Portfolio Management 7 - Pros and Cons of Alternative Investments

Question 1

Why are investors usually attracted to alternative investments?

Answer 1

The diversification benefits where portfolio managers generally match their clients’ risk and return objectives by investing in well-
diversified portfolios that have assets with low or even negative correlations

Question 2

Benefits of Alternative Investments:

Answer 2

1) Tax advantages (e.g., for REITs).
2) Portfolio managers’ ability to exploit mispricings.
3) Return premiums for illiquidity.
4) Significant use of leverage.

Question 3

Challenges of Alternative Investments:

Answer 3

1) Obtaining reliable measures of risk and return.
2) Identifying the appropriate allocation.
3) Selecting portfolio managers.