Alternative Investments 2

Question 1

Features of Real Estate Investments (Refer to Quadrant)

Answer 1

• Sources of Income: Rent, price appreciation.
• can be made directly in properties or indirectly through limited partnerships and publicly traded securities.
• types of real estate: single-family residential and commercial.
• The four largest subcategories of commercial real estate are of fice buildings, shopping, industrial/warehouse/distribution, and rental residential (single-family detached and multifamily apartment).

Question 2

Public v Private Real Estate

Answer 2

Private: ownership usually involves direct investment, such as purchasing property or lending money to a purchaser. Direct investments can be solely owned or indirectly owned through partnerships, where the general partner (GP) provides property management services and limited partners (LPs) are investors (e.g., pension plans).
Public: ownership involves securities that serve as claims on the underlying assets. Public real estate investment includes ownership of real estate investment trust (REIT) shares, equity in a real estate company, exchange-traded funds (ETFs), residential mortgage-backed securities (MBSs), commercial mortgage-backed securities (CMBSs), mortgage REITs, and mortgage ETFs.

Question 3

Debt v Equity Real Estate Investments (Refer to Quadrant)

Answer 3

Equity: ownership interest in real estate or securities of an entity that owns real estate. Equity investors control decisions such as borrowing money, property management, and the exit strategy.
Debt: Investor is a lender that owns a mortgage or mortgage-backed securities. A mortgage is collateralized (secured) by the underlying real estate. The lender has a higher priority claim than an equity investor in the event of default. Because the lender must be repaid first, the value of an equity investor’s interest is equal to the value of the property less the value of outstanding debt.

Question 4

Direct Real Estate Investment Benefits

Answer 4

1. Control. The owner can decide on what to purchase, how to f inance it, what improvements to make, to which segment of tenants to market the property, and when to sell.
2. Diversi fication. Real estate returns are less than perfectly correlated with the returns of stocks and bonds. Thus, adding private real estate investment to a portfolio can reduce risk relative to the expected portfolio return.
3. Tax benef its. Real estate can provide deductions for noncash depreciation (even as properties typically appreciate) as well as interest expense.

Question 5

Direct Real Estate Investment Drawbacks

Answer 5

• Illiquidity and price opacity
• Complexity of managing property
• Need for specialized knowledge about current market conditions
• High initial investment/capital needed
• Concentration risk if a portfolio has one or few properties

Question 6

Core Real Estate Strategy REITs

Answer 6

invest in high-quality commercial and residential properties that deliver stable returns. These REITs typically have open-end structures with indef inite lives. Like open-end mutual funds, this structure gives investors the opportunity to invest or redeem at any time.

Question 7

Closed-end REITs strategies:

Answer 7

1. Core-plus real estate strategies, which accept a bit more risk than core strategies by undertaking modest development and redevelopment.
2. Value-add real estate strategies, which undertake development and redevelopment on a somewhat larger scale than core-plus strategies.
3. Opportunistic real estate strategies, which pursue large-scale redevelopment and repurposing of assets, invest in distressed properties, or speculate on upturns in real estate markets.

Question 8

Explain the investment characteristics of real estate investments.

Answer 8

• first mortgages or investment-grade CMBSs are the least risky and are similar to investing in bonds.
• Core strategies are the next-least risky and also have bond-like characteristics, in that they receive stable rental income from many lessors (i.e., a diversi fied income pool).
• Value-add and opportunistic strategies are the most risky and are more equity-like in their risk- and-return characteristics.
• provide diversi fication bene fits in addition to liquidity of a publicly traded security. However, the correlation of REIT returns with equity returns is higher than that for direct investment, and correlations increase during steep market downturns. Even so, real estate investments do improve the risk-return pro file of a portfolio relative to one comprising only traditional asset classes.

Question 9

Infrastructure Investments

Answer 9

include transportation assets (eg, roads, airports, ports, railways), utility assets (e.g., gas distribution facilities, electric generation and distribution facilities, and waste disposal and treatment facilities), information and communication technology (e.g., telecom towers and cable systems), and social infrastructure (e.g., prisons, schools, and health care facilities).

Question 10

Investing in Infra

Answer 10

One way to invest in infrastructure is to construct the assets and either sell or lease them to the government or operate them directly. Alternatively, an investor might buy existing assets from a government to lease back or operate. Infrastructure investments can also be made by a public-private partnership.

Question 11

Cash Flows from Infra

Answer 11

Cash f lows generated from infrastructure investments include:
1. availability payments for making the infrastructure available,
2. usage-based payments such as highway tolls, and
3. take-or-pay arrangements that require the buyer to pay minimum purchase price for an agreed-upon volume.

Question 12

Brown-field Investments

Answer 12

Investments in infrastructure assets that are already constructed are referred to as brownf ield investments. An example of a brownf ield investment is the privatization of public assets, which may require additional improvements or involve a sale-leaseback arrangement whereby the asset is purchased from and leased back to the government. Brownf ield investments in fully operational facilities are called secondary-stage investments.

Question 13

Greenfield Investments

Answer 13

Investments in infrastructure assets that are to be constructed are referred to as green field investments. Greenf ield investments typically follow the build-operate-transfer (BOT) life cycle.

Question 14

Characteristics of Infrastructure.

Answer 14

• Infrastructure assets typically have a long life and are quite large in cost and scale, so direct investment in them has low liquidity.
• However, more liquid investments backed by infrastructure assets are available through ETFs, mutual funds, private equity funds, or master limited partnerships (MLPs).
• Publicly traded vehicles for investing in infrastructure are a small part of the overall universe of infrastructure investments and are relatively concentrated in a few categories of assets.
• Debt issued to fund infrastructure can be privately placed or publicly traded.
• cash flows from equity investment in infrastructure are stable and have low correlation with public equities.
• Infrastructure debt also tends to be safer and less affected by economic cycles.
• can provide diversification benefits
• subject to regulatory risk, risk from financial leverage and less cash flows than expected, construction risk, operational risk
• most suitable for long-term institutional investors such as pension plans, life insurance companies, and sovereign wealth funds.

Question 15

Characteristics of Brownfield Investments

Answer 15

In general, investing in brown field investments provides stable cash lows and relatively high current yields, but offers little potential for growth. Secondary-stage brown field investments (e.g., existing toll roads and hospitals) are the least risky and offer the lowest return.

Question 16

Characteristics of Greenfield Investments

Answer 16

Green field investments (e.g., new toll roads, renewable energy facilities) are subject to more uncertainty and may provide relatively lower yields in the near term, but offer greater growth potential. Infrastructure projects that rely on revenues from uncertain future demand tend to be the riskiest.
Green field investments in developing economies, while risky, have generated attractive returns over the long term as they bene it from increasing per-capita incomes and wealth.

Question 17

What are the primary components of natural resources in investment?

Answer 17

Raw land, land used for growing crops, timber, and commodities.

Question 18

What are the types of investment in natural resources?

Answer 18

Direct investment and via commingled funds such as ETFs, REITs, limited partnerships, and LLCs. Commodity futures and swaps are also commonly used.

Question 19

Features of Farmland
& Timberland

Answer 19

• generally illiquid investments
• value is primarily driven by location - proximity to transportation, access to water and quality of soil impacts value
• Sources of Income: rent, price appreciation, income from their output.
• Farmland - held by individuals
• Timberland - usually institutions
• Timberland size > Farmland size
• Timberland - requires expertise

Question 20

Investors who lack the expertise in Timberland can invest through…

Answer 20

timberland investment management organizations (TIMOs).

Question 21

Financing Farm/Timberland and controlling output produced

Answer 21

• Fewer financing options
• Bank Loans or Direct Private Debt
• Farmland - crops must be harvested in a short period
• Timberland - choice of harvesting based on prices and growth
• Price fluctuations often hedged through commodities
• Agriculture crops - attract ESG investors

Question 22

Commodities - Features

Answer 22

• 3 types: metals, agricultural products & energy products
• Also classified on the basis of grade (quality) and delivery location
• can invest directly, derivatives are more common
• As they are physical goods, have costs of storage and transportation

Question 23

Exposure to Commodities

Answer 23

• Derivatives: Futures, Forwards, Options. Futures that are exchange traded have no counterparty risk
• Exchange Traded Products.
• Managed Futures Funds (Commodity Trading Advisers (CTAs) and Separately managed accounts (SMAs))
• Specialized Funds

Question 24

Exchange Traded Products (ETPs)

Answer 24

ETFs & ETNs (Notes) - suitable for investors who are limited to buying equity shares. ETFs can invest in commodities or commodity futures and can track prices or indexes.

Question 25

Managed futures funds

Answer 25

• such as commodity trading advisers (CTAs), are actively managed. Some managers concentrate on speci fic sectors (e.g., agricultural commodities), while others are more diversif ied.
• Managed futures funds can be structured as limited partnerships with fees like those of hedge funds and restrictions on the number, net worth, and liquidity of the investors. - They can also be structured like mutual funds with shares that are publicly traded so that retail investors can benef it from professional management.
• This structure allows a lower minimum investment and offers greater liquidity than a limited partnership structure.
• Separately managed accounts (SMAs) are appropriate for larger investors who may require custom portfolios based on their individual preferences and needs.

Question 26

Specialized Funds

Answer 26

Specialized funds in specif ic commodity sectors can be organized under any of the structures we have discussed and focus on commodities such as oil and gas, grains, precious metals, or industrial metals.

Question 27

Commodity Valuations

Answer 27

Futures price ~ Spot Price * (1+rf) + Storage cost - Convenience Yield

Futures price = Spot Price + Net Cost of Carry
where, Net Cost of Carry = Cost of Capital + Storage Cost - Convenience Yield

Question 28

Contango & Backwardation

Answer 28

• Convenience yield is the nonmonetary value of having a physical commodity for use over the period of a futures contract.
• If there is little or no convenience yield, the net cost of carry will be positive, and futures prices will be higher than spot prices, a situation termed contango.
• When the convenience yield is high, the net cost of carry will be negative, and futures prices will be less than spot prices, a situation referred to as backwardation.
• Contango decreases the return of long-only investors, while backwardation increases it.

Question 29

What are the primary factors that affect spot prices for commodities?

Answer 29

Spot prices for commodities are affected by supply and demand. Demand is influenced by the value of the commodity to end users and global economic conditions, while supply is influenced by production, storage costs, and existing inventories.

Question 30

To what risk factors are commodity prices particularly sensitive?

Answer 30

Commodity prices are particularly sensitive to geopolitical and weather-related risk factors.

Question 31

Why is the supply of many commodities inelastic in the short run?

Answer 31

Supply is inelastic in the short run due to long lead times required to alter production levels, such as drilling oil wells or planting crops.

Question 32

How can weather and plant disease impact agricultural commodity prices?

Answer 32

Weather and plant disease can significantly affect production, leading to high prices when production is low and low prices when production is high.

Question 33

What happens to the costs of extracting oil and minerals as more expensive methods or more remote areas are used?

Answer 33

The costs of extracting oil and minerals increase as more expensive methods or more remote areas are utilized.

Question 34

What do commodity producers analyze to estimate future needs?

Answer 34

Commodity producers analyze economic events, government policy, and forecasts of future supply to estimate future needs.

Question 35

What do investors analyze to forecast commodity prices?

Answer 35

Investors analyze inventory levels, forecasts of production, changes in government policy, and expectations of economic growth to forecast commodity prices.

Question 36

How do the returns and volatility of commodities compare to global stocks and bonds in recent decades?

Answer 36

Returns and the volatility of returns have been higher for commodities than for global stocks or bonds.

Question 37

How do the returns and volatility of timberland and farmland compare to global stocks and bonds?

Answer 37

Timberland and farmland have higher average returns with lower volatility than global stocks and similar volatility to global bonds.

Question 38

What is the correlation of commodity returns with global equities and bonds, and how does it benefit a portfolio?

Answer 38

The correlation of commodity returns with global equities and bonds is historically low, providing diversification benefits when added to a traditional asset portfolio.

Question 39

How do commodity prices react during periods of high and low inflation?

Answer 39

During periods of high inflation, commodities outperform both stocks and bonds, and during periods of low inflation, they underperform.

Question 40

Why do commodities act as a hedge of inflation risk?

Answer 40

Because commodity prices tend to move with inflation rates

Question 41

What are Digital Assets?

Answer 41

Digital assets are assets that can be electronically created, stored, and transferred. This relatively new alternative asset class includes cryptocurrencies, tokens, and digital collectibles.

Question 42

Distributed Ledger Technology

Answer 42

A digital asset is secured and validated using distributed ledger technology (DLT), also known as blockchain technology. Cryptocurrencies have their own blockchains, while crypto tokens are built on blockchains that already exist.

Question 43

Distributed Ledger

Answer 43

A distributed ledger is a database shared among market participants. It maintains a record of all transactions, which allows each participant to have an identical copy of the database. DLT bene its include accuracy, transparency, and security; rapid ownership transfer; and peer-to-peer (P2P) interactions for creating, trading, and monitoring digital assets. DLT disadvantages include data protection concerns, potential privacy violations, and the large amount of computational power needed for verifying transactions.

Question 44

DLT Network

Answer 44

• A DLT network consists of a digital ledger, a consensus mechanism, and a network of participants.
• A consensus mechanism establishes a common state of the ledger, which involves validating transactions and updating the ledger.
• These two steps generate records that are immutable (i.e., unchangeable) while providing transparency for all network participants.
• DLT uses cryptography to encrypt data, which prevents unauthorized parties from accessing data.
• 2 Forms: permissionless and permissioned

Question 45

Smart Contracts

Answer 45

DLT can also implement smart contracts, where a computer program self-executes based on predetermined terms and conditions. Automating contingent claims and collateral transfers during default events are examples of smart contract applications.

Question 46

Blockchain

Answer 46

A blockchain is a digital ledger that records information sequentially within blocks. These blocks are linked together (i.e., chained), and information is secured using cryptographic techniques. Blocks within the chain contain a group of transactions as well as a secure link (known as a hash) to the previous block. A newly created transaction is only added to a chain after it has been validated by authorized participants.

Question 47

Consensus Protocols

Answer 47

Consensus protocols determine how blocks are chained together. They are structured to protect against market manipulation. The main types of consensus protocols are proof of work and proof of stake.

Question 48

Proof of Work Protocol

Answer 48

• The Proof of Work (PoW) protocol is a consensus mechanism where miners use powerful computers to solve cryptographic problems, verifying transactions and adding blocks to the blockchain.
• This process consumes significant energy and rewards miners with cryptocurrency.
• The high resource requirements make it costly to manipulate the blockchain, as controlling 51% of the network is necessary for such an attempt.
• A larger number of participants strengthens the blockchain’s security.
• PoW is the most widely used consensus mechanism.

Question 49

proof of stake (PoS) protocol

Answer 49

• The Proof of Stake (PoS) protocol is a consensus mechanism where validators pledge collateral (staking) to guarantee the validity of a block.
• Validators signal that a transaction is ready for the blockchain, and other validators verify its authenticity.
• They protect the network by controlling computational power and are rewarded with returns on their staked collateral.
• PoS is an emerging alternative to traditional consensus mechanisms.

Question 50

Permissionless Networks

Answer 50

• In permissionless networks, transactions are visible to all users within the network, and any user can execute a transaction.
• In addition, all network functions can be performed by any network participant.
• Bitcoin is considered a permissionless network, as are many other types of cryptocurrency.
• An advantage of a permissionless (i.e., open) network is that transactions are con firmed or denied through consensus mechanisms rather than by a centralized authority.
• Blockchain transactions cannot be manipulated once they have been added to the ledger, which creates an immutable record of all transactions.
• Transacting parties do not have to trust each other in permissionless networks.

Question 51

Permissioned Networks

Answer 51

• In permissioned networks, users may be restricted from some network activities. Permissions (or controls) can modify the level of ledger accessibility.
• These levels range from adding transactions (for network participants) to viewing only the transaction history (for regulators).
• Because permissioned blockchains have stronger restrictions, they are more cost effective than open and decentralized permissionless networks.

Question 52

Types of Digital Assets

Answer 52

• Bitcoin
• Altcoins (Other Cryptocurrencies, stablecoins, memecoins)
• Central Bank Digital Currencies (CBDCs)
• Nonfungible Tokens (NFTs)
• Security Tokens (Initial Coin Offerings (ICOs)
• Utility Tokens
• Governance Tokens

Question 53

Cryptocurrency

Answer 53

• Cryptocurrency is a digital currency issued privately with no backing from a central bank.
• By using this digital medium of exchange, parties can execute near-real-time transactions without the need for an intermediary.
• Cryptocurrencies commonly limit how many currency units can be issued.
• The objective of this supply limit is to maintain the unit as a store of value; however, many cryptocurrencies still experience extreme price volatility.

Question 54

Altcoins

Answer 54

• Alternate cryptocurrencies, known as altcoins, are based on the technology used by Bitcoin.
• The most well-known altcoin is Ether, which is built on the Ethereum network.
• The Ethereum blockchain allows users to develop applications (i.e., smart contracts) to secure and validate transactions.
• Therefore, the value of Ethereum and other programmable blockchains extends beyond being only a store of value.
• To date, Bitcoin and Ether are the two most popular cryptocurrencies; as of July 2022, they made up more than 80% of the total cryptocurrency market.

Question 55

Stablecoins

Answer 55

• Stablecoins offer stable digital currency values.
• These coins are linked to the value of another asset, such as the U.S. dollar, and secured by a basket of assets.
• The value of stablecoins is protected from price volatility through this reserve basket, which minimizes risk from potential transaction failures.
• Smart stablecoins or algorithmic stablecoins control their supply by using algorithms to mint additional assets when demand increases.
• Stablecoins cannot be exchanged for fiat currency, and they have no legal or regulatory backing.
• One of the most popular stablecoins is Tether, which is pegged to the U.S. dollar.
• A special case of stablecoins is an asset-backed token, which maintains price parity with a target asset, such as gold.

Question 56

Memecoins

Answer 56

• In general, meme coins are launched for entertainment purposes.
• In some cases, their rapid rise in popularity has allowed early purchasers to sell these coins for a quick and signi ficant pro it.
• The most popular meme coin is Dogecoin, which is based on a popular internet meme. In May 2021, Dogecoin saw a dramatic increase in market value thanks to social media endorsements.
• However, a year later, its market value dropped sharply as its usefulness came into question.

Question 57

Central Bank Digital Currency

Answer 57

• Governments do not currently back or regulate cryptocurrencies.
• Nevertheless, central banks are currently exploring the potential bene its of cryptocurrency equivalents as alternatives to physical currency.
• A central bank digital currency (CBDC) is essentially a digital version of a banknote or coin issued by a central bank.

Question 58

Tokenization

Answer 58

Tokenization uses DLT to streamline this process by digitally tracking the historical record of ownership.

Question 59

Non Fungible Token (NFT)

Answer 59

A nonfungible token (NFT) is an example of tokenization in which a digital asset is linked to a certi ficate of authenticity. The key difference between NFTs and “fungible” tokens is that each NFT represents a distinct object. For example, digital artwork is a common application for NFTs.

Question 60

Security Token

Answer 60

A security token digitally tracks ownership rights in publicly traded securities. A blockchain can facilitate the custody, settlement, recordkeeping, and post-trade processing of security tokens. With this single ledger technology, participants can perform various transactions more easily and with more transparency.

Question 61

Initial Coin Offering

Answer 61

An example of a security token is an initial coin offering (ICO), which is an unregulated process in which companies offer crypto tokens in exchange for money or other cryptocurrency. In an ICO, tokens are issued to investors for future purchases of products or services. An ICO is an alternative to regulated initial public offerings (IPOs). ICOs are potentially less expensive and take less time to raise capital compared to IPOs; however, most ICOs do not have attached voting rights. Many jurisdictions are considering regulating ICOs due to an increase in fraud connected to these offerings.

Question 62

Utility Tokens

Answer 62

Utility tokens provide network services, such as service payments and network fees. In contrast to security tokens that may pay dividends, a utility token only compensates investors for network activities.

Question 63

Governance Tokens

Answer 63

Governance tokens are offered on permissionless networks and act as voting rights to determine how networks should operate. For example, a network can maintain stability and integrity by voting on solutions for a technical issue.

Question 64

Key Differences between digital & other assets

Answer 64

• Inherent Value Differences: Crypto not backed by underlying assets, ie no fundamental value - price determined on asset growth determined by scarcity and transferability
• Transaction Validation difference: Crypto recorded on decentralised digital ledgers, compared to private ledger maintained by central intermediaries in case of other assets
• Medium of exchange differences: alternative to fiat currency, mainstream system hesitant to accept crypto as medium of exchange, not legal tender in most cases
• Regulatory Differences: regulations currently under development and typically unregulated

Question 65

Centralized Exchanges

Answer 65

• Privately held and offer trading platforms for price transparency and volume information.
• Despite being at odds with Bitcoin’s decentralized nature, centralized exchanges are the most popular type of cryptocurrency exchange.
• Traders on these exchanges trade directly and electronically on private servers, which may introduce security vulnerabilities.
• Compromised exchange servers can cause trading to halt and valuable user information to leak, such as keys to cryptocurrency wallets.
• Depending on the jurisdiction, some of these exchanges are regulated as financial exchanges.

Question 66

Decentralised Exchanges

Answer 66

• Decentralized exchanges implement decentralized blockchain principles.
• A decentralized exchange does not have a centralized authority and it operates on a distributed framework.
• Multiple computers are used to service this type of exchange, so if one computer is attacked, the exchange will remain in operation.
• Therefore, attacks on decentralized exchanges are substantially more diff icult.
• In addition, because no one person, group, or organization controls a decentralized exchange, regulations are dif ficult to enforce.

Question 67

Pump-and-Dump Schemes

Answer 67

On either type of exchange, a lack of regulatory oversight raises investor protection concerns. Fraud and market manipulation are more likely to occur, such as pump- and-dump schemes involving questionable promotion of cryptocurrencies on social media to deliberately increase prices.

Question 68

Direct Investment

Answer 68

• Direct investment in cryptocurrencies occurs when a transaction is recorded on the blockchain.
• When a transaction takes place, it becomes validated and permanently stored on the blockchain. Example: purchasing tokens on a cryptocurrency exchange, trading an NFT, and investing in an ICO.
• Continuous trading is offered on most cryptocurrency exchanges.

Question 69

Risk of Investments in Digital Assets

Answer 69

• Fraud (scam ICOs, pump-and-dump scheme, market manipulation, theft, attempts to gain access to wallet credentials.
• Losing passkeys
• many small cryptocurrencies are held primarily by a few large entities (known as whales) that may hold enough of a cryptocurrency to manipulate its price.

Question 70

Indirect Investments

Answer 70

• Cryptocurrency coin trusts
• Cryptocurrency futures contracts
• Cryptocurrency exchange-traded products
• Cryptocurrency stocks
• Cryptocurrency hedge funds

Question 71

Cryptocurrency coin trusts

Answer 71

Cryptocurrency coin trusts offer shares in a trust that holds large amounts of cryptocurrency. This type of investment trades over the counter and is similar to a closed-end fund. Coin trusts increase transparency while eliminating the need for digital wallets and encryption keys. However, some trusts charge substantial fees and expenses.

Question 72

Cryptocurrency futures contracts

Answer 72

involve buying or selling a specif ic quantity of cryptocurrency at a predetermined future date. For example, the Chicago Mercantile Exchange trades Bitcoin futures based on spot Bitcoin prices from cryptocurrency exchanges. These contracts are typically cash settled and involve leverage. Because this market is newly developing, cryptocurrency futures are typically more volatile and less liquid than traditional futures markets.

Question 73

Cryptocurrency exchange-traded products

Answer 73

such as exchange-traded funds, attempt to mimic the returns of digital assets. These products typically gain exposure to cryptocurrency price movements using cash or cryptocurrency derivatives.

Question 74

Cryptocurrency stocks

Answer 74

offer indirect exposure through their business connection to digital assets. Examples include public digital exchanges; payment providers that support cryptocurrencies; corporations that accept cryptocurrencies as payments, invest in cryptocurrencies, or mine cryptocurrencies; and companies that provide products or services for operating blockchain networks.

Question 75

Cryptocurrency hedge funds

Answer 75

employ strategies such as discretionary long, long/short, quantitative, and multistrategy to invest indirectly in cryptocurrencies.
Some hedge funds also conduct Bitcoin mining activities to generate additional returns.

Question 76

Asset-backed tokens

Answer 76

• Represent digital ownership of physical assets or f inancial assets (i.e., nondigital assets).
• These tokenized assets are collateralized by the underlying asset, such as oil, gold, or equities.
• Asset-backed tokens can potentially increase liquidity of high-priced assets, such as real estate, by allowing for fractional ownership.
• A digital representation also allows for an immutable record of ownership, which improves transparency and reduces transaction costs.
• Regulators generally classify asset-backed tokens as securities.
• The Ethereum network is often used to issue asset-backed tokens by allowing P2P interactions via smart contracts.
• Decentralized applications, referred to as dApps, enable transactions to be recorded on the blockchain without the need for a centralized system.

Question 77

Decentralized finance (DeFi)

Answer 77

• Decentralized finance (DeFi) grew out of this movement toward inancial decentralization.
• DeFi seeks to develop sophisticated financial products and services using open-source inancial applications.
• Essentially, DeFi is a marketplace of dApps that can offer a medium for exchange, a store of value, tokenization of assets, and immutable records of ownership.
• Currently, most dApps focus on digital asset speculation

Question 78

sources of risk, return, and diversi fication among digital asset investments.

Answer 78

• Cryptocurrency values depend largely on asset appreciation, and a signif icant driver of prices is their limited supply.
• Unregulated/ Regulation under development
• Fraud & Crime
• Generally, low correlation, however, correlations may increase during periods of extreme market stress.