Suzanne Harlan has a large, well-diversified stock and bond portfolio. She wants to try some alternative investments, and has contracted with Laurence Philips, principal of Philips Finance, to help assemble a new portfolio. Before agreeing to make recommendations for Harlan, Philips wants to determine whether she is a good candidate for alternative investments. He gives her a standard questionnaire that asks open-ended questions of all potential clients. Here are some of Harlan’s comments: * “I’m interested in high returns. I’m not afraid of risk, and I’m investing this money for the benefit of my eventual heirs.” * “While I expect risk on an individual-investment basis, I’d like to further diversify my portfolio and reduce overall risk.” * “I pay a lot of attention to expense and return data from my investments and track their performance closely.” * “I’m 65 years old and in excellent health.” After reading Harlan’s responses and learning that she is a fairly sophisticated investor, Philips agrees to take her on as a client. Harlan has a lot of experience with investments and has some ideas what she’d like to do. She brings Philips the following ideas: * “I have a colleague in the lumber business who says the furniture market is booming, and demand should increase in the year ahead. I’d like to purchase some lumber futures in the hopes that the price will rise.” * “Hedge funds are earning excellent returns, and I expect them to continue doing so. However, other investors have told me that the difficulty lies in assessing the quality of the funds, because they are not well regulated. So I’m interested in purchasing a fund of funds, so I can diversify my risk while potentially sharing in some outsized returns.” * “I already own a couple of REITs, but they represent a very small portion of my assets, and I’d like to increase my exposure to real estate. I’ve heard about pooled real estate funds, and I’m interested in one of those funds.” * “My neighbors founded Kelly Tool and Die, a machine-tool business, 20 years ago and have not managed the company well. They have told me they are considering filing for bankruptcy. I have contacts in the manufacturing business overseas who would be interested in acquiring Kelly’s assets. My Asian colleagues are willing to pay about 60% of book value for the assets, and my neighbors are willing to sell me the company for about 50% of the book value of its assets.” Harlan then tells Philips that it is imperative that the returns of any investments he recommends must be in some way comparable to a benchmark. Philips is not excited about the commodity idea and does not like funds of funds. However, he does know of several managers of individual hedge funds that might interest Harlan. He talks her out of the fund of funds idea and suggests she put her money in the Stillman Fund, which is run by one of his college friends. Fund manager Mark Stillman concentrates on spin-offs, generally buying the spun-off company and shorting the parent company. 1. Harlan seeks alternative investments that will both boost returns and diversify her portfolio. Which pair of her proposed investments represents the worst choices for each goal? Net returns Diversification A) Lumber Hedge funds B) Real estate funds Hedge funds C) Lumber Kelly Tool and Die 2 .Based on her investment suggestions and survey answers, Harlan is least concerned with: A) inflation. B) volatility. C) liquidity. 3. In his attempt to talk Harlan out of investing in a fund of funds, Philips addressed the advantages of investing in individual funds. Which of the following is his most compelling argument? A) The likelihood of style drift in a fund of funds. B) The lack of benchmarks for a fund of funds. C) The lower expenses of individual funds. 4. Stillman fund uses which strategy? A) Relative value. B) Hedged equity. C) Merger arbitrage. 5. Which of Harlan’s responses is most likely to make Philips consider her a bad candidate for alternative investments? A) “I pay several million dollars in taxes every year, and I want any additional investments to be tax-friendly.” B) “I pay a lot of attention to expense and return data from my investments and track their performance closely.” C) “I’m interested in high returns. I’m not afraid of risk, and I’m investing this money for the benefit of my eventual heirs.” 6. If Harlan is truly concerned about benchmarks, she should avoid which of her suggested investments? A) Kelly Tool and Die. B) None of them, benchmarks are available for all asset classes. C) Hedge funds.
- C 2. B. 3. C 4. A 5. A 6. A
C B C C A A
This was a tough one: Answers : CCCCBB
cdogstu77 Wrote: ------------------------------------------------------- > This was a tough one: > > Answers : CCCCBB Regarding question 6 (just to start): What exactly is the benchmark for a bankrupt manufacturing company? “My neighbors founded Kelly Tool and Die, a machine-tool business, 20 years ago and have not managed the company well. They have told me they are considering filing for bankruptcy. I have contacts in the manufacturing business overseas who would be interested in acquiring Kelly’s assets. My Asian colleagues are willing to pay about 60% of book value for the assets, and my neighbors are willing to sell me the company for about 50% of the book value of its assets.”
It’s considered private equity, (according to schweser) and therefore has a valid bench.
I can see why Harlan is slightly concerned about vol (she wants diversification). But why is she not least concerned about inflation? I guess there was not much said about inflation (that is why I assumed she was not concerned about inflation)… Although thinking about the fact that she would consider Kelly tool and Die suggests she has no concern about liquidity (putting weight on liquidity been less of a concern).
B C C C B C
cdogstu77 - Would it be possible for you to post explanations?
Harlan seeks alternative investments that will both boost returns and diversify her portfolio. Which pair of her proposed investments represents the worst choices for each goal? Net returns Diversification A) Lumber Hedge funds B) Real estate funds Hedge funds C) Lumber Kelly Tool and Die Your answer: B was incorrect. The correct answer was C) Lumber Kelly Tool and Die Commodity investments are primarily diversification tools, having little correlation with traditional stocks and bonds. The Kelly Tool and Die investment is private equity, which is more of a return enhancer than a diversifier. Real estate funds can boost both diversification and returns, while hedge funds can boost returns, diversify, or both, depending on the nature of the fund. Based on her investment suggestions and survey answers, Harlan is least concerned with: A) inflation. B) volatility. C) liquidity. Your answer: B was incorrect. The correct answer was C) liquidity. While Harlan’s comment about being willing to accept risk may suggest she is not concerned about volatility, she is most definitely concerned on a portfolio level, as evidenced by her desire to use alternative assets for diversification purposes. Her desire to track investments closely suggests she is interested in holding the managers of her investments accountable for their actions. Nothing in the information presented above offers any hint about Harlan’s concerns about inflation. However, Harlan’s stated desire to build wealth for her heirs suggests liquidity is not a concern. In his attempt to talk Harlan out of investing in a fund of funds, Philips addressed the advantages of investing in individual funds. Which of the following is his most compelling argument? A) The likelihood of style drift in a fund of funds. B) The lack of benchmarks for a fund of funds. C) The lower expenses of individual funds. Your answer: C was correct! The biggest disadvantage of the fund of funds is the extra layer of fees. Style drift could be an issue for both an individual hedge fund and a fund of funds, much as it is with traditional mutual funds. The issues of benchmarks and investability are probably more troubling for individual funds than for funds of funds. The Stillman fund uses which strategy? A) Relative value. B) Hedged equity. C) Merger arbitrage. Your answer: C was correct! Merger arbitrage funds usually focus on mergers, spin-offs, or takeovers, buying one company in the transaction and shorting the other. Which of Harlan’s responses is most likely to make Philips consider her a bad candidate for alternative investments? A) “I pay several million dollars in taxes every year, and I want any additional investments to be tax-friendly.” B) “I pay a lot of attention to expense and return data from my investments and track their performance closely.” C) “I’m interested in high returns. I’m not afraid of risk, and I’m investing this money for the benefit of my eventual heirs.” Your answer: B was correct! Many alternative assets provide high returns, and a high risk tolerance and low need for liquidity are positives for investors in alternative asset classes. And while many alternative assets are risky, they can provide a substantial diversification benefit when combined with mainstream investments. Many alternative investments are tax-friendly. However, most of the investments considered for this exam are not easy to value, and difficult to track closely over short periods of time. If Harlan is truly concerned about benchmarks, she should avoid which of her suggested investments? A) Kelly Tool and Die. B) None of them, benchmarks are available for all asset classes. C) Hedge funds. Your answer: A was incorrect. The correct answer was B) None of them, benchmarks are available for all asset classes. Benchmarks are available for commodities, real estate, private equity, and hedge funds, though not all of them are easy to interpret.
Thanks!