CFA Level I · CFA Level I Exam · Alternative Investment Features, Methods, and Structures
Which of the following is most likely a reason investors allocate to alternative investments within a diversified portfolio?
Investors most likely allocate to alternatives for diversification and potential return enhancement from lower correlation with traditional assets. They do not guarantee downside protection, and manager selection risk typically increases because returns differ widely across managers and standardized benchmarks are limited.
- APotential diversification benefits and return enhancement from lower correlation with traditional assetsCorrect
- BGuaranteed protection against losses in market downturns
- CElimination of manager selection risk through standardized benchmarks
Explanation
Alternatives are used mainly for diversification and potentially higher returns, though correlations can rise in stress. They offer no loss guarantee and manager selection risk is often greater because dispersion of manager returns is wide.
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