2019 CFA level 3 qbank reading 30 alternative investments portfolio management answers

10/12/2018 Learning Management System Question #1 of 87 Compared to stocks, direct equity investments in real estate have had: A) higher volatility of returns B) lower volatility of returns C) about the same volatility of returns Explanation in Lower volatility is the correct answer The average return has actually been lower than those of stocks over the long-term en tre (Study Session 15, Module 30.2, LOS 30.g) Related Material Question #2 of 87 bo ok c SchweserNotes - Book m Which of the following most likely represents the timeline of a private equity fund? A) The commitment period of years, the life of the fund reaching years, an option o to extend the fund more years w w B) The commitment period of 7-10 years, the life of the fund reaching 12-15 years, an option to extend the fund more years w C) The commitment period of years, the life of the fund reaching 7-10 years, an option to extend the fund more years Explanation The commitment period usually occurs during the rst ve years when the sponsor gives the capital calls The expected life of these funds is 7-10 years, and there is often an option to extend the life up to more years (Study Session 15, Module 30.3, LOS 30.k) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447664/print 1/47 10/12/2018 Learning Management System Question #3 of 87 With respect to managed futures and real estate, legal issues and valuation methods are special due diligence issues associated with: A) real estate only B) managed futures only C) real estate and managed futures Explanation Related Material Question #4 of 87 bo ok c SchweserNotes - Book en tre (Study Session 15, Module 30.1, LOS 30.d) in Active, direct investment in real estate requires all the due diligence checkpoints For the investment process due diligence checkpoint, valuation methods deserve special attention Under documents, there may be special zoning and legal issues m In alternative investments, distressed debt arbitrage seeks to earn a return from: A) an improvement in the prospects of the rm only w w rm .o B) either the decline of the stock to zero or an improvement in the prospects of the C) the decline of the stock to zero only w Explanation Distressed debt arbitrage is the purchasing of a company's distressed debt while selling the equities short The investment can earn a return in two ways: 1) if the equity declines or goes to zero the investor gains from the short position but may continue to gain from the long bond position, 2) if the company's prospects improve, because of the seniority of bond claims, the returns to bond holders should be greater than that of equity holders The possibility of returns from two events provides a good market opportunity (Study Session 15, Module 30.6, LOS 30.t) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447664/print 2/47 10/12/2018 Learning Management System Question #5 of 87 In the due diligence process of selecting an active manager of alternative investments, "assessing the organization of the manager's rm" means assessing the: A) terms and structure of the investments the manager o ers B) stability of the rm and sta turnover C) documents (e.g., prospectuses of the investments the manager o ers) Explanation in Assessing the organization of the manager and his/her operations means assessing whether it is stable and well run This would also mean measuring the sta turnover (Study Session 15, Module 30.1, LOS 30.b) en tre Related Material Question #6 of 87 bo ok c SchweserNotes - Book In the due diligence process of selecting an active manager of alternative investments, m "assessing the investment process" means assessing the: o A) stability of the organization and employee turnover w w B) special assets the manager o ers C) competitive edge the manager o ers w Explanation In the due diligence checkpoints, "assessing the investment process" means assessing the competitive edge the manager o ers The special assets are associated with the "market opportunity" checkpoint The stability of the organization and employee turnover is associated with the "organization" checkpoint (Study Session 15, Module 30.1, LOS 30.b) Related Material SchweserNotes - Book Question #7 of 87 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447664/print 3/47 10/12/2018 Learning Management System Which of the following statements regarding how managed futures are typically structured is least accurate? A) Commodity trading advisors are responsible for actively buying and selling futures contracts B) Commodity trading advisors hire commodity pool operators to manage the pool of futures contracts C) Commodity pool operators can act as commodity trading advisors who actively manage a pool of futures contracts Explanation Related Material SchweserNotes - Book o m Question #8 of 87 bo ok c (Study Session 15, Module 30.5, LOS 30.s) en tre in Managed futures programs are typically run by Commodity Pool Operators (CPOs) CPOs can themselves be commodity trading advisors (CTAs) or will hire CTAs to actually manage all or part of the pool In the United States, both must be registered with the U.S Commodity Futures Trading Commission and the National Futures Association Some CTAs may choose to work independently outside of a public or private CPO structure Compared to common stockholders, investors who use convertible preferred stock to make w w venture capital investments will receive the promised dividend: A) only if common stockholders receive a dividend or a disbursement through w liquidation B) before common stockholders receive a dividend or a disbursement through liquidation C) before common stockholders receive a dividend but not if there is a liquidation Explanation Preferred stockholders must be paid a speci ed amount, say twice the initial investment, before common stockholders can receive cash in the form of dividends or distributions through liquidation (Study Session 15, Module 30.3, LOS 30.j) Related Material https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447664/print 4/47 10/12/2018 Learning Management System SchweserNotes - Book Question #9 of 87 In distressed securities investing, a private equity fund that seeks to partner with the company in which the fund invests would most likely be called: A) an orphan equity fund B) a high yield fund .in C) a vulture fund en tre Explanation bo ok c A "vulture fund" is a private equity fund that uses an "active" approach where the fund or investor acquires positions in the company, and the investment gives some measure of control The investor can then in uence and assist the company and then acquire more ownership in the process of any reorganization By providing services and obtaining a strategic position, the investors create their own opportunity (Study Session 15, Module 30.6, LOS 30.t) Related Material o m SchweserNotes - Book w w Question #10 of 87 w With respect to weighting schemes for hedge fund indices, the weighting schemes: A) are always based upon assets under management B) can be either equally weighted or based upon assets under management C) are always equally weighted Explanation Weighting schemes are usually either equally weighted or based upon assets under management (Study Session 15, Module 30.4, LOS 30.e) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447664/print 5/47 10/12/2018 Learning Management System Question #11 of 87 In making investments in private equity, diversi cation is: A) possible by holding a number of positions, but usually only for investors with portfolios over $100 million B) possible by holding a number of positions, and the size of the portfolio is not an issue C) not possible to any investor .in Explanation Related Material SchweserNotes - Book m Question #12 of 87 bo ok c (Study Session 15, Module 30.3, LOS 30.l) en tre Diversi cation through number of positions can be a problem since commitments are usually large Usually investors with portfolios well over $100 million can invest in the necessary 5-10 investments needed for diversi cation .o A hedge fund that takes positions in convertible bonds or convertible preferred stock and then w w takes other positions in the underlying stock would be most accurately placed in the style category: w A) distressed securities B) equity market neutral C) convertible arbitrage Explanation Convertible arbitrage usually takes positions in convertible bonds or preferred stock as well as warrants, etc , and then takes other positions in the underlying stock (Study Session 15, Module 30.4, LOS 30.o) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447664/print 6/47 10/12/2018 Learning Management System Question #13 of 87 Special due diligence issues such as valuation, credit analysis, and nancial structure are most likely associated with investments: A) in distressed securities B) made indirectly in real estate C) in managed futures .in Explanation en tre Distressed securities investing requires due diligence with respect to business valuation, credit analysis, and assessing the company's problems and nancial structure Related Material Question #14 of 87 bo ok c SchweserNotes - Book In distressed securities investing, the fact that there can be cyclical supply and demand for w w B) J-factor risk .o A) market liquidity risk m these investments is associated with: C) arbitrage risk w Explanation Market liquidity risk refers to the low liquidity and the fact that there can be cyclical supply and demand for these investments (Study Session 15, Module 30.6, LOS 30.u) Related Material SchweserNotes - Book Question #15 of 87 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447664/print 7/47 10/12/2018 Learning Management System Hedge fund managers with good track records: A) generally continue to have good track records B) often demand higher incentive fees C) usually lower their fees to increase the assets under management Explanation Managers with good track records often demand higher incentive fees The concern for investors is whether the manager with a good historical record can continue to perform well enough to justify the higher fees (Study Session 15, Module 30.3, LOS 30.k) in Related Material en tre SchweserNotes - Book bo ok c Question #16 of 87 A hedge fund that focuses on earning returns from mergers, spin-o s, and takeovers would be most accurately placed in which style category? C) Hedged equity w w Explanation o B) Merger arbitrage m A) Equity market neutral w Merger arbitrage focuses on returns from mergers, spin-o s, takeovers, etc For example, if company X announces it will acquire company Y, the manager might buy shares in Y and short X (Study Session 15, Module 30.4, LOS 30.o) Related Material SchweserNotes - Book Question #17 of 87 In the structure of a hedge fund, which of the following is least accurate concerning a lock-up period? A lock-up period: https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447664/print 8/47 10/12/2018 Learning Management System A) establishes a cap on new investment B) establishes exit windows C) establishes a minimum investment period for each investment Explanation A lock-up period is a common provision in hedge funds Lock-up periods limit withdrawals by requiring a minimum investment period, e.g., 1-3 years, and designating exit windows The rationale is to prevent sudden withdrawals that could force the manager to have to unwind positions (Study Session 15, Module 30.4, LOS 30.p) Related Material en tre in SchweserNotes - Book Question #18 of 87 bo ok c With respect to the role of alternative assets in a portfolio, it can be best described as exposure to: A) unique asset classes and/or special investment strategies m B) special investment strategies Explanation o C) unique asset classes only w w We can categorize alternative investments into three categories corresponding to the role they play in the portfolio w Exposure to asset classes that stocks and bonds cannot provide Exposure to special investment strategies such as those used by hedge funds Investments that use both special strategies and unique asset classes (e.g., funds that invest in private equity and distressed securities) (Study Session 15, Module 30.1, LOS 30.a) Related Material SchweserNotes - Book Question #19 of 87 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447664/print 9/47 10/12/2018 Learning Management System Direct investment in commodities has become easier for all investors because of the: A) increased number of hedge funds in these markets B) increase in hedging activities of managers in rms that produce and/or deal in commodities C) the increase in the number of commodity indices Explanation There has been an increase in the number of indices making it easier for smaller investors to invest in commodities and take derivative positions in commodities .in (Study Session 15, Module 30.5, LOS 30.m) Related Material bo ok c Question #20 of 87 en tre SchweserNotes - Book Which stage of nancing generally supports further expansion of production and sales? A) The second stage m B) The third stage w w Explanation o C) The rst stage w The second stage of nancing supports further expansion of production and sales The third stage of nancing typically can support additional major expansion First stage funding is used to begin manufacturing and sales (Study Session 15, Module 30.3, LOS 30.h) Related Material SchweserNotes - Book Question #21 of 87 For use in evaluating hedge funds, which of the following is NOT a shortcoming of the Sharpe ratio? https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447664/print 10/47 10/12/2018 Learning Management System Explanation Survivorship bias is a big problem for these indices Indices may drop funds with poor track records or that fail, and this will overestimate returns in the overall market Studies have shown that the bias can be as high as 1.5% to 3% per year The degree of survivorship bias varies among the hedge-fund strategies It is probably low for event-driven strategies and higher for hedged-equity strategies (Study Session 15, Module 30.4, LOS 30.e) Related Material in SchweserNotes - Book en tre Question #64 of 87 Assessing what a manager's competitive edge is over other managers in a speci c market falls under which of the following due diligence checkpoints? Assessing the: bo ok c A) service providers B) market opportunity o ered C) investment process Explanation w w o m The due diligence checkpoint of assessing the investment process involves deciphering what a manager's competitive edge over others in the market is, along with how this manager's process identi es potential opportunities Assessing the service providers involves investigating the outside rms that support the manager's business Finally, assessing the market opportunity o ered includes deciding whether or not there are exploitable ine ciencies in the market for the type of investments in which the manager specializes in w (Study Session 15, Module 30.1, LOS 30.b) Related Material SchweserNotes - Book Question #65 of 87 With respect to hedge fund investing, the net return to an investor in a fund of funds would be lower than that earned from an individual hedge fund because of: A) the extra layer of fees only https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447664/print 33/47 10/12/2018 Learning Management System B) no reason; fund of funds earn returns that are equal to those of individual hedge funds C) both the extra layer of fees and the higher liquidity o ered Explanation Fund of funds are usually considered good choices for individual investors because they o er diversi cation and usually more liquidity One problem with fund of funds is that they usually have lower returns This is a result from both the additional layer of fees and cash drag (resulting from a desire to have higher liquidity) (Study Session 15, Module 30.4, LOS 30.q) Related Material en tre in SchweserNotes - Book Question #66 of 87 bo ok c With respect to commodities and managed futures, which have investable indices? A) Commodities but not managed futures B) Both commodities and managed futures m C) Neither commodities nor managed futures .o Explanation Indices for both asset classes use trading rules and assets to which investors have access w w (Study Session 15, Module 30.5, LOS 30.e) Related Material w SchweserNotes - Book Question #67 of 87 Which of the following is an example of an issuer of venture capital? A) Large, successful corporations B) Formative-stage companies C) Venture capitalists https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447664/print 34/47 10/12/2018 Learning Management System Explanation Formative-stage companies are young companies seeking capital, so therefore they are an example of an issuer of venture capital Venture capitalists are specialists who identify pools of capital available for investing in and nd the promising private companies to invest in Thus, venture capitalists are suppliers of venture capital Large companies that invest, or supply, venture capital opportunities in their own area of business expertise is referred to as corporate venturing (Study Session 15, Module 30.3, LOS 30.h) Related Material in SchweserNotes - Book en tre Question #68 of 87 An investor in private equity needs to prepare for capital calls, which: rst ve years of the fund bo ok c A) equal the funds promised at the initiation of the fund and usually occur during the B) is additional money requested by the sponsor as mezzanine nancing after the commitment period m C) occurs at the beginning of the life of the fund before the commitment period Explanation w w o This is the de nition of capital calls The investors in private equity usually make commitments at the initiation of the fund During the rst ve years, or so, the sponsor gives the capital calls to the investors to get the promised funds (Study Session 15, Module 30.3, LOS 30.l) w Related Material SchweserNotes - Book Hollis, Ignitowski, Jacobs, and Kelso are four analysts working in a windowless basement o ce at Madison Partners, a money manager specializing in alternative investments They have an ongoing debate over which alternative-investment vehicle is best As is often the case in longrunning feuds, each frequently refers back to a favorite argument Hollis: "I like receiving convertible preferred stock for my venture-capital investments because my claim is usually senior to those of investors who get in later." https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447664/print 35/47 10/12/2018 Learning Management System Ignitowski: "Agricultural commodity investments are better, because they provide an in ation hedge and have traditionally delivered better returns than bonds." Jacobs: "Private-equity limited partnerships not only limit the potential losses of initial investors, but also avoid double taxation." Kelso: "A fund of funds has less survivorship bias than an index, and it rarely falls prey to style drift." Opinions about investment classes aside, the four Madison analysts are tasked with performing due diligence on hedge funds Hedge funds are notoriously di cult to analyze, and the analysts in divide up the task, with each focusing on a certain aspect of the due diligence Hollis considers the hedge fund's strategy, looking at the investment style as well as the en tre individual investments to assess whether the fund is likely to outperform not only the market, but other hedge funds In this analysis, he also considers the fund's nancial policies and market risk pro le, using downside deviation rather than standard deviation Hollis also considers the age of the fund He prefers funds that have been around for awhile because bo ok c experienced management gives the funds an edge Lastly, Hollis' duties also include reviewing the funds' structure, examining who manages, audits, or regulates the fund Ignitowski focuses on performance data Because hedge funds are not well regulated, they have a lot of freedom regarding how they present performance data Ignitowski drills down into m the performance of individual holdings to assess whether the stated returns are accurate He then recalculates cumulative performance data using weekly returns, adjusting when possible o for in ows and out ows Ignitowski prefers larger funds since they have historically w w outperformed smaller funds Jacobs tackles the administrative details, starting with an analysis of the fund's fee structure He w researches legal issues, including pending lawsuits, regulatory actions, and lock-up provisions Jacobs' review also addresses personnel issues, including the amount of sta , turnover rates, and, when possible, rates of compensation Kelso calls investors in the hedge fund for references He asks about investors' knowledge of the managers' investment styles and whether they deviate from the stated style After the four analysts compile their analysis of hedge funds, their due diligence is forwarded upstairs to the investment director, Francine Finster She does not see the analysts' e-mail on this particular day because she is in conference with Dan Braden, a dot-com millionaire who retired at 35 with just one goal: becoming a billionaire Braden considers his portfolio of traditional investments – 60 percent large-cap stocks, 20 percent small-cap stocks, and 20 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447664/print 36/47 10/12/2018 Learning Management System percent bonds well-diversi ed for his age and level of wealth, but his knowledge of alternative investments is not extensive, and he is consulting Madison Partners for help with that portion of his portfolio Braden has high hopes for his portfolio He wants Finster to nd him an asset class that when added to a portfolio of stocks and bonds will result in better returns and a higher average return-to-volatility ratio, while at the same time bringing an additional diversi cation bene t to the portfolio Finster promises to look at some indexes and some research into historical returns of various asset classes in an attempt to nd this investment, but doubts she can nd anything that will meet Braden's criteria .in Looking ahead, Finster expects Braden to be a fairly di cult customer, demanding very high returns and creative strategies She decides that he might like the idea of a swap Finster en tre prefers interest-rate and commodity swaps but has not been involved in either type of transaction for a number of months To refresh her memory, she wrote down some bullet points comparing the two types of swaps: bo ok c The value of an interest-rate swap will change over time if market rates change, but will not change over time if market rates stay the same, even if prices change The value of a commodity swap will change over time regardless of whether market rates or prices change Both interest-rate and commodity swaps have a value of zero initially m In the event of a change in market rates, the value of both an interest-rate swap and a o commodity swap will change w w Question #69 of 87 w The alternative investment Finster added to the Braden portfolio is least likely to be: A) commodity futures B) a venture-capital fund C) a direct real estate investment Explanation Venture capital funds generally behave like private equity, and are designed to boost returns, not diversify Futures and real estate are traditionally used as diversi cation tools and are likely to lower overall returns for a stock-heavy portfolio As such, venture-capital is the least likely to reduce returns while raising the Sharpe ratio (Study Session 15, Module 30.1, LOS 30.d) https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447664/print 37/47 10/12/2018 Learning Management System Related Material SchweserNotes - Book Question #70 of 87 Which of the Madison analysts does NOT ignore hedge-fund conventions? A) Ignitowski, with his opinions about fund size B) Hollis, with his measure of fund risk en tre Explanation in C) Hollis, with his opinions about fund age bo ok c Common hedge-fund conventions include, "large funds underperform small funds," "young funds outperform old funds," and the use of simple monthly returns compounded over 12 periods The analysts not follow these conventions While standard deviation is a common convention for calculating the risk of equity and debt investments, downside deviation is commonly used for hedge funds As such, Hollis' measure of fund risk is in keeping with hedge-fund convention (Study Session 15, Module 30.1, LOS 30.d) Related Material o m SchweserNotes - Book w w Question #71 of 87 w Based on historical data from 1996 to 2015, Finster can most likely meet Braden's lofty goals by investing in: A) nothing, because no asset class meets those requirements B) venture capital C) managed futures Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447664/print 38/47 10/12/2018 Learning Management System During the 1996 to 2015 period, adding managed futures to an equally weighted portfolio of stocks and bonds achieved this goal with both an increased return and average return-tovolatility ratio During the equity market collapse of 2008, managed futures far outperformed all other asset classes studied Private equity provided return enhancement over the long term Hedge funds have been found to provide both diversi cation and return enhancement (Study Session 15, Module 30.1, LOS 30.d) Related Material Question #72 of 87 en tre Which of Finster's notes about swaps is least accurate? in SchweserNotes - Book A) The value of a commodity swap will change over time regardless of whether market rates or prices change bo ok c B) The value of an interest-rate swap will change over time if market rates change, but will not change over time if market rates stay the same, even if prices change C) Both interest-rate and commodity swaps have a value of zero initially Explanation o m The values of both interest-rate swaps and commodity swaps will change over time regardless of movement (or lack thereof) in market rates or prices Both types of swaps indeed have a value of zero at inception, and a change in market rates will a ect the value of both types of swaps w w (Study Session 15, Module 30.1, LOS 30.d) Related Material w SchweserNotes - Book Question #73 of 87 The Madison due diligence for hedge funds is detailed, but not comprehensive Which traditional aspect of due diligence is neglected? A) Assessment of the fund's suitability for particular investors B) Analysis of the fund's research expenditures https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447664/print 39/47 10/12/2018 Learning Management System C) Consideration of the fund's use of leverage Explanation A review of the fund's competitors is a good idea, but it is not part of due diligence Neither is an assessment of the fund's suitability for particular investors Both of those reviews should be part of the investment decision, but due diligence normally means an analysis of how the fund operates, rather than its investment merits relative to outside criteria The fund's use of leverage would fall under Hollis' expertise as he considers the investment style, nancial policies, and risk pro le Madison Partners appears to have this issue well in hand However, the fund's research strategy and expenditures are key to understanding how the fund operates, and none of Madison's analysts appears to address this topic (Study Session 15, Module 30.1, LOS 30.d) in Related Material en tre SchweserNotes - Book bo ok c Question #74 of 87 Which of the Madison Partners made the most accurate statement about alternative investments? A) Hollis m B) Ignitowski w w Explanation o C) Jacobs w Hollis is wrong because the claims of later investors are generally senior to those of investors holding convertible preferred stock Ignitowski is wrong because agricultural commodities have historically provided lower returns than bonds Jacobs' assessment of private-equity limited partnerships is accurate (Study Session 15, Module 30.1, LOS 30.d) Related Material SchweserNotes - Book Question #75 of 87 https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447664/print 40/47 10/12/2018 Learning Management System Style drift and survivorship bias are often mentioned in the analysis of hedge fund performance Which of the following statements is most accurate? Fund of funds can serve as better indicators of aggregate hedge fund performance than hedge fund indices because they tend to have a lower level of: A) style drift only B) both survivorship bias and style drift C) survivorship bias only Explanation bo ok c (Study Session 15, Module 30.4, LOS 30.q) en tre in A fund of funds may serve as a better indicator of aggregate performance of hedge funds (i.e., a better benchmark) because they su er from less survivorship bias If a fund of funds includes a fund that dissolves, the fund of funds includes the e ect of that failure in the return of the fund of funds; however, an index may simply drop the failed fund A fund of funds can su er from style drift This can produce problems in that the investor may not know what he/she is getting Over time, managers may tilt their respective portfolios in di erent directions It is not uncommon that two fund of funds who claim to be of the same style to have returns with a very low correlation Related Material m SchweserNotes - Book o Question #76 of 87 w w In distressed securities investing, event risk is: w A) a source of return only B) a source of both return and diversi cation C) a source of diversi cation only Explanation Event risk refers to the fact that the return on a particular investment within this class typically depends on a particular event for a company, and that can provide good diversi cation (Study Session 15, Module 30.6, LOS 30.u) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447664/print 41/47 10/12/2018 Learning Management System Question #77 of 87 For hedge funds, the basic incentive fee for managers may not be adequate because: A) they are usually too low, e.g., 2% or less B) a manager usually earns a minimum incentive fee regardless of the performance of the fund C) a hedge fund manager may have several goals other than earning a high return, e.g., lowering downside risk .in Explanation bo ok c (Study Session 15, Module 30.3, LOS 30.k) en tre The rationale for incentive fees is obvious: encourage the manager to earn higher pro ts There is some controversy concerning fees because a manager may have or should have other goals than simply earning a gross return For example, the manager may/should be providing limited downside risk and diversi cation The basic incentive fee does not reward this service Related Material m SchweserNotes - Book o Question #78 of 87 w w Which of the following is least likely to be a due diligence checkpoint in the selection process of active managers of alternative investments? w A) The service providers like lawyers and ancillary sta working for the manager’s rm B) Market opportunity the manager seeks to exploit C) The geographic location of the o ce with respect to the geographic locations in which the manager invests Explanation The due diligence checkpoint list does not mention the geographic location of the o ces (Study Session 15, Module 30.1, LOS 30.b) Related Material https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447664/print 42/47 10/12/2018 Learning Management System SchweserNotes - Book Question #79 of 87 When compared to a portfolio of publicly traded stocks, private equity is: A) correlated with stocks but adds moderate diversi cation because of its idiosyncratic risk component B) uncorrelated with stocks and adds a high degree of diversi cation .in C) correlated with stocks and has a low idiosyncratic risk component so it adds en tre virtually no diversi cation Explanation bo ok c Private equity returns typically move with stock market returns Computed correlations are often positive and low, but some attribute the low correlation to the infrequently-updated or "stale" prices of the private equity returns Each investment has a large idiosyncratic risk component, however, which can provide moderate diversi cation (Study Session 15, Module 30.3, LOS 30.f) Related Material o m SchweserNotes - Book w w Question #80 of 87 w Within the alternative asset class of real estate, analysts can classify investments as: A) either direct or indirect and as either start-up or middle market B) either direct or indirect but not as either start-up or middle market C) either start-up or middle market but not as direct or indirect Explanation Real estate investments are generally categorized as direct (i.e., the purchase of land and buildings) or indirect that includes REITs and CREFs The sub-categories of start-up and middle market apply to private equity and not real estate (Study Session 15, Module 30.1, LOS 30.d) Related Material https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447664/print 43/47 10/12/2018 Learning Management System SchweserNotes - Book Question #81 of 87 In the special issues that alternative investments raise for investment advisors of private wealth clients, "decision risk" is associated with: A) assessing the investment opportunity B) making hiring and ring decisions and general employee turnover of the in investment rm Explanation en tre C) changing a strategy at the time the portfolio has incurred a large loss Decision risk is the risk of irrationally changing a strategy bo ok c (Study Session 15, Module 30.1, LOS 30.c) Related Material m SchweserNotes - Book o Question #82 of 87 w w Which of the following statements regarding the performance of managed futures is most accurate? w A) Privately managed futures have not performed as well as publicly traded funds B) Publicly traded managed futures have performed well on both a stand-alone and portfolio basis C) Managed futures have exhibited a positive correlation to equities and bonds during up markets and a negative correlation during falling markets Explanation https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447664/print 44/47 10/12/2018 Learning Management System The primary bene t to managed futures is the signi cant diversi cation potential (i.e., improved Sharpe ratios) For example, some research has even shown that managed futures have exhibited positive correlation to equities and bonds during up markets and negative correlations during falling markets, although the performance seems to be related to speci c strategies and time periods In particular, private funds seem to add value whereas publicly traded funds have performed poorly both stand-alone and in portfolios (Study Session 15, Module 30.5, LOS 30.s) Related Material in SchweserNotes - Book en tre Question #83 of 87 Compared to indirect investments in real estate, direct investments in real estate are least likely to have which of the following properties? A) Higher transparency bo ok c B) Lower liquidity C) Lower mobility Explanation m Direct investments in real estate generally have low liquidity, large lot sizes, high transactions costs, low mobility, and asymmetric information in transactions (low transparency) w w Related Material o (Study Session 15, Module 30.1, LOS 30.d) w SchweserNotes - Book Question #84 of 87 A commodity pool operator (CPO) is deciding whether or not to hire a particular commodity trading advisor (CTA) The CTA has a good track record of performance and often exhibits negative correlation with equities thus enhancing overall performance in down markets Which of the following statements regarding whether or not the CPO should hire the CTA is most accurate? The CPO should: A) hire the CTA only if its beta and correlation have been considered in determining its risk relative to the pool of operators https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447664/print 45/47 10/12/2018 Learning Management System B) not hire the CTA if their past performance is highly correlated with the pool of operators, as this indicates their volatility relative to the pool is high C) not hire the CTA if their beta relative to other CTAs managing the pool of futures contracts is too low, as this indicates that the CTA’s past returns are low relative to h l f Explanation in In selecting a CTA to include in the portfolio, the manager should consider risk For example, even though CTAs often exhibit negative correlations with equities, correlations among CTAs themselves can range anywhere from signi cantly positive (i.e., close to 1.0) to only modestly positive In addition, the beta that relates the performance of an individual CTA to a fund of CTAs can be a good indicator of future risk-adjusted performance Just as equity beta relates the volatility (risk) of an individual equity security or portfolio to the overall equity market, the CTA beta measures the risk of the individual CTA relative to a fund of CTAs en tre (Study Session 15, Module 30.5, LOS 30.s) Related Material Question #85 of 87 bo ok c SchweserNotes - Book Adding an allocation to alternative asset classes such as private equity and hedge funds has m what theoretical impact on the return and risk of an investment portfolio? w w A) Increase o Impact on Returns w B) Decrease C) Increase Impact on Risk Increase Decrease Decrease Explanation Each category of alternative investments, such as private equity, hedge funds, and real estate, on its own is fairly risky, but can have signi cant diversi cation e ects for an investment portfolio In a portfolio context, alternative investments can signi cantly increase returns and lower the risk of the portfolio due to their low correlation with traditional asset classes (Study Session 15, Module 30.4, LOS 30.f) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447664/print 46/47 10/12/2018 Learning Management System Question #86 of 87 Which of the following is least likely to be included in private equity subgroups? A) Futures funds B) Start-up companies C) Private investment in public entities Explanation (Study Session 15, Module 30.1, LOS 30.d) Related Material Question #87 of 87 bo ok c SchweserNotes - Book en tre in Private equity subgroups are start-up companies, middle-market private companies, and private investment in public entities The distinguishing feature for the subgroups is the stage of development of the company to which the invested dollars ow m One problem in creating a private equity index is the: o A) problems with de ning what constitutes a private equity investment w w B) issue of leverage and how to deal with it C) infrequent repricing of the components w Explanation The value of a private equity index depends upon price-revealing events like IPOs, mergers, the raising of new nancing, etc Thus, the re-pricing of the index occurs infrequently (Study Session 15, Module 30.5, LOS 30.e) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice/qbank/24038518/quiz/83447664/print 47/47 ... Module 30 .3, LOS 30 .j) Related Material https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice /qbank/ 24 038 518/quiz/ 834 47664/print 4/47 10/12/2018 Learning Management. .. Module 30 .3, LOS 30 .h) Related Material SchweserNotes - Book https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice /qbank/ 24 038 518/quiz/ 834 47664/print 13/ 47... 15, Module 30 .3, LOS 30 .l) https://www.kaplanlearn.com/education/dashboard/index/66a9ea0d62bb71ab495925615029a3fd/practice /qbank/ 24 038 518/quiz/ 834 47664/print 14/47 10/12/2018 Learning Management