Alternative Investmentssr20r2017 Create o Review @ Guiz QBank Quiz September 20, 2017 Test ID; 54794404 Questions #1-6 of 87 Hollis, Ignitowski, Jacobs, and Kelso are four analysts working in a windowiess basement office at Madison Partners, a money manager specializing in altemative investments. They have an ongoing debate over which alternative-investment vehicle is best {As is often the case in long-running feuds, each frequently refers back to a favorite argument, Hollis: "like receiving convertible preferred stock for my venture-capital investments because my claim is usually senior to those of investors who get in later.” Ignitowski "Agricultural commodity investments are better, because they provide an inflation hedge-and have traditionally delivered better retums than bonds, Jacobs: "Private-equity ited partnerships not only limit the potential losses of initial investors, but also avoid double taxation " Kelso: "A fund of funds has less survivorship bias than an index, and it rarely fas prey to style drift." Opinions about investment classes aside, the four Madison analysts are tasked with performing due diligence on hedge funds. Hedge funds are notoriously dificultto analyze, and the analysts divide Up the task, with each focusing on a certain aspect of the due diligence. Hollis considers the hedge fund's strategy, looking at the investment style as well as the individual investments to assess whether the fund is likely to outperform not only the market, but other hedge funds, In this analysis, he also considers the fund's financial policies and market rik profile, using downside deviation rather than standard deviation, Hollis also considers the age of the fund, He prefers funds that have been around foraWvhile because experienced management gives the funds an edge. Lastly Hollis’ duties also include reviewing the funds' structure, examining who manages, audits, or regulates the fund. Ignitowski focuses on performance data. Because hedge funds are not well regulated, they have 2 lot of freedom regarding how they present performance data. Ignitowski drills down into the performance of individual holdings to assess whether the stated retums are accurate, He then recalculates cumulative performance data using weekly returns, adjusting when possible for inflows ‘and outflows. Ignitowski preféts larger funds since they have historically outperformed smaller funds. Jacabs tackles the administrative details, starting with an analysis of the fund's fee structure, He researches legal issues including pending lawsuits, regulatory actions, and lock-up provisions. Jacobs’ review also addresses personnel issues, including the amount of staff, turnover rates, and, when possible, rates of compensation, Kelso calls investors in the hedge fund for references. He asks about investors’ knowledge of the managers’ investment styles and whether they deviate from the stated style. ‘After the four analysts compile their analysis of hedge funds, their due diligence is forwarded upstairs to the investment director, Francine Finster. She does not see the analysts’ e-mail on this particular day because she is in conference with Dan Braden, a dot-com millionaire who retired at 26 with just one goal: becoming a billionaire. Braden considers his portfolio of traditional investments - 60 percent large-cap stocks, 20 percent small-cap stocks, and 20 percent bonds — well-diversified for his age and level of wealth, but his knowledge of alternative investments is not extensive, and he is consulting Madison Partners for help with that portion of his portfolio, hitps:sirwi keplaniesrn comeducationtest/print/ 2720548 estld=54798104 rTsreorent7 Create or Review a Quiz Braden has high hopes for his portfolio. He wants Finster to find him an asset class that will povice better returns than stocks. anda higher Sharpe ratio than bonds, while at the same time bringing an additional diversification benefitto the portfolio. Finster promises to look at some indexes and do some research into historical returns of various asset classes in an alternpt to find this investment, but doubts she can find anything that wil meet Braden's criteria, Finster convinces Braden to allow Madison to manage his alternative investments, She immediately purchases a security for him, ‘expecting ito lower his annual retums but increase his Sharpe ratio, Looking ahead, Finster expects Braden to be a fairly dificult customer, demanding very high returns and creative strategies. She decides that he might lke the idea of a swap. Finster prefers interest-rate and commodity swaps buthas not been involved in either type of transaction for @ number of months, To refresh her memory, she wrote down some bullet points comparing the two types of swaps: ‘+ The value of an interest-rate swap will change over time if market rates change, but will not change over time if market rates stay the same, even if prices change + The value of a commodity swap will change over time regardless of whether market rates or prices change. ‘© Both interest-rate and commodity swaps have a value of zero intially, ‘= Inthe event of a change in market rates, the value of both an interest-rate swap and a commodity swap will change. Question #1 of 87 ‘Question 1D: 602257 ‘The alternative investment Finster added to the Braden portfolio is least likely to be: YA) a venture-capital fund. X B) a direct real estate investment XC) commodity futures. Explanation ‘Venture capital funds generally behave lke private ecuity, and are designed to boost returns, not diversify Futures and real esiate are traditionally used as diversification tools and are likely to lower overall returns for a stock-heavy portfolio, As such, ‘venture-capital is the least likely to reduce retums while raising the Sharpe ratio. Question #2 of 87 ‘Question 1D: 602268 ‘Which of the Madison analysts does NOT ignore hedge-fund conventions? VA) Hollis, with his measure of fund risk. XB) Ignitowsk, with his opinions about fund size, X €) Hollis, with his opinions about fund age ‘Explanation ‘Common hedge-fund conventions include, "large funds underperform small funds," "young funds outperform old funds," and the use of simple monthly returns compounded over 12 periods. The analysts do not follow these conventions. While standard deviation is a common convention for calculating the risk of equity and debt investments, downside deviation is commonly used for hedge funds. As such, Hollis’ measure of fund risk is in keeping with hedge-fund convention, hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 202sr20r2017 Create o Review @ Cuiz Question #3 of 87 ‘Question 1D: 602259 Based on historical data, Finster can mast /ikely meet Braden's lofty goals by investing in J A) distressed securities. X B) venture capital X €) nothing, because no asset class meets those requirements. ‘Explanation ‘The HFR Distressed Securities index outperforms both stocks and bonds absolutely, with higher Sharpe ratios than either. Itis also poorly correlated with the stock market, so it would diversify a stock portfolio, Private equity has historically delivered better retums than stocks, but itis highly correlated with the stock market, and Sharpe ratios can be quite high, Diréct investments in real estate generally provide retums lower than those of stocks, though they do provide substantial diversification benefits. Question #4 of 87 ‘Question 1D: 466209 Which of Finster's notes about swaps is /east accurate? X A) Both interest-rate and commodity swaps have a value of zero initially. ¥_B) The value of an interest-rate swap will change over time if market rates change, but will not change over time if market rates stay the same, even if prices change. XC) The value of a commodity swap will change over time regardless of whether market rates or prices change. Explanation The values of both interest-rate swaps and commodity swaps will change over time regardless of movement (or lack thereof) in market rates or prices. Both types of swaps do indeed have a value of zero at inception, and a change in market rates will atfect, the value of both types of swaps. Question #5 of 87 ‘Question 1D: 602260 The Madison due di neglected? jence for hedge funds is detailed, but not comprehensive. Which traditional aspect of due diligence is vA) Analysis of the fund's research expenditures. XB) Assessment of the funds suitabilty for particular investors, X C) Consideration ofthe fund's use of leverage ‘Explanation Areview of the fund's competitors is a good idea, but itis not part of due diligence. Neither is an assessment of the fund's sultablty for particular investors. Both of those reviews should be part of the investment decision, but due diligence normally ‘means an analysis of how the fund operates, rather than its investment merits relative to outside criteria, The fund's use of leverage would fall under Holls' expertise as he considers the investment style, financial policies, and risk profile. Madison Partners appears to have this issue well in hand. However, the fund's research strategy and expenditures are key to understanding how the fund operates, and none of Madison's analysts appears to address this topic. hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 32sr20r2017 Create o Review @ Cuiz Question #6 of 87 ‘Question 1D: 602261 Which of the Madison Partners made the most accurate statement about altemative investments? X A) Hollis. XB) Ignitowski YG) Jacobs. ‘Explanation Hollis is wrong because the claims of later investors are generally senior to those of investors holding convertible preferred stock. Ignitowski is wrong because agricultural commodities have historically provided lower retums than bonds. Jags’ assessment of private-equity limited partnerships is accurate. Question #7 of 87 ‘Question 1D: 488277 ‘Special due ciligence issues such as valuation, credit analysis, and financial structure are most ikely assoviated with investments: X A) in managed futures. XB) made indirectly in real estate YC) in distressed securities. Explanation Distressed securities investing requires due diligence with respect to business valuation, credit analysis, and assessing the company’s problems and financial structure. Question #8 of 87 ‘Question 1D: 486308 For use in evaluating hedge furids, which of the following is NOT a shortcoming of the Sharpe ratio? X A) Ithas had little success in predicting winners. VB) Ituses an arbitrary reference return X €) Itisa stand-alone measure that ignores the diversification contributions of a hedge fund toan overall portolio, ‘Explanation ‘The Sharpe ratio is a very standarcized measure, and none of the inputs are arbitrary. Both remaining choices are recognized shortcomings of the Sharpe ratio, hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 a2sr20r2017 Create o Review @ Cuiz Question #9 of 87 ‘Question 1D: 466368 ‘When evaluating hedge funds, special issues that complicate the process would include the fact(s) that. A) many hedge funds are absolute return vehicles for which no benchmark exists, and they can use long/short strategies while most benchmarks are long only in nature, X B) benchmarks are absolute return in nature and do not address other goals such as the elimination of systematic risk. XC) benchmarks are designed to be both long and short in nature, but most hedge funds are long only. Explanation These are two problems in defining and creating benchmarks, One method for addressing problems in defining and creating benchmarks is the use of single and multifactor models, Thus, factor models do not pose a complication but offer @ solution, Question #10 of 87 ‘Question ID: 466311 When compared to a portfolio of publicly traded stocks, private equity is X A) correlated with stocks and has a low idiosyncratic risk component so it adds virtually no diversification. X B) uncorrelated with stocks and adds a high degree of diversification YG) correlated with stocks but adds moderate diversification because of its idiosynoratic risk ‘component. ‘Explanation Private equity retums typically move with stock market returns. Computed correlations are often positive and low, but some attribute the low correlation to the infrequently-updated or "stale" prices of the private equity retums, Each investment has a large idiosyncratic risk component, however, which can provide moderate divers Question #11 of 87 ‘Question 1D: 486287 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. X B) tax issues are a special issue to consider but suitabilty is not. X €) suitability is a special issue to consider but tax issues are not. Explanation hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 52sr20r2017 Create o Review @ Cuiz ‘Special issues that advisors for private-wealth clients should address are tax issues, determining suitability, communicating with the client, decision risk, and determining if they have a large position in a closely-held company. Question #12 of 87 ‘Question 1D: 466366, Style drift and survivorship bias are often mentioned in the analysis of hedge fund performance. Which of the following statements is most accurate? Fund of funds can serve as better indicators of aggregate hedge fund performance than hedge fund indices because they tend to have a lower level of X A) both survivorship bias and style drift. XB) style drift only Y_@) survivorship bias only Explanation ‘Afund of funds may serve as a better indicator of aggregate performance of hedge funds (.e., a bétter benchmark) because they suffer from less survivorship bias, Ifa fund of funds includes a fund that dissolves, the fund of funds includes the effect of that failure in the return of the fund of funds; however, an index may simply drop the failed fund. A fund of funds can suffer from style rif, This can produce problems in that the investor may not know what heishe is getting, Cver time, managers may tit their respective portfolios in different directions. It is not uncommon that two fund of funds who claim to be of the same style to have. returns with a very low correlation. Question #13 of 87 ‘Question 1D: 486367 ‘With respect to hedge fund investing, the net retum to an investor in a fund of funds would be lower than that earned from an individual hedge fund because of, X A) the extra layer of fees only. YB) both the extra layer of fees and the higher liquidity offered. XG) no reason; fund of funds earn returns that are equal to those of individual hedge funds. Explanation Fund of funds are usually considered good choices for individual investors because they offer diversification and usually more liquidity. One problem with fund of funds is that they usually have lower retums, This is a result from both the additional layer of fees and cash drag (resulting from a desire to have higher liquidity), Question #14 of 87 ‘Question ID: 486227 Hedge fund managers with good track records: X A) usually lower their fees to increase the assets under management. hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 802sr20r2017 Create o Review @ Cuiz X B) generally continue to have good track records, YG) often demand higher incentive fees, Explanation Managers with good track records often demand higher incentive fees. The concer for investors is whether the manager with a (g00¢ historical record can continue to perform well enough to |ustfy the higher fees, Question #15 of 87 ‘Question 1D: 649613 Civerstication is one of the major issues that must be addressed when formulating a private equity investment strategy. To be considered diversified, investors must be able to invest in § to 10 different investments. Which of the following Statements regarding private equity is most accurate? YA) Smaller portfolios can achieve the necessary diversification by investing in private equity funds. XB) Liquidity is usually not an issue with private equity due to its positive correlation with equities, X €) The typical private equity investment is usually less than 7 years, Explanation Private equily is considered illiquid with the typical commitmentbeing 7:to 10 years. Large portfolios of at least $500 milion are needed to invest in 6 to 10 different investments achieving the necessary diversification, Smaller portiolios can invest in private equity funds achieving the necessary diversification, Question #16 of 87 ‘Question 1D: 466331 Compared to common stockholders, investors who use convertible preferred stock to make venture capital investments will receive the promised dividend: X A) before common stockholders receive a dividend but not if there is a liquidation, XB) only if common stockholders receive a dividend or a disbursement through liquidation, YG) before common stockholders receive a dividend or a disbursement through liquidation. Explanation Preferred stockholders must be paid a specified amount, say twice the initial investment, before common stockholders can receive cash in the form of dividends or distributions through liquidation, Question #17 of 87 ‘Question ID: 466258 hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 7182sr20r2017 Create o Review @ Cuiz Commodities can be categorized into storable and nonstorable. Which category, i any, should an analyst recommend as a hedge against inflation? YA) Storable commodities. X B) Nonstorable commodities. X €) Both storable and nonstorable commodities Explanation Storable commodities like eneray and metals have retums that are positively correlated with inflation. The positive correlation ‘means the real return will tand to remain positive even when inflation increases, Question #18 of 87 ‘Question 10: 466379 In distressed securities investing, the type of risk that is from the human element associated with decisions determined in a court of laws called: X A) decision risk, XB) event risk YC) JHactor risk Explanation In J-factor risk, the "J factor" refers to the role that courts and judges can play in the return, and this involves an unpredictable human element. Question #19 of 87 ‘Question 1D: 486377 In distressed securities investing, event tisk is: vA) a source of both return and diversification. XB) a source of retum only. X ©) a source of diversification only. Explanation Event risk refers to the fact that the retum on a particular investment within this class typically depends on a particular event for a company, and that can provide good diversification. Question #20 of 87 ‘Question 10: 466283 In the due diligence process of selecting an active manager of alternative investments, “assessing the organization of the managers firm" means assessing the: hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 a2sr20r2017 Create o Review @ Cuiz VA) stability of the firm and staff turnover, XB) terms and structure of the investments the manager offers, X €) documents (e.g, prospectuses of the investments the manager offers) Explanation ‘Assessing the organation of the manager and his/her operations means assessing whether itis stable and well un. This would also mean measuring the staff turnover, Question #21 of 87 ‘Question 1D: 466209 When added to a portfolio of stacks and bonds, based upon historical performance, we can expect distressed securities to contribute: ¥ A) both enhanced return and diversification, XB) diversification but not enhanced retum XC) enhanced retum but not diversification ‘Explanation ‘They can provide high returns because many investors cannot hold distresséd debt securities, and few analysts cover the market, Based on comparisons of the average and Sharpe ratio, the HFR Distressed Securities Index outperformed both stocks and bonds both absolutely and on a risk-adjusted basis, The retums are often event-driven so the return is uncorrelated to the overall stock market and can provide diversification. Question #22 of 87 ‘Question 1D: 466294 With respect to managed futures and real estate, legal issues and valuation methods are special due dlligence Issues associated with: ¥ A) realestate only. X B) managed futures only X €) real estate and managed futures. Explanation Active, direct investment in real estate requires all the due diligence checkpoints. For the investment process due diligence checkpoint, valuation methods deserve special attention. Under documents, there may be special zoning and legal issues. Question #23 of 87 ‘Question 1D: 466220 Direct equity real estate investing has the following disadvantages over indirect real estate investing EXCEPT: hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 92sr20r2017 Create o Review @ Cuiz YA) less control over the invest ment's performance. XB) high commissions. X €) political risk Explanation Direct equity real estate investing has the following disadvantages: lack of divisibilly means a single investment may be a large part ofthe investor's portfolio. There are high information cost, high commissions, high operating and maintenance costs, and hands-on management requirements. There are special geographical risks like neighborhood deterioration and the political risk of changing tax codes Question #24 of 87 ‘Question ID: 486370 Which of the following statements regarding what a managed futures trading stratagy is called and how itis described is feast accurate? A) Unsystematic - the commodity trading adviser tracks specific commodity futures contracts and uses trading rules to signal when to buy and sell the contract. XB) Discretionary — the commodity trading advisor uses their own discretion to buy futures contracts they feel are over or undervalued, X €) Systematic ~ the commodity trading advisor trades according to market trends and may ‘even use a contrarian strategy which trades against the market trend. ‘Explanation Commodity trading advisor (CTA) strategies can bé described as systematic or discretionary (not unsystematic). CTAs that specialize in systematic trading strategies typically apply sets of rules to trade according to short, intermeiate, andlor long- term trends, They may also trade counter to trends in a contrarian (against the trend) strategy, Adiseretionary trading strategy is based on the discretion of the CTA, in the same way that any active manager seeks value Managed futures can also be classified according to the markets in which they trade. They apply systematic or discretionary trading strategies in financial markets, currency markets, or diversified markets, In fizancial markets, they trade in financial (Le interest rate) and currency futures, options, and forward contracts. Those that specialize in currency markets trade exclusively in curteney derivatives: A fund that trades in diversified markets trades in al the financial derivatives markets described as well as commodity derivatives, Question #25 of 87 ‘Question 1D: 406283 Compared to indirect investments in real estate, direct investments in real estate are feast fkely to have which of the following properties? X A) Lower mobility, YB) Higher transparency. hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 10082sr20r2017 Create o Review @ Cuiz X ©) Lower liquidity, Explanation Direct investments in real estate generally have low liquidity, large lot sizes, high transactions costs, low mobility, and asymmetric information in transactions (low transparency), Question #26 of 87 ‘Question 1D: 466343 Compared to direct investing in commodities, indirect investing is usually considered to be vA) more convenient, XB) less convenient X ©) justas convenient, which is very convenient, ‘Explanation This is generally true, but indirect investment via companies that deal in the commodity may provide limited exposure to the performance of the commodity, Question #27 of 87 ‘Question 1D: 466334 Which of the following most likely represents the compensation to a sponsor of a private equity fund? X A) A management fee of 10% and an incentive fee of 10%. XB) A management fee of 2% and an incentive fee of 2%, YG) A management fee of 2% and an incentive fee of 20%, ‘Explanation ‘Asa manager, the sponsor gets a management fee and incentive fee. The management fee is usually around 1.5%-2.5%, and is based upon the committed cash and not just the cash already invested. The percent may decline over time based upon the assumption that the sponsor's work declines over time, The incentive fee is the share of the profits, usually around 20%, that is paid to the manager after the fund has returned the outside investors’ capital Question #28 of 87 ‘Question 1D: 486375 In distressed securities investing, the strategy that focuses on trying to find opportunities where the prospects will improve is called: X A) amomentum strategy. The goal is to find a firm that has momentum.’ hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 wn082sr20r2017 Create o Review @ Cuiz ¥_B) long-only value investing. Its returns depend on the fact that not all investors can invest in distressed secures, X €) long-only value investing, Its retumms depend on the fact that the market for distressed securities is efficient. Explanation This is the basie principal of long-only value investing in distressed securities, Question #29 of 87 ‘Question 1D: 486378 In distressed securities investing, the fact that there can be cyclical supply and demand for these investments is associated with X A) J-factor risk, X B) arbitrage risk YG) market liquidity risk Explanation Market liquidity risk refers to the low liquidity and the fact that there can be cyclical supply and demand for these investments, Question #30 of 87 ‘Question ID: 486364 ‘Which of the following would be among the most common compensation structures for the manager of a hedge fund? X A) An assets-underemanagement fee of 1.5% and a lock-up fee of 20%. YB) An assets-under-management fee of 1.5% and an incentive fee of 20% of the dollar return over the initial investment, X ) An assets-under-management fee of 20% and an incentive fee of 1.5% of the dollar return over the initial investment. Explanation ‘The most common compensation structure of @ hedge fund consists of an assets-under-management fee, or AUM fee, of about 19%-2% and an incentive fee of 20% of "profits". The definition of profit should be spelled out.in the terms of the investment. It could be dollar return over the initial investment, for example, or the dollar return above the initial investment increased by some hurdle rate, Question #31 of 87 ‘Question 1D: 466369 When evaluating the performance of a hedge fund that uses leverage, the convention is to: hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 12182sr20r2017 Create o Review @ Cuiz X A) not attempt to evaluate the fund because the existence of leverage makes such an assessment impossible. X B) use an optimization model to determine the weights on the book and debt values. YC) treat an asset as if were fully paid to effectively “look through’ the leverage, ‘Explanation The conventions for dealing with leverage is to treat an asset as if it were fully paid to effectively "look through" the leverage. ‘When derivatives are included, the same principle of deleveraging is applied Question #32 of 87 ‘Question 1D: 466260 With respect to due diligence costs and liquidity, in comparing alternative investments to exchange traded stocks, the markets for altemative investments have VA) less liquidity and higher due diligence costs. XB) less liquicity and lower due diligence costs. X ©) more liquidity and higher due diligence costs, Explanation The common features are: low liquidity, provide good diversification, due diigence costs are high, difficult appraisals, and the markets for alternative investments are informationally less efficient than most stock markets. Question #33 of 87 ‘Question 1D: 466339 ‘An investor in private equity needs to prepare for capital calls, which’ YA) equal the funds promised at the initiation of the fund and usually occur during the first five years of the fund. X B) occurs at the beginning of the life of the fund before the commitment period. X €) is additional money requested by the sponsor as mezzanine financing after the commitment period, Explanation This is the definition of capital calls. The investors in private equity usually make commitments at the initiation of the fund. During the first five years, or g0, the sponsor gives the capital calls to the investors to get the promised funds. Question #34 of 87 ‘Question 1D: 486281 ‘Within the alternative asset class of real estate, analysts can classify investments as: hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 19002sr20r2017 Create o Review @ Cuiz X A) either startup or middle market but not as direct or indirect. YB) elther direct or indirect but not as either start-up or middle market. X €) either direct or indirect and as either start-up or middle market. Explanation Real estate investments are generally categorized as direct (ie., the purchase of land and buildings) or indirect that includes REITs and CREFs, The sub-categories of start-up and middle market apply to private equity and not real estate. Question #35 of 87 ‘Question 1D: 486282 Lee Benson, CFA, is considering purchasing stock in @ company that produces oil. With respect to asset class and subgroup, as an alternative investment, this choice would be most accurately categorized as: vA) an indirect investment in commodities. XB) a direct investment in commodities, X ) an indirect investment in real estate ‘Explanation Indirect invetment is one method used to gain exposure to commodities. Direct investment is the actual purchase of the commodities or the purchase of derivatives on commodities. Question #36 of 87 ‘Question ID: 466345 Compared to indirect investments in commodities, direct investments offer YA) more exposure to commodity returns but higher carrying costs. XB) less exposure to commodity returns and higher carrying costs, X €) less exposure to commodity returns but lower carrying costs. Explanation Often indirect investments via investing in a company producing the commodity provide lower exposure because the managers hedge the very exposure the investor seeks, Diract investments in commoditias incur costs of storage called carrying costs. Question #37 of 87 ‘Question 1D: 486328 In contrast to venture capital funds, buyout funds usually have a: YA) higher level of leverage and earlier and steadier cash flows. XB) higher level of leverage and later and more erratic cash flows. X €) lower level of leverage and earlier and steadier cash flows, hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 14032sr20r2017 Create o Review @ Cuiz ‘Explanation Buyout funds are usually investing in later-stage companies where the risks are lower. The cash flows are steadier and the investors can use more leverage. Question #38 of 87 ‘Question 1D: 466363 With respect to the operations of a hedge fund, a high water mark is designed to: X A) puta cap on the assets-under-management fee. YB) prevent a manager from being paid twice for the same gains of the fund. X C) prevent a manager from allowing the fund to become so large that it cannot be managed efficiently andlor use its selected style effectively Explanation ‘The high-water mark provision is designed to prevent payment to a manager twice for the same gains. Ifa fund goes fram $100 to $120 in value and the manager ears an incentive fee for the $20 gain, and then the fund's value goes down to $110 and back to $120, the manager will not eam a fee for the gain from $110 back to $120. $120 was a “high water mark." Question #39 of 87 ‘Question 1D: 466320, ‘The convertibitty feature in convertible preferred stock is important because it means that preferred stockholders: A) can benefit from a buyout favorable to common stockholders. X B) can block a possible buyout X €) can convert their claims to equal those of later investors in the company. Explanation Any buyout of the company that is favorable to shareholders will lead to the conversion of the preferred stock Question #40 of 87 ‘Question ID: 466326 I'@ hedge fund goal is the elimination of systematic risk, a problem for the fund in motivating the manager is that: xa) is impossible to gauge the degree to which systematic risk has been eliminated. YB) the standard incentive fee only applies to raw earnings and would not reward the elimination of systematic risk X €) the standard incentive fee only applies to assets under management and would not reward the elimination of systematic risk. hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 19102sr20r2017 Create o Review @ Cuiz Explanation There is some controversy concerning fees because a manager may have or should have other goals than simply earning a ‘gross return. For example, the manager may/should be providing limited downside risk and diversification, The basic incentive fee does not reward this service. Question #41 of 87 ‘Question 1D: 486278 ‘With respect to information efficiency and potential for diversification, in comparing alternative investments to exchange traded stocks, the markets for alternative investments are: X A) less informationally efficient and provide less opportunity for diversification. XB) more informationally efficient and provide more opportunity for diversification YG) less informationally efficient and provide more opportunity for diversification, 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 altemative investments are informationally less efficient than most stock markets. Question #42 of 87 ‘Question 1D: 466359 A hedge fund that focuses on eaming retums from mergers; spin-offs, and takeovers would be most accurately placed in which style category? VA) Merger arbitrage. XB) Hedges equity X €) Equity market neutral Explanation Merger arbitrage focuses on returns from mergers, spin-offs, takeovers, ete... For example, if company X announces it will acquire company ¥, the manager might buy shares in ¥ and short X Question #43 of 87 ‘Question ID: 486344 Direct investment in commodities has become easier forall investors because of the: X A) increased number of hedge funds in these markets, YB) the increase in the number of commodity indices, X €) increase in hedging activities of managers in firms that produce andior deal in commodities, hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 16002sr20r2017 Create o Review @ Cuiz Explanation There has been an increase in the number of indices making it easier for smaller investors to invest in commodities and take derivative positions in commo Question #44 of 87 ‘Question 1D: 466319. Compared to stocks, direct equity Investments in real estate have had. YA) lower volatility of returns. XB) higher volatility of returns. X €) about the same volatility of returns. ‘Explanation Lower volatility is the correct answer. The average return has actually been lower than those of stocks over the long-term, Question #45 of 87 ‘Question 1D: 466340 In making investments in private equity, diversification is: X A) possible by holding @ number of positions, and the size of the portfolio is not an issue. X B) not possible to any investor. YC) possible by holding a number of positions, biltusvally only fr investors with portfolios ‘over $100 milion, ‘Explanation Civerstication through number of positions can be a problem since commitments are usually large. Usually investors with portfolios well over $100 milion can invest in the necessary 5-10 investments needed for diversification Question #46 of 87 ‘Question 1D: 465481 Adding an allocation to altemative asset classes such as private equity and hedge funds has what theoretical impact on the retum and risk of an investment portfolio? Impacton Returns pact on Risk X A) Increase Increase YB) Increase Decrease X C) Decrease Decrease hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 17182sr20r2017 Create o Review @ Cuiz Explanation Each category of alternative investments, such as private equity, hedge funds, and real estate, on its ow is fairly risky, but can have significant diversification effects for an investment portfolio. In 2 portfolio context, alternative investments can significantly increase retums and lower the risk of the portfolio due to their low correlation with traditional asset classes. Question #47 of 87 ‘Question 1D: 466365 ‘Wiliam Jones, CFA, has a client who wants to invest in @ 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: XA) would be more liquid. YB) would have a lower correlation with equity markets. X C) may serve asa better indicator of aggregate performance of hedge funds, Explanation Fund of funds are usually considered good choices for individual investors because they offer diversification, usually offer more liquidity, and suffer from less survivorship bias thus they may serve as a better incicator of aggregate performance of hedge funds. One problem with fund of funds is that they are usually more correlated with equity markets than an individual fund, and this lowers their ability to diversify the overall portfolio. Question #48 of 87 ‘Question ID: 486276 ‘With respect to the role of alternative assets in a portfolio, It can be best described as exposure to: ¥ A) unique asset classes andlor special investment strategies. XB) unique asset classes only X ) special investment strategies, 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, Investments that use both special strategies and unique asset classes (e.9., funds that invest in private equity and distressed securities), Question #49 of 87 ‘Question 1D: 486305 With respect to hedge fund indices, back fill bias refers to: hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 10402sr20r2017 Create o Review @ Cuiz X A) modifying the historical series of the index by replacing the historical returns of recently dropped funds with the historical returns of new funds added to the index. VB) a hedge fund manager filing in historical values of his/her hedge func's performance when the fund has been selected to be included in an index. X €) the increased inflow of investments to a given fund in an index right after the style of the index has performed well Explanation Biases often exist in hedge fund indices because of the self-reporting of fund retums. This can apply to retums as they are eamed or when filing in gaps in the historical data, The inclination is to over report. Backfill or inclusion bias is the name of the potential bias when @ hedge fund joins an index and the manager adds historical data to complete the series, Question #50 of 87 ‘Question 1D: 486332 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 convertibie preferred stock in making an investment in venture capital? Convertible preferred stock YA) benefits in the event of a company buyout. XB) has dividends that can inerease. X €) ranks ahead of debt investors. Explanation Convertible preferred stock has a conversion feature that can be exercised ifthe stock is purchased at a premium as in a buyout. Debt ranks ahead of preferred stock and preferred dividends are normally fixed, Question #51 of 87 ‘Question ID: 466206 With respect to hedge fund indices, survivorship bies: X A) can be as high as 3% to 8% and is probably high for event-driven strategies and lower for hedged-equity strateg ¥_B) can be as high as 1.5% to 3% and is probably low for event-driven strategies and higher for hedged-ecuity strategies. XC) can be as high as 1.5% to 3% and is probably high for event-driven strategies and lower Tor hedged-ecuity strategies. ‘Explanation hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 1902sreorent7 Create or Review a Quiz ‘Survivorship bias isa big problem for these indices. Indices may drop funds with poor track records or that fall, and this will ‘overestimate retums in the overall market. Studies have shown that the bias can be as high as 1.5% to 396 per year. The degree of survivorship bias varies among the hedge-fund strategies. Its probably low for event-driven strategies and higher for hedged- equity strategies. Question #52 of 87 ‘Question ID: 406284 Assessing what a manager's competitive edge is over other managers in a specific market falls under which of the following due diligence checkpoints? Assessing the: YA) investment process. XB) service providers. X C) market opportunity offered. Explanation The due diligence checkpoint of assessing the investment process involves deciphering whata manager's competitive edge over others in the market is, along with how this manager's process identifies potential opportunities. Assessing the service providers, involves investigating the outside firms that support the manager's business. Finally, assessing the market opportunity offered includes deciding whether or not there are exploitable inefficiencies in the market for the type of investments in which the manager specializes in. Question #53 of 87 ‘Question 1D: 486357 ‘As an investment, the commodity energy is: ¥ A) storable and a hedge against inflation. XB) nonstorable but not a hedge against inflation, X ) nonstorable and a hedge against inflation Explanation Commodities that are not agricultural products tend to be storable and hedges against inflation. Energy is both storable and its return has been correlated with inflation, Question #54 of 87 ‘Question 1D: 486360 Ahedge fund that takes positions in convertible bonds or convertible preferred stack and then takes other positions in the underiying stock would be most accurately piaced in the style category X A) equity market neutral. YB) converte arbitrage. hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 2002sr20r2017 Create o Review @ Cuiz X €) distressed securities. Explanation Convertible arbitrage usually takes positions in convertible bonds or preferred stock as well as warrants, ete.... and then takes other positions in the underlying stock. Question #55 of 87 ‘Question 1D: 486361 ‘William Jones, CFA, has a client who wants to invest in @ 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: X A) the Hera Fund only. XB) either fund, VG) the Marius Fund only. Explanation Equity market neutral is usually the attempt to exploit price discrepancies through long and short positions. This strategy also has, the goal of the systematic risks canceling because of the long and short positions. Hedged equity strategies take fong and short positions in under and overvalued securtties, respectively, like equity market neutral strategies. The difference is that hedged equity strategies do not focus on balancing the posttions to eliminate systematic risks. Question #56 of 87 ‘Question ID: 466356 ‘Which of the following commodities is feast kely to have retums that are positively correlated with inflation? X A) Industrial metals. vB) Com. X €) Energy, ‘Explanation Nonstorable agricultural commodities returns have returns that are negatively correlated to inflation. Storable commodities like energy and metals have retums that are positively correlated with inflation Question #57 of 87 ‘Question ID: 466262 In the due diligence process of selecting an active manager of alternative investments, “assessing the investment process” means assessing the: hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 202sr20r2017 Create o Review @ Cuiz X A) special assets the manager offers. X B) stabil of the organization and employee tumover. YG) competitive edge the manager offers. Explanation In the due diligence checkpoints, “assessing the investment process” means assessing the competitive edge the manager offers, The special assets are associated with the "market opportunity" checkpoint. The stability of the organization and employee ‘tumover is associated with the "organization" checkpoint. Question #58 of 87 ‘Question 1D: 466302 With respect to weighting schemes for hedge fund indices, the weighting schemes: X A) are always equally weighted. YB) can be either equally weighted or based upon assets under management. XC) are always based upon assets under management ‘Explanation ‘Weighting schemes are usually either equally weighted or based upon assets under management, Question #59 of 87 ‘Question 1D: 466325 In the life of a private equity fund, capital calls represent the X A) request for more capital by the fund sponsor from the investors after the commitment period. VB) request for more capital by the fund sponsor from the investors during the commitment period X C) request for more capital by the fund sponsor from the investors at the beginning of the fund prior to the commitment period, Explanation The timeline includes the sponsor getting commitments from the investors at the start of the fund and then giving "capital calls” over the first five years (typically) called the commitment period to bring in the promised cash, Question #60 of 87 ‘Question 1D: 466261 Which of the following is least likely to be @ due diligence checkpoint in the selection process of active managers of altemative investments? hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 22102sr20r2017 Create o Review @ Cuiz YA) The geographic location of the office with respect to the geographic locations in which the manager invests. XB) The service providers lke lawyers and ancillary staff working for the manager's fim. X C) Market opportunity the manager seeks to expiot Explanation ‘The due dlligence checkpoint list does not mention the geographic location of the offices. Question #61 of 87 ‘Question 1D: 486374 In distressed securities investing, a private equity fund that seeks to partner with the company in which the fund invests would most ikely be called X A) ahigh yield fund, XB) an orphan equity fund. ¥ ¢) a vulture fund. ‘Explanation ‘A"Nulture fund" is a private equity fund that uses an “active!” approach where the fund or investor acquires positions in the company, and the investment gives some measure of control. The investor can then influence and assist the company and then ‘acquire more ownership in the process of any reorganization. BY providing services and obtaining a strategic position, the investors create their own opportunity Question #62 of 87 ‘Question ID: 466268 Ben Leesom, CFA, thinks distressed secunties are appropriate for one of his clients and would lke to include them in his client's portfolio. If liquidity is a concern for the client, which alternative investment, either private equity or a hedge fund, would be more appropriate? X A) Either one since both have approximately the same liquidity. X B) An investment with a private equity structure over a hedge fund structure VC) An investment with a hedge fund structure over a private equity structure. ‘Explanation Distressed securities can be divided by the two indicated structures, Hedge fund structured investments are usually more liquid than investments in distressed equity using the private equity structure. Question #63 of 87 ‘Question 1D: 486325 hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 22002sr20r2017 Create o Review @ Cuiz ‘Which of the following is an example of an issuer of venture capital? vA) Formative-stage companies. X B) Large, successful corporations. X ) Venture capitalists. ‘Explanation Formative-stage companies are young companies seeking capttal, so therefore they are an example of an issuer of venture capital. Venture capitalists are specialists who identify pools of capital available for investing in and find the promising private Companies to invest in, Thus, venture capitalists are suppliers of venture capital, Large companies that invest, or supply, venture capital opportunities in their own area of business expertise Is referted to as corporate venturing, Question #64 of 87 ‘Question 1D: 466276 In alternative investments, distressed debt arbitrage seeks to eam a return from: YA) elther the decline of the stock to zero or an improvement in the prospects of the firm, XB) the decline of the stock to zero only. X ) an improvement in the prospects ofthe firm only. Explanation Distressed debt arbitrage Is the purchasing of a company's distrésed debt while selling the equities short. The Investment can eam a return in two ways: 1) ifthe equity declines orgoes to zero the investor gains from the short position but may continue to «gain from the long bond position, 2) ifthe company's prospects improve, because of the seniority of bond claims, the retums to bond holders should be greater than that of equity holders. The possibilty of returns from two events provides a good market ‘opportunity Question #65 of 87 ‘Question 1D: 466322 With respect to buyers of venture capital, which group represents the first group to invest in the company after the initial entrepreneurs and their friends and family? X A) Strategic partners. X B) Venture capitalists, YG) Angel investors. Explanation Buyers of venture capital include angel investors who are usually accredited investors and the first outside investors after the: family and friends of the company founders. Venture capitalists come in later after identifying companies with potential but need hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 202sr20r2017 Create o Review @ Cuiz financial and strategic support. Further, large companies are usually in the same industry as the issuer and are also called strategic partners, Question #66 of 87 ‘Question 1D: 466310 Asan asset class, over the period 1990-2004, commodities would X A) have enhanced the return of a stock and bond portfolio largely from the performance of the energy subgroup. YB) not have enhanced the return of a stock and bond portfolio and would have done worse except for the performance of the energy subgroup, X ) not have enhanced the return of a stock and bond portfolio largely from the underperformance of the eneray subgroup. Explanation ‘The returns on commodities have generally been lower over the longer periad of 1990°2004 than stacks and bonds both absolutely and on a risk-adjusted basis, The energy subgroup of commodities has had the highest retums, and without it, the broad GSCI index return would have been much lower Question #67 of 87 ‘Question ID: 406269 With respect to adding managed futures investing to a stock and bond portfolio YA) atrend-following strategy will offer lower diversification than a contra strategy. XB) a trend-following strategy will offer diversification equal to that of a contrarian strategy, XC) a trend-following strategy will offer more diversification than a contrarian strategy. Explanation For managed futures funds, a trend-following strategy will offer lower diversification than a contrarian strategy. This should be obvious since the trends would be those of the cash markets for which the investor is tying to obtain diversification. The market for the underlying secutities will also play a role. Question #68 of 87 Question 10: 486278 The structure, explanation of performance data, and style and strategy are special due diligence issues most associated with X A) direct real estate investing. vB) hedge funds. X €) distressed securities. hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 25002sr20r2017 Create o Review @ Cuiz Explanation 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, Question #69 of 87 ‘Question 1D: 406362 In the structure of a hedge fund, which of the following is Jeast accurate conceming a lock-up period? A lock-up period: X A) establishes a minimum investment period for each investment. YB) establishes 2 cap on new investment. X €) establishes exit windows, ‘Explanation ‘Alock-up period is a common provision in hedge funds. Lock-up periods limit withdrawals by requiring a minimum investment period, e.g, 1-3 years, and designating exit windows. The rationale is to prevent sudden withdrawals that could force the manager to have to unwind positions. Question #70 of 87 ‘Question 1D: 466223, Which of the following most likely represents the timeline of a private equity fund? X 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 § years, the lfe of the fund reaching 7-10 years, an option to extend the fund 5 more years. X C) The commitment period of 7-10 years, the life of the fund reaching 12-15 years, an option to extend the fund 6 more years. ‘Explanation ‘The commitment periad usually occurs during the first five years when the sponsor gives the capital calls. The expected life of these funds is 7-10 years, and there is often an option to extend the life up to 5 more years. Question #71 of 87 ‘Question 1D: 466341 Uil Tillman, OFA, has a client who wishes to invest in private equity. The client's total portfolio is $2 milion. 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: X A) not invest the money because private equity requires a longer holding period than specified by the client. hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 26002sr20r2017 Create o Review @ Cuiz XB) invest the client's money because private equity has the desired propertias YG) not invest the money because it represents too much of the client's portfolio. Explanation Private equity has low liquidity, The allocation to this class should be 6% or less with a plan to keep the money invested for 7-10 years. Since the client only has $2 million, the $250,000 (12.5%) requested investment is too large. Question #72 of 87 ‘Question ID: 466204 Real estate has the National Council of Real Estate Investment Fiduclaries (NCREIF) Property Index as its principal benchmark. ‘Which of the following is most accurate? X A) The average return of the index has an upward bias. YB) The volatility of the index has a downward bias. X ) The volatility of the index has an upward bias. Explanation ‘Since the prices are obtained periodically, the volatiity of the index has a downward bies. Question #73 of 87 ‘Question 1D: 486338 For hedge funds, the basic incentive fee for managers may not be adequate because: X A) a manager usually earns a minimum incentive fee regardless of the performance of the fund. X B) they are usually too low, ¢.g, 2% or less, ¥ @) a hedge fund manager may have several goals other than earning a high return, e.g. lowering downside risk Explanation ‘The rationale for incentive fees is obvious: encourage the manager to eam higher profits. There s Some controversy conoeming fees because a manager may have or should have other goals than simply eaming a gross return. For example, the manager ‘maylshould be providing limited downside risk and dversificaton. The basic incentive fee does not reward ths service Question #74 of 87 ‘Question 1D: 466265, Bemice Clark, CFA, is analyzing the portfolio of a private wealth client In the process, Clark wants to address special issues that altemative investments raise for her client. The special issues would. hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 27182sr20r2017 Create o Review @ Cuiz YA) not include measuring the ownership in the client's corporate bond portfolio but ‘would include measuring the client's ownership in closely held companies. X B) include measuring the ownership in the client's corporate bond portfolio and the client's ownership in closely held companies, XC) not include measuring the ownership in the client's corporate bond portfolio and not include measuring the client's ownership in closely held companies. Explanation ‘Special issues that advisors for private-weatth clients should address are tax issues, determining suitability, communicating with the client, decision risk, and determining if they have a large position in a closely-held company. Measuring the ownership in corporate bonds is not a "special issue," Question #75 of 87 ‘Question 1D: 486203 With respect to commodities and managed futures, which have investable indices? X A) Neither commodities nor managed futures. JB) Both commodities and managed futures. X C) Commodities but not managed futures, Explanation Indices for both asset classes use trading rules and assets to which investors have access, Question #76 of 87 ‘Question 10: 466286 In the special issues that alternative investments raise for investment advisors of private wealth clients, “decision risk" is associated with: X A) assessing the investment opportunity. XB) making hiring and firing decisions and general employee turnover of the investment firm, YG) changing a strategy at the time the portfolio has incurred a large loss. ‘Explanation Decision risk is the risk of irationally changing a strategy. Question #77 of 87 ‘Question 1D: 486323 hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 2002sr20r2017 Create o Review @ Cuiz ‘With respect to the terms “formative-stage companies" and expansion-stage companies", which are considered issuers of venture capital? J A) Both formative-stage companies and expansion-stage companies. X B) Neither formative-stage companies nor expansion-stage companies. X C) Formative-stage companies only. Explanation Issuers of venture capital include formative-stage companies that are either new or young and expansion-stage companies that need funds to expand their revenues or prepare for an IPO. Question #78 of 87 ‘Question 10: 466327 With respect to venture capital (VC) funds and buyout funds, measuring retums accurately is X A) less difficult with VC funds than with buyout funds. XB) equaly difficult with VC funds as itis with buyout funds. Y_@) more dificult with VC funds than with buyout funds. Explanation ‘The difference is a natural consequence of the buyout funds purchasing entities in later stages of development Question #79 of 87 ‘Question ID: 466326 Which stage of financing generally supports further expansion of production and sales? X A) The third stag X B) The first stage. YG) The second stage, ‘Explanation ‘The second stage of financing supports further expansion of production and sales. The third stage of financing typically can support additional major expansion, First stage funding is used to begin manufacturing and sales. Question #80 of 87 ‘Question 1D: 466307 (One problem in creating a private equity index is the X A) problems with defining what constitutes a private equity investment. XB) issue of leverage and how to deal with it hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 20002sr20r2017 Create o Review @ Cuiz ¥_@) infrequent repricing of the components. Explanation The value of a private equity index depends upon price-revealing events like IPOs, mergers, the raising of new financing, etc. Thus, the re-pricing of the index occurs infrequently Question #81 of 87 ‘Question 1D: 486260, ‘Which of the following is least fikely to be included in private equity subgroups? X A) Start-up companies. XB) Private investment in public entities, YY @) Futures funds, ‘Explanation Private equity subgroups are start-up companies, middle-market private companies, and private investment in public entities. The distinguishing feature for the subgroups is the stage of development of the company to which the invested dollars flow. Question #82 of 87 ‘Question 1D: 466372 Which of the following statements regarding how managed futures are typically structured is feast accurate? X A) Commodity trading advisors are responsible for a futures contracts. ly buying and selling YB) Commodity trading advisors hire commodity pool operators to manage the pool of futures contracts, X C) Commodity pool operators can act as commodity trading advisors who actively manage 2 pool of futures contracts Explanation Managed futures programe are typically run by Commodity Pool Operators (CPOs). CPOs can themselves be commodity trading advisors (CTAS) or will hire TAs to actually manage all or part ofthe pool. In the United States, both must be registered with the U.S, Commodity Futures Trading Commission and the National Futures Association. Some CTAs may choose to work independently outside of a public or private CPO structure Question #83 of 87 ‘Question 1D: 466371 ‘A commodity pool operator (CPO) is deciding whether or not to hire a particular commodity trading advisor (CTA). The CTA has a good track record of performance and often exhibits negative correlation with equities thus enhancing overall performance in hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 3002sr20r2017 Create o Review @ Cuiz down markets, Which of the following statements regarding whether or not the CPO should hire the CTA is most accurate? The PO should: X A) not hire the CTA if their past performance is highly correlated with the pool of operators, as this indicates their volatility relative to the pool is high. XB) not hire the CTA if their beta relative to other CTAS managing the pool of futures contracts is too low, as this indicates that the CTA's past retums are low relative to the pool of operators, Y @) hite the CTA only ifits beta and correlation have been considered in determining its risk relative to the pool of operators Explanation In selecting a CTA to include in the portfolio, the manager should consider risk. For example, even though OTAS often exhibt negative correlations with equities, correlations among CTAs themselves can range anywhere from sighificantly positive (Le., close to 1,0) to only modestly positive, In addition, the beta that relates the performance of an individual CTA to a fund of CTAS can be a good indicator of future risk-adjusted performance. Just as equity beta relates the volatility (risk) of an individual equity security of portfolio to the overall equity market, the CTA beta measures the risk of the individual CTA relative to a fund of CTAs. Question #84 of 87 ‘Question 1D: 466328 In contrast to venture capital funds, buyout funds usually have: X A) more frequent losses and more upside potential, XB) less frequent losses and more upside potential YG) less frequent losses and less upside potential Explanation These differences are the natural consequence of the buyout funds purchasing entities in later stages of development or even established companies where the risks are lower Question #85 of 87 ‘Question 1D: 406324 ‘With respect to the seed and start-up point in the early stage of venture capital, which of the two represents a point where the company has already started generating revenue? X A) Notat the start-up point, but revenue has begun at the seed point. XB) Notat the seed point, but revenue has begun at the start-up point. YG) Innether the seed nor start-up point. Explanation hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 3102sreorent7 Create or Review a Quiz The stages through which private companies pass are the early-stage, later-stage, and exit stages. The early stage consists of i) seed: the small amount of money provided by the entrepreneur to get the idea off the ground, i) start-up: usualy a pre-revenue stage that brings the entrepreneur's idea to commercialization, il first stage: additional funds i the idea is sound but startup funds have run out. The later-stage occurs after revenue has started Question #86 of 87 ‘Question 1D: 466373 ‘Which of the following statements regarding the performance of managed futures is most accurate? X A) Publicly traded managed futures have performed well on both a stand-alone and portfolio basis. X B) Privately managed futures have not performed as well as publicly traded funds. VC) Managed futures have exhibited a positive correlation to equities and bonds during up, markets and a negative correlation during falling markets, Explanation ‘The primary benefit to managed futures is the significant diversification potential ((e,, improved Sharpe ratios). For example, some research has even shown that managed futures have exhibited positive correlation to equities and bonds during up markets and negative correlations during falling markets, although the performance seems to be related to specific strategies and time periods. In particular, private funds seem to add value whereas publicly taded funds have performed poorly both stand- alone and in portfolios. Question #87 of 87 ‘Question 1D: 466321 Direct equity real estate investing has all of the following advantages over indirect real estate investing EXCEPT. X A) the ability to manage geographic diversification. YB) lower information costs. X C) tax deductible expenses. Explanation Direct equity real estate investing has the following advantages: many expenses are tax deductible, the ability to use more leverage than other investments, having more control, and the ability to diversify geographically. Higher information costs are a disadvantage to direct real estate investing, hitps:sarwi keplaniesen com/educationtestiprnt/| 2720548 7estld=54798104 32182