CFA Level 1 - Alternative Investments Session 18 - Reading 74 - LOS d

CFA Level 1 - Alternative Investments Session 18 - Reading 74 - LOS d (Notes, Practice Questions, Sample Questions) 1. Investors can diversify their direct real estate holdings through all of the following vehicles EXCEPT: A) co-operative shares. [Explanation: Real estate co-operativesare generally a tool with which multiple owners can purchaseshares in a single building or complex. This strategy spreads outrisk among many investors but doesn’t offer much in the way ofdiversification for a single investor. Commingled funds andlimited partnerships typically allow investors to spread their betseither geographically or through different property types] B) commingled funds.C) limited partnerships. 2. Mortgages are considered to be a form of real estate investment because: A) the investor receives a constant stream of cash flows. B) if the borrower defaults on the loan, the lender may end upowning the property. [Explanation: It is true that the borrowerwill own the property if all loan terms are met, but the question isstated in terms of the mortgage lender, not the borrower. Theinvestor anticipates a constant stream of cash flows, similar toother fixed income investments, but is also subject to defaults aswell as prepayments. If the borrower defaults on the terms of theloan, the property will revert back to the lender, and thisexposure is the reason why mortgages are considered a realestate investment] C) the borrower will own the property at the end of the loan term.

3. Which of the following is least likely to be a form of real estate investment? A) Aggregation vehicles. B) Property insurance. [Explanation: Property insurance is notconsidered a category of real estate investment because theunderlying real estate does not revert to the insurer if theproperty holder allows the policy to lapse. A leveraged equityposition and aggregation vehicles such as real estate investmenttrusts are each forms of real estate investment] C) Leveraged equity position. 4. Demand for real estate is a function of all of the following factors EXCEPT? A) Competitive properties. [Explanation: This is a determinant ofthe supply of real estate property. Both remaining choices aredeterminants of demand] B) Population characteristics of the community.C) The terms and conditions of mortgage financing. 5. Which of the following least likely affects a property’s investment potential? A) Structure of the financing mechanisms used to buy theproperty. [Explanation: The financing and investing decisions aremade separately. Market value analysis does not consider howthe asset will be financed] B) The legal rights associated with the property.C) The activity around the property, both commercial andnon-commercial. 6. Which of the following statements regarding real estate valuation is CORRECT?

A) The estimated market value of a property depends upon theparticular investor. B) Each property is unique, so the investment value may bedependent upon the particular use planned for the property.[Explanation: The market value is completely independent of anyconsiderations based upon the investor or potential investor.There is not a “most reliable” valuation method – all have theiradvantages and disadvantages. The investment value may bedependent upon the planned use of the property—remember thatmarket value and investment value are two different things] C) The most reliable real estate valuation method is the costapproach.