Real assets is one of the broader sections in the CAIA Level I curriculum — four distinct categories, each with its own valuation framework, risk profile, and role within an institutional portfolio. The breadth is part of what makes it challenging.
This post covers all four categories at exam depth. It's written for candidates already working through the curriculum. For a broader overview of the exam and how this section fits into the whole, see our complete CAIA Level I candidate guide.
Real assets share two characteristics that distinguish them from financial assets like equities and bonds. First, their value is tied to physical assets or physical commodities, which means their return drivers are fundamentally different from the return drivers of public securities. Second, many real assets have demonstrated inflation-sensitivity — their prices tend to move with, or ahead of, general price levels rather than being eroded by them.
For institutional investors managing long-duration liabilities — pension funds, endowments, insurance companies — these characteristics are valuable. The exam tests this rationale explicitly. Know why real assets are included in institutional portfolios, not just what they are.
Real estate investment takes two forms: direct ownership of physical property, and indirect investment through vehicles that pool capital to invest in real estate. Real estate investment trusts (REITs) are publicly listed vehicles that own portfolios of income-producing property and are required to distribute the substantial majority of taxable income to shareholders.
Publicly listed REITs tend to have higher correlation with broad equity markets than direct real estate does — because public markets impose mark-to-market pricing and REIT prices reflect investor sentiment about equities as much as they reflect underlying property values. Direct real estate, valued periodically by appraisal, shows lower correlation with equities — though this is partly a smoothing artefact of appraisal-based valuation rather than a true reduction in co-movement.
Equity investors own the residual value of the property after debt is serviced. They receive income from rents after debt payments, and capital appreciation from property value increases. They bear the first loss in a downturn.
Debt investors — mortgage lenders, commercial mortgage-backed securities investors — have a senior claim on the property and receive fixed contractual payments. Their downside protection comes from the loan-to-value ratio. Their upside is capped at the contractual interest rate and principal repayment.
The exam tests three approaches to real estate valuation and their appropriate applications.
Income approach. Values the property based on the income it generates. The core relationship is: Value = Net Operating Income / Capitalisation Rate. A property generating $500,000 of NOI in a market where comparable properties trade at a 5% cap rate is worth $10 million. Cap rates and property values move inversely — when cap rates compress, property values rise. Rising interest rates tend to put upward pressure on cap rates.
Sales comparison approach. Values the property by reference to recent transactions in comparable properties. Most reliable when there is an active transaction market with genuinely comparable sales.
Cost approach. Values the property as the cost of the land plus the cost of replacing the improvements at current construction costs, less depreciation. Most applicable for properties that are rarely sold on the open market. Least useful for income-producing properties where the income approach is available.
Collateralised mortgage obligations divide mortgage cash flows into tranches with different prepayment and credit risk profiles. The exam tests two specific tranches in detail.
Interest-only (IO) tranches receive only the interest cash flows from the underlying pool. When interest rates fall and prepayments accelerate, the outstanding balance of the pool shrinks faster than expected, which reduces the interest payments the IO tranche receives. IO tranches therefore lose value when rates fall — opposite to the behaviour of most fixed income instruments.
Principal-only (PO) tranches receive only the principal cash flows. When prepayments accelerate, PO investors receive their principal back sooner, which is beneficial. PO tranches perform well when rates fall — the exact inverse of the IO.
Understanding the counterintuitive interest rate sensitivity of IO versus PO tranches is reliable exam territory.
Infrastructure refers to long-lived physical assets that provide essential services to economies: transportation networks, utilities, social infrastructure, and energy infrastructure. Key investment characteristics include long asset lives creating duration matching opportunities for long-term investors, and revenue models often linked to inflation — regulated returns tied to inflation indices, toll roads with CPI-linked pricing mechanisms.
The distinction between regulated and merchant infrastructure is exam-relevant. Regulated assets have returns set by regulatory frameworks and tend to have lower risk and more predictable cash flows. Merchant assets generate revenues from market prices and have more variable returns.
When the futures price exceeds the spot price — the normal expectation for storable commodities given positive carry costs — the market is in contango. The futures curve slopes upward.
When the futures price is below the spot price, the market is in backwardation. This occurs when the convenience yield — the value of having physical access to the commodity now — exceeds the carry costs. During supply shortages or periods of high immediate demand, spot prices exceed futures prices.
Investors in commodity futures don't typically hold contracts to delivery — they roll positions by selling the expiring contract and buying the next one.
In backwardation: the futures price is below the current spot price. When you sell an expiring contract and buy the next one, you buy at a price below spot. As that contract converges to spot, it rises — generating positive roll yield.
In contango: the futures price is above the current spot price. When you roll, you buy at a higher price than you sold. As the contract converges toward spot, it falls — generating negative roll yield. This is why a commodity futures investor can lose money even when the spot price doesn't fall.
The total return from a long commodity futures position has three components:
Spot return: the change in the spot price of the underlying commodity.
Roll yield: the gain or loss from rolling expiring contracts forward. Positive in backwardation, negative in contango.
Collateral return: interest earned on collateral (typically Treasury bills) posted to hold the futures position.
Total Commodity Futures Return = Spot Return + Roll Yield + Collateral Return. Know this formula, know the sign and driver of each component, and be able to identify how each changes as market conditions change.
Farmland generates returns from crop income plus land value appreciation. Timberland has a distinctive biological growth characteristic: trees grow continuously, increasing in both volume and quality over time. This gives timberland a degree of flexibility other real assets lack — if timber prices are low, the trees can continue growing and be harvested when prices improve.
Both farmland and timberland have demonstrated inflation sensitivity in historical data. As physical assets whose output prices are linked to food and commodity prices, they tend to hold real value during inflationary periods.
Running through all four categories is the inflation-hedging rationale. The exam tests this at both the conceptual level and the asset-specific level.
Real estate: rental income and property values tend to rise with inflation, and long-term leases often include contractual inflation escalators. Infrastructure: regulated returns linked to inflation indices. Commodities: commodity prices are themselves a component of many inflation measures. Natural resources: land values and agricultural commodity prices reflect underlying inflation in goods markets.
Understanding both the theoretical basis and the practical limits of this inflation sensitivity — including the conditions under which real assets don't hedge inflation effectively — is the depth the exam requires.
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Get access — $199 →For a full breakdown of how real assets fit within the CAIA Level I curriculum alongside the other topic areas, see our topic-by-topic guide. For structuring your preparation across the full exam, see our study plan guide.