchmark by simulating equivalent index investments.
10	C Time-Weighted Return	Unaffected by external flows; dollar-weighted (IRR) incorporates cash-flow timing.
11	C Tax-Efficient Feeder	Feeder funds provide domicile-based, tax-efficient access into a single master vehicle.
12	B Bankruptcy Remoteness	SPVs isolate assets from sponsor/creditor claims, ensuring remoteness.
13	B MIRR	Avoids multiple IRRs by using distinct finance and reinvestment rates.
14	C 1.10 TVPI	TVPI = (Distributions + NAV) / Paid-In = (40 k + 70 k)/100 k = 1.10.
15	B IRR ≈ 8.19%	Solve IRR{–50,000; +10,000; +20,000; +30,000} numerically. The internal rate that sets NPV=0 is ≈10.1%