20 Free CFA Mock Exam Questions and Answers on Alternative Investments

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Pays dividends before common stock, option can be exercised if stock is purchased at a premium in a buyout scenarioDebt still ranks ahead of them

• Convertible preferred stock
• Commodity benchmarks
• Real estate pros/cons
• Private equity

Usually an index with varying underlying assets (GSCI is common)pay attention to differences in economic conditions between historical period used for forecasting and today as effect on commodity prices may be major

• Real estate benchmarks
• Commodities
• Commodity benchmarks
• PE benchmarks/issues

DiversificationExposure to nontraditional risk factors and strategiesIlliquidityLimited access to informationNeed for complex diligenceDifferent tax treatmentsDifficult to appraise performance/establish benchmarksMay create concentrated positionsDecision risk- risk of investors irrationally changing strategy when returns are extreme

• Alternative investments as an asset class
• Direct real estate investments
• Real estate pros/cons
• Indirect investments

Direct- invest in futures/forwardsIndirect- invest in companies that product commodities (may be less efficient/have higher basis risk if these companies hedge)More likely to hedge unexpected inflation when storable and demand is tied to economic activity (rather than stable)Close to 0 correlation with other asset classes, so provide diversification (even though no return enhancement)Exposure to event risk that changes spot prices (political, economic, natural disaster, etc)Return= spot return + roll yield

• VC Risks
• Commodities
• Private equity
• Commodity benchmarks

SD is biased since returns are skewed and leptokurtic-May use downside deviation to focus on negative returns only and not penalize for positive volatilitySharpe ratio may be gamed-Dependent on how returns are calculated/time periods-Using out of the money options can increase today's return by collecting premiums now-Longer time periods used can create lower volatility-Assumes normality- HF returns aren't normal-Illiquid assets, stale prices have lower vol and bias the SR up-SD may have serial correlation

• PE benchmarks/issues
• HF performance measures
• Private equity
• Diligence issues

NAREIT- REIT index (indirect investments); includes leveraged positions and returns are net of fees, more correlated with equitiesNCREIF- index of direct investments based on appraisal values (smoothed); unleveraged properties, lower correlation with equities, returns gross of fees

• Real estate benchmarks
• Commodity benchmarks
• Hedge fund benchmark issues
• Real estate pros/cons

Indices vary a lot in composition and report infrequentlyDiverse strategies make funds hard to compareParticipation is voluntary and past data may not be relevantSubject to popularity, survivorship, backfill and stale price biasesIndex components are infrequently priced due to fewer events like IPOs, M&A, etcMany claim there are no direct benchmarks and use absolute returns/a hurdle rate as a benchmarkMay use single/multifactor models or create tracking portfolios with comparable risk/return characteristics

• Hedge fund benchmark issues
• Diligence issues
• PE lockup periods
• PE benchmarks/issues

Limit withdrawals for a minimum period to prevent sudden withdrawals

• Private equity
• Commodities
• VC Risks
• PE lockup periods

Normal considerations: market opportunity (out of the universe), investment process, org structure, people, service providers, etc++ Taxes, Suitability of AI (holding periods, fees, risk, etc), Decision Risk- not as much of a concern when investors don't make rash decisions(should also consider other closely held funds if all the other considerations have already been made)

• PE benchmarks/issues
• Indirect investments
• VC Risks
• Diligence issues

More common, tend to smooth results and understate volatility, overstate correlation

• Appraisal based indices
• Diligence issues
• PE lockup periods
• Private equity