CIMA Investment Vehicles and Strategies 3 — Questions and Answers
Question 1: Which of the following best describes the J-curve effect in private equity investing?
- Early negative returns due to fees and capital calls before investments appreciate (Correct answer)
- Returns that accelerate exponentially as the fund matures
- A pattern of returns that mirrors public equity markets with a lag
- Distributions that increase over time as portfolio companies grow
Correct answer: Early negative returns due to fees and capital calls before investments appreciate
The J-curve reflects negative early returns caused by management fees and unrealized investments, followed by positive returns as companies appreciate and are exited.
Question 2: A variable annuity subaccount differs from a mutual fund primarily because:
- It is held within an insurance wrapper providing tax deferral (Correct answer)
- It offers guaranteed returns unlike a mutual fund
- It is not subject to SEC regulation
- It cannot invest in equities
Correct answer: It is held within an insurance wrapper providing tax deferral
Variable annuity subaccounts function similarly to mutual funds but are held within an insurance contract, providing tax-deferred growth.
Question 3: In a real estate investment trust (REIT), the 90% distribution requirement refers to:
- At least 90% of taxable income must be distributed to shareholders to maintain REIT status (Correct answer)
- 90% of assets must be in qualifying real estate
- 90% of revenues must derive from real property
- At least 90% of shares must be held by U.S. investors
Correct answer: At least 90% of taxable income must be distributed to shareholders to maintain REIT status
To qualify for pass-through tax treatment, REITs must distribute at least 90% of their taxable income to shareholders.
Question 4: Which of the following is a characteristic of a global macro hedge fund strategy?
- Uses top-down analysis to take leveraged positions across asset classes and currencies based on macroeconomic views (Correct answer)
- Focuses on exploiting pricing discrepancies between related securities within the same country
- Invests exclusively in emerging market equities based on fundamental analysis
- Employs statistical arbitrage across highly correlated equity pairs
Correct answer: Uses top-down analysis to take leveraged positions across asset classes and currencies based on macroeconomic views
Global macro funds use top-down macroeconomic analysis to take directional positions in currencies, bonds, equities, and commodities across global markets.
Question 5: A pension fund allocates 5% to infrastructure investments. Which characteristic makes infrastructure particularly attractive for pension funds?
- Long-duration, inflation-linked cash flows that match pension liabilities (Correct answer)
- High liquidity allowing rapid portfolio rebalancing
- Uncapped upside potential similar to venture capital
- Short payback periods reducing reinvestment risk
Correct answer: Long-duration, inflation-linked cash flows that match pension liabilities
Infrastructure assets often generate stable, long-duration cash flows with inflation linkage, making them well-suited to match long-term pension liabilities.
Question 6: An exchange-traded note (ETN) differs from an ETF in that an ETN:
- Is an unsecured debt obligation of the issuer with no underlying basket of assets (Correct answer)
- Holds a physical basket of securities in a trust structure
- Is exempt from counterparty risk
- Must distribute dividends to investors
Correct answer: Is an unsecured debt obligation of the issuer with no underlying basket of assets
ETNs are unsecured debt instruments issued by financial institutions that promise to pay an index-linked return, exposing investors to issuer credit risk.
Question 7: In options-based portfolio protection, a protective put strategy is equivalent to:
- A long call option combined with a risk-free bond (put-call parity) (Correct answer)
- A covered call strategy with downside protection
- A collar strategy with unlimited upside
- A short straddle with defined maximum loss
Correct answer: A long call option combined with a risk-free bond (put-call parity)
By put-call parity, owning the underlying plus a put equals a long call plus a risk-free bond, making these positions economically equivalent.
CIMA Investment Vehicles and Strategies 3
Which of the following best describes the J-curve effect in private equity investing?