Chartered Alternative Investment Analyst Association (CAIA) Practice Exam

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Prepare for the Chartered Alternative Investment Analyst Association (CAIA) Exam with structured quizzes, flashcards, and detailed explanations. Study efficiently and boost your confidence for the test!

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Which of the following is a disadvantage of real estate as an investment?

High liquidity
Homogeneity
Illiquidity
Ease of valuation

The correct answer is: Illiquidity

Illiquidity is indeed a significant disadvantage of real estate as an investment. Real estate assets are typically not easily converted into cash compared to other investments such as stocks or bonds. The process of buying or selling real estate can take considerable time due to various factors like market conditions, property location, and the complexities involved in legal transactions. This lack of liquidity means that investors may not be able to quickly access their capital if they need it, which can be a critical drawback in times of financial need or emergency. The other options do not highlight disadvantages effectively. For instance, high liquidity would generally be seen as an advantage, indicating that an asset can be easily sold. Homogeneity suggests that properties are uniform, which is not a common characteristic of real estate; properties often vary significantly in terms of value, location, and type, which adds diversification rather than detracting from the investment. Lastly, ease of valuation can be misleading; valuing real estate can be complex due to the uniqueness of each property, local market influences, and other variables involved.