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.

Q1. With respect to the role of alternative assets in a portfolio, it can be best described as exposure to:

A)   special investment strategies.

B)   unique asset classes only.

C)   unique asset classes and/or special investment strategies.

Q2. Special due diligence issues such as valuation, credit analysis, and financial structure are most likely associated with investments:

A)   in managed futures.

B)   in distressed securities.

C)   made indirectly in real estate.

Q3. The structure, explanation of performance data, and style and strategy are special due diligence issues most associated with:

A)   direct real estate investing.

B)   hedge funds.

C)   distressed securities.

Q4. With respect to information efficiency and potential for diversification, in comparing alternative investments to exchange traded stocks, the markets for alternative investments are:

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

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

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

Q5. 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 lower due diligence costs.

B)   less liquidity and higher due diligence costs.

C)   more liquidity and higher due diligence costs.

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. fficeffice" />

Q1. With respect to the role of alternative assets in a portfolio, it can be best described as exposure to:

A)   special investment strategies.

B)   unique asset classes only.

C)   unique asset classes and/or special investment strategies.

Correct answer is C)

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).

Q2. Special due diligence issues such as valuation, credit analysis, and financial structure are most likely associated with investments:

A)   in managed futures.

B)   in distressed securities.

C)   made indirectly in real estate.

Correct answer is B)

Distressed securities investing requires due diligence with respect to business valuation, credit analysis, and assessing the company’s problems and financial structure.

Q3. The structure, explanation of performance data, and style and strategy are special due diligence issues most associated with:

A)   direct real estate investing.

B)   hedge funds.

C)   distressed securities.

Correct answer is B)

Due diligence in hedge funds should include an inquiry into the following list: the structure of the hedge fund, the strategy and style of the hedge fund, performance data since inception with explanations, risk measures, research, administration, and legal issues.

Q4. With respect to information efficiency and potential for diversification, in comparing alternative investments to exchange traded stocks, the markets for alternative investments are:

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

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

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

Correct answer is A)

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.

Q5. 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 lower due diligence costs.

B)   less liquidity and higher due diligence costs.

C)   more liquidity and higher due diligence costs.

Correct answer is B)

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.

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