Uppermark Chapter 3
A commodity trading advisor observes a humped futures curve. Which of the following best describes this curve?
A humped curve is in contango (upward sloping) for shorter maturity contracts and is backwardated (downward sloping) for longer maturity contracts.
Empirical evidence indicates that, over the long-term, changes in spot commodity prices are generally _______ than the riskless rate
less
The Bloomberg Commodity Index is a diversified index that relies primarily on ___________ data (i.e., __________ activity) to select the weights of its underlying futures contracts. To remain diversified, it caps sectors' weights at ____% and individual commodity weights at ____%.
liquidity, trading, 33, 15
Compared to fixed-rate notes, floating-rate notes have which of the following characteristics?
lower durations and lower price risks
Which of the following is a newer and untraditional reason for patent buyers to enter the market?
monetary exploitation
For adjustable rate mortgages loans, payments may be adjusted each year based on
an index rate plus a margin rate
Volatility of smoothed returns equation
annualized volatility/sqrt(number of data points)
CLN payout equation
Principal + (coupon rate x principal) + [(commodity value - strike)/strike) x principal]
What correlation do real commodity prices have with inflation?
Real commodity prices (i.e., prices adjusted for inflation) have no correlation with inflation.
Describe the relationship between the returns of operating firms and the prices of their underlying commodities
Returns on operating firms differ significantly from the prices of the firms' underlying commodities.
appraisal-based volatility formula
SD(ri,t)/sqrt(N)
Which of the following ways is most likely to lead to lagged values being used in the index?
Selective appraisals refer to the fact that managers have discretion over when to appraise their illiquid assets. Since appraisals can be costly, managers must be selective in the assets that they appraise. Thus, some values used in the index may be stale.
An investor in film production and distribution is trying to estimate revenues of some potential investments. She is looking at sequels of films. Which of the following most accurately reflects observations made of film sequels relative to their forefunners?
Sequels tend to generate greater revenues and have lower risk.
The smoothing of a return series can hinder which estimates?
Smoothing can reduce estimates of correlation (and volatility), which will result in overestimation of diversification benefits.
Closed-end fund premium/discount equation
(Market price/NAV)-1 (NAV based return is positive if market price < NAV)
Key advantages of appraisal-based models (2)
- They do not suffer from a small sample size bias. - All properties can be appraised frequently and by numerous experts.
In theory, the extent to which changes in natural resource prices affect the performance of operating firms that process the natural resources are driven by -
- Price elasticity of the demand of the natural resource - Price elasticity of the supply of the natural resource - Extent to which the operating firm is exposed to (or has hedged) changes in its profits
Drawbacks to investing in private equity real estate funds -
1) No direct control over the underlying portfolio of real estate properties (and thus no ability to make managerial decisions about the properties). 2) Often no liquid exit strategy. 3) Possibly unreliable reported performance (due to issues with reporting the underlying properties' values).
Drawbacks for timberland investing -
1) Timber values are tied to cyclical industries (e.g., housing) 2) Long growth cycle 3) Risk of natural disasters
Global demand for agricultural products is driven by three macro factors:
1) global population growth, 2) rising incomes (and thus changing diets) in emerging markets, and 3) increased use of biofuels
Effects of smoothing returns that can result from the appraisal process are (3)
1) lower volatility of returns than that of market returns, 2) lower correlation with other assets, and 3) lagged/delayed returns compared to market returns.
Three arguments against financial institutions investing in physical inventories -
1. Lack of systematic risk premia 2. Increasing technologies (resulting in declining commodity prices) 3. Wasted convenience yield (i.e., commodities have convenience yields that financial institutions do not benefit from)
The Bloomberg Commodity Index contains approximately how many commodities?
23
The Thomson Reuters Core Commodity CRB Index groups commodities into ____ tiers and selects the ____________ of each commodity to reflect its economic significance to global economic development. Some commodities are selected to provide liquidity and some to provide diversification for the index.
4, weightings
To qualify as a REIT, a corporation must generate at least ____% of its income from real estate assets.
75
What positions does a calendar spread involve?
A calendar spread involves long and short positions in the same commodity with different delivery dates. The strategy is a time spread.
A natural resource should be developed when which of the following values is zero?
A natural resource should be developed when the time value of its development option is zero.
Is a share of a pharmaceutical company considered unbundled intellectual property?
A share of a pharmaceutical company is not considered unbundled intellectual property (IP) since the IP of the company (e.g., its research) cannot be traded on a stand-alone basis.
Some financial analysts are suggesting that the U.S. dollar will weaken as a result of the current global environment. This will likely have which of the following effects on commodity prices?
A weaker U.S. dollar tends to increase commodity prices. The rationale for this is that many commodities world-wide are priced in U.S. dollars.
A perpetual option is:
An American option with no expiration date
Between these two styles of real estate investing, core and opportunistic, which is bond-like and which is equity-like?
Core properties are bond-like and opportunistic properties are equity-like.
expected return on a lot of land
E(r) = pE(rd)+(1-p)E(rud)
When there is an excess supply of a commodity, which of the following best describes the futures market for the commodity?
Excess supply of a commodity means that inventory levels exceed demand levels (so convenience yield is low). In this environment, the forward curve is upward sloping; i.e., the market is in contango.
Which of the following situations refers to normal backwardation? (formula)
F < E(St)
Forward commodity price equation
FT = P0e^(r+c-y)T
Midstream operations in the oil and gas sector focus on which of the following?
Midstream operations focus on storage and transportation of oil/gas.
What represents the return distribution of mortgage REITs over the past 20 years?
Mortgage REIT returns were negatively skewed and leptokurtic (i.e., fat-tailed or with excess kurtosis greater than three).
What involves the fixed-charges ratio, and what does it measure?
The fixed-charges ratio is the ratio of the net operating income divided by all fixed claims on that income; i.e., the loan payments and all other fixed costs. It is a measure of how well the income can cover these fixed-charge claims.
less, less
In a backwardated market, the futures price of a commodity is _____ than its spot (current) price. Under normal backwardation, the futures price is believed to be ______ than its expected future spot price
Which of the following best describes intellectual property?
Intellectual property is an excludable, intangible real asset. It may be bundled or unbundled.
Under normal backwardation, which of the following holds regarding the asset underlying a futures contract regarding systematic risk?
It has positive systematic risk, where the future price is lower than the expected spot price, resulting in a lower futures price
What best describes the debt service coverage ratio?
It is the ratio of a property's net operating income divided by the annual interest and principal payments on the property's mortgage. It is a measure of how well the net income can cover these debt charges
Property value =
NOI/Cap Rate
Do public REITs provide investors a significant risk premium for their underlying real estate assets?
No
return on assets formula
Operating income/total assets operating income = income - (taxes + insurance cost)
Key strategies for acquiring and monetizing patent-related intellectual property
Patent acquisition and licensing Patent enforcement and litigation Patent sale license-back Patent lending strategies Patent sales and pooling
What is the difference between the Bloomberg Commodity Index and the S&P GSCI?
The Bloomberg Commodity Index has its weightings based primarily on liquidity data, whereas the S&P GSCI is production-weighted
Which of the following likely best explains the divergence in performance observed between the NCREIF Property Index and the NAREIT Index during the global financial crisis?
The NAREIT's price volatility was due in part to a contagion effect of the public equity market.
Is the NCREIF Property Index or REIT Index more highly correlated with the stock market?
The NCREIF Property Index is based on appraised real estate valuations. In contrast, REIT stocks trade on exchanges, therefore their returns are more highly correlated with the stock market.
Is the NCREIF property index leveraged/unleveraged based on quarterly/monthly returns?
The NPI is an unleveraged index based on quarterly returns.
What does the working curve describe?
The Working curve is an upward-sloping curve that describes the relationship between a commodity's inventory level and the slope of the forward curve. The Working curve illustrates the theory of storage, which maintains that when a commodity's inventory levels are high, the forward curve is upward sloping (i.e., its slope is positive and the curve is in contango); and when a commodity's inventory levels are low, the forward curve is downward sloping (i.e., its slope is negative and the curve is in backwardation.
The cap rate is defined as the ratio of: Also, what does the cap rate measure?
The cap rate is defined as the ratio of a property's net operating income to its value. It provides a measure of expected return on the property.
An environment is described as being in normal backwardation in which of the following situations?
The expected future spot price is greater than the futures price.
A homeowner has a 30-year fixed-rate, constant payment, fully amortized mortgage. Which of the following best describes the interest and principal components of the monthly mortgage payments over the 30-year term?
The interest component decreases and the principal component increases.
What provision refers to the licensor retaining the right to use a patent/research for non-commercial use?
The reservation of rights provision refers to the licensor retaining the right to use the patent/research, generally for non-commercial use.
Value of intellectual property formula
V0 = p(CF1/r-g) p - probability of success r - rate of return g - growth rate
How do governments use regulation to address the monopolistic nature of infrastructure assets?
To account for the monopolistic nature of capital-intensive infrastructure assets, governments typically establish pricing mechanisms or regulate infrastructure prices, and restrict competition and establish statutory monopolies.
The volatility used in the value of an exchange option is driven by 3 factors:
Volatility of delivered asset Volatility of received asset Correlation between volatilities of delivered and received assets
Mortgage borrowers' ability to make unscheduled principal mortgage payments gives them a _____ option on the value of the mortgage (since they can essentially ____ the mortgage loan). It also gives them a ____ option on the mortgage rate (since they can essentially _____ the mortgage rate).
call, buy, put, sell
total cash flow formula
commitment(1+IRR)^(holding period)
Investments in which of the following assets resulted in 0% maximum drawdown over the past 20 years?
farmland
refers to granting a license for use in a particular geographic region or market.
field of use provision
REITs may have _________ price risk than __________ real estate investments, because their shares trade on the market and, thus, their prices assume some financial market volatility. This is one of the disadvantages of REITs.
greater, private
Infrastructure investments share the following characteristics with institutional bonds (3)
inflationary hedging potential, high current yield, steady income
The decision tree is solved by backward induction, which means the developer starts at the final nodes and then goes backwards through the tree, moving from node to node until the decision to accept or reject the project is made at the _______ node.
initial
cap rate formula
net operating income / property value
The notion that investments in oil operating companies are not pure plays on the return on oil is best reflected by which of the following values for the correlations between oil-firm ETF prices and U.S. equity prices?
positive
The Standard & Poor's GSCI is a ______________-weighted index and the Thomson Reuters Core Commodity CRB Index is a _____-weighted index.
production, tier (4 tiers)
IP project rate of return formula
r = p(CF1/V0)+g (where p=probability of success CF1 = cash flow V0 = current value g = cash flow increase/decrease)
Reported (stale) return (r*) formula
r*i,t = (contemporaneous true return)(true return t) + (1-contemporaneous true return)(true return i)
Which of the following types of farmland comprise the NCREIF Farmland Index?
row crop land and permanent crop land
Early-stage (or first-stage or start-up) venture capital financing is used at the stage when the ________-generation of a ______-tested viable prototype is tested by potential end users. At this stage, the company is generating revenues from the product.
second, beta
The two types of patent-backed lending strategies are:
securitization and mezzanine IP lending.
Value-added real estate investments are expected to generate returns that, compared to the NCREIF property index, are:
slightly higher
Which of the following best describes the collateral yield of a commodity futures contract?
the interest earned on Treasury bills used to collateralize the futures contracts
An acceptable LTV ratio varies depending on (3)
the property sector, geographic region, and stage of the real estate cycle
According to the US prudent person rule, before _______, the rule basically prohibited pension funds from investing in __________ funds
venture capital
Over the past two decades, which of the following return statistics of equity REITs were markedly greater than those of global equities? (3)
volatility, excessive kurtosis, and maximum drawdown