CPM Alternative Investments in Portfolios

Question 1

Which of the following is considered an alternative investment in a traditional portfolio context?

Accepted Answer

Private equity, hedge funds, and real assets

Answer

Alternative investments include asset classes outside traditional stocks and bonds, such as private equity, hedge funds, real estate, commodities, and infrastructure.

Question 2

The primary reason portfolio managers include alternative investments is to:

Accepted Answer

Improve risk-adjusted returns through diversification due to low correlation with traditional asset classes

Answer

Alternatives typically have lower correlations with stocks and bonds, providing diversification benefits that can improve overall portfolio risk-adjusted returns.

Question 3

Private equity investments are characterized by:

Accepted Answer

Illiquidity, long lock-up periods, and potential for higher returns than public markets as compensation for illiquidity

Answer

Private equity investments are illiquid, often requiring capital commitments for 7–10 years, but they offer an illiquidity premium — the potential for higher returns than public market equivalents.

Question 4

A hedge fund using a market-neutral strategy aims to:

Accepted Answer

Generate returns uncorrelated with the broad market by balancing long and short positions to offset market risk

Answer

Market-neutral hedge funds combine long and short positions to neutralize overall market exposure (beta ≈ 0), seeking to profit purely from individual stock selection skill.

Question 5

Real estate investment trusts (REITs) provide investors with exposure to real estate while maintaining:

Accepted Answer

Daily liquidity, as REITs trade on public stock exchanges

Answer

REITs allow investors to gain real estate exposure through publicly traded shares, providing daily liquidity that is absent in direct property investment.

CPM - Certified Portfolio Manager Practice Test

CPM - Certified Portfolio Manager Practice Test

CPM Alternative Investments in Portfolios