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CAIA Level I study materials
CAIA Level I study resources

CAIA Level I practice questions

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Question 1Professional Standards and Ethics

Which of the following is an explicit obligation under the CAIA Code of Ethics?

  1. Disclosing every proprietary model used in an investment process
  2. Maintaining and improving professional competence Correct answer.
  3. Guaranteeing that investment recommendations will be profitable
  4. Publishing all personal investment holdings each quarter

Explanation

The Code requires members to act with integrity, competence and dignity, to maintain and improve their professional competence, and to avoid knowingly participating in violations of the Code. It imposes no duty to guarantee results, reveal proprietary models, or report personal holdings.

Question 2Professional Standards and Ethics

The primary purpose of the GIPS standards is to:

  1. provide fair representation and full disclosure of performance Correct answer.
  2. guarantee that all reported returns have been independently audited
  3. establish minimum competency examinations for portfolio managers
  4. standardize the management fees charged by asset managers

Explanation

GIPS is a voluntary, firm-wide set of ethical performance standards whose objective is fair representation and full disclosure, enabling prospective clients to compare firms on a consistent basis. It does not license individuals, regulate fees, or mandate an audit.

Question 3Professional Standards and Ethics

While walking past a conference room, an analyst overhears two executives discussing an unannounced takeover bid. The analyst has no other information about the company. According to the Standards, the analyst should:

  1. immediately purchase shares and disclose the trade to her employer
  2. share the information with her team but personally refrain from trading
  3. trade only in accounts managed for family members
  4. neither trade on the information nor cause others to trade on it Correct answer.

Explanation

An unannounced takeover bid is both material and nonpublic, so members may not act on it or cause others to act on it. Trading through family accounts or passing the tip to colleagues is equally prohibited.

Question 4Professional Standards and Ethics

Fiduciary duty in an investment management relationship is best described as an obligation to:

  1. act loyally and with care in the client's best interest Correct answer.
  2. maximize the manager's fee revenue while reporting results transparently
  3. disclose performance only to regulators and auditors
  4. follow every client instruction regardless of whether it is lawful

Explanation

A fiduciary owes duties of loyalty and care, subordinating the manager's own interests to those of the client and acting prudently. Obeying unlawful instructions or restricting disclosure would breach those duties.

Question 5Professional Standards and Ethics

A portfolio manager is offered an all-expenses-paid resort trip by a broker seeking trade allocations. Under the Standards, the manager should most appropriately:

  1. decline or seek employer approval, since the gift may compromise objectivity Correct answer.
  2. accept, because gifts below a stated dollar threshold are always permitted
  3. accept, because broker entertainment is a normal part of business
  4. accept, provided the trip is disclosed to clients after it is taken

Explanation

Gifts and entertainment from parties with whom the member does business may impair independence and objectivity, so they must be judged against employer policy and typically refused or approved in advance. Disclosure after the fact does not remove the influence.

Question 6Professional Standards and Ethics

A client tells her adviser that she intends to conceal income from tax authorities. Under the Standards, the adviser may most appropriately:

  1. disclose the information to the appropriate authorities Correct answer.
  2. continue to manage the account and ignore the statement
  3. trade on the information before it becomes public
  4. share the information with other clients as an example

Explanation

Confidentiality yields when disclosure is required by law or when the information concerns illegal activity. Ignoring the statement, trading on it, or relaying it to other clients would each breach a separate Standard.

Question 7Professional Standards and Ethics

Using a research report written by another firm, in substantially unchanged form, without crediting the author is best described as:

  1. plagiarism, which violates the Standards Correct answer.
  2. acceptable if the report is publicly available
  3. acceptable if the analyst adds a new summary page
  4. permitted when the source firm is a competitor

Explanation

Presenting another party's work as one's own is plagiarism whether or not the source is public. Members must attribute research and quotations to their authors, although factual data from recognized sources may be used with credit.

Question 8Professional Standards and Ethics

An analyst completes a research report and plans to distribute it. To comply with the Standards on fair dealing, the analyst should:

  1. give the report first to clients who pay performance fees
  2. allow sales staff to share conclusions verbally before publication
  3. provide the report to the largest clients several days in advance
  4. disseminate the recommendation to all clients at approximately the same time Correct answer.

Explanation

Recommendations must reach all clients on a fair and simultaneous basis, with no client given a head start. Differing service levels may justify different formats or delivery methods only where no client is disadvantaged.

Question 9Professional Standards and Ethics

A manager uses client brokerage commissions to buy a research subscription that is used partly for the firm's own marketing. To comply with the Standards, the manager should:

  1. charge the subscription to the clients' advisory fee instead
  2. use the service only in proportion to the benefit received by client accounts Correct answer.
  3. use the service freely, since soft dollars are not client assets
  4. disclose the arrangement and then use the service for any purpose the firm chooses

Explanation

Client brokerage belongs to the client, so research purchased with soft dollars must benefit the accounts that generated the commissions. Uses that primarily serve the firm's marketing, or that are shifted to clients without consent, are inconsistent with the Standards.

Question 10Professional Standards and Ethics

A manager pays an unaffiliated solicitor a percentage of assets raised. According to the Standards, the manager must:

  1. disclose the arrangement to the employer and to the client Correct answer.
  2. keep the arrangement confidential to protect the client relationship
  3. disclose the arrangement only if the client specifically asks about fees
  4. record the payment as a research expense in client reports

Explanation

Referral arrangements can influence a recommendation and therefore must be disclosed to the employer and to clients or prospects. Concealment, or disclosure only on request, is insufficient to address the conflict.

Question 11Professional Standards and Ethics

A firm shows prospects a composite of simulated returns produced by applying its current model to historical data. Which action is most consistent with the Standards?

  1. Present the simulated returns only to qualified prospective clients
  2. Present the simulated returns alongside the firm's audited actual returns
  3. Label the composite as gross of fees so the returns are comparable
  4. Label the results clearly as hypothetical and disclose the limitations of the model Correct answer.

Explanation

Hypothetical or model results may be shown only when they are clearly identified as such and accompanied by disclosure of the assumptions and limitations involved. Presenting them without that label, or implying comparability with actual results, is misleading.

Question 12Professional Standards and Ethics

An adviser learns that a stock she covers is likely to be upgraded. Under the Standards, the order of priority for trading is:

  1. employer accounts, client accounts, then personal accounts
  2. client accounts first; personal trades must not disadvantage clients Correct answer.
  3. personal accounts, employer accounts, then client accounts
  4. client accounts, personal accounts of family members, then employer accounts

Explanation

Client interests take precedence over the member's own, and personal transactions must never exploit client trades or information. Employer accounts generally come after client accounts, and family accounts are treated as personal.

Question 13Professional Standards and Ethics

Which statement about GIPS compliance is accurate?

  1. Compliance with GIPS is determined on a firm-wide basis Correct answer.
  2. A firm may claim compliance for a single composite only
  3. Compliance is awarded by a regulator after an audit
  4. Compliance is established separately for each individual portfolio

Explanation

A firm claims GIPS compliance as an investment firm as a whole, not portfolio by portfolio or composite by composite. Compliance is self-declared and is not conferred by a regulator or an audit.

Question 14Professional Standards and Ethics

Which statement about independent verification under GIPS is accurate?

  1. Verification certifies that the firm's reported returns are free of any material error
  2. Verification must be performed annually by the firm's auditor
  3. Verification is mandatory for firms that manage alternative investments
  4. Verification is voluntary and does not assure the accuracy of any composite Correct answer.

Explanation

Verification is a voluntary third-party review of the firm's overall GIPS compliance policies and procedures. It does not assure the accuracy of any particular composite or return, and firms may not claim that a specific composite has been verified.

Question 15Professional Standards and Ethics

An alternative investment manager states in a pitch book that a fund is 'capital-guaranteed' because of a tail-risk hedge. Under the Standards, this statement is:

  1. acceptable if the hedge has historically eliminated losses
  2. a misrepresentation, because the guarantee cannot be substantiated Correct answer.
  3. acceptable if the fund's auditor reviews the marketing material
  4. acceptable if the guarantee is disclosed in the footnotes

Explanation

Statements about guarantees, risk and return must be accurate and supportable. A hedge can reduce risk but does not guarantee principal, and fine-print disclosure does not cure a misleading headline claim.

Question 16Professional Standards and Ethics

An analyst discovers that her employer is concealing losses from investors. Under the Standards, she may most appropriately:

  1. discuss the matter with clients rather than regulators
  2. wait until the annual audit to raise the concern
  3. report the conduct to compliance or to regulators Correct answer.
  4. resign quietly without reporting the conduct

Explanation

The duty of loyalty to an employer does not prevent a member from reporting illegal activity internally or to regulators, and the Code permits such reporting. Silence or selective disclosure to clients leaves the misconduct in place and may involve the member in it.

Question 17Professional Standards and Ethics

Before recommending a private real estate fund to a client, an adviser should most appropriately:

  1. delegate the assessment to the client's accountant
  2. rely on the fund's GIPS-compliant presentation as sufficient diligence
  3. review the fund's marketing brochure and prior-year returns only
  4. assess the client's objectives and the fund's risks and terms Correct answer.

Explanation

Members must understand a product's risks and confirm suitability before recommending it, which requires independent analysis of the vehicle's terms as well as the client's objectives. A performance presentation or brochure is a starting point, not a substitute for diligence, and suitability cannot be delegated.

Question 18Professional Standards and Ethics

An execution trader places small buy orders near the close to push a stock's price up so that a large sell order can be filled at a better price. This practice is best described as:

  1. best execution
  2. window dressing
  3. market manipulation Correct answer.
  4. a permissible trading tactic

Explanation

Transactions intended to move a price artificially so that another trade benefits are manipulative and prohibited by the Standards. Best execution concerns obtaining favorable terms for clients, and window dressing refers to cosmetic portfolio changes before reporting dates.

Question 19Professional Standards and Ethics

A senior analyst serves on the board of a company that his firm rates. Under the Standards, the analyst should most appropriately:

  1. continue both roles without disclosure if no compensation is received
  2. disclose the conflict to the employer and clients, and recuse as needed Correct answer.
  3. resign from the board immediately in all circumstances
  4. remove the company from the firm's coverage universe

Explanation

Board service creates a conflict of interest that must be disclosed to the employer and to clients, and the analyst should be recused from related recommendations where appropriate. Outright resignation or dropping coverage is not mandated.

Question 20Professional Standards and Ethics

Under GIPS, a firm's composites must include:

  1. only portfolios that pay fees based on assets under management
  2. all actual, fee-paying, discretionary portfolios Correct answer.
  3. every portfolio managed by the firm, whether discretionary or not
  4. only portfolios that have been independently verified

Explanation

Composites must contain all actual, fee-paying, discretionary portfolios that meet the composite definition, which prevents cherry-picking of favorable accounts. Non-discretionary and non-fee-paying portfolios may be included only under specified conditions with disclosure.

Question 21Professional Standards and Ethics

An analyst combines public information about an industry with a nonmaterial nonpublic observation from a site visit to form a favorable forecast. This activity is:

  1. permitted under the mosaic theory of materiality Correct answer.
  2. prohibited, because any nonpublic information may not be used
  3. prohibited unless the site visit is disclosed to clients
  4. permitted only if the analyst's employer approves the conclusion

Explanation

The mosaic theory allows members to piece together public information and nonmaterial nonpublic information to reach an investment conclusion. The prohibition applies only when the information is both material and nonpublic.

Question 22Professional Standards and Ethics

A firm that has been managing assets for twelve years wishes to claim GIPS compliance. At a minimum, it must present:

  1. twelve years of performance
  2. ten years of performance Correct answer.
  3. five years of performance
  4. one year of performance

Explanation

A firm must present at least five years of compliant performance, or the period since inception if shorter, and must add each subsequent year until ten years are shown. Firms are not required to present more than ten years.

Question 23Professional Standards and Ethics

An adviser directs client trades to a broker whose commissions are well above the lowest available, because the broker provides research that benefits all client accounts. Under the Standards, the adviser:

  1. may pay more if the research benefits clients, while still seeking best execution Correct answer.
  2. may not use client commissions to obtain research under any circumstances
  3. must pay for all research from the firm's own resources
  4. must always select the broker charging the lowest commission

Explanation

Best execution weighs price together with the value of research and services received, so higher commissions can be justified when the research benefits the paying client accounts. The member must still periodically assess whether the broker's overall terms remain competitive.

Question 24Professional Standards and Ethics

When the Code and Standards conflict with local law, a member should:

  1. comply with local law and also abide by the Code where it is stricter Correct answer.
  2. apply whichever requirement is less demanding to reduce legal risk
  3. follow local law in all cases, even when the Code is stricter
  4. follow the Code in all cases, even where local law is stricter

Explanation

Members must observe the stricter of applicable law and the Code and Standards. Deliberately choosing the less demanding rule, whether legal or ethical, is itself a violation.

Question 25Professional Standards and Ethics

A firm discovers that a compliant presentation it distributed contained a material calculation error. To remain consistent with GIPS, the firm must:

  1. silently revise the presentation for future use
  2. withdraw its claim of compliance for the entire firm
  3. correct the error promptly and disclose the correction to affected parties Correct answer.
  4. wait until the next annual update to revise the numbers

Explanation

GIPS requires a firm to take reasonable steps to correct material errors in compliant presentations and to disclose the correction to those who received them. Silent revision or delay misleads parties who relied on the erroneous figures.

Question 26Introduction to Alternative Investments

Which characteristic most distinguishes alternative investments from traditional stock and bond portfolios?

  1. Exposure limited to exchange-traded securities
  2. Returns guaranteed by the fund sponsor
  3. Public filings updated every trading day
  4. Limited liquidity and infrequent pricing Correct answer.

Explanation

Alternative investments generally trade in private or thin markets, so holdings are infrequently traded and valuations are estimated periodically rather than set by continuous public auction. This illiquidity and appraisal-based pricing are the defining structural features of the asset class.

Question 27Introduction to Alternative Investments

Which fee arrangement is meant by the industry shorthand "two and twenty" for a hedge fund?

  1. A 2% management fee plus 20% of profits Correct answer.
  2. A 2% incentive fee plus 20% of committed capital
  3. A 20% management fee plus 2% of profits
  4. A flat 20% management fee with no incentive fee

Explanation

Hedge fund compensation is conventionally a management fee assessed on assets under management plus an incentive fee assessed on investment gains. The standard quotation is 2% of assets and 20% of profits, sometimes subject to a hurdle and high-water mark.

Question 28Introduction to Alternative Investments

A hedge fund with a high-water mark provision will:

  1. Reset the incentive fee base at the start of each quarter
  2. Pay investors a fixed coupon before any fee
  3. Charge incentive fees on gross profits even after a loss
  4. Earn incentive fees only above the prior peak Correct answer.

Explanation

A high-water mark ensures the manager receives performance fees only after recovering any prior losses, so the fee base is the highest net asset value previously achieved. After a drawdown, gains merely restoring the prior peak do not generate incentive fees.

Question 29Introduction to Alternative Investments

Early private equity fund returns typically plot a J-curve because:

  1. Realized gains are distributed before capital is called
  2. Management fees decline steadily over the fund's life
  3. Leverage is highest in the final years of the fund
  4. Early fees and losses precede later realizations Correct answer.

Explanation

In the early years, management fees and write-downs depress reported net asset value before portfolio companies mature and are sold at gains. The resulting pattern of negative early returns followed by later gains is the J-curve.

Question 30Introduction to Alternative Investments

A property producing $1,200,000 of net operating income is valued at $20,000,000. Its capitalization rate is closest to:

  1. 6.0% Correct answer.
  2. 1.2%
  3. 12.0%
  4. 16.7%

Explanation

The capitalization rate equals net operating income divided by property value, so $1.2 million divided by $20 million gives 6.0%. It represents the unlevered income yield implied by the purchase price.

Question 31Introduction to Alternative Investments

A commodity futures market is described as being in backwardation when:

  1. Spot and futures prices are equal at all maturities
  2. Futures prices rise with maturity for every contract month
  3. Futures prices are below spot prices Correct answer.
  4. The exchange imposes a daily price limit

Explanation

Backwardation describes a downward-sloping futures curve in which deferred contracts trade below the spot price. It is often associated with tight nearby supply or a high convenience yield for holding the physical commodity.

Question 32Introduction to Alternative Investments

Commodity trading advisors are most closely associated with which approach?

  1. Rules-based trading of futures contracts Correct answer.
  2. Origination of residential mortgages
  3. Passive replication of a broad equity index
  4. Leveraged buyouts of private companies

Explanation

Commodity trading advisors are regulated managers of futures and forward positions, and most run systematic, trend-following programs across financial and commodity markets. Their strategies are typically quantitative and highly liquid rather than fundamentally driven.

Question 33Introduction to Alternative Investments

A lock-up provision in a hedge fund investment means the investor:

  1. Cannot redeem capital for a stated initial period Correct answer.
  2. Receives a guaranteed minimum return while locked
  3. May sell the position only to the general partner
  4. May redeem on any business day without notice

Explanation

A lock-up bars redemption for a defined initial period, often one to three years, so the manager can hold less liquid positions without forced selling. After it expires, redemption windows and notice periods usually still apply.

Question 34Introduction to Alternative Investments

A fund charges a 20% incentive fee subject to a 6% hard hurdle. If the fund returns 10% net of management fees, the incentive fee equals:

  1. 0.8% of capital Correct answer.
  2. 1.2% of capital
  3. 6.0% of capital
  4. 2.0% of capital

Explanation

With a hard hurdle, the incentive fee applies only to the return above the hurdle: 20% multiplied by the 4% excess return equals 0.8% of capital. Returns up to the hurdle accrue entirely to investors.

Question 35Introduction to Alternative Investments

In a cash merger arbitrage position, the arbitrageur generally earns a profit when:

  1. The acquirer's share price falls sharply after announcement
  2. The deal closes and the spread converges Correct answer.
  3. Interest rates rise during the offer period
  4. The target's share price collapses on antitrust news

Explanation

The arbitrageur buys the target below the announced cash offer price and captures the spread when the deal completes. The spread compensates for the risk that the transaction breaks.

Question 36Introduction to Alternative Investments

Convertible arbitrage typically involves:

  1. Shorting a convertible bond against a long stock position
  2. Buying a convertible bond and shorting the underlying stock Correct answer.
  3. Buying calls and shorting puts on the same stock
  4. Buying a convertible bond and buying the underlying stock

Explanation

The classic trade is long the convertible, which embeds an equity option, hedged with a short position in the underlying stock. The hedge isolates the mispricing of the embedded option and credit spread while muting directional equity exposure.

Question 37Introduction to Alternative Investments

An investor seeking to reduce vintage-year risk in a private equity program should:

  1. Concentrate commitments in a single fund
  2. Invest only in funds raised during expansions
  3. Rely on the manager to time commitments
  4. Spread commitments across vintage years Correct answer.

Explanation

Vintage-year risk is the dependence of returns on the economic conditions prevailing when a fund deploys capital. Committing across several vintage years diversifies entry valuations and exit environments, smoothing the program's outcome.

Question 38Introduction to Alternative Investments

Which financing round normally occurs earliest in a venture capital company's life cycle?

  1. Series B
  2. Mezzanine stage
  3. Series C
  4. Seed stage Correct answer.

Explanation

Seed capital funds company formation and initial product development, before institutional rounds such as Series A, B, and C. Mezzanine financing arrives later, when the company is closer to a liquidity event.

Question 39Introduction to Alternative Investments

A private equity fund reports a TVPI of 1.8x and a DPI of 0.6x. Which conclusion is supported?

  1. The fund has lost 40% of committed capital
  2. The fund's IRR must exceed 18% per year
  3. Most of the reported value remains unrealized Correct answer.
  4. The fund has returned 1.8 times capital in cash

Explanation

TVPI counts both realized distributions and unrealized residual value, while DPI counts only distributions. Since distributions of 0.6x are far below the 1.8x total, roughly two-thirds of the reported value is still unrealized.

Question 40Introduction to Alternative Investments

When a commodity futures curve is in contango, a fully collateralized long-only futures position will generally:

  1. Incur negative roll yield when contracts roll Correct answer.
  2. Earn positive roll yield as contracts mature
  3. Be unaffected by the shape of the curve
  4. Receive the convenience yield in cash

Explanation

In contango, deferred contracts are more expensive than nearby ones, so rolling a maturing long into a later contract entails buying higher and produces a negative roll yield. That drag can offset spot price gains.

Question 41Introduction to Alternative Investments

Which feature is most typical of core infrastructure investments?

  1. Stable, inflation-linked long-term cash flows Correct answer.
  2. Heavy exposure to discretionary consumer spending
  3. Short asset lives with rapid obsolescence
  4. Revenue tied directly to commodity prices

Explanation

Core infrastructure such as toll roads, utilities, and regulated pipelines features long-lived assets, high barriers to entry, and revenue often indexed to inflation. These traits produce predictable, bond-like cash flows with low demand elasticity.

Question 42Introduction to Alternative Investments

The principal drawback of accessing hedge funds through a fund of funds is:

  1. Reduced manager diversification
  2. Inability to access closed funds
  3. An additional layer of fees Correct answer.
  4. Required daily liquidity

Explanation

A fund of funds charges its own management and incentive fees on top of those levied by the underlying managers, creating a fee-on-fee drag. In exchange, investors obtain manager selection, due diligence, and diversification they may not achieve alone.

Question 43Introduction to Alternative Investments

When a hedge fund creates a side pocket, the affected assets are:

  1. Transferred to investors at original cost
  2. Segregated and redeemed only when realized Correct answer.
  3. Sold immediately to meet redemptions
  4. Written down to zero until liquidation

Explanation

Side pockets isolate hard-to-value or illiquid positions from the fund's main portfolio so that redeeming investors cannot force their sale. The pocketed assets are typically distributed in kind or in cash only after they are realized.

Question 44Introduction to Alternative Investments

Appraisal-based valuation of illiquid assets tends to:

  1. Overstate the volatility of reported returns
  2. Smooth returns and understate volatility Correct answer.
  3. Remove serial correlation from return series
  4. Produce perfectly normal return distributions

Explanation

When marks are based on periodic appraisals or comparable transactions rather than trades, new information enters reported values gradually. The resulting serial correlation in returns makes measured volatility too low and reported correlations with other assets too small.

Question 45Introduction to Alternative Investments

Compared with direct ownership of individual properties, a listed REIT investment typically offers:

  1. Greater liquidity but higher equity-market beta Correct answer.
  2. A higher illiquidity premium per unit of risk
  3. Greater control over building operations
  4. Lower correlation with the broad equity market

Explanation

Listed REITs trade continuously, so they are far more liquid than direct property, but their share prices move with the equity market and often exhibit a beta closer to stocks. Direct ownership offers control and illiquidity premia but no daily exit.

Question 46Introduction to Alternative Investments

A hedge fund index that admits managers only after they begin reporting and drops funds when they close will most likely:

  1. Eliminate all bias because reporting is voluntary
  2. Match a buy-and-hold benchmark exactly
  3. Overstate returns through backfill and survivorship bias Correct answer.
  4. Understate returns because failing funds stay in

Explanation

Backfill bias arises because a manager's earlier, often strong, track record enters the index when it joins, while survivorship bias removes funds that closed after poor results. Both distort the index upward relative to the true opportunity set.

Question 47Introduction to Alternative Investments

An investor buying senior secured bank loans of a firm already in default is primarily relying on:

  1. Conversion of the loan into common shares
  2. The equity option value embedded in the loan
  3. Claim priority and collateral recovery value Correct answer.
  4. Duration gains from falling interest rates

Explanation

Distressed secured lenders sit high in the capital structure, so returns depend on the collateral and the recovery rate achieved in restructuring or liquidation. The purchase price well below par provides the return if recoveries exceed that price.

Question 48Introduction to Alternative Investments

Alternative risk premia products differ from traditional hedge funds chiefly because they:

  1. Guarantee positive returns in rising equity markets
  2. Harvest rules-based factor exposures at lower fees Correct answer.
  3. Deliver alpha from discretionary manager skill
  4. Require long lock-ups and illiquid holdings

Explanation

Alternative risk premia strategies package systematic, repeatable exposures such as value, carry, momentum, and trend in transparent, liquid vehicles with low fees. The return source is a compensated factor exposure rather than idiosyncratic manager skill.

Question 49Introduction to Alternative Investments

A fund begins at $100 per share with a high-water mark of $100. It falls to $80 in year 1 and rises to $110 in year 2. With a 20% incentive fee and no hurdle, the year-2 fee per share is:

  1. $2.00 Correct answer.
  2. $16.00
  3. $6.00
  4. $22.00

Explanation

The high-water mark of $100 must be recovered before any fee is charged, so only the $10 above the prior peak is fee-bearing. Twenty percent of $10 equals $2.00 per share.

Question 50Introduction to Alternative Investments

A property produces net operating income of $5 million expected to grow 2% annually forever, and investors require a 9% total return. Using a Gordon growth approach, the property value is closest to:

  1. $250.0 million
  2. $55.6 million
  3. $45.5 million
  4. $71.4 million Correct answer.

Explanation

The value equals next year's income divided by the cap rate implied by the required return minus growth. Here $5 million divided by the 7% spread between 9% and 2% yields about $71.4 million.