- CFA Exams
- CFA Level I Exam
- Topic 8. Alternative Investments
- Learning Module 3. Investments in Private Capital: Equity and Debt
- Subject 1. Private Equity Investment Characteristics
CFA Practice Question
Investors in distressed securities are most likely to:
A. Be able to avoid liquidity risks.
B. Have positions similar to venture capital investments.
C. Profit through trading the securities in the secondary market.
D. Attempt to profit through investing in overvalued securities and selling short undervalued securities.
A. Be able to avoid liquidity risks.
B. Have positions similar to venture capital investments.
C. Profit through trading the securities in the secondary market.
D. Attempt to profit through investing in overvalued securities and selling short undervalued securities.
Correct Answer: B.
Investors in distressed securities generally hope to profit from security mispricing; however, the strategy is to invest in undervalued securities and short overvalued securities. The market for distressed securities is generally not liquid, so investors are subject to liquidity risk. Because they must hold the investments for substantial periods of time with a significant probability of failure, investors have exposures similar to venture capital investors.
Investors in distressed securities generally hope to profit from security mispricing; however, the strategy is to invest in undervalued securities and short overvalued securities. The market for distressed securities is generally not liquid, so investors are subject to liquidity risk. Because they must hold the investments for substantial periods of time with a significant probability of failure, investors have exposures similar to venture capital investors.
User Contributed Comments 2
| User | Comment |
|---|---|
| ankurwa10 | Essentially, they are in it for long run. Seek to profit from the value going up, which is going to happen if the underlying recovers. (pretty much like VCs nurturing a start up) |
| ascruggs92 | ^When you explain it that way it makes sense. It's weird to conceptualize at first though, because they may be making similarly risky investments, where they look and what they buy are on complete opposite sides of the spectrum ( i.e. VC's buy new unproven companies hoping for them to take off versus distressed investors buying failing companies at deep discounts to profit off liquidation or restructuring) |