IMC Asset Classes 3 — Questions and Answers
Question 1: What is 'private equity' as an asset class?
- Shares in small companies listed on AIM
- Investment in companies that are not listed on public stock exchanges, typically seeking capital growth (Correct answer)
- Government bonds issued privately
- Shares held by company founders only
Correct answer: Investment in companies that are not listed on public stock exchanges, typically seeking capital growth
Private equity involves investing in companies not listed on public stock exchanges. It includes venture capital (early-stage), growth equity, and buyouts (mature companies). Returns come from capital appreciation over a medium to long-term horizon.
Question 2: What is 'infrastructure' as an alternative asset class?
- Investments in technology companies
- Long-term investments in physical assets such as roads, bridges, airports, and utilities (Correct answer)
- Short-term loans to construction companies
- Investments in building materials manufacturers
Correct answer: Long-term investments in physical assets such as roads, bridges, airports, and utilities
Infrastructure as an asset class involves investing in physical systems and facilities such as transport networks, utilities, energy, and social infrastructure. It typically offers stable, long-term, inflation-linked returns and low correlation with equities.
Question 3: What is a 'commodity' in investment terms?
- A mass-produced consumer good sold in supermarkets
- A raw material or primary agricultural product that can be bought and sold, such as gold, oil, or wheat (Correct answer)
- Any physical asset held as investment
- A type of structured financial product
Correct answer: A raw material or primary agricultural product that can be bought and sold, such as gold, oil, or wheat
Commodities are standardised physical goods (hard commodities like metals and energy; soft commodities like agricultural products) that are traded on exchanges. Investors access them through futures contracts, ETFs, or shares in commodity producers.
Question 4: What is the key risk associated with investing in property as an asset class?
- Excessive liquidity
- Illiquidity — property is slow and expensive to buy and sell (Correct answer)
- Regulatory constraints preventing any returns
- Extreme correlation with equity markets
Correct answer: Illiquidity — property is slow and expensive to buy and sell
Property is an illiquid asset class — transactions are slow, costly (stamp duty, legal fees, agent fees), and cannot be partially sold. This makes it difficult to quickly exit a position or rebalance a portfolio compared to listed securities.
Question 5: What is an ETF (Exchange-Traded Fund)?
- A type of government bond
- A fund that trades on a stock exchange, typically tracking an index, combining features of both funds and shares (Correct answer)
- A European Trading Framework regulation
- A fixed-term deposit account
Correct answer: A fund that trades on a stock exchange, typically tracking an index, combining features of both funds and shares
An ETF is a fund listed and traded on a stock exchange throughout the trading day, unlike traditional open-ended funds priced once daily. Most ETFs passively track an index (equities, bonds, commodities), offering low cost and intraday liquidity.
Question 6: What is 'short selling' and what is its maximum theoretical loss?
- Selling investments with short maturities; maximum loss is the investment amount
- Borrowing and selling securities you do not own, hoping to buy them back cheaper; maximum loss is theoretically unlimited (Correct answer)
- Selling call options; maximum loss is the premium paid
- Selling bonds before maturity; maximum loss is the coupon income
Correct answer: Borrowing and selling securities you do not own, hoping to buy them back cheaper; maximum loss is theoretically unlimited
Short selling involves borrowing securities and selling them, aiming to buy them back at a lower price and profit from the difference. If the price rises instead, the short seller must buy at a higher price. Since prices can rise indefinitely, maximum loss is theoretically unlimited.
IMC Asset Classes 3
What is 'private equity' as an asset class?