CFA Level I · CFA Level I Exam · Real Estate and Infrastructure
A regulated water utility is classified as an economic infrastructure asset. Which feature is most likely a characteristic of this investment?
A regulated water utility most likely has revenue driven by inelastic demand and regulated tariffs. Water is an essential service with a natural monopoly, so cash flows are stable and often inflation-linked, unlike cyclical businesses or assets held for short-term trading gains.
- ACash flows depend heavily on the business cycle
- BRevenue is typically driven by inelastic demand and regulated tariffsCorrect
- CReturns are dominated by short-term trading gains
Explanation
Utilities provide essential services with inelastic demand and regulated or contracted pricing, which gives stable, inflation-linked cash flows. Heavy cyclicality is not typical, and returns come mainly from long-term income, not trading gains.
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