Alternative Investments

Question 0

Cap rate

Answer 0

= NOI/value
= discount rate - growth rate

Only applied to first-year NOI

Question 1

Net operating income for a property

Answer 1

Rental income, if fully occupied
+ other income
- vacancy and collection loss
- operating expense

Excludes financing costs and taxes

Question 2

Income approach - direct capitalization method

Answer 2

Apply cap rate to first year NOI

Question 3

Income approach - DCF method

Answer 3

Determine PV of future cash flows using discount rate and PV of terminal value

Question 4

Cost approach

Answer 4

Replacement cost of land and building, less depreciation and curable problems (economically sensible)

Question 5

Sales comparison approach

Answer 5

• Use comps to make adjustments

- Take an average

Question 6

Funds from operations (FFO)

Answer 6

Accounting net earnings
+ depreciation expense
+ deferred tax expenses
-/+ gains/losses from sales of property and debt restructuring

Question 7

Adjusted funds from operations

Answer 7

FFO

• non-cash rent adjustment
• recurring maintenance-type capital expenditures and leasing commissions

Question 8

Advantage of AFFO

Answer 8

Considers capital expenditures to sustain property’s economic value

Question 9

VC ownership %

Answer 9

(Investment)/(PV of exit value)

OR

(FV of investment)/(exit value)

Question 10

Recommended return metric for private equity

Answer 10

IRR (net IRR for LPs)

Question 11

Number of shares issued to the VC

Answer 11

Founder’s shares*[f/(1-f)]

Question 12

Price per VC share

Answer 12

Investment/(# of VC shares)

Question 13

Adjusted discount rate for probability of failure

Answer 13

(1+r)/(1-q) - 1

r = unadjusted discount rate
q = probability of failure in a year

Question 14

Arbitrage based hedge fund strategy

Answer 14

• profit from security mispricings while matching short exposure to long exposure
• highest Sharpe ratio
• low standard deviation of net returns
• perform well in stable periods (negative skewness and fat tails)

Question 15

Convertible bond arbitrage hedge fund strategy

Answer 15

• long convertible bond and short underlying equity

- performs well when volatility is increasing and credit spreads are tightening

Question 16

Equity market neutral hedge fund strategy

Answer 16

Long and short equities with zero beta exposure

Question 17

Event driven hedge fund strategy

Answer 17

• based on expected outcome of specific events

- includes investing in distressed debt

Question 18

Risk/merger arbitrage hedge fund strategy

Answer 18

Focused on differences between target’s merger price and market price with the expectation of the completion of the merger

Question 19

Fixed income arbitrage hedge fund strategy

Answer 19

• short high quality bonds and go long low quality bonds

- spread provides income if spreads remain the same or tighten and liquidity is available

Question 20

Medium volatility hedge fund strategy

Answer 20

Long and short with net long positions

Question 21

Global macro hedge fund strategy

Answer 21

Broad market bets on indices, currencies, commodities and other asset classes

Question 22

Long-short equity hedge fund strategy

Answer 22

Long and short equities with flexibility to adjust beta exposures

Question 23

Managed futures hedge fund strategy

Answer 23

• speculate in futures

- offers diversification and hedging benefits as part of a portfolio