Private equity... Just returns? remember, 2010, saying, returns, equity

jbaldyga

I just hit a schweser prob saying its only good for returns, while i know its not as good a diverifier as commodities/RE , i remember cfai text explicitly saying it was good for both.... I even wrote it down bc it seemed diff than what i read in schweser.

Whats the deal? This was schw 2010 exam 1 pm 16.2

liangfeng

just found this, maybe this helps:

RETURN ENHANCEMENT AND DIVERSIFICATION

Real estate. High risk-adjusted performance is possible because ofthe low liquidity, large sizes, high transactions costs, and low information transparency that usually means the seller knows more than the buyer. Real estate provides great diversification potential.

Private equity is less of a diveI;sifier and more a long-term return enhancer.

Commodities offer diversification to a portfolio ofstocks and bonds. The returns on commodities are generally lower than stocks and bonds.

Hedge funds generated higher returns than stocks and bonds over the period 1990-2004 and generally provide moderate to good diversification benefits.

Managed futures provide returns similar to that ofhedge funds and can provide
diversification.

Distressed securities have generally beaten stocks and bonds but have a large negative skew and are uncorrelated with the overall stock market.

Valores

If you work in PE...

...is that diversified or return enhanced? ;-)

ohai

Schweser P28, i think it means that only for extremely large portfolio(>100mm), PE can act as a diversification tool. For most investors, PE is only a return enhancer.

jmh530

Yes, only relying on Schweser may work for L1 but after that...

Re the PE-issue: It is positively correlated to the stocks/bonds but not a 1 of course (remember something in the .60ies if I'm correct). Thus, it provides some diversification but in the gray area, where you should choose if f.e. commidities are providing a better diversification, you should choose the latter.

That's how I understand it

Maybe studies have even shown that the return enhancement has a greater impact on overall performance than the diversification part (just guessing!), but IMO CFAI does asks some complicated but not too ambigious questions.

Windjam

Contradiction to Schweser it can't be!

If anyone can pass LIII this year only studying Schweser they are a genius.

Analyze_This

it is a diversifer as well. this was form a sample exam question. it is more of a return enhancer, but still a diversifier as well.