Unit study guide · NISM Series XIX-A
Overview of Alternative Investments
7 questions in this unit
What this unit covers
- Which alternative investment typically provides equity funding to an unlisted business at an early stage?
- What does beta primarily describe when analysing an investment against a market benchmark?
- Which description best explains alpha in an investment performance assessment that adjusts for market exposure?
- How can an alternative asset help diversify a portfolio of listed shares?
- Why might an investor demand a higher expected return from an otherwise comparable investment that is difficult to sell?
- Which investment most directly exposes an investor to commercial property rents and the property’s eventual sale value?
- An unlisted fund updates its asset values once a year. A listed equity fund is priced daily, and its reported returns fluctuate more. What is the sound conclusion?
Key ideas
From the practice bank · 1
Which alternative investment typically provides equity funding to an unlisted business at an early stage?
Venture capital provides risk-bearing equity funding to young businesses with growth potential. Such investments can also lose substantial capital. Remember: Venture capital is associated with early-stage business funding.
Hint Recall the funding route used by young businesses that cannot yet access public equity markets. Common mistake: Confusing business equity funding with a fixed-income savings instrument.
XIX-A-001From the practice bank · 2
What does beta primarily describe when analysing an investment against a market benchmark?
Beta describes an investment’s sensitivity to movements in its market benchmark. It does not measure every source of investment risk. Remember: Beta measures market sensitivity, not the manager’s skill.
Hint Consider what happens to the investment when the wider market moves. Common mistake: Treating beta as a complete measure of all investment risks.
XIX-A-002From the practice bank · 3
Which description best explains alpha in an investment performance assessment that adjusts for market exposure?
Alpha is the return beyond what the chosen model expects for the investment’s market exposure. A positive total return can still have negative alpha. Remember: Positive returns and positive alpha are different claims.
Hint Separate the return expected for the risk taken from any additional performance. Common mistake: Calling every profitable investment an example of positive alpha.
XIX-A-003From the practice bank · 4
How can an alternative asset help diversify a portfolio of listed shares?
An alternative asset may diversify listed shares when their returns do not move perfectly together. This can reduce some portfolio risk without eliminating losses. Remember: Diversification depends on return relationships, not just different asset labels.
Hint Think about how the returns of different assets move together. Common mistake: Assuming that adding any alternative asset must make a portfolio safer.
XIX-A-004From the practice bank · 5
Why might an investor demand a higher expected return from an otherwise comparable investment that is difficult to sell?
An investor may require an illiquidity premium as compensation for limited access to money. A required or expected premium is not a guaranteed realised return. Remember: Illiquidity can justify demanding compensation, not assuming it will be earned.
Hint Consider the cost of being unable to use the money at short notice. Common mistake: Treating an illiquidity premium as a promised payment.
XIX-A-005From the practice bank · 6
Which investment most directly exposes an investor to commercial property rents and the property’s eventual sale value?
A leased commercial building directly produces exposure to rental income and property sale value. These cash flows also depend on occupancy, costs and market conditions. Remember: Identify an alternative asset through its underlying economic cash flows.
Hint Match the investment with the source of its cash flows. Common mistake: Classifying every income-paying asset as the same type of investment.
XIX-A-006From the practice bank · 7
An unlisted fund updates its asset values once a year. A listed equity fund is priced daily, and its reported returns fluctuate more. What is the sound conclusion?
Different valuation frequencies can distort a comparison based on reported volatility. Infrequent valuations may hide economic changes between valuation dates. Remember: A smoother reported value is not proof of a safer underlying investment.
Hint Check how often each investment’s reported value is allowed to change. Common mistake: Comparing reported volatility without considering valuation frequency.
XIX-A-007