Review Questions Ch1

REVIEW QUESTIONS & ANSWERS - Chapter 1 Define investment? An investment is that it is deferred consumption. Any net outlay of cash made with the prospect of receiving future benefits might be considered an investment. Define alternative investment? Alternative investments are sometimes viewed as including any investment that is not simply a long position in traditional investments. Define traditional investment? Traditional investments include publicly traded equities, fixed-income securities, and cash. 2. List four major types of real assets other than land and other types of real estate? • Natural resources, commodities, infrastructure and intellectual property 3. List the three major types of alternative investments other than real assets in the CAIA curriculum? • Hedge Funds, Private Equity, Structured Products 4. Name the assets that are often characterized as traditional by some and as alternatives by others for each of the following categories: hedge funds, private equity and real assets? • Hedge Funds - liquid alternative mutual funds • Private Equity - closed-end funds with illiquid holdings • Real Assets - public real estate and public equities of corporations with performance dominated by stable positions in real assets 5. Approximately when did average-quality corporate bonds and international equities become commonly viewed as institutional-quality investments in the United States? • Between 1950 to 1980 6. Name the four return characteristics that differentiate traditional and alternative investments? • Diversification, Illiquidity, Inefficiency, Nonnormality 7. Name four major methods of analysis that distinguish the analysis of alternative investments from the analysis of traditional investments?
• Return Computation Methods, Statistical Methods, Valuation Methods, Portfolio Management Methods 8. Describe an incomplete market? • An incomplete market refers to the lack of investment opportunities that causes market participants to be unable to implement an investment strategy that satisfies their exact preferences such as risk preferences. 9. Define active management? • Active management refers to efforts of buying and selling securities in pursuit of superior combinations of risk and return 10. What distinguishes use of the term pure arbitrage from the more general usage of the term arbitrage? • Pure arbitrage is risk-free, while arbitrage, as a more general term, is not risk-free. Pure arbitrage is an attempt to earn risk-free profits through the simultaneous purchase and sale of identical positions trading at different prices in different markets. Whereas, arbitrage is used to represent efforts to earn superior returns even when risk is present because the long and short positions are not in identical assets or are not held over the same time period
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