Alternative Investments

KNOWLEDGE EXPECTED OF: QAFP® Professionals

Highest Knowledge Level: Understanding

Knowledge Levels and Associated Verbs


Awareness
The state of being aware that something exists / to have familiarity with a particular activity or subject
Understanding
To comprehend the general relationship of particulars / to have an expertise with how something works
Application
Ability to put information to use / to use knowledge for relevant, practical purposes
Evaluation
To judge or conclude by utilizing data / a systematic determination of something’s worth or significance
Define
To state exactly the meaning of
Identify
To be aware of / to recognize and correctly name / to locate an appropriate resource
Explain
To make clear the meaning of / to describe something in more detail or reveal relevant facts or ideas related to it
Determine
To ascertain / to come to a decision, such as by investigation or reasoning
Compare
To note the similarities and differences between two or more things
Estimate
To determine an approximate value for
Calculate
To find the value using mathematics
Convert
To change from one form or purpose to another
Evaluate
To reach a conclusion or make a through careful study
Interpret
To give the meaning of / to construe or understand / to translate orally

Hold cursor over or click on each term to read its definition.

  • Identify the primary investment objectives typically associated with the asset class of alternative investments. 
    • Growth of capital 
  • Identify purposes for which holding the asset class of alternative investments may be used, such as:
    • Capital appreciation
    • Risk minimization 
  • Identify investment vehicles that are a part of the asset class of alternative investments, such as: 
    • Commodities
    • Derivatives
      • Principal protected notes
      • Options
      • Forwards
      • Warrants
      • Rights
    • Hedge funds1
    • Private equity
    • Collectibles 
  • Identify the characteristics of each type of alternative investment, such as: 
    • Relative potential for loss of capital 
    • Level of liquidity 
    • Relative level of volatility 
  • Define a commodity. 
  • Identify the purpose for which a commodity investment may be used. 
  • Identify commonly traded commodities used as investments, such as: 
    • Grains (corn, oats, rice, wheat, milk, cocoa, coffee, cotton, sugar)
    • Livestock (hogs and cattle)
    • Energy (crude oil, ethanol, natural gas, gasoline, propane)
    • Industrial metals (copper, lead, zinc, tin, aluminium, nickel, cobalt)
    • Precious metals (gold, platinum, palladium, silver) 
  • Define a principal protected note. 
  • Identify the purpose for which a principal protected note may be used. 
  • Define an option. 
  • Identify the purpose for which an option may be used. 
  • Define an employee stock option.  
  • Identify the purpose for which an employee stock option may be used. 
  • Define a future. 
  • Identify the purpose for which a future may be used. 
  • Identify underlying assets for futures, such as: 
    • Financial instruments such as stocks, bonds, currencies, interest rates and stock indices
    • Commodity futures such as gold, crude oil, grains, dairy, and livestock 
  • Define a right.  
  • Identify the purpose for which a right may be used. 
  • Define a warrant. 
  • Identify the purpose for which a warrant may be used. 
  • Define private equity.  
  • Identify the purpose for which private equity may be used. 
  • Define an investment collectible. 
  • Identify the purpose for which an investment collectible may be used. 
  • Identify typical collectibles that may be characterized as an investment, such as:
    • Fine art
    • Rare books
    • Classic cars
    • Wine
    • Coins
    • Stamps
    • Comic books
    • Sports cards
    • Diamonds
    • Memorabilia
    • Famous autographs

REFERENCES

1 Hedge funds are an alternative investment; however they are included in the Investment Structure segment of this document as they are generally compared to other managed investment fund structures. 

KNOWLEDGE EXPECTED OF: CFP® Professionals

Highest Knowledge Level: Understanding

Knowledge Levels and Associated Verbs


Awareness
The state of being aware that something exists / to have familiarity with a particular activity or subject
Understanding
To comprehend the general relationship of particulars / to have an expertise with how something works
Application
Ability to put information to use / to use knowledge for relevant, practical purposes
Evaluation
To judge or conclude by utilizing data / a systematic determination of something’s worth or significance
Define
To state exactly the meaning of
Identify
To be aware of / to recognize and correctly name / to locate an appropriate resource
Explain
To make clear the meaning of / to describe something in more detail or reveal relevant facts or ideas related to it
Determine
To ascertain / to come to a decision, such as by investigation or reasoning
Compare
To note the similarities and differences between two or more things
Estimate
To determine an approximate value for
Calculate
To find the value using mathematics
Convert
To change from one form or purpose to another
Evaluate
To reach a conclusion or make a through careful study
Interpret
To give the meaning of / to construe or understand / to translate orally

Hold cursor over or click on each term to read its definition.

  • Identify the primary investment objectives typically associated with the asset class of alternative investments. 
    • Growth of capital 
  • Identify purposes for which holding the asset class of alternative investments may be used, such as:
    • Capital appreciation
    • Risk minimization 
  • Identify investment vehicles that are a part of the asset class of alternative investments, such as: 
    • Commodities
    • Derivatives
      • Principal protected notes
      • Options
      • Forwards
      • Warrants
      • Rights
    • Hedge funds1
    • Private equity
    • Collectibles 
  • Identify the characteristics of each type of alternative investment, such as: 
    • Relative potential for loss of capital 
    • Level of liquidity 
    • Relative level of volatility 
  • Define a commodity. 
  • Identify the purpose for which a commodity investment may be used. 
  • Identify commonly traded commodities used as investments, such as: 
    • Grains (corn, oats, rice, wheat, milk, cocoa, coffee, cotton, sugar)
    • Livestock (hogs and cattle)
    • Energy (crude oil, ethanol, natural gas, gasoline, propane)
    • Industrial metals (copper, lead, zinc, tin, aluminium, nickel, cobalt)
    • Precious metals (gold, platinum, palladium, silver) 
  • Define a principal protected note. 
  • Identify the purpose for which a principal protected note may be used. 
  • Define an option. 
  • Identify the purpose for which an option may be used. 
  • Define an employee stock option.  
  • Identify the purpose for which an employee stock option may be used. 
  • Define a future. 
  • Identify the purpose for which a future may be used. 
  • Identify underlying assets for futures, such as: 
    • Financial instruments such as stocks, bonds, currencies, interest rates and stock indices
    • Commodity futures such as gold, crude oil, grains, dairy, and livestock 
  • Define a right.  
  • Identify the purpose for which a right may be used. 
  • Define a warrant. 
  • Identify the purpose for which a warrant may be used. 
  • Define private equity.  
  • Identify the purpose for which private equity may be used. 
  • Define an investment collectible. 
  • Identify the purpose for which an investment collectible may be used. 
  • Identify typical collectibles that may be characterized as an investment, such as:
    • Fine art
    • Rare books
    • Classic cars
    • Wine
    • Coins
    • Stamps
    • Comic books
    • Sports cards
    • Diamonds
    • Memorabilia
    • Famous autographs

Additional Knowledge Expected of CFP Professionals
  • Explain risks associated with each alternative investment. 
  • Explain where commodities are traded.
  • Identify the primary investment objectives typically associated with a principal protected note.
    • Preservation of capital
    • Growth of capital
  • Explain purposes for holding principal protected notes, such as:
    • Capital appreciation
    • Risk minimization
  • Identify that a principal protected note is issued and backed by a financial institution.
  • Explain that principal protected notes may have restrictions on redemption prior to maturity. 
  • Explain how a return is generated for a principal protected note.
    • When held to maturity
    • When redeemed prior to maturity
  • Explain variables that the risk of a principal protected note may be linked to, such as:
    • The creditworthiness of the issuer / guarantor of the note
    • The value of the underlying asset
  • Identify that principal protected notes typically generate interest income. 
  • Explain the tax treatment (based on asset location) of a principal protected note.
    • When held to maturity
    • When disposed of prior to maturity
  • Identify the primary investment objectives typically associated with options.
    • Growth of capital
    • Income
  • Explain purposes for using options, such as:
    • Capital appreciation
    • Risk minimization
    • Leverage
    • Market entry and exit
  • Identify assets for which options are issued and traded, such as:
    • Stocks
    • Commodities
    • Currency
  • Explain components of an option, such as:
    • Call
    • Put
    • Strike price
    • Exercise price
    • Trading unit
    • Option premium
  • Explain parties to an option, such as:
    • Buyer (Owner)
    • Seller (Writer)
  • Explain terminology related to options, such as:
    • In the money
    • At the money
    • Out of the money
    • Intrinsic value
    • Time value
  • Explain that the value of an option is based on the underlying asset of that option.
  • Explain how a return is generated for an option.
  • Explain how a protective put works. 
  • Explain where options are traded.
  • Define an employee stock option. 
  • Define terms associated with an employee stock option, such as:
    • Vesting
    • Expiry
  • Explain the tax treatment of an employee stock option.
    • At the time shares are granted
    • At the time shares are vested
    • At the time shares are disposed of
  • Define a restricted share unit (RSU).
  • Define a forward.
  • Explain how a return is generated for a forward.
  • Explain options available to settle futures, such as:
    • Offsetting position prior to expiry
    • Delivery of underlying asset at expiry
  • Explain parties to a right, such as:
    • Issuing company
    • Shareholder
  • Explain terminology related to rights, such as:
    • Subscription or offering price
    • Ex-rights
    • Cum-rights
    • Intrinsic value
  • Identify that a secondary market exists for trading rights. 
  • Explain parties to a warrant, such as:
    • Issuing company
    • Shareholder
    • Warrant holder
  • Explain terminology related to warrants, such as:
    • Intrinsic value
    • Time value
  • Identify that a secondary market exists for trading warrants.
  • Identify the primary investment objectives typically associated with private equity.
    • Growth of capital
    • Income
  • Identify the primary investment objectives typically associated with collectibles.
    • Growth of capital
  • Explain purposes for holding collectibles as an investment, such as:
    • Capital appreciation
  • Explain the tax treatment of a collectible.

REFERENCES

1 Hedge funds are an alternative investment; however they are included in the Investment Structure segment of this document as they are generally compared to other managed investment fund structures. 
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