Test Bank For Analysis for Financial Management, 13th Edition
Alternative Investments
1) A portfolio manager who adds commodities to a portfolio of traditional investments is most
likely seeking to:
A) both increase expected returns and decrease portfolio variance.
B) decrease portfolio variance only.
C) increase expected returns only.
2) A Hong Kong hedge fund was valued at HK$400 million at the end of last year. At year's end
the value before fees was HK$480 million. The fund charges 2 and 20. Management fees are
calculated on end- of-year values. Incentive fees are independent of management fees and
calculated using no hurdle rate. The previous year the fund’s net return was 2.5%. The
annualized return for the last two years is closest to:
A) 8.1%.
B) 13.6%.
C) 7.9%.
3) A Canadian hedge fund has a value of C$100 million at the beginning of the year. The fund
charges a 2% management fee based on assets under management at the beginning of the
year and a 20% incentive fee with a 10% hard hurdle rate. Incentive fees are calculated net of
management fees. The value at the end of the year before fees is C$112 million. The net
return to investors is closest to:
A) 10%.
B) 9%.
C) 8%.
4) For a given set of underlying real estate properties, the type of real estate index that is most
likely to have the lowest standard deviation is a(n):
A) REIT trading price index.
B) appraisal index.
C) repeat sales index.
5) An example of a relative value hedge fund strategy is:
A) convertible arbitrage.
B) merger arbitrage.
C) market neutral.
1
,Test Bank For Analysis for Financial Management, 13th Edition
Alternative Investments
6) A hedge fund that charges an incentive fee on all profits, but only if the fund's rate of return
exceeds a stated benchmark, is said to have a:
A) hard hurdle rate.
B) high water mark.
C) soft hurdle rate.
7) A hedge fund has a 2-and-20 fee structure, based on beginning-of-period assets, with a soft
hurdle rate of 5%. Incentive fees are calculated before management fees. An endowment
invests $60.0 million in the hedge fund. The value of the endowment's investment, before
fees, decreases to $56.2 million after one year and increases to $58.0 million the next year. In
the second year the endowment will be charged management and incentive fees closest to:
A) $1.10 million.
B) $1.70 million.
C) $1.15 million.
8) Relatively infrequent valuations of private equity portfolio companies most likely cause:
A) correlations of fund returns with equity returns to be biased downward.
B) standard deviations of fund returns to be biased upward.
C) average fund returns to be biased upward.
9) Adjusted funds from operations (AFFO) is best described as an estimate of a real estate
investment trust's:
A) free cash flow.
B) net operating income.
C) operating cash flow.
10) To exit an investment in a portfolio company through a trade sale, a private equity firm sells:
A) the portfolio company to one of the portfolio company’s competitors.
B) shares of a portfolio company to the public.
C) the portfolio company to another private equity firm.
11) If a commodity futures market is in backwardation:
A) the futures price is of the commodity is higher than the spot price.
B) a long futures position will have a negative roll yield.
C) the commodity has a high convenience yield.
2
,Test Bank For Analysis for Financial Management, 13th Edition
Alternative Investments
Answer Key
Test name: Test Bank for Alternative Investments
1) B
Unlike most alternative investments, expected returns on commodities are typically less than
expected returns on traditional investments. However, because their returns typically have a low
correlation with returns on traditional investments, adding commodities to a portfolio of
traditional investments can decrease portfolio variance.
2) C
Management fee is HK$480 million × 0.02 = HK$9.6 million.
Incentive fee is (HK$480 million − HK$400 million) × 0.20 = HK$16.0 million. Total fee is
HK$9.6 million + HK$16.0 million = HK$25.6 million.
Net of fee: HK$480.0 − HK$25.6 = HK$454.4 million Net return: (HK$454.4 / HK$400.00) − 1
= 13.6%
Two year annualized return is(1.136 × 1.025)1/2 − 1 = 7.9%
(Study Session 17, Module 50.2, LOS 50.d)
3) A
Management Fee: C$100.0 × 2.0% = C$2.0 million Gross value at end of year (given) = C$112.0
million
Incentive fee = [(C$112.0 − C$100.0 − C$2.0 − (C$100.0 × 10.0%)] × 20% = C$0
Total fee = C$2.0 million
Net of fee: C$112.0 − C$2.0 = C$110.0 million Net return = (C$110.0 / C$100.0) − 1 =10.0%
(Study Session 17, Module 50.2, LOS 50.d)
4) B
3
, Test Bank For Analysis for Financial Management, 13th Edition
Alternative Investments
Appraisal index returns are based on estimates of property values. Because estimating values
tends to introduce smoothing into returns data, appraisal index returns are likely to have lower
standard deviations than index returns based on repeat sales or trading prices of REIT shares.
(Study Session 17, Module 50.1, LOS 50.e)
5) A
Relative value strategies include convertible arbitrage fixed income, asset-backed fixed income,
general fixed income, volatility, and multi-strategy. Market neutral is an equity hedge strategy.
Merger arbitrage is an event driven strategy.
6) C
With a soft hurdle rate, a hedge fund charges an incentive fee on all profits, but only if the fund's
rate of return exceeds a stated benchmark. With a hard hurdle rate, a hedge fund charges an
incentive fee only on the portion of returns that exceed a stated benchmark. With a high water
mark, a fund's value must exceed its highest previous value before the fund may charge an
incentive fee.
7) B
Year 1: Management fee = $60.0 million × 2% = $1.2 million. No incentive fee is charged
because the fund decreased in value. Value after fees = $56.2 million − $1.2 million = $55.0
million.
Year 2: Management fee = $55.0 million × 2% = $1.1 million.
Year 2 return = $58.0 million / $55.0 million − 1 = 5.45% which is greater than the hurdle rate.
With a soft hurdle rate and no high water mark provision, the entire gain is eligible for incentive
fees: ($58.0 million − $55.0 million) × 20% = $0.6 million.
Total fees in Year 2 = $1.1 million + $0.6 million = $1.7 million.
8) A
Infrequent valuation results in downward bias in both standard deviations and correlations.
9) A
AFFO equals funds from operations minus recurring capital expenditures and is analogous to
free cash flow.
4
Alternative Investments
1) A portfolio manager who adds commodities to a portfolio of traditional investments is most
likely seeking to:
A) both increase expected returns and decrease portfolio variance.
B) decrease portfolio variance only.
C) increase expected returns only.
2) A Hong Kong hedge fund was valued at HK$400 million at the end of last year. At year's end
the value before fees was HK$480 million. The fund charges 2 and 20. Management fees are
calculated on end- of-year values. Incentive fees are independent of management fees and
calculated using no hurdle rate. The previous year the fund’s net return was 2.5%. The
annualized return for the last two years is closest to:
A) 8.1%.
B) 13.6%.
C) 7.9%.
3) A Canadian hedge fund has a value of C$100 million at the beginning of the year. The fund
charges a 2% management fee based on assets under management at the beginning of the
year and a 20% incentive fee with a 10% hard hurdle rate. Incentive fees are calculated net of
management fees. The value at the end of the year before fees is C$112 million. The net
return to investors is closest to:
A) 10%.
B) 9%.
C) 8%.
4) For a given set of underlying real estate properties, the type of real estate index that is most
likely to have the lowest standard deviation is a(n):
A) REIT trading price index.
B) appraisal index.
C) repeat sales index.
5) An example of a relative value hedge fund strategy is:
A) convertible arbitrage.
B) merger arbitrage.
C) market neutral.
1
,Test Bank For Analysis for Financial Management, 13th Edition
Alternative Investments
6) A hedge fund that charges an incentive fee on all profits, but only if the fund's rate of return
exceeds a stated benchmark, is said to have a:
A) hard hurdle rate.
B) high water mark.
C) soft hurdle rate.
7) A hedge fund has a 2-and-20 fee structure, based on beginning-of-period assets, with a soft
hurdle rate of 5%. Incentive fees are calculated before management fees. An endowment
invests $60.0 million in the hedge fund. The value of the endowment's investment, before
fees, decreases to $56.2 million after one year and increases to $58.0 million the next year. In
the second year the endowment will be charged management and incentive fees closest to:
A) $1.10 million.
B) $1.70 million.
C) $1.15 million.
8) Relatively infrequent valuations of private equity portfolio companies most likely cause:
A) correlations of fund returns with equity returns to be biased downward.
B) standard deviations of fund returns to be biased upward.
C) average fund returns to be biased upward.
9) Adjusted funds from operations (AFFO) is best described as an estimate of a real estate
investment trust's:
A) free cash flow.
B) net operating income.
C) operating cash flow.
10) To exit an investment in a portfolio company through a trade sale, a private equity firm sells:
A) the portfolio company to one of the portfolio company’s competitors.
B) shares of a portfolio company to the public.
C) the portfolio company to another private equity firm.
11) If a commodity futures market is in backwardation:
A) the futures price is of the commodity is higher than the spot price.
B) a long futures position will have a negative roll yield.
C) the commodity has a high convenience yield.
2
,Test Bank For Analysis for Financial Management, 13th Edition
Alternative Investments
Answer Key
Test name: Test Bank for Alternative Investments
1) B
Unlike most alternative investments, expected returns on commodities are typically less than
expected returns on traditional investments. However, because their returns typically have a low
correlation with returns on traditional investments, adding commodities to a portfolio of
traditional investments can decrease portfolio variance.
2) C
Management fee is HK$480 million × 0.02 = HK$9.6 million.
Incentive fee is (HK$480 million − HK$400 million) × 0.20 = HK$16.0 million. Total fee is
HK$9.6 million + HK$16.0 million = HK$25.6 million.
Net of fee: HK$480.0 − HK$25.6 = HK$454.4 million Net return: (HK$454.4 / HK$400.00) − 1
= 13.6%
Two year annualized return is(1.136 × 1.025)1/2 − 1 = 7.9%
(Study Session 17, Module 50.2, LOS 50.d)
3) A
Management Fee: C$100.0 × 2.0% = C$2.0 million Gross value at end of year (given) = C$112.0
million
Incentive fee = [(C$112.0 − C$100.0 − C$2.0 − (C$100.0 × 10.0%)] × 20% = C$0
Total fee = C$2.0 million
Net of fee: C$112.0 − C$2.0 = C$110.0 million Net return = (C$110.0 / C$100.0) − 1 =10.0%
(Study Session 17, Module 50.2, LOS 50.d)
4) B
3
, Test Bank For Analysis for Financial Management, 13th Edition
Alternative Investments
Appraisal index returns are based on estimates of property values. Because estimating values
tends to introduce smoothing into returns data, appraisal index returns are likely to have lower
standard deviations than index returns based on repeat sales or trading prices of REIT shares.
(Study Session 17, Module 50.1, LOS 50.e)
5) A
Relative value strategies include convertible arbitrage fixed income, asset-backed fixed income,
general fixed income, volatility, and multi-strategy. Market neutral is an equity hedge strategy.
Merger arbitrage is an event driven strategy.
6) C
With a soft hurdle rate, a hedge fund charges an incentive fee on all profits, but only if the fund's
rate of return exceeds a stated benchmark. With a hard hurdle rate, a hedge fund charges an
incentive fee only on the portion of returns that exceed a stated benchmark. With a high water
mark, a fund's value must exceed its highest previous value before the fund may charge an
incentive fee.
7) B
Year 1: Management fee = $60.0 million × 2% = $1.2 million. No incentive fee is charged
because the fund decreased in value. Value after fees = $56.2 million − $1.2 million = $55.0
million.
Year 2: Management fee = $55.0 million × 2% = $1.1 million.
Year 2 return = $58.0 million / $55.0 million − 1 = 5.45% which is greater than the hurdle rate.
With a soft hurdle rate and no high water mark provision, the entire gain is eligible for incentive
fees: ($58.0 million − $55.0 million) × 20% = $0.6 million.
Total fees in Year 2 = $1.1 million + $0.6 million = $1.7 million.
8) A
Infrequent valuation results in downward bias in both standard deviations and correlations.
9) A
AFFO equals funds from operations minus recurring capital expenditures and is analogous to
free cash flow.
4
