CAIA EXAM 1 CHAPTER 1 WITH 100% CORRECT ANSWERS ALREADY GRADED A+

Alternative investments Alternative investments are sometimes viewed as including any investment that is not simply a long position in traditional investments. Fixed-Income Securities A fixed income security is an investment that provides a return in the form of fixed periodic payments and the eventual return of principal at maturity. Private equity Private equity is capital that is not listed on a public exchange. Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts of public companies, resulting in the delisting of public equity. Institutional and retail investors provide the capital for private equity, and the capital can be utilized to fund new technology, make acquisitions, expand working capital, and to bolster and solidify a balance sheet. Private Debt Private debt is the debt accumulated by individuals or private businesses. Private debt can take numerous forms; a personal loan, credit card, corporate bond or business loan for instance. Traditional Investments Typically, traditional investments include publicly traded equities, fixed-income securities, and cash. For example, if a particular investment (such as private equity) is not commonly covered as equity in books on investing, then many people would view it as an alternative investment. Deferred Consumption Saving is income not spent, or deferred consumption. Investment A good definition of an investment is that it is deferred consumption. Any net outlay of cash made with the prospect of receiving future benefits might be considered an investment. So investments can range from planting a tree to buying stocks to acquiring a college education. Institutional Quality Investment is the type of investment that financial institutions such as pension funds or endowments might include in their holdings because they are expected to deliver reasonable returns at an acceptable level of risk. For example, a pension fund would consider holding the publicly traded equities of a major corporation but may be reluctant to hold collectibles such as baseball cards or stamps. Also, investments in very small and very speculative projects are typically viewed as being inappropriate for such an institution due to its responsibility to select investments that offer suitable risk levels and financial return prospects for its clients. Major Alternative Asset Catagories 38% hedge funds 30% Real Assets 29% Private Equity 3% Structured Products Furthermore, some of the investments on the list can be classified as traditional investments rather than alternative investments. For example, real estate and especially real estate investment trusts are frequently viewed as being traditional institutional-quality investments. There is both public and private. A lot more public though. REAL ASSETS Real assets are investments in which the underlying assets involve direct ownership of nonfinancial assets rather than ownership through financial assets, such as the securities of manufacturing or service enterprises. Real assets tend to represent more direct claims on consumption than do common stocks, p. 4 Finally, while some descriptions of real assets limit the category to tangible assets, we define real assets to include intangible assets, such as intellectual property (e.g., patents, copyrights, and trademarks, as well as music, film, and publishing royalties). The opposite of a real asset is a financial asset, not an intangible asset. p. 6 Financial asset is not a real asset—it is a claim on cash flows, such as a share of stock or a bond. Intangible assets, such as technology, directly facilitate production, thereby creating increased value. It can be argued that intangible assets represent a very large and rapidly increasing role in the wealth of society. p. 6