Reading 34: Alternative Investments Portfolio Management－ features, discuss, common

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CFA Institute Area 8-11, 13: Asset Valuation
Session 11: Alternative Investments for Portfolio Management
Reading 34: Alternative Investments Portfolio Management
LOS a: Characterize the common features of alternative investments and their markets, and discuss how they may be grouped by the role they typically play in a portfolio.

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With respect to information efficiency and potential for diversification, in comparing alternative investments to exchange traded stocks, the markets for alternative investments are:

A) more informationally efficient and provide more opportunity for diversification.

B) less informationally efficient and provide more opportunity for diversification.

C) less informationally efficient and provide less opportunity for diversification.

D) more informationally efficient and provide less opportunity for diversification.

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Answer and Explanation

Alternative investments can provide exposure to unique risks and trading strategies and thus provide good diversification to a stock and bond portfolio. The markets for alternative investments are informationally less efficient than most stock markets.

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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) unique asset classes only.

C) special investment strategies.

D) neither unique asset classes and/or special investment strategies.

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Answer and Explanation

We can categorize alternative investments into three categories corresponding to the role they play in the portfolio.

1. Exposure to asset classes that stocks and bonds cannot provide.
2. Exposure to special investment strategies such as those used by hedge funds.
3. Investments that use both special strategies and unique asset classes (e.g., funds that invest in private equity and distressed securities).

1. Exposure to asset classes that stocks and bonds cannot provide.
2. Exposure to special investment strategies such as those used by hedge funds.
3. Investments that use both special strategies and unique asset classes (e.g., funds that invest in private equity and distressed securities).

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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) less liquidity and higher due diligence costs.

B) more liquidity and higher due diligence costs.

C) more liquidity and lower due diligence costs.

D) less liquidity and lower due diligence costs.

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Answer and Explanation

The common features are: low liquidity, provide good diversification, due diligence costs are high, difficult appraisals, and the markets for alternative investments are informationally less efficient than most stock markets.