8. Alternative Investments

Question: As opposed to stocks and bonds, commodities are most likely:

• A) physical assets Correct
• B) traded on futures exchanges
• C) characterized by lack of intrinsic value

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Question: Which of the following statements regarding the pricing of commodity futures contracts is most accurate?

• A) The arbitrage free price of a commodities futures contract is often lower than that of a financial security futures contract due to storage costs Correct
• B) Commodities that are subject to sudden and large demand shocks may exhibit backwardation in the futures market due to significant convenience yields
• C) The convenience yield for a commodity is positively correlated with the futures price

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Question: Roger Torsten is studying historical data on the commodities markets to assist with his a forecast he is producing in his role as an economic researcher. He has observed long periods in the past when the term structure of the futures market for a commodity displays a negative trend. Which of the following explanations is most likely an explanation for this observed trend?

• A) Due to an increase in the supply of the commodity, the convenience yield has dropped to nearly zero Correct
• B) Producers concerned about a potential drop in price of the commodity are taking hedging positions to lock in a sales price
• C)

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Question: As compared to a production value-weighted index, an equally weighted index would most likely have:

• A) higher weight to oil Correct
• B) lower weight to oil Your Answer
• C) equal weight to oil

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Question: Which commodity is most likely to be characterized by large economies of scale in production?

• A) Copper Correct
• B) Wheat Your Answer
• C) Cattle

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Question: Don Chancery is working on a forecast of commodity price movements for the economic research department at his investment firm. He is basing his predictions on the theory that pricing is driven solely by producers who hold (or expect to hold) commodities, and hedge their position with a short futures contract, leading to normal backwardation. Which of the following theories is Chancery most likely using?

• A) The Hedging Pressure Hypothesis
• B) The Insurance Theory Correct Your Answer
• C) The Theory of Storage

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Question: Ben Tarson, CFA is currently undertaking an analysis of the commodity markets to present to a potential client. Part of his presentation concerns the impact short hedgers have on the price of commodity futures contracts. Which of the following market participants is most likely to take a short hedge position?

• A) A hedge fund buying copper in the spot market and selling copper futures contracts
• B) Wheat farmer looking to sell wheat forward Correct Your Answer
• C) Airline looking to purchase fuel forward

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Question: Which of the following commodities has historically been least likely to be traded globally?

• A) Livestock Correct
• B) Corn Your Answer
• C) Natural gas

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Question: Suppose that corn futures contracts are in backwardation. Which of the following is least likely to be true?

• A) Spot price of corn is higher than the futures price Correct
• B) the basis for corn futures contract is negative Your Answer
• C) roll yield on the corn futures is positive

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Question: Which of the following statements regarding commodity returns is least accurate?

• A) The collateral yield on a commodity futures position is negative if the convenience yield is lower than the storage cost Correct
• B) A commodity futures market in backwardation will increase the return on an investor’s position via a positive roll yield
• C) Due to roll yield and collateral yield, a commodity futures position may have a positive yield despite a drop in the spot price

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Question: An investor establishes a long position in 800 WTI (oil) contracts at $45 per barrel. Which of the following components of investor's return will have a non-negative value?

• A) price return Correct
• B) roll return
• C) rebalancing return

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Question: Political risk is least likely to affect the price of which commodity?

• A) Industrial Metals Correct
• B) Coffee
• C)

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Question: The current spot price of a commodity is $85.20. An investor purchases a 6 month futures contract on the underlying commodity at a price of $84.80. Which of the following statements regarding the roll yield is most accurate?

• A) Roll return will only be positive if the spot price drops below $85.20 at maturity Correct
• B) If the market stays in backwardation, the roll return will be positive regardless of the movement in spot price
• C) Roll return will only be negative if the spot price drops below $84.80 at maturity

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Question: An oil refiner wants to hedge oil price risk using a swap. The swap pays the oil price above $50 per barrel in exchange for a fixed price of $1 per barrel. The notional principal is 1 million barrels. If the refiner enters the swap, the total profit to the refiner if the price of oil is $52 is closest to:

• A) –$2,000,000 Correct
• B) +$2,000,000
• C) +$1,000,000

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Question: Which of the following least accurately identifies a type of publicly traded real estate security?

• A) Investment trusts Correct
• B) Direct mortgage lending
• C) Operating companies Your Answer

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Question: Which of the following is most likely to represent a publicly traded real estate debt investment?

• A) A real estate operating company (REOC)
• B) Secured bank debt collateralized by real estate Correct
• C) A mortgage real estate investment trust (Mortgage REIT) Your Answer

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Question: Which of the following is least likely a difference between real estate investments and traditional asset classes like stocks and bonds?

• A) Real estate tends to be indivisible
• B) Real estate tends to be difficult to value Correct
• C) Real estate tends to be homogenous

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Question: Compared to transaction-based indices used to track the performance of private real estate, appraisal-based indices are most likely to exhibit an apparent:

• A) time lag Correct
• B) higher volatility
• C)

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Question: Based on projected real estate conditions and the partners' discussion given in the vignette, 3CC's top recommendation would most likely be:

• A) public debt
• B) private equity Correct
• C) public equity

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Question: If the pension fund chooses to invest in hotels over apartments, one possible reason for this is that hotels:

• A) may offer higher rates of returns because of higher operational risk
• B) are commercial properties while apartments are residential properties Correct Your Answer
• C) are not affected by cost and availability of debt capital

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Question: Which statement regarding issues with indices is least likely correct?

• A) Chekov’s statement Correct
• B) Chanwit’s statement Your Answer
• C) Clarkson’s statement

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Question: Which of the following most accurately identifies one of the disadvantages of investing in real estate through publicly traded securities? Compared to other real estate investment vehicles, publicly traded securities expose investors to:

• A) unlimited liability
• B) more-volatile returns Correct Your Answer
• C) inferior liquidity

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Question: A key difference between Funds From Operations (FFO) and Adjusted Funds From Operations (AFFO) is that AFFO excludes:

• A) non-cash rent while FFO does not
• B) depreciation while FFO does not Correct
• C)

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Question: Which of the following most accurately identifies non-core real estate property types?

• A) Office and industrial
• B) Hotel and hospitality Correct
• C) Retail and multi-family residential

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Question: Which of the following most accurately identifies one of the characteristics of a private equity investment in income-producing real estate?

• A) Sensitivity to the credit market Correct
• B) Homogeneity Your Answer
• C) Passive management

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Question: Which of the following most accurately identifies one of the advantages of investing in real estate through publicly traded securities?

• A) Publicly traded corporate structures cost less to maintain Correct
• B) Diversification by geography and property type is facilitated
• C) Structural conflicts of interest are eliminated

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Question: Retail sales growth is most likely to be a top economic factor affecting the economic value of a(n):

• A) industrial REIT Correct
• B) residential REIT Your Answer
• C) health care REIT

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Question: The net asset value approach to valuation makes sense for REITs because:

• A) NAV equals the value that public equity investors attach to a REIT
• B) there exist active private markets for real estate assets Correct Your Answer
• C) the price at which a REIT trades very closely tracks NAV

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Question: Which of the following most accurately describes an approach to REIT valuation?

• A) The discounted cash flow approach typically consists of intermediate-term cash flow projections plus a terminal value based on cash flow multiples Correct
• B) The P/AFFO approach avoids estimates and assumptions in its calculation Your Answer
• C)

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Question: Which of the following is the most likely to represent an advantage of investing in publicly traded real estate securities over direct ownership of property? Publicly traded real estate securities offer:

• A) more control over investment decisions
• B) greater liquidity Correct
• C) lower price volatility Your Answer

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Question: Which of the following is an expense normally deducted from accounting net earnings but not from FFO?

• A) Property operating expenses
• B) Depreciation expense Correct
• C) Property taxes Your Answer

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Question: If a REIT has assets with a current market value of $3,000,000, liabilities with a current market value of $2,000,000, and 100,000 shares outstanding, what is the NAVPS per share?

• A) $50.00 Correct
• B) $30.00 Your Answer
• C) $10.00

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Question: Appropriate due diligence in a private real estate investment is most likely to:

• A) mitigate unforeseen potential problems
• B) lower existing operating costs Correct
• C) review lease and rental history

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Question: Compared with REITs, real estate operating companies (REOCs) are most likely to feature higher:

• A) yields
• B) levels of income tax exemption Correct
• C) operating flexibility

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Question: Which of the following most accurately identifies a private equity investment in income- producing real estate?

• A) Investment in a real estate investment trust (REIT) Correct
• B) Direct ownership of real estate properties
• C) Private market mortgage lending by an insurance company

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Question: When calculating NAVPS, a real estate company's assets and liabilities are valued at their:

• A) book value Correct
• B) liquidation value Your Answer
• C) market value

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Question: Which of the following least accurately describes a major category of due diligence factors that should be investigated in determining the value of a property?

• A) Operating expenses Correct
• B) Structural integrity Your Answer
• C) Pipeline analysis

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Question: Compared to the Sharpe ratio, the Sortino ratio may be preferred when comparing hedge funds due to which of the following?

• A) The high volatility of hedge funds Correct
• B) The right-tail risk of hedge funds
• C) The left-tail risk of hedge funds

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Question: A process which is helpful for creating linear conditional factor models that avoid multicollinearity is:

• A) step-wise regression analysis Correct
• B) correlation residual factor analysis
• C) mean-variance collinearity analysis

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Question: Managed futures strategies are typically characterized as:

• A) a strategy with a return profile that tends to be very counter-cyclical Correct
• B) a highly liquid strategy, active across a wide range of asset classes, and able to go long or short with relative ease
• C) an diversifying strategy to consider in rising markets as they outperform equity markets in rising markets

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Question: Which of the following best represents the net short position of a short-biased hedge fund strategy?

• A) 100% Correct
• B) 0%
• C) 50%

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Question: The failure of a merger to occur is a risk of which of the following hedge fund strategies?

• A) Opportunistic
• B) Equity related Correct
• C) Event driven

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Question: Which of the following is a disadvantage of a multistrategy fund as opposed to a fund-of- funds?

• A) Volatility of returns
• B) Fee structure Correct
• C) Operational risk

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Question: Which general statement describing key differences between long/short equity (L/S) strategies and equity market neutral (EMN) is most accurate?

• A) L/S strategies typically have more concentrated portfolios than EMN strategies, use lower leverage than EMN, and target unlevered returns that are higher than EMN Correct
• B) EMN strategies rely on selecting securities with sufficient liquidity, have longer security selection time horizons, and usually have greater leverage than L/S equity strategies
• C) EMN strategies are less diversified than L/S strategies but typically use greater amounts of financial leverage to generate returns than L/S strategies

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Question: Catalysts for global macro hedge funds outperformance include:

• A) muted volatility in periods of quantitative easing and p/e multiples can expand across the globe Correct
• B) steep equity market sell-offs, interest rate changes, currency devaluations, volatility spikes and geopolitical shocks
• C) low and stable interest rates, steady trending equity global markets and tight credit spreads

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Question: Which one of the following is least likely considered to be an argument to include hedge funds in a diversified portfolio?

• A) Access to a larger investment universe Correct
• B) Greater transparency of investment management decisions and ability to pursue more aggressive strategies
• C) Flexibility to use short selling and derivative contracts and greater use of leverage

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Question: The hedge fund strategy that typically requires the longest time commitment and has the greatest variability of investment returns is:

• A) distressed securities Correct
• B) fixed income arbitrage
• C) merger and acquisition funds Your Answer

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Question: The payoff profile of merger arbitrage positions is similar to the return on:

• A) a risky bond, short a call and long a put Correct
• B) a riskless bond, short a put, and long a call
• C) a riskless bond, short a call, and short a put Your Answer

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Question: Because convertible securities are issued sporadically by smaller companies in small offering sizes with unrated debt, the value of the embedded option tends to trade at:

• A) relatively low implied volatility levels compared with realized volatility for the underlying equity
• B) a discount to the implied equity volatility of the underlying equity Correct
• C) a premium to implied volatility of the underlying equity. A hedge fund analyst working for a corporate pension fund uses a conditional linear factor risk model to identify the sources of return for the hedge fund Uno Investments (UNO). Through stepwise regression, the model identifies four independent factors: 1. Equity risk (SNP500) 2. Currency risk (USD) Your Answer

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Question: Based on the data in Exhibit 1: Conditional Linear Factor Model Coefficients for UNO and the statement from the fund documents regarding UNO's strategy (and assuming that a t-statistic with an absolute value greater than 2 is significant), which of the following statements is most accurate?

• A) The macro analysts have exhibited good market timing skill with respect to equity risk Correct
• B) UNO has been, on average, net short equity market risk during times of market crisis
• C) The macro analysts have exhibited poor market timing skill with respect to equity risk Your Answer

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Question: A manager with superior market timing skills would exhibit which of the following statistically significant coefficients in the conditional linear factor model?

• A) USD: negative, DUSD: positive, CREDIT: positive, DCREDIT: negative Correct
• B) USD: positive, DUSD: negative, CREDIT: positive, DCREDIT: negative Your Answer
• C) USD: negative, DUSD: negative, CREDIT: positive, DCREDIT: positive

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Question: Which of the following rationales is least likely to be appropriate when justifying a 20% allocation to hedge funds in a multi-asset portfolio such as a corporate pension plan?

• A) The allocation will decrease portfolio volatility
• B) The allocation will increase portfolio risk-adjusted return Correct Your Answer
• C) The allocation will increase portfolio return. Leigh Winstanton is a relative value hedge fund manager. She is currently analyzing government bond and swaps markets for pricing discrepancies, collating the data displayed as follows: 5-year Treasury Inflation-Protected Securities (TIPS) coupon rate: 1% (priced at par) 5-year Treasury bond coupon rate: 3% (priced at par) 5-year inflation swap fixed rate: 1.5% Winstanton also engages in convertible bond arbitrage trades. She collates data on a potential convertible arbitrage trade in the securities of Triste, Inc. (TST), a medium-sized manufacturer of agricultural equipment, displayed as follows: TST has in issue a 2-year 4% annual coupon convertible bond, priced at 115

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Question: To capture the pricing discrepancy between the Treasury bond market and the swaps market, Winstanton should execute which of the following trades?

• A) Buy Treasuries, Sell TIPS, pay fixed under inflation swap
• B) Sell Treasuries, sell TIPS, receive fixed under inflation swap Correct
• C) Buy Treasuries, buy TIPS, pay fixed under inflation swap Your Answer

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Question: The immediate arbitrage profit from buying the TST convertible bond and converting into shares is closest to:

• A) USD 6 per share Correct
• B) USD 4 per share Your Answer
• C) USD 10 per share

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Question: Considering the objective of the new volatility trader, which of the following volatility trading strategies would most likely be appropriate for adding to the fund?

• A) Long positions in OTC options Correct
• B) Roll down using VIX futures Your Answer
• C) Relative value volatility arbitrage using exchange-traded options

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Question: Institutional limitations on banks and insurance companies are most likely to lead to pricing inefficiencies in which type of strategy?

• A) Volatility trading
• B) Distressed securities Correct Your Answer
• C) Global macro

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Question: Including which of the following hedge fund strategies in a diversified portfolio is least likely to mitigate drawdowns?

• A) Global macro
• B) Distressed securities Correct Your Answer
• C) Equity market-neutral

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Question: Opportunistic hedge fund strategies employ:

• A) long and short positions in equity Correct
• B) an investment in distressed debt
• C) a top-down approach

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Question: A conditional factor risk model is used in analyzing hedge fund returns. The purpose of the dummy variable in that model is to distinguish between:

• A) periods of normal market activity and financial crises Correct
• B) funds in countries with high inflation and low inflation
• C) managed funds and passive funds

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Question: Two key advantage of multi-strategy hedge funds over fund-of-funds managers are:

• A) economies of scale as different hedge fund strategies share the same administrative costs, and greater left tail risk than fund-of-funds Correct
• B) the ability and knowledge to rapidly make tactical reallocation decisions to the firm’s strategic allocation based on changing market conditions, and greater visibility to assess the overall risk exposure
• C) more attractive fees for investors than fund-of-funds managers, and a greater level of diversification than fund-of-funds provide

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Question: A traditional 60% equity/40% fixed income allocation was adjusted by adding a hedge fund to the portfolio, resulting in the following allocation: 48% equity/32% fixed income/20% hedge fund. There was no reduction in the standard deviation of the portfolio after the addition of the hedge fund. The hedge fund most likely added was:

• A) a dedicated short bias fund
• B) a distressed securities fund Correct
• C) a bear market equity fund

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Question: Which of the following is least likely included in the four-factor, conditional linear model used to quantify hedge fund strategies' risk exposures?

• A) Credit risk Correct
• B) Volatility risk
• C) Interest rate risk

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Question: Hedge Fund Z follows a short volatility strategy, while Hedge Fund Y makes insurance investments. Which of the following is most accurate concerning the funds?

• A) Z has a natural hedge against market declines
• B) Z’s strategy is neither positively nor negatively correlated with the market Correct
• C)

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Question: In order to establish a beta-neutral pairs trade, relative to the number of shares bought in the long position in HOM, Shore should short sell:

• A) the same number of shares in SAR Correct
• B) double the number of shares in SAR Your Answer
• C) half the number of shares in SAR

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Question: The increase in soft-catalyst trades by the merger arbitrage team will be expected to:

• A) increase the return and decrease the risk of the team Correct
• B) decrease both the risk and return of the team Your Answer
• C) increase both the risk and return of the team

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Question: The ratio of potential losses if the deal fails versus the potential gains if the deal succeeds for the BIG/SMA merger arbitrage trade is closest to:

• A) 4 Correct
• B) 3 Your Answer
• C) 5

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Question: The key factors an insurance settlements portfolio manager must successfully analyze include:

• A) the underlying interest rate on the policy, the early termination provisions of the contract, and the government bond yield curve
• B) expected policy cash flows, ongoing premium payment obligations, and the eventual death benefit to be received Correct
• C) the probability that the insurance company will face financial pressure, the demeanor of the policy holder, and the age of the policyholder. Bobby Berg is an investment analyst at Conduit Asset Management (CAM), a manager of a large fund of hedge funds. Berg is performing research into investments relating to catastrophe reinsurance and life settlements, a relatively new sector for hedge fund investment. Berg meets with Michael Stern, a hedge fund manager who specializes in investments in the insurance sector. Stern discusses recent life settlement opportunities presented by insurance brokers and discusses their relative merits, the details of which are displayed in Exhibit 1. Exhibit 1: Selected Life Settlement Opportunities Insurance Pool Surrender Value ($m) Annual Premium (Percentage of Benefit) Life Expectancy of Pool vs. Mortality Tables Your Answer

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Question: Using the data in Exhibit 1 and assuming that all other features of Insurance Pool A, Insurance Pool B, and Insurance Pool C are equivalent, the life settlement investment opportunity with the best expected return is most likely to be:

• A) C) Pool Correct
• B) Pool
• C) Pool B

Page 15 | Status: ✅ Correct

Question: Based on the fee structure information provided, if CAM allocates equally to two managers —one of which makes a gross return of 8%, while the other manager realizes a gross return of –8%—the net return to CAM investors is closest to:

• A) 0.0% Correct
• B) -1.5% Your Answer
• C) -3.1%

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Question: How many of the three factors listed by the client of CAM would a fund-of-funds (FoF) structure be preferred to a multi-manager structure from the point of view of investors in the fund?

• A) Two Correct
• B) None Your Answer
• C) One

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Question: Long/short equity funds typically:

• A) eliminate market exposure through a net beta of zero Correct Your Answer
• B) reduce standard deviation to zero
• C) maintain a net long equity exposure of 40–60%

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Question: Distressed security investing generally:

• A) involves shorting the securities of the distressed firm Correct Your Answer
• B) produces lower returns than other event-driven strategies
• C) uses low leverage

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Question: Top down analysis is the key driver behind which of the following hedge fund strategies?

• A) Fixed income arbitrage Your Answer
• B) Merger and acquisition
• C) Global macro Correct

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Question: An advantage and a disadvantage of using fund-of-funds (FoF) for access to hedge fund are:

• A) The advantage of access to top ranked managers with smaller investment bite sizes and the disadvantage of no netting of performance fees Correct
• B) The advantage of lower overall fee structures and the disadvantage of a lack of research capability
• C) The advantage of being able to access best of breed managers in each class of hedge fund and the disadvantage of negative economies of scale for monitoring. Glen Downing, CFA, recently took a new position as chief investment officer at Deep Dive Asset Management (Deep Dive), a hedge fund-of-funds (FoF) based in the Cayman Islands. Having worked only at mutual funds in the past, Downing is new to the hedge fund world and wants to get up to speed quickly to take advantage of what he believes to be exceptional market opportunities. Downing is particularly excited about the opportunities an FoF can offer, compared to that of individual hedge funds. The first fund Downing considers for investment is Copernicus Management (Copernicus), a hedge fund that invests in many different asset classes. Copernicus's team relies on a top- down approach to screening potential investments, and the team's choice is often influenced by current market conditions. Downing will compare Copernicus to others in its peer group, but is unsure of how to classify the fund. Another potential investment under consideration is APM International Advisors' global macro fund. APM management recently made the following claims during a sales pitch to Downing:

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Question: Downing's excitement about FoF investing would least appropriately be based on a belief that:

• A) he can provide better liquidity terms to his individual investors
• B) he may be able to invest in hedge funds closed to new investors Correct
• C) his investors will have more transparency in their investments

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Question: Copernicus's investment strategy would most accurately be classified as:

• A) specialist
• B) opportunistic Correct
• C) event driven

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Question: Which claim made by APM is least accurate ?

• A) Claim 3 Correct
• B) Claim 2
• C) Claim 1

Page 20 | Status: ✅ Correct

Question: Esoteric's staff's statements regarding its volatility trading are least accurate regarding:

• A) risk reduction
• B) convexity Correct
• C) insurance-like returns

Page 20 | Status: ✅ Correct