Alternative Investments - Alternative Investments Section 1
1. Alternative investment funds are most likely managed:
- Option : C
- Explanation : Most alternative investment funds are actively managed and seek to generate positive alpha returns.
- Option : C
- Explanation :
Alternative investments include assets like:
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Hedge funds
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Private equity
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Real estate
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Commodities
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Infrastructure
These differ significantly from traditional investments like stocks and bonds.
Let's break down the options:
A. Transparency – ❌
Alternative investments are less transparent compared to traditional investments.
They often have complex structures, are not as heavily regulated, and may not provide regular or detailed reporting. For example, hedge funds and private equity funds typically disclose limited information.
B. Liquidity – ❌
Alternative investments tend to be less liquid.
They often have lock-up periods (e.g., private equity or real estate), and there’s not always a ready secondary market. Selling such investments quickly can be difficult without incurring losses.
C. Expected Returns – ✅
Alternative investments are more likely to offer higher expected returns, as compensation for:
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Higher risk
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Iiquidity
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Lack of transparency
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Complexity
These higher potential returns are one of the main reasons investors allocate a portion of their portfolio to alternatives.
🔁 Summary:
Compared to traditional investments, alternative investments tend to offer higher expected returns, but at the cost of lower liquidity and transparency.
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- Option : B
- Explanation : Relative to traditional investments, alternative investments are characterized by low correlation with traditional investments, low level of regulation, and unique legal and tax considerations.
4. Which of the following factors is most likely to be a characteristic of alternative investments?
- Option : A
- Explanation : General characteristics of alternative investments include: illiquidity of underlying investments, narrow manager specialization, low correlation with traditional investments, low level of regulation and less transparency, limited and potentially problematic historical risk and return data, unique legal and tax considerations.
5. Alternative investments are least likely to be characterized by higher:
- Option : C
- Explanation :
Alternative investments (such as hedge funds, private equity, real estate, commodities, etc.) are least likely to be characterized by high transparency. Here's a breakdown:
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A. Fees – Alternative investments typically have higher fees than traditional investments. For example, hedge funds often follow a "2 and 20" fee structure (2% management fee and 20% performance fee).
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B. Illiquidity – These investments are often less liquid, meaning it can be harder to sell them quickly without affecting the price.
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C. Transparency – Alternative investments generally have lower transparency compared to traditional investments like stocks or bonds. They are not as heavily regulated and do not disclose information as frequently or in as much detail.
Thus, they are least likely to be characterized by higher transparency.
✅ Correct Answer: C. transparency
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