Investments Chapter 12 Review Questions

Which of the following alternative investments is the least liquid?: A An investment in a private equity fund B An investment in a real estate investment trust C An investment in a commodity futures contract

A An investment in a private equity fund

The private equity firm receives management fees: A based on committed capital. B only if the private equity fund is profitable. C based on profits generated by the private equity fund's investments.

A based on committed capital

A private market investment vehicle holding hundreds of commercial properties that are diversified by geography, property type, and vintage year is best described as a real estate: A equity fund. B investment trust. C limited partnership.

A equity fund.

A private equity fund is most likely: A funded by investors who are limited partners. B operated by a fund manager who is a limited partner. C set up by a private equity firm who is a limited partner.

A funded by investors who are limited partners

In which type of real estate investment does the investor supply capital to a general partner who then invests the capital? A real estate equity fund A real estate investment trust A real estate limited partnership

A real estate limited partnership

Which of the following real estate segments represents the most speculative investment? A Offices B Undeveloped land C Land with utilities and building permits

B Undeveloped land

Alternative investments most likely: A are highly liquid. B exhibit low correlations with equity and debt securities. C offer greater transparency than investments in equity and debt securities.

B exhibit low correlations with equity and debt securities.

Which type of private equity strategy is most likely used to finance a start-up company? A Buyout B Growth equity C Venture capital

C Venture capital

Which of the following is most likely an advantage of alternative investments? They are lightly regulated. They help reduce portfolio risk. They always outperform debt and equity investments.

They help reduce portfolio risk

Commodity investment through the purchase of natural resource or commodity related stocks most likely offers investors the benefit of: a hedge against inflation. portfolio risk diversification. an inflation hedge and portfolio risk diversification.

a hedge against inflation.

A private equity strategy that finances established companies with a high proportion of debt that have recently underperformed is: venture capital. a leveraged buyout. a distressed investment.

a leveraged buyout.

A disadvantage of alternative investments is that they: are highly regulated. are difficult to value. tend to be highly correlated with other asset classes.

are difficult to value

Which of the following is a limitation of alternative investments? Alternative investments: are illiquid. are highly regulated. have high correlations with other asset classes.

are illiquid.

A private equity strategy that involves acquiring companies that have the potential to generate strong revenues and profits in the future but are currently underperforming can be referred to as a: buyout strategy. growth equity strategy. venture capital strategy.

buyout strategy.

A multifamily residential dwelling is best described as an example of: commercial real estate. residential real estate. a real estate limited partnership.

commercial real estate.

For private equity investments, management fees are most likely paid on the capital: invested. committed. returned from successful investments.

committed.

The purchase of British Petroleum stock to gain exposure to oil is an example of the purchase of a: commodity. commodity derivative. commodity-related company.

commodity-related company.

In the private equity realm, the J curve refers to the pattern of: carried interest received by the limited partners. cumulative net cash flows to the limited partners. drawdown in capital committed by the limited partners.

cumulative net cash flows to the limited partners

Investors may gain exposure to commodity investment through the purchase of: derivatives. investment trusts. limited partnerships.

derivatives.

A real estate investment vehicle that holds investments in commercial real estate, is structured as an open-end fund, and permits redemptions on a quarterly basis is most likely a real estate: equity fund. investment trust. limited partnership.

equity fund.

In a private equity partnership, the general partner is responsible for: contributing capital. paying management fees. finding suitable investments.

finding suitable investments.

A private equity fund is most likely: funded by investors who are limited partners. operated by a fund manager who is a limited partner. set up by a private equity firm who is a limited partner.

funded by investors who are limited partners.

A private equity strategy that involves investing in existing profitable businesses that have proven business models can be described as: secondary. growth equity. venture capital.

growth equity.

One of the most speculative segments of the commercial real estate market is: land. retail. offices.

land

A private equity investment that requires financing with a cash flow to the target company at the time of investment is most likely a: secondary. leveraged buyout. distressed investment.

leveraged buyout.

Relative to traditional investments, it would be accurate to describe alternative investments as being: easy to value and liquid. heavily regulated and illiquid. lightly regulated and not as transparent.

lightly regulated and not as transparent.

In a private equity structure, capital contributions are generally provided by: limited partners. general partners. limited and general partners.

limited partners.

In a private equity structure, the limited partner is responsible for: raising capital. management fees. selecting investments.

management fees.

Compared with real estate equity funds, real estate investment trusts are: more liquid. less liquid. equally liquid.

more liquid.

By adding alternative assets to a portfolio invested in stocks and bonds, an investor can: increase liquidity. reduce portfolio risk. make the portfolio more transparent.

reduce portfolio risk.

The advantage to investors of alternative investments that have a correlation of less than +1 with other assets in their portfolio is: reduced risk. increased return. increased liquidity.

reduced risk.

The form of real estate investment that many individuals make as part of their financial plan is most likely: raw land. residential real estate. commercial real estate.

residential real estate.

Investors who add alternative investments to their portfolios may expect portfolio returns to: rise and risk to fall fall and risk to fall rise and risk to rise

rise and risk to fall

As the level of inflation increases, the price of commodities will most likely: rise. fall. remain unchanged.

rise.

The least efficient way for an investor to gain exposure to a commodity investment is most likely through the purchase of: the commodity. commodity derivatives. commodity-related stocks.

the commodity

In the area of private equity investing, carried interest is: the interest paid on committed capital. the management fees paid by the limited partner. the share of profits retained by the general partner

the share of profits retained by the general partner

An investor who wants to redeem an investment in a real estate equity fund could do so by selling the shares: to the fund. on an exchange. to the fund's general partner.

to the fund.

The highest-risk area of private equity investment is most likely: buyout investing. growth equity investing. venture capital investing.

venture capital investing.

A form of private equity that consists of financing companies with an innovative business idea at an early stage is most likely: buyouts. growth equity. venture capital.

venture capital.