Chapter 9

Question 1

To be considered an asset class, what are the conditions that must be met?

Answer 1

1. Homogeneity within the asset class.
2. Correlation of returns.
3. Availability of pricing and composition data.
4. Ivestability

Question 2

What are the three reasons why and investor would add alternative investments to their portfolio?

Answer 2

1. To incrementally increase returns more than the increase in risk.
2. To incrementally decrease risk less than the decrease in return.
3. To increase absolute returns (positive returns in all markets). making the portfolio more resistant to losses during bear markets. Keep in mind, there are securities and investment strategies that allow an investor to make a profit on the decline of a security’s value.

Question 3

What are the features and characteristics of real estate?

Answer 3

1. Uniqueness of property.
2. Interrelationships.
3. Immovability.
4. Illiquidity.
5. Market inefficiencies.

Question 4

What are some of the benefits of private equity investing?

Answer 4

1. Superior returns.
2. Absolute return goals.
3. Access to legitimate inside information.
4. Influences over management and flexibility of implementation.
5. Leveraging off the statement of financial position.

Question 5

What are some of the risks specific to cryptocurrencies, including Bitcoin?

Answer 5

1. Cybercrime and theft.
2. Lack of consistent regulation.
3. Government prohibition or ban.
4. Loss of keys.
5. End user error.

Question 6

What are some of the constraints in investing in hedge funds?

Answer 6

1. Time horizon.
2. Liquidity requirements.
3. Tax situation.
4. Portfolio rebalancing.

Question 7

What are the six primary liquid alt strategies?

Answer 7

1. Equity long/short.
2. Event-driven.
3. Tactical trading/macro.
4. Managed futures.
5. Multi-strategy.
6. Relative value.

Memory aid: Every Equity Trade Makes Me Richer.
Also: Liquid alt minimum investment sizes are often $50k to $150k.

Question 8

What are some of the benefits of using futures and futures options?

Answer 8

1. Direct exposure to commodities.
2. Diversification.
3. Liquidity.
4. Low transaction costs.
5. Price determination.
6. Transparency.

Question 9

What are some of the risks of using futures and futures options?

Answer 9

1. Excessive leverage.
2. Lack of diversification.

Question 10

What are some of the benefits in investing in ETFs with commodity exposure?

Answer 10

1. Low expense ratios.
2. Low transactions costs.
3. Stock-like features.

Question 11

What are some of the risk and disadvantages of investing in ETFs?

Answer 11

1. Lack of diversification.
2. Temptation to trade excessively.
3. Currency risk.
4. Excessive leverage.
5. Basic risk.
6. Credit risk.
7. Roll yield risk.W

Question 12

What are some of the benefits or investing in physical commoditiies?

Answer 12

1. Direct exposure.

Question 13

What are some of the risks and disadvantages of investing in physical commodities?

Answer 13

1. Large minimum investment.
2. Transportation costs.
3. Storage/insurance costs.
4. Assaying costs (precious metals)

Question 14

What does ‘economies of scale’ mean?

Answer 14

Basically refers to the fact that as a company produces more, it can lower its cost per unit.

Question 15

What are the different types for real estate syndications?

Answer 15

1. Land banking.
2. Brownfield developments.
3. Redevelopment projects.
4. Purchase of distressed properties or those with mortgages in default.
5. Mortgage syndications.
6. Mortgage fund on a specific project.
7. Blind pools.