knowledge topics
Alternative Investments
KNOWLEDGE EXPECTED OF: Both CFP® Professionals and QAFPTM Professionals
- Identify the primary investment objectives typically associated with the asset class of alternative investments.
- Growth of capital
- Explain purposes for holding the asset class of alternative investments, 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
- Restricted share units
- Forwards
- Warrants
- Rights
- Hedge funds†
- Private equity
- Collectibles
- Explain characteristics of each type of alternative investment, such as:
- Relative potential for loss of capital
- Level of liquidity
- Relative level of volatility
- Explain how each of the factors may impact the suitability of an alternative investment, such as:
- Time horizon
- Volatility
- Risk tolerance
- Investment objective
- Financial situation
- Personal situation
- Income
- Liquidity
- Control
- Tax impact
- Investment management process
- Economic cycle
- Cost
- Historical performance
- Performance expectations
- Evaluate how each of the factors may impact the suitability of an alternative investment.
- Explain for whom each alternative investment may be suitable.
- Interpret a return for each alternative investment.
- Explain risks associated with each alternative investment.
- Identify the primary investment objectives that commodities support.
- Growth of capital
- Income
- Explain purposes for holding options, such as:
- Capital appreciation
- Risk minimization
- Leverage
- Market entry and exit
- 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
- Explain where commodities are traded.
- Define a principal protected note.
- Identify the primary investment objectives typically associated with a principal protected note.
- Nominal 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 redeem ability 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 credit worthiness 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
- Estimate the tax impact (based on asset location) of a principal protected note.
- When held to maturity
- When disposed of prior to maturity
- Define an option.
- 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).
- Explain the tax treatment of restricted share units.
- At the time shares are granted
- At the time shares are vested
- At the time shares are disposed of
- Compare a stock option and a restricted share unit (RSU), specifically:
- Value over time
- Comparable number of options/restricted shares offered
- Vesting requirements
- Tax treatment
- Define a forward.
- Explain how a return is generated for a forward.
- Define a future.
- 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
- Explain options available to settle futures, such as:
- Offsetting position prior to expiry
- Delivery of underlying asset at expiry
- Define a right.
- 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.
- Define a warrant.
- 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.
- Define private equity.
- Identify the primary investment objectives typically associated with private equity.
- Growth of capital
- Income
- Identify typical collectibles that may be characterized as an alternative investment, such as:
- Fine art
- Rare books
- Classic cars
- Wine
- Coins
- Stamps
- Comic books
- Sports cards
- Diamonds
- Memorabilia
- Famous autographs
- 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.
- Estimate the tax impact of a collectible.
† Hedge funds are an alternative investment, however they have been included in the Investment Structure segment of the document since they are generally compared to other managed investment fund structures.
Glossary of Verbs (mouse over to see definition)
-
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
-
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 judgement through careful study
-
Interpret
To give the meaning of / to construe or understand / to translate orally
Read more about the Taxonomy used in the FP-BoK
previous / Equities