Knowledge Tree
Relations (1)
related 2.00 — strongly supporting 3 facts
Alternative investments are related to liquidity because managing operational liquidity is a key evaluation factor for these assets [1], and liquidity is a specific factor exposure used to determine their expected returns [2]. Furthermore, alternative investments are distinguished from traditional investments by their inherent potential for illiquidity at both the fund and asset levels [3].
Facts (3)
Sources
Risk Factors, Expected Returns, and Investment Instruments analystprep.com 3 facts
procedureThe 'building blocks' method for determining expected returns for alternative investments involves four steps: (1) begin with the risk-free rate, (2) add estimated returns linked to relevant factor exposures such as credit spreads, yield curve, equity, and liquidity, (3) incorporate assumptions for manager alpha, and (4) subtract appropriate management fees, incentive fees, and taxes.
procedureKey factors for evaluating alternative investments include defining risk characteristics, setting return expectations, choosing the appropriate investment vehicle, managing operational liquidity, evaluating expenses and fees, and navigating tax implications.
claimTraditional investments are typically highly liquid, whereas alternative investments can introduce illiquidity at both the fund and asset levels.