CFA Practice Question

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CFA Practice Question

Which of the following is the most valid argument for including venture capital investments in a traditional multi-asset class portfolio?
A. Venture capital investments tend to offer high risk-adjusted returns.
B. Venture capital investments tend to have low correlations with other asset classes.
C. Venture capital investments are managed by professionals who have successful track records in managing businesses.
Explanation: Venture capital is a separate asset class, and exhibits low correlations with other traditional asset classes. Therefore, venture capital offers potential for further diversification for a traditional assets portfolio. Venture capital investments are highly risky- more than 10% of them lose 100% of their values. Overall, they offer high returns in exchange for assuming high risk but not necessarily high risk-adjusted returns. The fact that a significant percentage of venture capital investments fail indicates that management's record of success is not a valid argument for venture capital investing.

User Contributed Comments 2

User Comment
Lamkerst Portfolio management is all about diversification. Ideal assets are those having negative correlation with traditional equities and bonds. But such assets are very rare because--at least in theory--all assets obey the same economic laws.
111hal111 VC only has a low correlation because the assets aren't mark to market and the NAVs don't move. These investments will get hit just as hard in a real blow out... a la dot.com crisis
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