CFAI 7 - Derivados/ Investimentos alternativos

Question 1

•Which of the following is least likely to be considered an alternative investment?
A.Real estate
B.Commodities
C.Long-only equity funds

Answer 1

•C is correct. Long-only equity funds are typically considered traditional investments and real estate and commodities are typically classified as alternative investments.

Question 2

•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 investment portfolio. The investor’s goals will be best satisfied with an investment in:
A.real estate.
B.a hedge fund.
C.a private equity fund.

Answer 2

•B is correct. Hedge funds may use a variety of strategies (event-driven, relative value, macro and equity hedge), generally have a low correlation with traditional investments, and may take long and short positions.

Question 3

•Relative to traditional investments, alternative investments are least likely to be characterized by:
A.high levels of transparency.
B.limited historical return data.
C.significant restrictions on redemptions.

Answer 3

•A is correct. Alternative investments are characterized as typically having low levels of transparency.

Question 4

•An investor is most likely to consider adding alternative investments to a traditional investment portfolio because:
A.of their historically higher returns.
B.of their historically lower standard deviation of returns.
C.their inclusion is expected to reduce the portfolio’s Sharpe ratio.

Answer 4

•A is correct. The historically higher returns to most categories of alternative investments compared with traditional investments result in potentially higher returns to a portfolio containing alternative investments. The less than perfect correlation with traditional investments results in portfolio risk (standard deviation) being less than the weighted average of the standard deviations of the investments. This has potential to increase the Sharpe ratio in spite of the historically higher standard deviation of returns of most categories of alternative investments.

Question 5

•An investor may prefer a single hedge fund to a fund of funds if he seeks:
A.due diligence expertise.
B.better redemption terms.
C.a less complex fee structure.

Answer 5

•C is correct. Hedge funds of funds have multi-layered fee structures, while the fee structure for a single hedge fund is less complex. Funds of funds presumably have some expertise in conducting due diligence on hedge funds and may be able to negotiate more favorable redemption terms than could an individual investor in a single hedge fund.

Question 6

•Hedge funds are similar to private equity funds in that both:
A.are typically structured as partnerships.
B.assess management fees based on assets under management.
C.do not earn an incentive fee until the initial investment is repaid.

Answer 6

•A is correct. Private equity funds and hedge funds are typically structured as partnerships where investors are limited partners (LP) and the fund is the general partner (GP). The management fee for private equity funds is based on committed capital whereas for hedge funds the management fees are based on assets under management. For most private equity funds, the general partner does not earn an incentive fee until the limited partners have received their initial investment back.

Question 7

•An investor seeks a current income stream as a component of total return, and desires an investment that historically has low correlation with other asset classes. The investment most likely to achieve the investor’s goals is:
A.timberland.
B.collectibles.
C.commodities.

Answer 7

•A is correct. Timberland offers an income stream based on the sale of timber products as a component of total return and has historically generated returns not highly correlated with other asset classes.

Question 8

•A hedge fund invests primarily in distressed debt. Quoted market prices are available for the underlying holdings but they trade infrequently. Which of the following will the hedge fund most likely use in calculating net asset value for trading purposes?
A.Average quotes
B.Average quotes adjusted for liquidity
C.Bid prices for short positions and ask prices for long positions

Answer 8

•B is correct. Many practitioners believe that liquidity discounts are necessary to reflect fair value. This has resulted in some funds having two NAVs - for trading and reporting. The fund may use average quotes for reporting purposes but apply liquidity discounts for trading purposes.

Question 9

•Angel investing capital is typically provided in which stage of financing?
A.Later-stage.
B.Formative-stage.
C.Mezzanine-stage.

Answer 9

•B is correct. Formative-stage financing occurs when the company is still in the process of being formed and encompasses several financing steps. Angel investing capital is typically raised in this early stage of financing.

Question 10

•If a commodity’s forward curve is in contango, the component of a commodities futures return most likely to reflect this is:
A.spot prices.
B.the roll yield.
C.the collateral yield.

Answer 10

•B is correct. Roll yield refers to the difference between the spot price of a commodity and the price specified by its futures contract (or the difference between two futures contracts with different expiration dates). When futures prices are higher than the spot price, the commodity forward curve is upward sloping, and the prices are referred to as being in contango. Contango occurs when there is little or no convenience yield.

Question 11

•If a commodity’s forward curve is in contango, the component of a commodities futures return most likely to reflect this is:
A.spot prices.
B.the roll yield.
C.the collateral yield.

Answer 11

•B is correct. Roll yield refers to the difference between the spot price of a commodity and the price specified by its futures contract (or the difference between two futures contracts with different expiration dates). When futures prices are higher than the spot price, the commodity forward curve is upward sloping, and the prices are referred to as being in contango. Contango occurs when there is little or no convenience yield.

Question 12

•United Capital is a hedge fund with $250 million of initial capital. United charges a 2% management fee based on assets under management at year end, and a 20% incentive fee based on returns in excess of an 8% hurdle rate. In its first year, United appreciates 16%. Assume management fees are calculated using end-of-period valuation. The investor’s net return assuming the performance fee is calculated net of the management fee is closest to:
A.11.58%.
B.12.54%.
C.12.80%.

Answer 12

•B is correct. The net investor return is 12.54%, calculated as:
End of year capital = $250 million × 1.16 = $290 million

Management fee = $290 million × 2% = $5.8 million

Hurdle amount = 8% of $250 million = $20 million;

Incentive fee = ($290 − $250 − $20 − $5.8) million × 20% = $2.84 million

Total fees to United Capital = ($5.8 + $2.84) million = $8.64 million

Investor net return: ($290 − $250 − $8.64) / $250 = 12.54%

Question 13

•Capricorn Fund of Funds invests GBP 100 million in each of Alpha Hedge Fund and ABC Hedge Fund. Capricorn FOF has a “1 and 10” fee structure. Management fees and incentive fees are calculated independently at the end of each year. After one year, net of their respective management and incentive fees, the investment in Alpha is valued at GBP80 million and the investment in ABC is valued at GBP140 million. The annual return to an investor in Capricorn, net of fees assessed at the fund of funds level, is closest to:
A.7.9%.
B.8.0%.
C.8.1%.

Answer 13

•A is correct because the net investor return is 7.9%, calculated as:
First, note that “1 and 10” refers to a 1% management fee, and a 10% incentive fee.
End of year capital = GBP140 million + GBP80 million = GBP220 million

Management fee = GBP220 million × 1% = GBP2.2 million

Incentive fee = (GBP220 − GBP200) million × 10% = GBP2 million

Total fees to Capricorn = (GBP2.2 + GBP2) million = GBP4.2 million

Investor net return: (GBP220 − GBP200 − GBP4.2) / GBP200 = 7.9%

Question 14

•An analyst wanting to assess the downside risk of an alternative investment is least likely to use the investment’s:
A.Sortino ratio.
B.value at risk (VaR).
C.standard deviation of returns.

Answer 14

•C is correct. Downside risk measures focus on the left side of the return distribution curve where losses occur. The standard deviation of returns assumes that returns are normally distributed. Many alternative investments do not exhibit close-to-normal distribution of returns, which is a crucial assumption for the validity of a standard deviation as a comprehensive risk measure. Assuming normal probability distributions when calculating these measures will lead to an underestimation of downside risk for a negatively skewed distribution. Both the Sortino ratio and the value-at-risk measure are both measures of downside risk.

Question 15

Private equity strategies

Answer 15

LVBO
Venture capital
Distressed investments
Development Capital

Question 16

Real state index, tipos de índice

appraisal
repeat sales
reit index

Answer 16

Appraisal index (usa estimativas de de valor como inpouts) é revista anualmente

Repeat Sales index ( baseia-se nas vendas de real estate para tirar cotação)

REIT Index (Usam o preço de Reits existentes para se precificar)

Question 17

Which of the following is a result of arbitrage?
A.The law of one price
B.The law of similar prices
C.The law of limited profitability

Answer 17

A is correct. Arbitrage forces equivalent assets to have a single price. There is nothing called the law of similar prices or the law of limited profitability.

Question 18

Which of the following accurately defines arbitrage?
A.An opportunity to make a profit at no risk
B.An opportunity to make a profit at no risk and with the investment of no capital
C.An opportunity to earn a return in excess of the return appropriate for the risk assumed

Answer 18

B is correct. An opportunity to profit at no risk could merely describe the purchase of a risk-free asset. An opportunity to earn a return in excess of the return appropriate for the risk assumed is a concept studied in portfolio management and is often referred to as an abnormal return. It is certainly desirable but is hardly an arbitrage because it requires the assumption of risk and the investment of capital. Arbitrage is risk free and requires no capital because selling the overpriced asset produces the funds to buy the underpriced asset.

Question 19

A derivative is best described as a financial instrument that derives its performance by:
A.passing through the returns of the underlying.
B.replicating the performance of the underlying.
C.transforming the performance of the underlying.

Answer 19

C is correct. A derivative is a financial instrument that transforms the performance of the underlying. The transformation of performance function of derivatives is what distinguishes it from mutual funds and exchange traded funds that pass through the returns of the underlying.
A is incorrect because derivatives, in contrast to mutual funds and exchange traded funds, do not simply pass through the returns of the underlying at payout. B is incorrect because a derivative transforms rather than replicates the performance of the underlying.

Question 20

•Which of the following derivatives is classified as a contingent claim?
A.Futures contracts
B.Interest rate swaps
C.Credit default swaps

Answer 20

•C is correct. A credit default swap (CDS) is a derivative in which the credit protection seller provides protection to the credit protection buyer against the credit risk of a separate party. CDS are classified as a contingent claim.
A is incorrect because futures contracts are classified as forward commitments. B is incorrect because interest rate swaps are classified as forward commitments.

Question 21

•In contrast to contingent claims, forward commitments provide the:
A.right to buy or sell the underlying asset in the future.
B.obligation to buy or sell the underlying asset in the future.
C.promise to provide credit protection in the event of default.

Answer 21

•B is correct. Forward commitments represent an obligation to buy or sell the underlying asset at an agreed upon price at a future date.
A is incorrect because the right to buy or sell the underlying asset is a characteristic of contingent claims, not forward commitments. C is incorrect because a credit default swap provides a promise to provide credit protection to the credit protection buyer in the event of a credit event such as a default or credit downgrade and is classified as a contingent claim.

Question 22

•A credit derivative is a derivative contract in which the:
A.clearinghouse provides a credit guarantee to both the buyer and the seller.
B.seller provides protection to the buyer against the credit risk of a third party.
C.the buyer and seller provide a performance bond at initiation of the contract.

Answer 22

•B is correct. A credit derivative is a derivative contract in which the credit protection seller provides protection to the credit protection buyer against the credit risk of a third party.
A is incorrect because the clearinghouse provides a credit guarantee to both the buyer and the seller of a futures contract, whereas a credit derivative is between two parties, in which the credit protection seller provides a credit guarantee to the credit protection buyer. C is incorrect because futures contracts require that both the buyer and the seller of the futures contract provide a cash deposit for a portion of the futures transaction into a margin account, often referred to as a performance bond or good faith deposit.

Question 23

•Compared with the underlying spot market, derivative markets are more likely to have:
A.greater liquidity.
B.higher transaction costs.
C.higher capital requirements.

Answer 23

•A is correct. Derivative markets typically have greater liquidity than the underlying spot market as a result of the lower capital required to trade derivatives compared with the underlying. Derivatives also have lower transaction costs and lower capital requirements than the underlying.

Question 24

The law of one price is best described as:
A.the true fundamental value of an asset.
B.earning a risk-free profit without committing any capital.
C.two assets that will produce the same cash flows in the future must sell for equivalent prices.

Answer 24

C is correct. The law of one price occurs when market participants engage in arbitrage activities so that identical assets sell for the same price in different markets.
A is incorrect because the law of one price refers to identical assets. B is incorrect because it refer to arbitrage not the law of one price.

Question 25

Which of the following does not represent a benefit of holding an asset?
A.The convenience yield
B.An optimistic expected outlook for the asset
C.Dividends if the asset is a stock or interest if the asset is a bond

Answer 25

B is correct. An optimistic forecast for the asset is not a benefit of holding the asset, but it does appear in the valuation of the asset as a high expected price at the horizon date. Convenience yields and dividends and interest are benefits of holding the asset.

There is substantial evidence that some commodities generate a benefit that is somewhat opaque and difficult to measure. This benefit is called the convenience yield. It represents a nonmonetary advantage of holding the asset.