j describe indices representing alternative investments;

Question 1

Alternative Investment Indices (Commodity indices
• Real estate investment trust indices
• Hedge fund indices)

Answer 1

Indexes to represent markets for alternative assets such as commodities, real estate, and hedge funds.

Question 2

Commodity Index Issues

Answer 2

Issues in creating commodity indexes include the weighting method (different indexes can have vastly different commodity weights and resulting risk and return) and the fact that commodity indexes are based on the performance of commodity futures contracts, not the actual commodities, which can result in different performance for a commodity index versus the actual commodity.

Weighting methodology is a major issue for commodity indexes. Several different methodologies are used, including equal weighting and global production values. Differences in weighting cause differing exposures for the indexes and lead to different risk and return profiles.
Commodity indexes represent futures contracts on commodities, not the actual spot prices of commodities. Commodity index returns come from three sources: the risk-free rate of return, changes in futures prices, and the roll yield.

Question 3

Real Estate Index Characteristics

Answer 3

Real estate indexes include appraisal indexes, repeat property sales indexes, and indexes of real estate investment trusts.

Question 4

Hedge Fund Index Reporting

Answer 4

Because hedge funds report their performance to index providers voluntarily, the performance of different hedge fund indexes can vary substantially and index returns have an upward bias.