Alternative Investments

CFA® Level II, published weight 5–10%. Commodities, real estate direct and listed, hedge fund strategies.

What the outline covers

Introduction to Commodities and Commodity Derivatives
Overview of Types of Real Estate Investment
Investments in Real Estate through Publicly Traded Securities
Hedge Fund Strategies

Sample questions

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Question 1

A commodity futures curve is in contango. An investor holding a long-only rolling futures position will most likely earn:

A. A positive roll return
B. A negative roll return
C. A roll return of exactly zero
D. A roll return independent of the curve shape

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B. In contango the investor sells a cheaper expiring contract and buys a more expensive deferred one, producing a negative roll return.

Reading: Alternative Investments — Introduction to Commodities, LOS 1.d

Question 2

A REIT reports net income of $40m, depreciation of $22m and gains on property sales of $6m. Funds from operations is:

NI $40m · Dep $22m · Gains $6m

A. $50m
B. $56m
C. $62m
D. $68m

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B. FFO = NI + depreciation − gains on sales = 40 + 22 − 6 = $56m. Gains are excluded because they are not recurring operating income.

Reading: Alternative Investments — Investments in Real Estate through Publicly Traded Securities, LOS 3.c

Question 3

A merger arbitrage strategy has a return profile most similar to:

A. A long call on the target
B. A short put on deal completion
C. A long straddle
D. A long position in the acquirer

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B. The strategy earns a small steady spread when deals close and suffers large losses when they break — the payoff shape of a short put.

Reading: Alternative Investments — Hedge Fund Strategies, LOS 4.c

Question 4

Compared with direct real estate ownership, publicly traded REITs most likely exhibit:

A. Lower liquidity and lower short-run equity correlation
B. Higher liquidity and higher short-run equity correlation
C. Higher liquidity and lower short-run equity correlation
D. Identical liquidity and correlation

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B. Listed vehicles trade continuously, which gives liquidity but also imports short-run equity market beta that direct property does not display.

Reading: Alternative Investments — Investments in Real Estate through Publicly Traded Securities, LOS 3.a

Question 5

Under the theory of storage, a market in contango is best explained by:

A. A high convenience yield
B. High storage costs relative to the convenience yield
C. Producer hedging pressure
D. Backwardated inventory levels

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B. Contango arises when the cost of carrying inventory exceeds the convenience yield of holding the physical commodity.

Reading: Alternative Investments — Introduction to Commodities, LOS 1.e

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