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Alternative Investments - Answers

The document is a sample exam for CFA Level I that contains 7 multiple choice questions about hedge funds, real estate indexes, venture capital, and commodities. The questions assess understanding of concepts like survivorship bias in hedge fund indexes, fee structures, risk measures, sample selection bias, mezzanine financing, hedge fund strategies, and gaining exposure to commodity prices. The explanations provided for each question reinforce the relevant learning outcome being tested.

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Krishna Goel
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214 views3 pages

Alternative Investments - Answers

The document is a sample exam for CFA Level I that contains 7 multiple choice questions about hedge funds, real estate indexes, venture capital, and commodities. The questions assess understanding of concepts like survivorship bias in hedge fund indexes, fee structures, risk measures, sample selection bias, mezzanine financing, hedge fund strategies, and gaining exposure to commodity prices. The explanations provided for each question reinforce the relevant learning outcome being tested.

Uploaded by

Krishna Goel
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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CFA Level I

Question #1 of 7 Question ID: 1210992

Survivorship bias in reported hedge fund index returns will most likely result in index:

A) returns and risk that are biased upward.


B) returns and risk that are biased downward.

C) risk that is biased downward and returns that are biased upward.

Explanation

Surviving firms are more likely to have had good past returns and have taken on less risk than the average fund, leading to
upward bias in index returns and downward bias in index risk measures. (Study Session 17, Module 50.2, LOS 50.e)

Question #2 of 7 Question ID: 1210993

A hedge fund with a 2 and 20 fee structure has a hard hurdle rate of 5%. If the incentive fee and management fee are calculated
independently and the management fee is based on beginning-of-period asset values, an investor's net return over a period
during which the gross value of the fund has increased 22% is closest to:

A) 16.4%.
B) 16.6%.
C) 17.0%.

Explanation

The management fee is 2% of the beginning asset value, which reduces an investor's gross return by 2% to 22 − 2 = 20%. The
incentive fee is 20% of the excess gross return over the hurdle rate, or 0.20(0.22 – 0.05) = 3.4%. The investor return net of fees
is 22% − 2% − 3.4% = 16.6%. (Study Session 17, Module 50.2, LOS 50.d)

Question #3 of 7 Question ID: 1210994

The least appropriate measure of risk for alternative investments is:

A) value at risk (VaR).

B) the Sortino ratio.


C) variance of returns.
Explanation

Because returns distributions of alternative investments are often leptokurtic and negatively skewed, variance is not an
appropriate risk measure. Value at risk (VaR) and the Sortino ratio based on downside deviations from the mean are measures
of downside risk that are more appropriate for alternative investments. (Study Session 17, Module 50.2, LOS 50.f)

Question #4 of 7 Question ID: 1210990

The type of real estate index that most likely exhibits sample selection bias is:

A) REIT index.
B) appraisal index.
C) repeat sales index.

Explanation

A repeat sales index includes prices of properties that have recently sold. Because these properties may not be representative of
overall property values (may be biased toward properties that have declined or increased the most in value of the period), there
is the risk of sample selection bias. An appraisal index or a REIT index is generally constructed for a sample of representative
properties or REIT property pools. (Study Session 17, Module 50.1, LOS 50.e)

Question #5 of 7 Question ID: 1210991

With respect to mezzanine-stage financing in venture capital investing and mezzanine financing of a leveraged buyout:

A) mezzanine-stage financing refers to a type of security but mezzanine financing does


not.
B) mezzanine financing refers to a type of security but mezzanine-stage financing
does not.

C) both terms refer to financing by issuance of securities that have both debt and equity
characteristics.

Explanation

Mezzanine financing in an LBO refers to the issue of securities that have both debt and equity features so that they are on the
balance sheet between debt and equity. Mezzanine-stage financing refers to financing of different types that is employed during
the period just prior to an IPO of a firm funded by venture capital. (Study Session 17, Module 50.1, LOS 50.b)

Question #6 of 7 Question ID: 1210995

A hedge fund that engages primarily in distressed debt investing and merger arbitrage is best described as using:

A) a macro strategy.
B) an event-driven strategy.
C) a relative value strategy.

Explanation

Event-driven strategies attempt to capitalize on unique events or opportunities such as distressed debt or mergers and
acquisitions. Relative value strategies involve taking long and short positions in related securities to exploit pricing inefficiencies.
Macro strategy funds make directional trades on markets, currencies, interest rates, or other factors. (Study Session 17, Module
50.2, LOS 50.b)

Question #7 of 7 Question ID: 1210996

The type of investment most often used to gain exposure to commodity prices is a portfolio of:

A) derivative securities.

B) physical commodities.

C) commodity producing companies.

Explanation

The most commonly used instruments to get exposure to commodity prices are commodity derivative securities, such as futures
contracts. (Study Session 17, Module 50.2, LOS 50.b)

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