CFA Level 1 - Alternative Investments. Questions and answers. Graded A+

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CFA Level 1 - Alternative Investments. Questions and answers. Graded A+ Q. Which of the following is least likely to be considered an alternative investment? A. Real estate B. Commodities C. L ... ong-only equity funds - ✔✔C Alternative investments that rely on estimates rather than observable market prices for valuation purposes are most likely to report: A. returns that are understated. B. volatility of returns that is understated. C. correlations of returns with the returns of traditional assets that are overstated. - ✔✔B Which of the following investments most likely provides an investor with indirect equity exposure to real estate? A. Real estate limited partnerships B. Real estate investment trusts C. Commercial mortgage-backed securities - ✔✔B Which of the following most likely belongs in an alternative asset category? A. A limited partnership that takes long and short positions in publicly traded equity. B. Equity in an emerging market company that is traded over-the-counter. C. Securitized commercial real estate debt. - ✔✔A An alternative investments fund that uses leverage and takes long and short positions in securities is most likely a: A. leveraged buyout fund. B. hedge fund. C. venture capital fund. - ✔✔B If an investor uses derivatives to make a long investment in commodities, the return earned on margin is best described as: A. convenience yield. B. collateral yield. C. price return. - ✔✔B In the context of venture capital financing, seed-stage financing most likely supports: A. initial commercial production and sales. B. product development and/or marketing efforts. C. transformation of an idea into a business plan. - ✔✔B With regard to venture capital, which of the following statements is most likely true regarding venture capital? A. Investments typically are in later stage and more established companies. B. Investors tend to have short time horizons. C. Investors require a higher return than investors in publicly traded equity. - ✔✔C Do management fees most likely get paid to the manager of a hedge fund, regardless of the fund's performance? A. No, only when the fund's net asset value exceeds the previous high-water mark B. No, only when the fund's gross return is positive C. Yes - ✔✔C Which of the following infrastructure investments would most likely be easiest to value? A: A. master limited partnership holding greenfield investments. B. master limited partnership holding brownfield investments. C. private equity fund holding brownfield investments. - ✔✔B A master limited partnership (MLP) is publicly traded, whereas a private equity fund is not. Therefore the MLP will have market pricing information to help with valuation. A brownfield investment is an existing asset that likely has operational and financial history to aid in valuation; a greenfield investment is in new construction. If the price of a commodity futures contract is below the spot price, it is most likely that the: A. cost of carry exceeds the convenience yield. B. roll yield is negative. C. convenience yield exceeds storage costs. - ✔✔C The convenience yield must exceed the cost of carry to arrive at a futures price below the spot price because the futures price is approximately equal to the spot price [(1 + r) + Storage cost - Convenience yield] and the cost of carry is defined as interest cost plus storage cost. Given that interest cost is always positive, the convenience yield must also exceed storage costs to arrive at a futures price below the spot price. Investors look at many key due diligence factors when investing in hedge funds. Which of the following factors is most likely the biggest challenge to fully assess? A. Investment strategy and process B. Size and longevity C. Track record - ✔✔A The investment strategy and process of a hedge fund is likely to be challenging to fully assess because hedge funds often limit disclosure in order to maintain their competitive advantage and to not give away information that is considered proprietary. High Plains Capital is a hedge fund with a portfolio valued at $475,000,000 at the beginning of the year. One year later, the value of assets under management is $541,500,000. The hedge fund charges a 1.5% management fee based on the end-of-year portfolio value as well as a 10% incentive fee. If the incentive fee and management fee are calculated independently, the effective return for a hedge fund investor is closest to: A. 12.29%. B. 10.89%. C. 11.06%. - ✔✔B Management fee = $541,500,000 × 0.015 = $8,122,500 Incentive fee = ($541,500,000 - $475,000,000) × 0.10 = $6,650,000 Total fees = $14,772,500 Return = ($541,500,000 - $475,000,000 - $14,772,500)/$475,000,000 = 0.1089 or 10.89% Concentrated portfolio strategies are attractive because of their: A. potential to generate alpha. B. ability to track market indices. C. low risk. - ✔✔A For a hedge fund investor, a benefit of investing in a fund of funds is least likely the: A. higher level of due diligence expertise. B. multilayered fee structure. C. ability to negotiate better redemption terms. - ✔✔B Funds of funds have a multilayered fee structure that will reduce the returns to the investor. A commodity market is in contango when futures prices are: A. lower than the spot price. B. the same as the spot price. C. higher than the spot price. - ✔✔C When a commodity market is in contango, futures prices are higher than the spot price. A is incorrect. This is the definition of backwardation. B is incorrect. This is neither contango nor backwardation When the futures price of a commodity exceeds the spot price, the commodity market is most likely in: A. contango. B. backwardation. C. carry. - ✔✔A When a commodity market is in contango, futures prices are higher than spot prices. When spot prices are higher than the futures price, the market is said to be in backwardation. A manager is compensated with a management fee based on committed capital plus an incentive fee based on fund performance. This scenario best describes the fee structure of a: A. private equity fund. B. hedge fund. C. mutual fund. - ✔✔A A private equity manager is compensated through a management fee based on committed capital plus an incentive fee. The management fee of a private equity fund that has not yet invested all of its committed capital is most likely based on: A. committed capital. B. remaining capital. C. invested capital. - ✔✔A The management fee of private equity funds is based on committed capital until the committed capital is fully drawn down and invested. This approach is in contrast to hedge funds, for which the management fee is based on invested capital. A private equity limited partner would least likely experience which of the following? A. Capital calls in the partnership's early years to fund investments. B. A management fee based on committed capital, not invested capital. C. Short time lags between investments in and exits from portfolio companies. - ✔✔C There are likely to be long time lags between investments in and exits from portfolio companies. Q. An investor seeking an indirect debt investment in real estate will: A. purchase a mortgage-backed security. B. purchase a commercial property. C. originate a residential mortgage - ✔✔A Q. The majority of private equity activity involves: A. derivative positions. B. leveraged buyouts. C. investing in mortgaged-backed securities. - ✔✔B Q. The real estate valuation method that uses a discounted cash flow model is best characterized as: A. a comparable sales approach. B. a cost approach. C. an income approach. - ✔✔C [Show More]

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