CFA Alternative Investments


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Investors are increasingly turning to alternative investments seeking diversification benefits and higher returns. This study session describes the common types of alternative investments, their valuation, their unique risks and opportunities, and their relation to traditional investments.

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CFA Alternative Investments

  1. 1. Alternative Investments Topic Weight: 3%© PristineThis Presentation has been prepared to provide general information about theCompany to whom it is addressed. This Presentation does not purport to contain allthe information. The information provided in this presentation is meant only forthe recipient and is not to be shared with anyone else.
  2. 2. Real Estate Valuation Real Estate Valuation Sale Comparison Income Approach Approach Market value is estimated relative to a Values the property using a perpetuity benchmark. discount type of model. Wherein the various factors Net Operating Income (NOI) affecting the price of the security Appraisalprice  are determined and quantified and Market cap rate put in as a regression equation to Benchmark NOI finally arrive at the price of the Market cap rate  security. Benchmark transaction pricePristine
  3. 3. Concept Checker  The specifics of a simple hedonic model are as below: Characteristic Units Slope Coefficient In $ Number of Rooms Number 50,000 Distance to nearest public Miles -5,000 transportation Gym in the neighborhood 0 or 1 10,000 The characteristics of a specific real estate property: Has 5 bedrooms, half mile away from the bus stop, and no gym in the neighborhood. The appraised value using sales comparison approach is: A. $ 237500 B. $ 247500 C. $ 255000Pristine
  4. 4. Answer  B Characteristi Units Characte Slope Value of c ristic of Coefficie Characterist Specific nt In $ ic Property Number of Numbe 5 50,000 250,000 Rooms r Distance to Miles 0.5 -5,000 -2500 nearest public transportation Gym in the 0 or 1 0 10,000 0 neighborhood The Appraised 247,500 valuePristine
  5. 5. Concept Checker Apartment XYZ Gross Potential Rental Income $500,000 Estimated Vacancy and Collection 10% Losses Insurance and Taxes $50,000 Maintenance $20,000 Depreciation $15,000 Interest on Financing $15,000 If there was a similar sale with an NOI of 100,000 and its sales price was 1,000,000, find the market value of apartment XYZ. A. $ 3.8mn B. $ 3.67mn C. $ 3.75mnPristine
  6. 6. Answer A Apartment Depreciation and XYZ cost of financing Gross Potential Rental Income $500,000 are not factors in Estimated Vacancy and 10%*$500,000 ($50,000) the NOI calculation. Collection Losses It is assumed that Insurance and Taxes ($50,000) maintenance will Maintenance ($20,000) keep the property in good condition Net Operating Income 380,000 (NOI) and the value of Similar Transaction property is NOI 100,000 independent of any Market Price 100,000 financing Cap Rate 10% arrangement. Market Price Note: Taxes that are NOI (Apartment XYZ) 380,000 relevant are property taxes. Cap Rate 10% Market Price of 3.8mn XYZPristine