Alternative Investments - Alternative Investments Section 2
- Option : B
- Explanation : 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
- Option : B
- Explanation : Downside risk measures focus on the left side of the return distribution curve where losses occur. Sortino ratio is a measure of downside risk
- Option : C
- Explanation : 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.
39. The value at risk of an alternative investment is best described as the:
- Option : C
- Explanation : 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.
40. Which of the following is least likely a reason to invest in commodity derivatives?
- Option : C
- Explanation : 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
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