Topic 5-Alternative Investments ((i) Common risk and return features of alternative investments.)

Question 1

Common risk and return features of alternative investments

Answer 1

• Alternative investments complement stocks, bonds and other traditional financial instruments traded on international financial markets.
• Alternative investments Involve special legal structures that avoid some taxes (ETFs) or avoid some
  regulations (hedge funds)

*** Higher risk and higher expected return

Common return features on alternative investments are:

1. Illiquidity
2. Difficulty in determining current market values
3. Limited historical risk and return data
4. Extensive investment analysis required

Return features:

1. A liquidity premium compensates the investor for the investor’s inability to continuously re balance the alternative investments in the portfolio
2. A segmentation premium compensates investors for the risk of alternative assets that, by nature, are generally not priced in a fully integrated global market.