As the price increases of commodities are mirrored in higher price indices,
the nominal return is equal to inflation and the real return is zero
Alternative Investments MCQ - Alternative Investments Section 2
Downside risk measures focus on the left side of the return distribution
curve where losses occur. Sortino ratio is a measure of downside risk
38
Which of the following is most accurate for risk-return measures evaluating
alternative investments?
Most alternative investments tend to be leptokurtic and negatively skewed
i.e. with fat tails due to positive average returns and long-tails downside
due to potential extreme losses. Since their distribution is not close to
normal distribution but is negatively skewed, standard deviation is not an
appropriate measure for volatility and hence leads to an understated VaR
figure. Moreover, since alternative investments are generally illiquid, the
use of estimated rather than actual transaction prices result in smoothed
out or overstated returns and understated volatility/standard deviation.
The value at risk of an alternative investment is best described as the
minimum amount of loss expected over a given time period at a given
probability level.
The prices of commodity derivatives are highly dependent on the
underlying commodity prices which is why it is very important to
understand the physical supply chain and general supply–demand
dynamics of a commodity
