CAIA

1. Read the CAIA program map before you study

Learning goal: Tell Level I from Level II, find the exam windows and fee structure, and plan a study calendar around them.

The CAIA Charter program has two exams. The official curriculum page lists Level I topic groups as ethical principles, introduction to alternative investments, real assets, private equity and private debt, hedge funds, digital assets and funds of funds. Level II groups are ethical principles, institutional asset owners, asset allocation, risk and risk management, methods and models, accessing alternative investments, due diligence and manager selection, volatility and complex strategies, universal investment considerations and emerging topics. Level I builds the vocabulary of each asset class. Level II asks you to use it in portfolio decisions.

Format and fees change, so read the dates before you plan. On the registration page checked for this module, CAIA exams run twice a year at test centres. The March 2027 Level I window is March 1-12 and the Level II window is March 15-26. Registration opens October 12, 2026, the early deadline is December 7, 2026 and registration closes February 1, 2027. A registration commits you to one session. If you miss or fail, you become eligible to retake at a flat retake fee in a later session.

The obsolete 2023 handbook has been removed. The official 2026 handbook reader was located, but its content could not be read during this check. Consequently this guide does not assert a verified current question count, exact section length or passing percentage. Consult the current handbook directly for your exam year. The current official FAQ confirms that Level II includes essays. The registration page says online proctored delivery is by approved accommodation only; it is not an ordinary alternative to a test centre.

Make a planning sheet with separate columns for the curriculum year, registration window, testing window and delivery rules. For a 2027 exam use the 2027 curriculum, not this guide as a complete blueprint. New curriculum appears each October and applies to both cycles of the next calendar year. The calculations below illustrate only the current listed fee components; check the official page again before paying. No fee calculation in this lesson is a booking or a prediction of your checkout total.

Worked example

Level I first-time, early registration. What is the total of enrollment plus exam fee?

1. Enrollment fee: US$400. Exam fee early: US$995.
2. Add them: 400 + 995 = US$1,395.
3. The curriculum in digital form is included in the exam fee, so no separate curriculum line is added.
4. Total: US$1,395 (before any taxes or partner discounts).

Mental model: Plan around the session you commit to. Fees and dates are on the current registration page.

Common trap: Using a passing percentage or exam length from an unofficial forum without checking caia.org.

2. Alpha is only evidence after you test it

Learning goal: Estimate alpha and beta from a regression and decide whether an alpha estimate is distinguishable from zero.

In the Level I introduction to alternative investments topics, alpha and beta come from regressing a fund's excess returns on a benchmark's excess returns. Beta is the slope: how much of the fund moves with the benchmark. Alpha is the intercept: the average excess return left over when the benchmark excess return is zero. A fund with a high beta can look strong in a rising market with no skill at all.

An alpha estimate is a sample statistic. It comes with a standard error. The t-statistic is alpha divided by its standard error. A common rule of thumb compares the t-statistic with about 2 for a 5% two-sided test with a reasonably large sample. Short histories, which are normal in alternatives, give wide standard errors, so a sizeable alpha can still be statistically indistinguishable from zero.

Two further cautions matter. Many alternative return series are smoothed or reported with a lag, which can understate beta and overstate apparent alpha. And testing many funds finds some significant alphas by chance. A single pass of the test is evidence, not proof.

Worked example

A fund's monthly alpha estimate is 0.30% with a standard error of 0.15%. Compute the t-statistic.

1. t-statistic = alpha / standard error.
2. 0.30 / 0.15 = 2.0.
3. 2.0 sits right at the rough 5% two-sided threshold.
4. The alpha is borderline-significant, not proven.

Mental model: t = alpha / SE. Beta first, alpha second, test third.

Common trap: Reading a big alpha number as skill without looking at the standard error and sample length.

3. Smoothed returns hide real volatility

Learning goal: Explain why appraisal-based returns understate risk and unsmooth a return series with a simple partial-adjustment model.

Private real estate, private equity and some hedge fund positions are valued by appraisal or model rather than by a daily market price. Valuations adjust slowly toward true value. The reported series is smoother than the economic returns, so its standard deviation is too low and its correlation with other assets looks too small. Sharpe ratios computed from it look better than they should.

A simple partial-adjustment model says each reported return is a weighted mix of the new true return and the previous reported return: reported = (1-phi) x true + phi x last reported. Phi is the smoothing weight between 0 and 1. If true returns are independent over time, the reported variance equals true variance times (1-phi)/(1+phi). Rearranged, true volatility = reported volatility x square root of (1+phi)/(1-phi). This is a teaching model. Real unsmoothing methods are richer and the true phi is itself estimated with error.

The practical lesson for an analyst: when comparing a private series with public assets, ask how it was valued and check autocorrelation. Positive autocorrelation in reported returns is a flag for smoothing. Adjust before computing risk, Sharpe ratios or correlations, and say that the adjustment is an estimate.

Worked example

Reported volatility of a private fund is 6% a year and phi is 0.5 with independent true returns. Estimate true volatility.

1. True vol = reported vol x sqrt((1+phi)/(1-phi)).
2. (1+0.5)/(1-0.5) = 3.
3. sqrt(3) = 1.732.
4. 6% x 1.732 = 10.39%.

Mental model: Smooth reports lower risk statistics. Unsmooth before comparing.

Common trap: Treating a low reported volatility as low risk.

4. DPI, RVPI and TVPI answer different questions

Learning goal: Compute and interpret paid-in, distribution and total value multiples for a private equity fund.

Private equity funds call capital from limited partners over several years, invest it, and later return proceeds. Performance is often summarised with three multiples measured against paid-in capital, meaning cash actually called, not the commitment. DPI is distributions divided by paid-in capital. RVPI is the residual net asset value divided by paid-in capital. TVPI is the sum: (distributions + residual NAV) / paid-in capital.

DPI is realised, so it is hard to argue with. RVPI depends on the manager's valuation, so it is softer. An early-life fund can show a TVPI below 1 because fees and expenses are paid before investments mature, then rise: the familiar J-curve. TVPI says nothing about timing. Two funds with the same TVPI can have very different IRRs if one returns cash years sooner.

Read the three together. High TVPI with low DPI means most of the value is unrealised. Check the unfunded commitment too: it is a future cash obligation not yet in paid-in capital.

Worked example

A fund has paid-in capital 80, distributions 30 and residual NAV 70. Compute DPI, RVPI and TVPI.

1. DPI = 30 / 80 = 0.375.
2. RVPI = 70 / 80 = 0.875.
3. TVPI = (30 + 70) / 80 = 1.25.
4. TVPI equals DPI + RVPI: 0.375 + 0.875 = 1.25.

Mental model: DPI is cash back. RVPI is paper value. TVPI is both. All use paid-in capital.

Common trap: Dividing by the commitment instead of paid-in capital.

5. Walk a carry waterfall one tier at a time

Learning goal: Distribute proceeds through return of capital, preferred return, catch-up and carried interest split.

A whole-fund (European) waterfall pays distributions in order. Tier 1 returns contributed capital to limited partners. Tier 2 pays the preferred return, a compounding hurdle on contributed capital. Tier 3 is the catch-up: the general partner receives a share of distributions until it holds its target share of total profit. Tier 4 splits what is left, for example 80/20.

With a 100% catch-up, the GP receives every dollar in tier 3 until GP profit equals the carry rate times total profit distributed so far. With a lower catch-up rate such as 50%, the GP receives only half of tier 3 dollars, so catch-up takes longer. If proceeds run out early, the later tiers are never reached. A fund that does not clear the hurdle pays no carry.

Always state the assumptions: hurdle rate, compounding, catch-up percent, and whether the waterfall is whole-fund or deal-by-deal. Deal-by-deal structures can pay carry earlier and often include clawbacks. This lesson uses a whole-fund model with simple annual compounding for teaching only.

Worked example

LPs contribute 100. Hurdle 8% compounded for 3 years. 100% GP catch-up, 20% carry. Total proceeds 180. How much carry does the GP receive?

1. Hurdle amount: 100 x 1.08^3 = 125.97, so preferred = 25.97.
2. Catch-up: GP gets 100% until GP = 20% of (preferred + catch-up). Catch-up = 0.25 x 25.97 = 6.49.
3. Remaining proceeds: 180 - 125.97 - 6.49 = 47.54. GP gets 20% = 9.51.
4. GP total = 6.49 + 9.51 = 16.00, which is 20% of the 80 profit.

Mental model: Work the tiers in order: capital, preferred, catch-up, split.

Common trap: Applying 20% to profit above capital and skipping the hurdle test.

6. Cap rates link income to value

Learning goal: Value an income property from NOI and a capitalization rate and see how rate changes move value.

Real estate valuation in the Level I real assets topics starts with net operating income (NOI): rental income less operating expenses, before debt service, depreciation and income tax. The capitalization rate is NOI divided by value. Rearranged, value = NOI / cap rate. A lower cap rate means buyers accept less income per dollar of price, usually because they expect growth, lower risk or cheap financing.

Value is very sensitive to the cap rate. For a fixed NOI, going from 6% to 7% cuts value by about one seventh, even though income did not change. A cap rate is not a return forecast. It ignores growth, capital spending, leverage and the exit price, so it is a pricing shorthand, not an IRR.

Income approach is only one of the three appraisal approaches. Comparable sales and replacement cost also matter. Stale comparables lag market moves, which links this lesson back to appraisal smoothing.

Worked example

NOI is 2.4 million and the market cap rate is 6%. What is the value, and what happens if the cap rate rises to 7%?

1. Value = NOI / cap rate = 2.4 / 0.06 = 40.0 million.
2. At 7%: 2.4 / 0.07 = 34.29 million.
3. Change: 34.29 - 40.0 = -5.71 million, about -14.3%.
4. Income stayed the same. Only the pricing rate changed.

Mental model: Value = NOI / cap rate. Small rate moves create large value moves.

Common trap: Treating a cap rate as the total return on the property.

7. High-water marks decide when an incentive fee is earned

Learning goal: Compute net asset value after an incentive fee that has a high-water mark.

Hedge funds in the Level I hedge fund topics commonly charge a management fee and an incentive fee. An incentive fee is a share of profits, often 20%. A high-water mark (HWM) is the highest net asset value, per investor, at which an incentive fee was previously paid. The fund earns a new incentive fee only on gains that lift the NAV above that mark.

The HWM protects investors from paying twice for the same recovery. After a loss, the manager must first win back the lost ground. Without that rule, a fund that rose 20% one year and fell 10% the next could collect two fees on a round trip. A hurdle rate is a separate feature: the fund must beat a rate before any incentive fee applies. Some funds have both.

The model here ignores management fees, crystallisation timing and investor entry dates, which all change the exact result in practice. Read the fund documents for the actual definition of the mark and the fee base.

Worked example

Start NAV 100, 20% incentive fee with HWM, no hurdle, no management fee. Year 1 +20%, Year 2 -10%, Year 3 +15%. Find NAV after the year 3 fee.

1. Year 1: 120, fee 0.2 x 20 = 4, NAV 116. HWM = 116.
2. Year 2: 116 x 0.9 = 104.4. No fee.
3. Year 3: 104.4 x 1.15 = 120.06. Above HWM by 4.06.
4. Fee = 0.2 x 4.06 = 0.812. NAV = 119.248.

Mental model: Fee only on new highs, measured net of past fees.

Common trap: Charging the fee on the full year gain when the NAV is still near the mark.

8. Expected loss and credit spreads are different things

Learning goal: Compute expected loss from default probability, loss severity and exposure, and relate it to a simple spread approximation.

The Level I private debt and credit risk topics treat expected loss as a product: probability of default (PD) times loss given default (LGD) times exposure at default (EAD). PD is the chance of default over the horizon. LGD is the fraction of exposure not recovered. Recovery rate is 1 minus LGD. Secured loans usually have lower LGD than unsecured ones, all else equal.

A rough approximation links expected loss to the spread a lender should require just to break even: spread is about PD times LGD on an annual basis. This ignores liquidity, risk aversion and the unexpected loss around the average. Market spreads are normally wider than expected loss because investors are paid for bearing that uncertainty.

Use the formula to compare credits with different mixes. A high-PD senior secured loan can have the same expected loss as a low-PD unsecured one. Always check which measures are annual and which cover the full horizon.

Worked example

PD 3%, LGD 60%, EAD 50 million. Compute the expected loss and the approximate break-even spread.

1. Expected loss = 0.03 x 0.60 x 50 = 0.9 million.
2. Loss rate = 0.03 x 0.60 = 1.8%.
3. Approximate break-even annual spread = 1.8% (ignoring risk premium).
4. The market would normally charge more than this.

Mental model: EL = PD x LGD x EAD. Spread pays for EL and for risk.

Common trap: Using recovery rate in place of LGD.

9. The denominator effect pushes private weights above target

Learning goal: Explain why a fall in public markets raises the reported weight of private assets and how an asset owner can respond.

Institutional asset owners in Level II often set a target share for private assets. Private holdings are valued infrequently, so when public markets fall quickly the private line item falls slowly. The total portfolio value drops, the private weight rises, and the asset owner can look over its limit without having bought anything. This is called the denominator effect.

Selling illiquid assets is slow and costly, and often it is not wise. Alternatives are to stop new commitments for a period, trim public assets less than the plan implies, slow or pace commitments, use secondary sales selectively, or raise the policy range temporarily. The Level II emerging topics cover rebalancing illiquid portfolios and managing liquidity for capital calls, which include unfunded commitments that will draw cash at a bad time.

Check two things: the reported weight and the unfunded commitments. A portfolio at 40% private can have a much larger future private weight if capital is still to be called. Weight limits and liquidity limits are different rules and can bind at different times.

Worked example

Portfolio is 60 public and 40 private. Public falls 20% and private is unchanged at 40. What is the private weight?

1. Public after the fall: 60 x 0.8 = 48.
2. Total = 48 + 40 = 88.
3. Private weight = 40 / 88 = 45.45%.
4. Private weight rose by about 5.5 points with no purchases.

Mental model: When public falls and private lags, private weight rises mechanically.

Common trap: Reading the higher private weight as a sign that private performed well.

10. Fund-of-funds fees stack, and operational due diligence is a separate test

Learning goal: Compute the net return after two layers of fees and separate investment risk from operational risk in manager selection.

A fund of funds (FoF) invests in several hedge funds or private funds and adds its own fees. The investor pays the underlying managers first and then pays the FoF manager on what is left. A common layout is a management fee plus an incentive fee at each layer. Fee layers compound the drag, so a headline gross return can overstate what reaches the investor by a wide margin.

In Level II due diligence and manager selection, operational due diligence (ODD) asks whether the business can be trusted to do what it says: independent administrator, auditor quality, valuation policy, custody, cash controls, compliance culture and key-person risk. Investment due diligence asks about the strategy and edge. A strong track record does not offset a weak control environment, because operational failures can lose capital regardless of the strategy.

The toy model below uses a flat management fee and a 20% or 10% incentive fee on the profit after management fees. It ignores hurdles and marks. Real terms vary, so always read the offering documents.

Worked example

Underlying gross return 12%, management fee 2%, incentive 20% of the profit after management fee. FoF adds 1% management and 10% incentive on its profit after its management fee. What is the net return?

1. Underlying: 12 - 2 = 10; incentive 20% x 10 = 2; net 8%.
2. FoF: 8 - 1 = 7; incentive 10% x 7 = 0.7; net 6.3%.
3. Total drag from 12% gross to 6.3% net = 5.7 points.
4. Check: the fee layers cost nearly half of gross.

Mental model: Fees stack. ODD tests controls, not strategy.

Common trap: Adding the two incentive rates as a single 30% fee.

11. Diversification depends on correlation, not asset count

Learning goal: Compute two-asset portfolio volatility and see how correlation changes it.

In Level II asset allocation and the risk topics, portfolio risk is not the average of asset risks. For two assets, the variance is w1 squared x s1 squared + w2 squared x s2 squared + 2 x w1 x w2 x rho x s1 x s2, where rho is the correlation. When rho is 1 the volatility is the weighted average. When rho is below 1 diversification lowers risk below that average.

Alternatives look attractive partly because their reported correlations to equities are low. That is where the smoothing lesson matters: stale valuations bias reported correlation down and flatter the diversification benefit. In stress, correlations of risky assets tend to rise, so a model with a calm-period rho can understate loss.

Mean-variance optimisation uses these inputs directly, which makes the results very sensitive to estimation error. Small changes in expected return or correlation can swing the weights a lot. Treat the output as a starting point and test it against constraints and liquidity needs.

Worked example

Weights 60/40, volatilities 8% and 15%, correlation 0.2. Compute portfolio volatility.

1. Variance = 0.36 x 0.0064 + 0.16 x 0.0225 + 2 x 0.6 x 0.4 x 0.2 x 0.08 x 0.15.
2. = 0.002304 + 0.0036 + 0.001152 = 0.007056.
3. Volatility = sqrt(0.007056) = 0.084 = 8.4%.
4. The weighted average is 10.8%, so diversification saved 2.4 points.

Mental model: Risk depends on the covariance term. Check where the correlation estimate came from.

Common trap: Averaging volatilities by weight and calling that portfolio risk.

12. Liquidity belongs in a cash calendar

Learning goal: Separate reported asset value from money available to meet a capital call.

A portfolio can show a high value and still lack the cash needed on a particular date. Private fund commitments, unfunded commitments, invested capital and net asset value are different quantities. A commitment is a promise subject to the fund agreement. An unfunded commitment is the portion not yet contributed. Neither should be treated as an immediately tradable asset. Liquidity planning starts with the dates and amounts of potential cash outflows.

In an original case, an investor has 100 units of cash, expects an 80-unit capital call, and needs 30 units for other obligations. The cash demand is 110, so the shortfall is ten. An expected distribution next month does not fund an obligation this week. Put inflows and outflows on the same timeline before netting them. If the distribution is uncertain, represent it in a scenario rather than silently treating it as guaranteed.

CAIA lists liquidity and funding risks and managing liquidity for capital calls among its official topic areas. These terms connect a portfolio decision to an operational problem: which assets can supply cash, at what time, and under what restrictions? A reported private-asset valuation may be unavailable for sale at that value. A borrowing facility may create cash but also creates repayment and financing risks. Do not label every possible cash source equivalent.

Practice set: cash is 90, a call is 50 and living or operating obligations are 45. Calculate the five-unit shortfall. Then suppose a confirmed liquid sale provides fifteen units before both obligations settle; the cash balance after them is ten. Finally move that sale after the call and ask whether it solves the earlier funding need. It does not. This exercise is a calendar model, not a recommendation to borrow or sell. When reviewing a manager or portfolio, ask for the timing assumptions and test an adverse distribution scenario.

Source alignment: [CAIA curriculum: Liquidity and Funding Risks]. All numerical data and practice questions here are original teaching examples, not official exam questions or observed results.

Worked example

Cash 100; call 80; other same-date obligations 30. Find the shortfall.

1. Place all cash needs on the same date.
2. Total demand is 80+30=110.
3. Available cash is 100.
4. Shortfall is 10.

Mental model: Separate reported asset value from money available to meet a capital call.

Common trap: Net future distributions against an earlier cash call.

13. Hedges leave a residual exposure

Learning goal: Calculate the net sensitivity after a hedge instead of assuming the word hedged means safe.

A hedge changes a defined exposure. It does not automatically remove every risk in a position. Specify the factor being hedged, the sensitivity of the original position, and the sensitivity of the hedge. With a simple linear model, net sensitivity equals the original sensitivity plus the hedge sensitivity. A hedge with the opposite sign can offset part of the exposure while leaving basis, funding or liquidity risks outside that model.

For an original example, a portfolio has a sensitivity of plus 1.2 million currency units per unit move in a selected factor. A hedge contributes minus 0.9 million per unit move. The residual is plus 0.3 million. If the factor rises by two units and the approximation holds, the net change is plus 0.6 million. This arithmetic is not a forecast: it is conditional on a linear sensitivity and stable relationships.

CAIA includes hedging portfolios, multi-factor models and risk measurement in its official Level II topic list. The important teaching step is to keep the model boundary visible. A hedge aligned with a broad market index may not precisely track a specific portfolio. A relationship estimated in one period may change. The calculation can be correct while the assumed exposure is incomplete. State what is held constant and what the simplified calculation omits.

Practice set: original exposure is plus eight, hedge exposure is minus five, and the factor falls by four. Net sensitivity is plus three, so the modeled change is minus twelve. Then strengthen the hedge to minus ten: residual sensitivity becomes minus two and the same factor decline creates a modeled gain of eight. The second position is overhedged relative to this single factor, not risk-free. Add a separate funding charge of two to the result and identify why it belongs outside the sensitivity multiplication. Check sign, units and horizon before interpreting a hedge.

Source alignment: [CAIA curriculum: Hedging Portfolios; Risk Measurement]. All numerical data and practice questions here are original teaching examples, not official exam questions or observed results.

Worked example

Original factor sensitivity +8; hedge -5; factor change -4. Find modeled net change.

1. Add signed sensitivities.
2. 8-5=3 residual exposure.
3. Multiply 3 by -4.
4. Modeled net change is -12.

Mental model: Calculate the net sensitivity after a hedge instead of assuming the word hedged means safe.

Common trap: Use the hedge label as proof of zero total risk.

14. Due diligence separates strategy from operations

Learning goal: Ask whether an investment process and an operating control each answer their own question.

Investment due diligence examines the claimed strategy: what generates returns, which risks it accepts, and whether the evidence supports the process. Operational due diligence asks about the organization and controls that implement and report that strategy. A persuasive investment story does not establish reliable custody, reconciliations, valuation controls or governance. CAIA lists investment process due diligence, operational due diligence and terms and business activities as separate official topics.

An original manager presentation shows attractive historical returns and describes a repeatable trading rule. The operational review discovers that the same person enters trades, approves reconciliations and sets valuations without an independent review. The return chart does not answer that control concern. Conversely, strong reconciliations do not show that the strategy is attractive at its current capacity. Record each observation in the appropriate evidence column.

Use questions that can be answered with documents or a demonstration. Who can authorize a transfer? Who independently checks balances? How are hard-to-value holdings priced and challenged? What happens when a key person is unavailable? What contractual gates or notice periods limit redemption? These are editorial review questions, not a universal regulatory checklist or a certification standard. Their value is that they expose assumptions the return chart leaves untested.

Practice set: classify three findings. A backtest omits trading costs, so it challenges investment evidence. An unreconciled cash balance challenges operations. A redemption restriction affects terms and liquidity. Then identify what would reduce uncertainty in each case: a net-of-cost analysis, an independently checked reconciliation and the signed fund terms. None alone proves the manager is suitable. A decision should state unresolved findings and the evidence still needed, rather than hide them behind a single due-diligence score.

Source alignment: [CAIA curriculum: Due Diligence & Selecting Managers]. All numerical data and practice questions here are original teaching examples, not official exam questions or observed results.

Worked example

A manager shows high returns but cannot explain independent balance reconciliation. Which review is missing?

1. Separate return evidence from operating controls.
2. A return chart addresses historical performance.
3. Reconciliation concerns the reliability of records.
4. Operational due diligence is needed.

Mental model: Ask whether an investment process and an operating control each answer their own question.

Common trap: Let investment performance substitute for operational evidence.

15. A valuation is a model with assumptions

Learning goal: Identify which assumptions drive a private-asset value before comparing it with a quoted market price.

A private-asset valuation may depend on a forecast, a discount rate, comparables or an income multiple rather than an immediately executable quoted price. A number written in a statement is an estimate produced under a method. CAIA includes valuation methods for private assets and real-estate valuation among its official topics. For study, distinguish the calculation from the claim that the estimate could be realized in a sale today.

In a deliberately simplified one-period model, a cash flow of 110 discounted at ten percent has a present value of 100. Raise the discount rate to twenty percent while keeping the cash flow fixed and the value becomes about 91.67. The lower value results from the changed rate, not a decline in the forecast cash flow. Hold other inputs constant when interpreting a sensitivity test.

A real investment can have many cash flows, uncertainty, debt, fees and a terminal value. The one-period example is not a complete appraisal. Its purpose is to make assumptions visible. If two valuations differ, compare horizons, cash-flow definitions and discount rates before declaring one wrong. A cash flow to the whole firm differs from a cash flow to equity holders. Matching the cash-flow type and discount-rate concept is essential to a consistent model.

Practice set: value a single certain-for-the-example payment of 121 received in two periods using a ten percent per-period discount rate. Divide 121 by 1.1 squared to obtain 100. Then value 120 received in one period at twenty percent; the answer is also 100 despite different cash-flow timing and rates. Equal values do not imply identical risk. Add a scenario where the expected cash flow is ninety rather than 120 at the same rate; the modeled value falls to seventy-five. Label every estimate with its timing and assumptions.

Source alignment: [CAIA curriculum: Valuation Methods for Private Assets]. All numerical data and practice questions here are original teaching examples, not official exam questions or observed results.

Worked example

Value 110 received one period later at a 10% per-period discount rate.

1. Match period and rate.
2. Discount factor is 1.10.
3. Divide 110 by 1.10.
4. Present value is 100.

Mental model: Identify which assumptions drive a private-asset value before comparing it with a quoted market price.

Common trap: Treat a modeled valuation as a guaranteed sale price.

16. Mixed portfolio cases need separate denominators

Learning goal: Use a short integrated set to check cash, performance multiples and portfolio weights independently.

An integrated problem can contain several ratios that sound similar but use different denominators. Before calculating, write the definition of each quantity. Distribution to paid-in capital divides distributions by paid-in capital. Residual value to paid-in capital divides residual value by paid-in capital. A portfolio weight divides one holding by the entire portfolio value. A cash shortfall compares obligations with available cash. Mixing these bases produces an answer that may look plausible but describes the wrong quantity.

Use an original case: a private fund has paid-in capital of 100, distributed sixty and reports residual value of eighty. Its distribution multiple is 0.6, residual multiple is 0.8 and total value multiple is 1.4. These simple multiples ignore timing. The total multiple does not imply an annual return of forty percent. To discuss an annualized result, dates and a defined return method would be needed.

Now place the eighty-unit residual asset in a portfolio with 120 units of other assets. Its reported weight is forty percent. If the other assets fall to eighty while the private valuation remains eighty, the private weight rises to fifty percent without a new contribution. That change is a denominator effect in the stated valuation snapshot, not evidence that private assets rose. Separately, a cash balance of twenty cannot meet a call of twenty-five without another source of five.

Practice set: paid-in capital is fifty, distributions are twenty and residual value is forty-five. Calculate total value multiple 1.3. Put the residual asset alongside 105 units of other assets and calculate a thirty percent weight. Finally compare fifteen cash with eighteen obligations and identify a three-unit shortfall. For each answer, say what it does not show: timing-adjusted performance, executable sale value or a complete liquidity forecast. This is an original practice set, not an official CAIA mini-exam or a score estimate.

Source alignment: [CAIA curriculum: Measures of Risk and Performance; Liquidity and Funding Risks]. All numerical data and practice questions here are original teaching examples, not official exam questions or observed results.

Worked example

Paid-in 100, distributions 60, residual 80. Calculate total value multiple.

1. Keep paid-in capital as the denominator.
2. Add distributions and residual value: 140.
3. Divide by paid-in 100.
4. Total multiple is 1.4.

Mental model: Use a short integrated set to check cash, performance multiples and portfolio weights independently.

Common trap: Use one ratio as a substitute for return, weight and liquidity.