CAIA- 12 - Measuring Private Equity Risk Flashcards
There are 4 key risks associated with private equity:
- ___ risk
- ___risk
- ___or ___risk
- ___or ___risk
There are 4 key risks associated with private equity:
- Market risk
- Liquidity risk
- Commitment or funding risk
- Capital or realization risk
___ risk refers to the economic uncertainty that impacts the price/value of an asset.
Market risk refers to the economic uncertainty that impacts the price/value of an asset.
___ risk refers to the risk that PE investors face when trying to sell their partnership stakes.
Liquidity risk refers to the risk that PE investors face when trying to sell their partnership stakes.
___ or ___risk refers to the risk that investors are unable to meet their contractually binding commitments to a PE fund.
Commitment or funding risk refers to the risk that investors are unable to meet their contractually binding commitments to a PE fund.
___ or ___risk refers to the long-term risk that PE investors are unable to recoup their invested capital at the time of exit.
Capital or realization risk refers to the long-term risk that PE investors are unable to recoup their invested capital at the time of exit.
___ risk tends to be independent between PE firms and, thus, can be ___ ___in portfolios of funds.
Operational risk tends to be independent between PE firms and, thus, can be diversified away in portfolios of funds.
Financial risk primarily comprises ___ risk and ___ risk.
Financial risk primarily comprises market risk and liquidity risk.
Financial risk can/cannot be diversified away.
Financial risk can be diversified away.
Most PE investments follow a ___-to-___philosophy that involves implementing a value creation plan and then selling the investments for a profit.
Most PE investments follow a buy-to-sell philosophy that involves implementing a value creation plan and then selling the investments for a profit.
During the restructuring phase, portfolio companies (are/are not) subject to the same regulations and reporting requirements as before.
During the restructuring phase, portfolio companies are not subject to the same regulations and reporting requirements as before.
Some institutional investors adopt a ___-to-___philosophy that implements a value creation plan and holds the portfolio companies after restructuring them.
Some institutional investors adopt a buy-to-keep philosophy that implements a value creation plan and holds the portfolio companies after restructuring them.
The following are arbitrage opportunities within private equity:
- Capture ___ ___
- Benefit from ___
- Earn ___ ___
The following are arbitrage opportunities within private equity:
- Capture niche opportunities
- Benefit from restructuring
- Earn illiquidity premium
There are 2 ways to value an asset:
- Current ___ value
- ___value of ___ ___ ___
There are 2 ways to value an asset:
- Current market value
- Present value of future cash flows
Risk Measurement Guidelines published by EVCA indicate that the risk of PE is best characterized by the LP’s ___ in the ___ ___.
Risk Measurement Guidelines published by EVCA indicate that the risk of PE is best characterized by the LP’s share in the PE fund.
Undrawn commitments expose LPs to ___ or ___risk.
Undrawn commitments expose LPs to commitment or funding risk.
Commitment risk can be reduced or avoided by not ___ and by holding undrawn assets in ___-___securities.
Commitment risk can be reduced or avoided by not overcommitting and by holding undrawn assets in risk-free securities.
The perspective that GPs act as lenders to LPs for undrawn commitments (is/is not) widely accepted in the industry.
The perspective that GPs act as lenders to LPs for undrawn commitments is not widely accepted in the industry.
The ___ ___ ___measure provides an estimate of likely losses based on historical prices under normal economic conditions.
The value at risk measure provides an estimate of likely losses based on historical prices under normal economic conditions.
The key risk measure underlying VAR is ___.
The key risk measure underlying VAR is volatility.
Non-financial firms use an equivalent of VaR called ___ ___ ___ ___.
Non-financial firms use an equivalent of VaR called cash flow at risk.
___ ___ ___ ___is defined as the maximum deviation between actual cash flows and a pre-set level of cash flows.
Cash flow at risk is defined as the maximum deviation between actual cash flows and a pre-set level of cash flows.
(CFaR/VaR) is typically computed for short periods of time, whereas (CFaR/VaR)is computed over longer periods.
VaR is typically computed for short periods of time, whereas CFaR is computed over longer periods.
What is the equation for a scenario’s gain/loss?
[PV - Avg(PV)] / n
