CAIA level 1 - Topic 2 Introduction to alts Exam Questions And Answers 100% Verified

CAIA level 1 - Topic 2 Introduction to alts Exam Questions And Answers 100% Verified 4 types of alternative assets - answerAlternatives are defined by inclusion: Real Assets Hedge Funds Private Equity Structred products Real Assets - answerDirect ownership of non financial assets: - natural resources - commodities - real estate - land - infrastructure - IP (intellectual property) 5 Structures of Alternatives - answerTRICS: - trading - marked by high skill & complex strategy (hedge fund) - regulatory - marked by lower government regulation and taxation ( - institutional - private & non-retail markets - compensation - performance based fee & incentive structure - securities - unlike traditional equity & debt cash flow structure Structures of Real assets - answerInstitutional Securities Regulatory Compensation Hedge Funds - answerPrivately organized investment vehicles with little regulation - involved shorting, leverage or derivatives - includes managed future Private equity - answerEquity and debt positions which are not publicly traded - venture capital - LBOs - mezzanine debt - distressed debt Structured Products - answerInstruments created to exhibit particularly return, risk, taxation, or other attribute - include CDOs and credit derivatives Return characteristics of alternatives - answerNIDI Non-normality - do not follow bell curve (not easily modeled or predicted) Illiquidity - investment trades infrequently and/or with low volume; often nondivisible lumpy assets Diversifiers - low correlation with traditional assets; absolute return products Inefficiency - market prices do not reflect all available information; may lead to superior risk- adjusted performance Methods of analysis - answerRSVP - return computation - use cash flows due to lack of market values - statistical - incorporate the non-normality of returns - valuation - incorporate evaluation of fund managers, investment illiquidity, unique cash flows & appraised valuation - portfolio management - address non-normality and illiquidity Other factors of alternatives - answer3is Information asymmetries Incomplete market Innovation 4 goals of alternatives - answer- active management (outperform benchmark) - arbitrage - simultaneous long and short relative value positions - return enhancement - increasing average returns - return diversifier - focus on decreasing risk Absolute return standard - answerReturns are evaluated independently of market, usually against zero or risk less rate Relative return standard - answerReturns are evaluated relative to benchmark linked to markets Active risk - answerRisk that causes portfolio's return to deviate from benchmark return due to active management Lumpy assets - answerAssets that can only be bought or sold in specific quantities (large real estate holdings) Moral hazard - answerRisk that behavior of one or more parties changes after entering into a contract Operationally focused real assets - answerRequire higher level of management: real estate, land, infrastructure, intellectual property (vs commodities)