Lesson 5.3: Other Alternative Investments Flashcards
A client who is interested in investing in commodities might look at:
Debentures are a security; each of the others is a commodity.
An investment adviser representative (IAR) has several clients who are interested in adding precious metals to their portfolios. Which of the following is the IAR most likely to recommend?
For the exam, there are likely only going to be three precious metals: gold, silver, and platinum. Some students find it easy to remember the list of precious metals by looking at their frequent flyer status. You might be a silver, a gold, or a platinum level, but no airline has a copper, nickel, or aluminum level flyer status. Others look at their credit cards. Perhaps a person has a gold or platinum card but certainly not a card with one of those other metals.
Commodities contracts are available on:
Only gold, silver, and platinum is a precious metal with commodity contracts available.
One of the benefits of adding precious metals to an investor’s portfolio is:
a potential inflation hedge.
Precious metals are traditionally viewed as a hedge against inflation. One of their benefits is that they have a low correlation with the stock market. Transaction costs for precious metals tend to be higher than securities—the dealer spreads can be relatively high. One significant negative is that these investments generate no income.
Commodity futures contracts are available on:
Commodity futures contracts are available on metals, both precious and industrial; animal products, such as eggs; and agricultural crops, such as soybeans. Single-family homes are not a tradable commodity.
Someone who wishes to invest in precious metals would consider any of the following except:
A) lead.
B) gold.
C) silver.
D) platinum.
lead
Lead is not considered a precious metal. Some students find it easy to remember the list of precious metals by looking at their frequent flyer status. You might be a silver, a gold, or a platinum level, but no airline has a lead level flyer status. Others look at their credit cards, perhaps a gold or platinum card, but certainly not a lead card.
When a client is interested in investing in commodities, you would expect to discuss:
Agricultural products, including soybeans and other grains, are popular commodities.
An investment adviser who is discussing forward contracts with a client would most likely be referring to an investment in:
an agricultural commodity.
Forward contracts are available on commodities, such as agricultural products (e.g., corn, wheat, and soybeans). Puts and calls are options, not forward contracts; although this could be a way to diversify the portfolio, that does not directly answer the question.
Lisa is considering investing in gold. She owns a portfolio of stocks, bonds, and money market securities. Relative to her existing portfolio, the primary benefit of the gold investment is most likely:
low correlation between traditional asset returns and gold.
The returns on gold and other precious metals exhibit low correlation with stock and bond returns. Investment experts generally cite this as the key advantage to investing in hard assets. Precious metals do not generally follow cyclical industries. Indeed, most look at them as countercyclical investments. The investment time horizon is whatever the investor makes it. Investors can hold stock indefinitely and buy bonds with short or long maturities, depending on portfolio objectives. Gold is not a renewable resource.
Commodity contracts are available on many different types of commodities. One of those types is precious metals. Included in the definition of a precious metal would be all of the following except
A) gold.
B) silver.
C) diamonds.
D) platinum.
C) diamonds.
Diamonds may be more valuable than any of the other choices, but they are not a metal.
