54 RELATE TO THE SINGER FAMILY PORTFOLIO. DONNA MCDONALD...

Questions 49-54 relate to the Singer Family Portfolio.

Donna McDonald manages the Singer Family (Singer) offices, including the $500 million family

portfolio. Singer's Investment Policy Statement (IPS) maintains fairly specific risk and return

objectives but gives McDonald a great deal of latitude in selecting asset classes that can be used

to meet these objectives. McDonald has no IPS constraints other than balancing Singer's return

with tax effect and not taking an active management role in any Singer investment.

Current family members receive an equal income allocation from the fund when they reach 21

years of age, so McDonald must grow the fund more rapidly than inflation to prepare for the next

generation. Therefore, McDonald is willing to invest up to 10% of the Singer portfolio in return-

enhancing alternative investments.

McDonald contacted several consultants to assist him with alternative investment asset classes

that he doesn't feel comfortable managing alone. He first turns his attention to a real estate

consultant who says:

Statement 1: "Direct real estate investments have good diversification benefits with stocks,

but they have poor diversification benefits with bonds because of the income

aspect inherent in a real estate investment."

McDonald then consults with a private equity consultant who states the following:

Statement 2: "Venture capital funds typically finance only expansion-stage companies."

Statement 3: "Buyout funds purchase established companies and participate in taking public

companies private."

After further discussion with the private equity consultant, McDonald believes that private equity

is potentially a viable investment alternative for the Singer portfolio. She decides to further

investigate the key investment differences between venture capital funds and buyout funds

before making any IPS and asset allocation changes.

McDonald is also concerned about unexpected inflation and is considering adding commodities

to the Singer portfolio as a means to hedge this risk. She next consults a commodities advisor

who states:

Statement 4: "Commodities are an exception to many other alternative investments

because benchmarks are available and investable."

Statement 5: "They proved a consistent hedge against inflation in all periods."

...

The use of alternative investments in the Singer portfolio will most likely:

A) increase due diligence costs.

B) allow index funds to be used as an alternative to active managers.

C) reduce decision risk.

Question #50 of 60

Regarding Statement 1 and the diversification benefits of real estate, it is most likely correct that

real estate provides a diversification benefit:

A) to stocks but not to bonds.

B) to bonds but not to stocks.

C) to both stocks and bonds.

Question #51 of 60

Assuming that McDonald completes her due diligence on private equity investing, what is

the most accurate investment difference between venture capital and buyout funds?

A) Buyout funds are usually less leveraged than venture capital funds.

B) Venture capital investors generally receive cash flows later than buyout fund investors.

C) Venture capital investments have more risk of loss than buyout funds, but their return estimates

are less subject to error.

Question #52 of 60

McDonald's private equity consultant is correct with regard to:

Statement 2 Statement 3

A) No No

B) No Yes

C) Yes Yes

Question #53 of 60

Which of the statements made by the commodity advisor are correct?

A) Only statement 4 is correct.

B) Only statement 5 is correct.

C) Both statements are correct.

Question #54 of 60

McDonald has found that many alternative investments are best accessed through hedge funds.

In using hedge funds she is most likely to find:

A) high correlation between hedge funds.

B) using a fund-of-funds (FOF) can provide diversification and better access to specific hedge funds.

C) high-water marks are common but lock-up periods are not.

Question #55 of 60