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

Question #11 of 87In 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 millio

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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.

Which of the following most likely represents the timeline of a private equity fund?

A) The commitment period of 2 years, the life of the fund reaching 5 years, an option to

extend the fund 3 more years

B) The commitment period of 7-10 years, the life of the fund reaching 12-15 years, an

option to extend the fund 5 more years

C) The commitment period of 5 years, the life of the fund reaching 7-10 years, an option to

extend the fund 5 more years

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.

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In alternative investments, distressed debt arbitrage seeks to earn a return from:

A) an improvement in the prospects of the rm only.

B) either the decline of the stock to zero or an improvement in the prospects of the rm.

C) the decline of the stock to zero only.

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).

In the due diligence process of selecting an active manager of alternative investments,

"assessing the investment process" means assessing the:

A) stability of the organization and employee turnover.

B) special assets the manager o ers.

C) competitive edge the manager o ers.

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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

Compared to common stockholders, investors who use convertible preferred stock to make

venture capital investments will receive the promised dividend:

A) only if common stockholders receive a dividend or a disbursement through 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.

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.

C) a vulture fund.

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.

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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.

A hedge fund that takes positions in convertible bonds or convertible preferred stock and then

takes other positions in the underlying stock would be most accurately placed in the style

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 distressed securities investing, the fact that there can be cyclical supply and demand for

these investments is associated with:

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A) market liquidity risk.

B) J-factor risk.

C) arbitrage risk.

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.

A hedge fund that focuses on earning returns from mergers, spin-o s, and takeovers would be

most accurately placed in which style category?

A) Equity market neutral.

B) Merger arbitrage.

C) Hedged equity.

In the structure of a hedge fund, which of the following is least accurate concerning a lock-up

period? A lock-up period:

A) establishes a cap on new investment.

B) establishes exit windows.

C) establishes a minimum investment period for each investment.

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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.

B) special investment strategies.

C) unique asset classes only.

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.

Which stage of nancing generally supports further expansion of production and sales?

A) The second stage.

B) The third stage.

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B) It is a stand-alone measure that ignores the diversi cation contributions of a hedge

fund to an overall portfolio

C) It has had little success in predicting winners.

Compared to indirect investments in commodities, direct investments o er:

A) less exposure to commodity returns but lower carrying costs.

B) more exposure to commodity returns but higher carrying costs.

C) less exposure to commodity returns and higher carrying costs.

Frank Campbell, CFA, has a client who wants to make a venture capital investment Campbell is

considering recommending convertible preferred Which of the following is most likely an

advantage of using convertible preferred stock in making an investment in venture capital?

Convertible preferred stock:

A) bene ts in the event of a company buyout.

B) has dividends that can increase.

C) ranks ahead of debt investors.

With respect to information e ciency and potential for diversi cation, in comparing alternative

investments to exchange traded stocks, the markets for alternative investments are:

A) more informationally e cient and provide more opportunity for diversi cation.

B) less informationally e cient and provide less opportunity for diversi cation.

C) less informationally e cient and provide more opportunity for diversi cation.

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William Jones, CFA, has a client who wants to invest in a hedge fund that has the strategy of

investing in equities and has among its goals the elimination of systematic risk Jones has found

two funds that he thinks are well run: the Marius Fund that uses an equity market neutral

strategy and the Hera Fund that uses a hedged equity strategy Given the client's stated

preferences, Jones should recommend:

A) the Hera Fund only.

B) either fund.

C) the Marius Fund only.

With respect to the terms "formative-stage companies" and "expansion-stage companies",

which are considered issuers of venture capital?

A) Formative-stage companies only.

B) Both formative-stage companies and expansion-stage companies.

C) Neither formative-stage companies nor expansion-stage companies.

In the life of a private equity fund, capital calls represent the:

A) request for more capital by the fund sponsor from the investors after the commitment

period

B) request for more capital by the fund sponsor from the investors during the

commitment period

C) request for more capital by the fund sponsor from the investors at the beginning of the

fund prior to the commitment period

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Jill Tillman, CFA, has a client who wishes to invest in private equity The client's total portfolio is

$2 million The client wants to invest $250,000 in private equity, wants to keep the money

invested for 7-10 years, and does not need liquidity Tillman should:

A) invest the client’s money because private equity has the desired properties.

B) not invest the money because private equity requires a longer holding period than

speci ed by the client

C) not invest the money because it represents too much of the client’s portfolio.

Bernice Clark, CFA, is analyzing the portfolio of a private wealth client In the process, Clark

wants to address special issues that alternative investments raise for her client The special

issues would:

A) not include measuring the ownership in the client’s corporate bond portfolio and not

include measuring the client’s ownership in closely held companies

B) not include measuring the ownership in the client’s corporate bond portfolio but would

include measuring the client’s ownership in closely held companies

C) include measuring the ownership in the client’s corporate bond portfolio and the client’s

ownership in closely held companies

Diversi cation is one of the major issues that must be addressed when formulating a private

equity investment strategy To be considered diversi ed, investors must be able to invest in 5

to 10 di erent investments Which of the following statements regarding private equity is most

accurate?

A) Liquidity is usually not an issue with private equity due to its positive correlation with

equities

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B) Smaller portfolios can achieve the necessary diversi cation by investing in private

equity funds

C) The typical private equity investment is usually less than 7 years.

In contrast to venture capital funds, buyout funds usually have:

A) less frequent losses and less upside potential.

B) less frequent losses and more upside potential.

C) more frequent losses and more upside potential.

As an investment, the commodity energy is:

A) nonstorable and a hedge against in ation.

B) storable and a hedge against in ation.

C) nonstorable but not a hedge against in ation.

When added to a portfolio of stocks and bonds, based upon historical performance, we can

expect distressed securities to contribute:

A) diversi cation but not enhanced return.

B) enhanced return but not diversi cation.

C) both enhanced return and diversi cation.

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With respect to adding managed futures investing to a stock and bond portfolio:

A) a trend-following strategy will o er lower diversi cation than a contrarian strategy.

B) a trend-following strategy will o er more diversi cation than a contrarian strategy.

C) a trend-following strategy will o er diversi cation equal to that of a contrarian strategy.

Commodities can be categorized into storable and nonstorable Which category, if any, should

an analyst recommend as a hedge against in ation?

A) Both storable and nonstorable commodities.

B) Storable commodities.

C) Nonstorable commodities.

In contrast to venture capital funds, buyout funds usually have a:

A) higher level of leverage and earlier and steadier cash ows.

B) lower level of leverage and earlier and steadier cash ows.

C) higher level of leverage and later and more erratic cash ows.

In the special issues that alternative investments raise for investment advisors of private wealth

clients, with respect to tax issues and suitability:

A) both are explicitly special issues to consider.

B) suitability is a special issue to consider but tax issues are not.

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C) tax issues are a special issue to consider but suitability is not.

As an asset class, over the period from 1996 to 2015, commodities:

A) enhanced the return of an equally weighted stock and bond portfolio due to

commodities’ low correlation with stocks and bonds

B) underperformed the return of an equally weighted stock and bond portfolio both on an

absolute and risk adjusted basis

C) enhanced the risk adjusted return of an equally weighted stock and bond portfolio due

to commodities’ low correlation with stocks and bond

Which of the following would be among the most common compensation structures for the

manager of a hedge fund?

A) An assets-under-management fee of 1.5% and a lock-up fee of 20%.

B) An assets-under-management fee of 1.5% and an incentive fee of 20% of the dollar

return over the initial investment

C) An assets-under-management fee of 20% and an incentive fee of 1.5% of the dollar

return over the initial investment

The structure, explanation of performance data, and style and strategy are special due

diligence issues most associated with:

A) distressed securities.

B) hedge funds.

C) direct real estate investing.

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With respect to due diligence costs and liquidity, in comparing alternative investments to

exchange traded stocks, the markets for alternative investments have:

A) more liquidity and higher due diligence costs.

B) less liquidity and lower due diligence costs.

C) less liquidity and higher due diligence costs.

With respect to the operations of a hedge fund, a high water mark is designed to:

A) prevent a manager from allowing the fund to become so large that it cannot be

managed e ciently and/or use its selected style e ectively

B) put a cap on the assets-under-management fee.

C) prevent a manager from being paid twice for the same gains of the fund.

If a hedge fund goal is the elimination of systematic risk, a problem for the fund in motivating

the manager is that:

A) the standard incentive fee only applies to assets under management and would not

reward the elimination of systematic risk

B) it is impossible to gauge the degree to which systematic risk has been eliminated.

C) the standard incentive fee only applies to raw earnings and would not reward the

elimination of systematic risk

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When evaluating the performance of a hedge fund that uses leverage, the convention is to:

A) not attempt to evaluate the fund because the existence of leverage makes such an

assessment impossible

B) treat an asset as if it were fully paid to e ectively “look through” the leverage.

C) use an optimization model to determine the weights on the book and debt values.

William Jones, CFA, has a client who wants to invest in a hedge fund Jones might recommend a

fund of funds instead of a single fund for all of the following reasons EXCEPT a fund of funds:

A) may serve as a better indicator of aggregate performance of hedge funds.

B) would be more liquid.

C) would have a lower correlation with equity markets.

In distressed securities investing, the strategy that focuses on trying to nd opportunities

where the prospects will improve is called:

A) long-only value investing Its returns depend on the fact that not all investors can invest

in distressed securities

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