Alternative Investments - Review Questions Flashcards
An investor is seeking an investment that can take long and short positions, may use multi-strategies, and historically exhibits low correlation with a traditional portfolio. The goal of this investor will be achieved with an investment in:
Choose the best answer.
1) real estate
2) a hedge fund
3) a private equity fund
2) a hedge fund
Hedge funds have less constraint than traditional investments and some other alternative investments. The funds often take either long or short positions in investments, have varied strategies, and generally exhibit low correlation of returns with a traditional portfolio.
Investors are primarily motivated to invest in commodities because they offer:
1) Positive volatility of commodities relative to stock and bond investments.
2) Positive correlation of commodities with stock and bond investments.
3) Positive correlation of commodities with unexpected inflation.
4) Positive correlation of commodities with expected inflation.
3) Positive correlation of commodities with unexpected inflation.
Commodities offer diversification benefits due to their negative return correlation with other assets and positive correlation with unexpected inflation.
Which strategy profits from discrepancies between a current security price and the expected price upon completion of a takeover?
Choose the best answer.
1) Convertible Arbitrage
2) Fixed Income Arbitrage
3) Emerging Markets
4) Merger Arbitrage
4) Merger Arbitrage
Merger arbitrage involves buying the stock of a company being acquired and going short (selling) the stock of the acquiring company when the merger/acquisition is announced.
Which of the following statements concerning a real estate investment trust (REIT) is (are) correct?
1) A REIT must distribute at least 75% of its annual taxable income.
2) A REIT must be at least 75% invested in real estate, government securities, or cash.
3) A REIT may may offer a long-term hedge against inflation
4) The price of REIT shares may be below the actual book value of the real estate holdings.
(1) only
(2) and (4) only
(2), (3) and (4) only
(2) only
(2), (3) and (4) only
The only statement from the above list that is false is (1). A REIT must distribute at least 90% of its annual taxable income. All other statements above are correct.
Jason is an investor with moderate risk tolerance. He is 53, married with a combined income with his wife of $125,000. Most of his total net worth is tied up in the equity of his real estate (primary home). He plans to retire at age 68. He needs current income to pay for his son’s college expenses. Which of the following portfolios is most appropriate for Jason?
1) 40% money market fund, 20% large cap stock mutual fund, 15% international equity ETF, 25% MLP, 10% private equity.
2) 5% money market fund, 45% US Total Market Index Fund, 15% international equity ETF, 35% medium-term municipal bond fund.
3) 60% S&P 500 index fund, 20% international equity ETF, 20% managed futures fund.
4) 30% S&P index fund, 15% international index fund, 20% REITs, 20% medium term corporate bond fund, 5% money market fund
2) 5% money market fund, 45% US Total Market Index Fund, 15% international equity ETF, 35% medium-term municipal bond fund.
This portfolio meets Jason’s goals of liquidity, long-term growth and current income to pay for the college expenses. REIT income is taxed as regular income, therefore not as tax efficient as municipal bonds. Alternative investments like private equity and managed futures are not appropriate for his risk tolerance.
Adding alternative investments to a portfolio of traditional investments typically results in a ____________ total portfolio risk, and a _____________ Sharpe ratio.
Choose the best answer.
1) higher, higher
2) lower, higher
3) lower, lower
2) lower, higher
Although individual alternative investments exhibit higher risk (standard deviation) by themselves, adding them to a diversified portfolio generally lowers the overall risk of the portfolio and results in a higher risk adjusted return (higher Sharpe ratio).
Higher returns for alternative investments are most likely because of:
Choose the best answer.
1) high liquidity
2) low correlation with traditional investments
3) more price transparency
4) less informationally efficient markets
4) less informationally efficient markets
Because of illiquidity and a lack of information regarding some alternative investments, higher returns are possible with these investments.
When describing types of asset classes, the term “Hybrid” refers to:
Choose the best answer.
1) A group of securities that can go either long or short.
2) A group of securities that contain all the major categories of stocks, bonds and cash equivalents.
3) A fund that invests in multiple asset classes, like a stock and bond mutual fund.
3) A fund that invests in multiple asset classes, like a stock and bond mutual fund.
Which of the following risks are exclusive to Cryptocurrency investors?
I) Hacking/Cybersecurity
II) Regulatory
III) Liquidity
IV) ESG
Choose the best answer.
1) All of the above
2) I & II
3) I, II, IV
4) None of the above
4) None of the above
None of these risks are exclusive to Cryptocurrency investing. The risks may be higher or lower than traditional investments, but the same types of risk exist in most markets.
Based on current market conditions in 2022, which client risk tolerance from an investor policy statement is the most suitable for investing in Cryptocurrency:
Choose the best answer.
1) High Ability and Low Willingness to take risk
2) High Ability and High Willingness to take risk
3) Low Ability and High Willingness to take risk
4) Low Ability and Low Willingness to take risk
2) High Ability and High Willingness to take risk
Cryptocurrency is still speculative as an investment with no cash flow, high price volatility, and potentially low liquidity. The only risk tolerance that would make sense for an asset class with that profile is for a client that has both a high ability and a high willingness to take on risk.
