CFA 2018 level 3 schweser practice exam CFA 2018 level 3 question bank 09 alternative investments questions

ALTERNATIVE INVESTMENTS QUESTION IS COMPOSED OF TWO PARTS (A, B) FOR A TOTAL OF 11 MINUTES Kim Waters is a partner in Sagebrush Partners She has been unhappy with the returns of the portfolio in recent years and wants the managing partner, Bob Hart, to expand the range of investments in order to raise returns Hart has been running the portfolio in a conservative manner The portfolio has been limited to long-only positions in investment-grade fixed income securities and mid-to-large-cap equities with significant diversification across major global equity markets Waters wants Hart to investigate higher return alternative investments Hart suggests they consider buyout funds instead of venture capital investments He points out to Waters that compared to venture capital funds, buyout funds usually have parameters that are a better fit for the conservative investment policy objectives of Sagebrush Partners A Discuss two advantages and one disadvantage of buyout funds compared to venture capital funds (3 minutes) Hart points out several concerns with respect to private equity investing to Waters, saying, “Private equity is more of a diversifier than a long-term return enhancer.” Hart goes on to explain, “There is also the carried interest, which is interest limited partners have to pay to cover the financing costs of leverage.” Hart warns her about the lack of liquidity in private equity and states, “You should use real estate investments in raw land rather than buyout funds to generate more immediate cash flow.” Waters also wants Hart to look at using convertible preferred stock as a vehicle for direct venture capital investment Waters states, “I want to make sure that the preferred is structured so that later investors receive seniority in order to increase their claim on the company assets.” B State whether or not each of the comments made is correct Explain why Answer Question B in the template provided (8 minutes) Template for Question B Comment "Private equity is more of a diversifier than a longterm return enhancer." "There is also the carried interest, which is interest limited partners have to pay to cover the financing costs of leverage." “You should use real estate investments in raw land rather than buyout funds to generate more immediate cash flow.” “I want to make sure that the preferred is structured so that later investors can receive seniority in order to increase their claim on the company assets.” Is the comment correct? (circle one) Explanation Yes No Yes No Yes No Yes No QUESTION IS COMPOSED OF TWO PARTS (A, B) FOR A TOTAL OF 12 MINUTES Ron Warrick is a portfolio manager for Orleans Advisers He is considering recommending hedge funds and other alternative assets to his clients, but before doing so, he is investigating the historical performance of these assets With regard to hedge funds, he finds that their historical performance has been quite impressive over the past decade, but he is concerned that the return statistics provided for the hedge funds may be misleading He is particularly concerned with backfill bias and survivorship bias A Explain what backfill and survivorship bias are, plus how and why they would likely affect reported return (6 minutes) Warrick would also like to understand how to measure the performance of hedge funds Specifically, he has heard there are problems associated with using the Sharpe ratio to measure hedge fund performance B Explain how the following two items are likely to affect the Sharpe ratio of a hedge fund i Illiquidity leading to the use of appraisal data ii Managers who use different annualization methods for return and risk (6 minutes) QUESTION HAS THREE PARTS (A, B, C) FOR A TOTAL OF 14 MINUTES Hara Cho is responsible for nontraditional investments at Max Wealth Management (MWM) MWM is a high net worth investment management firm The firm’s marketing department put together slides that can be used in client presentations Hara is reviewing the slide content Slide 1: Standard Features of Alternative Investments   Significant diversification when added to traditional portfolios MWM provides monthly asset valuation, creating sufficient liquidity for most clients Slide 2: Alternative Assets Classes Managed by MWM    Commodities Real estate Managed futures Slide 3: Value Added in Commodities Through:   Cash management Positive roll return in both contango and backwardation markets Slide 4: Real Estate    A core asset for those seeking diversification MWM expertise adds value through direct purchase of real estate properties Results are benchmarked to the NAREIT Index A Considering only Slides and 2, explain whether the two claims made in Slide for each of the asset classes in Slide are most likely true or false Do not consider slide and in answering this question Consider each claim and each asset class separately (6 minutes) B Based on all the available information, discuss whether MWM’s commodity approach should be classified as an asset class or a manager strategy Support your answer with the information provided (4 minutes) C State two advantages and two disadvantages to MWM’s clients of using the NAREIT Index as a benchmark for evaluating MWM’s real estate management (4 minutes) ... of Alternative Investments   Significant diversification when added to traditional portfolios MWM provides monthly asset valuation, creating sufficient liquidity for most clients Slide 2: Alternative. .. Yes No QUESTION IS COMPOSED OF TWO PARTS (A, B) FOR A TOTAL OF 12 MINUTES Ron Warrick is a portfolio manager for Orleans Advisers He is considering recommending hedge funds and other alternative. .. annualization methods for return and risk (6 minutes) QUESTION HAS THREE PARTS (A, B, C) FOR A TOTAL OF 14 MINUTES Hara Cho is responsible for nontraditional investments at Max Wealth Management (MWM) MWM