Ch 16: Alternative Investments

The intrinsic value of an apartment complex with the following details is closest to: Gross potential receipts $440,027 Gross potential income $460,829 Gross income before expenses $437,909 Net operating income $227,930 Capitalization rate 11.9%

$1,915,378 Intrinsic Value = NOI ÷ capitalization rate = 227,930 ÷ 0.119 = 1,915,378

The net gain on buying a call option for $10 when the stock price is $28, the exercise price is $20, and the expiration date stock price is $40 is closest to:

$10 The option expires with an intrinsic value of $20 (the owner has the right to buy at 20 when the stock trades at 40). The owner of the option paid $10, so the net gain is $10 (20 - 10).

Dale is considering the purchase of a rental property with several units. The property rents for $12,300 a month when all units are occupied. The units are expected to be rented 80% of the year. Additional expenses associated with the property include real estate taxes of $11,800 a year, liability insurance of $4,000 a year, advertising expense of $1,200 a year, maintenance costs of $11,200 a year, depreciation of $32,700 a year, and interest expense on the property loan of $25,000 a year. If Dale's required rate of return on the property is 10%, what is the intrinsic value of the property?

$898,800 $147,600 Gross potential rental receipts ($12,300 x 12) + 0 Other income = $147,600 Gross potential income - 29,520 Vacancy losses (20%x $147,600) = $118,080 Gross income before expenses - 28,200 Operating expenses (excluding interest & depreciation) = $89,880 Net Operating Income (NOI)

A private equity firm has a wealthy individual shareholder who has recently declared personal bankruptcy. The likelihood the investor will be limited in her ability to make additional required contributions to the firm is known as:

85% Period 0, 1, 2, 3 EBITDA $6, $7.20, $8.64, $10.37 Cash Flow 0, 1, 2, 3 Buy/Sell -$26, -, -, $145.18 EBITDA -, $7.20, $8.64, $10.37 Debt -, ($5.04), ($5.04), ($5.04) Net CF -$26, $2.16, $3.60, $150.51 r= 6*[(2.16+3.06+150.51)/26]

A cash flow evaluation of income-producing real estate takes into account which of the following variables? 1. Taxes 2. Projected rental income 3. Depreciation

All of the above

The U.S. federal government imposes rules and regulations in the corn and dairy markets as a means of helping farmers in an attempt to stabilize the agricultural markets. Which of the following accurately describes the means by which this is accomplished? A)By imposing price controls. B)By acting as a buyer of last resort.

Both a and b

Which of the following best describes the means by which private equity managers are compensated? A)They are compensated through carried interest. B)If investments are held in the fund a minimum of 3 years, they will receive long-term capital gain tax treatment on their compensation.

Both a and b

The venture capitalist return on their investment is most likely realized during the:

Bridge stage

Which position produces a loss when the price of the underlying asset rises?

Buying a put option on a share of stock.

U.S. federal and state governments are most likely to impose regulatory price controls on:

Dairy products.

A private equity firm has a wealthy individual shareholder who has recently declared personal bankruptcy. The likelihood the investor will be limited in her ability to make additional required contributions to the firm is known as:

Funding risk

A watch worn by Christopher Columbus during his global sea travels will least likely:

Have a long price history.

Which of the following statements regarding hedge funds is NOT correct?

Hedge fund managers have leeway to pursue investment opportunities that is equivalent to that of mutual fund managers.

Which of the following lists of characteristics best describe alternative investments?

Illiquid, high fees and risk, low correlation with equities and bonds, high research costs, not recommended for conservative investors.

Primary commodities most likely include:

Oil extracted from wells.

A hedge fund manager believes the correlation coefficient between two large financial institutions is going to fall. Using advanced statistical techniques, the manager shorts the higher price stock and buys the lower priced stock. The least likely risk facing the manager is:

Options exchanges experience a sudden drop in volume.

The best hedge against inflation is most likely:

Owning cases of vintage wine.

The least likely reason a significant investment in an ancient European coin collection would have high research costs is because of:

Protection from inflation is uncertain.

Which of the following is the most suitable addition to the retirement income portfolio for a moderate risk tolerance, moderate net worth investor seeking diversification and current income?

Publicly traded mortgage REIT.

A hedge fund manager believes the price of oil will fall over the next three months. The position most likely to result in a profit if the manager is accurate is:

Purchase a put option on a barrel of oil.

Motives for including alternative investments in a portfolio most likely include:

Reduction in the number of publicly held stocks.

Josh Dolan collects Russian string instruments as part of his investment portfolio. Dolan owns several violins and cellos and purchases a rare Saint Petersburg grand piano made in the 1880s. His total collectible investment now exceeds $10 million. Dolan made the investment during an international auction in which he outbid ten other collectors. The least likely result of this investment for Dolan is:

Substantial liquidity issues.

The use of futures contracts for a farmer who grows a variety of fruits and grains is most likely to be limited by:

The lack of availability of fruit contracts on the exchanges.

Hedge funds are least likely known for:

Unlimited redemptions.