Vignette: Some types of alternate investments are real estate, private equity, commodities, hedge funds, managed futures, and distressed securities.
Alternate investments differ from common stock and bond investments. The major difference between the different types of investments is the risk and return characteristics that each of the investment types offer.
These types of investments can be risky, illiquid, complex and it may be hard to find information on a particular investment. On the other hand, they can add diversification benefits, act as hedges to commodities and inflation, and may offer a higher return for a smaller level of initial investment.
Although these types of securities are not a traditional form of investment, some of these types of securities comprise a sizeable portion of the total assets of U.S. households. For example, ownership of real estate comprises one-third of total assets.
Question: An angel investor is an investor that is:
Select an Answer: not considered a supply of venture capital. often helping to finance a company that is in an expansion stage. often a co-founder to the original idea. often the first source of financing that is provided by an outside investor.
Rationale:
The angel investor is the first source of venture capital financing that a company uses in its initial stages.
2024-12-01
Vignette: Aaron Greyspam, VP - Risk Management at First Federal Bank (FFB), monitors the risks that the bank is exposed to in its lending practices and derivatives transactions. Since the lending and derivatives businesses of FFB has expanded rapidly, Aaron has to split his department into two sub-units and has to hire new staff to assist him.
Question: Phil is learning more about credit risks. All of the following are true except:
Select an Answer: Expected credit exposure (ECE) is the probability-weighted average of the amounts an institution is owed. Expected default loss is the ECE times expected probability of default. FFB has credit exposure to an instrument whether the instrument has a positive or a negative market value with respect to the institution. Expected default loss should be subtracted from a contract's expected revenue in pricing the contract.
Rationale:
Market value is also known as replacement value. If the market value is positive to an institution, it faces credit exposure to this amount. If the market value is negative, it is the institution's counterparty that has credit exposure.
2024-11-30
Vignette: Aaron Greyspam, VP - Risk Management at First Federal Bank (FFB), monitors the risks that the bank is exposed to in its lending practices and derivatives transactions. Since the lending and derivatives businesses of FFB has expanded rapidly, Aaron has to split his department into two sub-units and has to hire new staff to assist him.
Question: Aaron tells Phil, who is his new assistant, that all of the following are components of credit risk except:
Select an Answer: FFB will lose $1 million in a swap in the event of default. the outstanding amount owed to FFB is $1 million in a derivatives contract. a 45% probability that FFB's counterparty will not make the payment. in the event of default, FFB may be paid $500,000 from the sale of assets of the defaulting party.
Rationale:
The three components of credit risk are:
probability of default - probability that counterparty will fail to make payment;
credit exposure - the amount that a party with a claim will lose in the event of default; and
recovery rate - fraction of the claim paid by defaulting party or is recovered from sale of collateral.
2024-11-29
Vignette: Domestic bond management is made up of many different investment styles and strategies. Within each of these styles are varying degrees of exposure to various enhancement strategies.
Question: Which of the following would not be a reason to index a bond portfolio?
Rationale:
While the other answer choices may be reasons for indexing a bond portfolio, the concept of risk-free profit is unrelated to bond portfolio indexing. A bond index is comprised of a collection of bonds that satisfy a set of rules (characteristics) that are then applied to all issues in the marketplace.
2024-11-28
Vignette: Cindy Long is employed with Vector Capital. Cindy is responsible for monitoring the portfolio managers of the firm with regard to risk considerations.
Vector serves both individual and institutional clients and aims to provide the best return for a specified risk level for each client. The following is a situation that Cindy faces regularly in performing her duties and responsibilities.
Question: Cindy is a selective risk manager and, within the context of VAR, which of the following is correct?
Select an Answer: A selective risk manager only selects investments that meet predetermined investment parameters. A selective risk manager pursues some risks and hedges others. A selective risk manager uses VAR to select investments. A selective risk manager only selects certain risks to measure.
Rationale:
A selective risk manager separates the different sources of risk for identification. This enables the manager to hedge some risks and actively pursue others. The manager would pursue risk in areas that they have expertise in and hedge the risk in areas in which they do not have expertise. A total risk manager, as opposed to a selective risk manager, does not separate out sources of risk.
