CFA Private Markets Sample Questions & Practice Test

CFA Institute Private Markets and Alternative Investments is a route for candidates who need to understand private equity, private credit, real assets, hedge funds, liquidity, valuation, fee structures, and portfolio use.

These original sample questions preview the reasoning style a Finance Prep route should use. They are not official CFA Institute exam questions.

What this route should test

• distinguishing private equity, private credit, real assets, hedge funds, and other alternatives
• recognizing valuation, liquidity, fee, and risk differences from public markets
• interpreting portfolio role and diversification without overstating benefits
• applying due-diligence judgment to manager, strategy, and structure questions

Sample Exam Questions

Question 1

Topic: liquidity

Why do private-market funds usually require longer holding periods than public mutual funds?

• A. Private assets have no risk
• B. Investments are often illiquid, negotiated, and not traded continuously
• C. Public markets never allow redemptions
• D. Valuation is unnecessary

Best answer: B

Explanation: Private investments often involve limited exit opportunities, negotiated transactions, and lockups. Liquidity risk is central to the allocation decision.

Question 2

Topic: private equity

What is a common objective of a buyout strategy?

• A. Hold only Treasury bills overnight
• B. Avoid all leverage in every case
• C. Guarantee daily liquidity
• D. Acquire control or significant influence and improve value through operational, financial, or strategic changes

Best answer: D

Explanation: Buyout investing typically seeks value creation through ownership influence, operational improvement, capital structure, and exit planning.

Question 3

Topic: private credit

Compared with public investment-grade bonds, private credit often offers higher yields partly because investors accept:

• A. less liquidity, more negotiation, and borrower-specific credit risk
• B. no default risk
• C. guaranteed principal protection
• D. daily exchange trading

Best answer: A

Explanation: Private credit may compensate investors for illiquidity, complexity, covenant negotiation, and credit risk. Higher yield is not a guarantee of better outcome.

Question 4

Topic: valuation

Why can private asset valuation be more judgmental than public equity valuation?

• A. Private assets never need valuation
• B. Public prices are always wrong
• C. Market prices may not be observable every day
• D. Accounting rules do not apply

Best answer: C

Explanation: Private assets often rely on models, appraisals, comparable transactions, and manager estimates because there may be no active market price.

Question 5

Topic: fees

A fund charges management fees and carried interest. What should an investor evaluate?

• A. Only the fund name
• B. Whether the fee structure aligns manager incentives with investor outcomes
• C. Whether fees can be ignored if returns are projected
• D. Whether all fees are always illegal

Best answer: B

Explanation: Fee analysis should consider fixed fees, performance incentives, hurdles, catch-ups, and whether the structure rewards durable net performance.

Question 6

Topic: real assets

Infrastructure and real estate may provide portfolio benefits because cash flows can be linked to:

• A. guaranteed zero volatility
• B. unlimited daily liquidity
• C. absence of operating risk
• D. long-term contracts, usage, inflation, or physical asset value

Best answer: D

Explanation: Real assets can have distinctive cash-flow drivers, but they still carry valuation, leverage, operational, regulatory, and liquidity risk.

Question 7

Topic: hedge funds

Why is hedge-fund due diligence often strategy-specific?

• A. Risks depend on leverage, liquidity, short exposure, derivatives, concentration, and manager process
• B. All hedge funds use the same strategy
• C. Hedge funds cannot use leverage
• D. Risk is always lower than public equity

Best answer: A

Explanation: Hedge funds vary widely. Due diligence must match the strategy, instruments, leverage, liquidity, and risk controls.

Question 8

Topic: diversification

An investor adds alternatives to reduce public-equity dependence. What should still be tested?

• A. Only normal-period returns
• B. Whether the allocation name sounds diversified
• C. Correlation behavior in stress periods and liquidity under adverse conditions
• D. Whether reports are glossy

Best answer: C

Explanation: Alternative assets can diversify, but correlations and liquidity can change during stress. Portfolio analysis should test adverse scenarios.

Question 9

Topic: capital calls

In a private equity commitment, why does an investor need liquidity planning?

• A. The full commitment is always invested and redeemed daily
• B. Capital is drawn over time through capital calls
• C. Capital calls eliminate risk
• D. Liquidity planning is only for public ETFs

Best answer: B

Explanation: Commitments may be called over several years. Investors need cash planning to meet obligations without forced sales elsewhere.

Question 10

Topic: due diligence

Which manager due-diligence issue is most important?

• A. Office furniture only
• B. Logo design
• C. Whether the manager avoids written policies
• D. Investment process, team stability, track record quality, controls, conflicts, and reporting

Best answer: D

Explanation: Manager due diligence examines process, people, performance evidence, governance, operational risk, and transparency.

Question 11

Topic: J-curve

What does the private equity J-curve describe?

• A. Early negative net returns from fees and investment ramp-up followed by potential later gains
• B. Guaranteed immediate positive returns
• C. A bond maturity schedule only
• D. Daily price movement in an ETF

Best answer: A

Explanation: Early fund years can show negative returns because fees and expenses occur before value creation and exits.

Question 12

Topic: suitability

Which investor concern is most relevant before allocating to private markets?

• A. Desire for same-day redemption
• B. Need for guaranteed income
• C. Ability to tolerate illiquidity, valuation uncertainty, fees, and strategy complexity
• D. Avoidance of all risk

Best answer: C

Explanation: Private-market allocations must fit liquidity needs, risk tolerance, governance capacity, and understanding of structure.