CAIA level 1 - Topic 2 Introduction to alts Study Guide with Complete Solutions

CAIA level 1 - Topic 2 Introduction to alts Study Guide with Complete Solutions 4 types of alternative assets - Answer️️ -Alternatives are defined by inclusion: Real Assets Hedge Funds Private Equity Structred products Real Assets - Answer️️ -Direct ownership of non financial assets: - natural resources - commodities - real estate - land - infrastructure - IP (intellectual property) 5 Structures of Alternatives - Answer️️ -TRICS: - trading - marked by high skill & complex strategy (hedge fund) - regulatory - marked by lower government regulation and taxation ( ©SOPHIABENNET@2024/2025 Monday, August 19, 2024 10:32 PM 2 - institutional - private & non-retail markets - compensation - performance based fee & incentive structure - securities - unlike traditional equity & debt cash flow structure Structures of Real assets - Answer️️ -Institutional Securities Regulatory Compensation Hedge Funds - Answer️️ -Privately organized investment vehicles with little regulation - involved shorting, leverage or derivatives - includes managed future Private equity - Answer️️ -Equity and debt positions which are not publicly traded - venture capital - LBOs - mezzanine debt - distressed debt Structured Products - Answer️️ -Instruments created to exhibit particularly return, risk, taxation, or other attribute ©SOPHIABENNET@2024/2025 Monday, August 19, 2024 10:32 PM 3 - include CDOs and credit derivatives Return characteristics of alternatives - Answer️️ -NIDI Non-normality - do not follow bell curve (not easily modeled or predicted) Illiquidity - investment trades infrequently and/or with low volume; often nondivisible lumpy assets Diversifiers - low correlation with traditional assets; absolute return products Inefficiency - market prices do not reflect all available information; may lead to superior risk-adjusted performance Methods of analysis - Answer️️ -RSVP - return computation - use cash flows due to lack of market values - statistical - incorporate the non-normality of returns - valuation - incorporate evaluation of fund managers, investment illiquidity, unique cash flows & appraised valuation - portfolio management - address non-normality and illiquidity Other factors of alternatives - Answer️️ -3is Information asymmetries Incomplete market Innovation ©SOPHIABENNET@2024/2025 Monday, August 19, 2024 10:32 PM 4 4 goals of alternatives - Answer️️ -- active management (outperform benchmark) - arbitrage - simultaneous long and short relative value positions - return enhancement - increasing average returns - return diversifier - focus on decreasing risk Absolute return standard - Answer️️ -Returns are evaluated independently of market, usually against zero or risk less rate Relative return standard - Answer️️ -Returns are evaluated relative to benchmark linked to markets Active risk - Answer️️ -Risk that causes portfolio's return t