What is Alternative Investments?

Question 1

Define investments

Answer 1

Investment in deferred consumption

Question 2

List four major types of real assets other than land and other types of real estate:

Answer 2

1. Natural Resources
2. Commodities
3. Infrastructure
4. Intellectual Property

Question 3

List the three major types of alternative investments other than real assets in the CAIA curriculum:

Answer 3

1. Hedge Funds
2. Private Equity
3. Structured Products

Question 4

Name the five structures that differentiate traditional and alternative investments:

Answer 4

1. Regulatory Structures
2. Securities Structures
3. Trading Securities
4. Compensation Structures
5. Institutional Structures

Question 5

Which of the five structures that differentiate traditional and alternative investments relates to the taxation of an instrument?

Answer 5

Regulatory Structures

Question 6

Name the four return characteristics that differentiate traditional and alternative investments:

Answer 6

1. Diversification
2. Illiquidity
3. Inefficiency
4. Nonnormality

Question 7

Name four major methods of analysis that distinguish the analysis of alternative investments from the analysis of traditional investments:

Answer 7

1. Return Computation
2. Statistical
3. Valuation
4. Portfolio Management

Question 8

Describe an incomplete market

Answer 8

Lack of investment opportunities that cause market participants to be unable to implement an investment strategy that satisfies their exact preferences such as risk preferences

Question 9

Define active managment

Answer 9

Buying and selling securities in pursuit of superior combinations of risk and return

Question 10

What distinguishes pure arbitrage from the more general usage of the term arbitrage?

Answer 10

1. Pure arbitrage is risk free
2. Risk free profits through the simultaneous purchase and sale of identical positions trading at different prices in different markets
3. Arbitrage is not risk free
4. Long and short positions are not identical or are not held over the same time period

Question 11

Illiquidity

Answer 11

investment trades infrequently or with low volume

Question 12

Absolute Return Products

Answer 12

Having little or no return correlation with traditional assets, and have investment performance of traditional investment.

Question 13

Regulatory Structure

Answer 13

Role of government, including both regulation and taxation, in influencing the nature of an investment.

Question 14

Securities Structure

Answer 14

Structuring of cash flows through leverage and securitization.

Question 15

Securitization

Answer 15

Transforming asset ownership into a pro rata or pari passu basis.

Question 16

Trading Structure

Answer 16

Role of an investment vehicle’s investment managers in developing and implementing trading strategies.

Question 17

Compensation Structure

Answer 17

Organizational issues, especially compensation schemes, influence particular investments.

Question 18

Institutional Structure

Answer 18

Financial markets and financial institutions related to a particular investment, such as whether the investment is publicly traded.

Question 19

Information Asymmetries

Answer 19

Extent to which market participants possess different data and knowledge.

Question 20

Incomplete markets

Answer 20

Markets with insufficient distinct investment opportunities.

Question 21

Moral Hazard

Answer 21

Risk that the behavior of one or more parties will change after entering into a contract.

Question 22

Absolute Return Standard

Answer 22

Means that returns are to be evaluated relative to zero, a fixed rate, or relative to the riskless rate, and therefore independently or performance in equity markets, debt markets, or any other markets.

Question 23

Return Enhancer

Answer 23

Including an investment product in a portfolio

Question 24

Return Diversifier

Answer 24

Relation in the portfolio’s risk that it is believed to offer through its lack of correlation with the portfolio’s other assets.