CAIA- 12 - Measuring Private Equity Risk Flashcards

1
Q

There are 4 key risks associated with private equity:

  1. ___ risk
  2. ___risk
  3. ___or ___risk
  4. ___or ___risk
A

There are 4 key risks associated with private equity:

  1. Market risk
  2. Liquidity risk
  3. Commitment or funding risk
  4. Capital or realization risk
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2
Q

___ risk refers to the economic uncertainty that impacts the price/value of an asset.

A

Market risk refers to the economic uncertainty that impacts the price/value of an asset.

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3
Q

___ risk refers to the risk that PE investors face when trying to sell their partnership stakes.

A

Liquidity risk refers to the risk that PE investors face when trying to sell their partnership stakes.

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4
Q

___ or ___risk refers to the risk that investors are unable to meet their contractually binding commitments to a PE fund.

A

Commitment or funding risk refers to the risk that investors are unable to meet their contractually binding commitments to a PE fund.

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5
Q

___ or ___risk refers to the long-term risk that PE investors are unable to recoup their invested capital at the time of exit.

A

Capital or realization risk refers to the long-term risk that PE investors are unable to recoup their invested capital at the time of exit.

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6
Q

___ risk tends to be independent between PE firms and, thus, can be ___ ___in portfolios of funds.

A

Operational risk tends to be independent between PE firms and, thus, can be diversified away in portfolios of funds.

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7
Q

Financial risk primarily comprises ___ risk and ___ risk.

A

Financial risk primarily comprises market risk and liquidity risk.

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8
Q

Financial risk can/cannot be diversified away.

A

Financial risk can be diversified away.

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9
Q

Most PE investments follow a ___-to-___philosophy that involves implementing a value creation plan and then selling the investments for a profit.

A

Most PE investments follow a buy-to-sell philosophy that involves implementing a value creation plan and then selling the investments for a profit.

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10
Q

During the restructuring phase, portfolio companies (are/are not) subject to the same regulations and reporting requirements as before.

A

During the restructuring phase, portfolio companies are not subject to the same regulations and reporting requirements as before.

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11
Q

Some institutional investors adopt a ___-to-___philosophy that implements a value creation plan and holds the portfolio companies after restructuring them.

A

Some institutional investors adopt a buy-to-keep philosophy that implements a value creation plan and holds the portfolio companies after restructuring them.

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12
Q

The following are arbitrage opportunities within private equity:

  1. Capture ___ ___
  2. Benefit from ___
  3. Earn ___ ___
A

The following are arbitrage opportunities within private equity:

  1. Capture niche opportunities
  2. Benefit from restructuring
  3. Earn illiquidity premium
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13
Q

There are 2 ways to value an asset:

  1. Current ___ value
  2. ___value of ___ ___ ___
A

There are 2 ways to value an asset:

  1. Current market value
  2. Present value of future cash flows
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14
Q

Risk Measurement Guidelines published by EVCA indicate that the risk of PE is best characterized by the LP’s ___ in the ___ ___.

A

Risk Measurement Guidelines published by EVCA indicate that the risk of PE is best characterized by the LP’s share in the PE fund.

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15
Q

Undrawn commitments expose LPs to ___ or ___risk.

A

Undrawn commitments expose LPs to commitment or funding risk.

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16
Q

Commitment risk can be reduced or avoided by not ___ and by holding undrawn assets in ___-___securities.

A

Commitment risk can be reduced or avoided by not overcommitting and by holding undrawn assets in risk-free securities.

17
Q

The perspective that GPs act as lenders to LPs for undrawn commitments (is/is not) widely accepted in the industry.

A

The perspective that GPs act as lenders to LPs for undrawn commitments is not widely accepted in the industry.

18
Q

The ___ ___ ___measure provides an estimate of likely losses based on historical prices under normal economic conditions.

A

The value at risk measure provides an estimate of likely losses based on historical prices under normal economic conditions.

19
Q

The key risk measure underlying VAR is ___.

A

The key risk measure underlying VAR is volatility.

20
Q

Non-financial firms use an equivalent of VaR called ___ ___ ___ ___.

A

Non-financial firms use an equivalent of VaR called cash flow at risk.

21
Q

___ ___ ___ ___is defined as the maximum deviation between actual cash flows and a pre-set level of cash flows.

A

Cash flow at risk is defined as the maximum deviation between actual cash flows and a pre-set level of cash flows.

22
Q

(CFaR/VaR) is typically computed for short periods of time, whereas (CFaR/VaR)is computed over longer periods.

A

VaR is typically computed for short periods of time, whereas CFaR is computed over longer periods.

23
Q

What is the equation for a scenario’s gain/loss?

A

[PV - Avg(PV)] / n