Activity 2 Assignment

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William Rainey Harper College *

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Finance

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May 22, 2024

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A. After reading CAIA chapter 1, please answer the following questions (11 points) Please use your own wording to answer the questions. 1) Define the term "investment" and give two examples. Investment is the act of allocating resources with the expectation of generating future returns. Examples include purchasing stocks for potential capital gains and investing in bonds for fixed interest payments. 2) List four major types of real assets other than land and other types of real estate and give an example of each type. Four major types of real assets, excluding land and other real estate, are: a) Natural resources (e.g., oil fields) b) Infrastructure (e.g., toll roads) c) Commodities (e.g., gold) d) Intellectual property (e.g., patents) operationally focused 3) List the 3 major types of alternative investments other than real assets in the CAIA curriculum. The three major types of alternative investments, apart from real assets, are: a) Hedge funds b) Private equity c) Structured Products 4) Name and define the five structures that differentiate traditional and alternative investments. The five structures that differentiate traditional and alternative investments are: a) Legal and regulatory structure b) Securities structure c) Trading structure d) Compensation structure e) Institution structure Investment horizon, Return characteristics, Risk characteristics, Market structure 5) Which of the five structures that differentiate traditional and alternative investments relates to the taxation of an instrument? The structure related to the taxation of an instrument is the "regulatory structure."

6) Name and define the four return characteristics that differentiate traditional and alternative investments. The four return characteristics that differentiate traditional and alternative investments are: a) Diversification means spreading your investments to reduce risk by choosing things that don't all move in the same way. b) Illiquidity is when you can't quickly buy or sell something because not many people are trading it. c) Inefficiency is when the market doesn't behave as expected, creating opportunities for investors to take advantage of the differences. d) Non-Normality is when investment returns don't follow the typical pattern, making them harder to predict using standard methods. 7) Name and define the four major methods of analysis that distinguish alternative investments from traditional investments. The four major methods of analysis distinguishing alternative investments are: a) Return Computation Methods: Figuring out how much money you can make from an investment based on how it's set up. b) Statistical Methods: Using math to understand how an investment's profits vary, mainly by looking at the average and how much they might change. c) Valuation Methods:Deciding how much an investment is worth by considering the overall value of the economy, including pricing for regular investments and finding potentially mispriced ones. d) Portfolio Management Method: Applying smart strategies to handle issues like unusual behavior in the market. This method also focuses on making investments that have the potential to bring in really good profits. 8) Describe an "incomplete market".

An "incomplete market" happens when you can't trade or invest in certain things because they're not available. 9) What does it mean if a market participant has asymmetrical information? A market participant having asymmetrical information means they possess unequal knowledge compared to others in the market, potentially giving them an advantage. So basically they know more giving them an advantage. 10) What is the risk caused by active management and describe the risk. The risk caused by active management is “active risk” or "managerial risk," which arises from the decisions and actions of fund managers and their impact on investment performance. 11) Are the terms "pure arbitrage" and "arbitrage" the same or different? If different, please explain their differences. "Pure arbitrage" and "arbitrage" are different. Pure arbitrage involves risk-free transactions with guaranteed profits, while arbitrage may involve some risk and uncertainties in practice such as focusing on earning returns even if there is still risk. B. Answer the following questions regarding the PGIM video (5 points) 1)What is the wrong question to ask about alternative investments? The wrong question to ask about alternative investments is “what has been the performance or fees of different strategy 2)What is the proper question to ask about alternative investments? “What’s the role that alternatives are playing in their over portfolio construction? And over a long period of time? 3)Which hedge fund strategies are good for diversification and why are they good? Hedge funds are good for diversification in relative value and global macroeconomic both added value Return, diversification, private equity, real estate and hedge fund 4)Which hedge fund strategies are not good diversifiers and why are they not good?

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Funds to funds, equity hedge products, hedge fund strategies event driven were very correlated with the equity more so it didn’t provide value Stock picking Long-short equity Market neutral 5)What does the term "lower for longer mean? Is that occurring today? It’s the new norm. Core part to look for alternatives if we are lower for longer for fixed income and we have muted growth expectation for equity is also lower what will boost return. We found after a long period of times return and diversification are good strategies. When investors say that, they are talking about the Federal Reserve and its likely policy on short-term interest rates. The Fed is expected to keep the cost of borrowing money lower for longer than was previously expected.

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