Chartered Alternative Investment Analyst Association (CAIA) Practice Exam

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Which characteristic typically relates to the liquidity of alternative investments?

Highly liquid in nature
Illiquid and requires longer holding periods
Can be sold quickly at market value
Liquidity similar to that of stocks

The correct answer is: Illiquid and requires longer holding periods

The characteristic that typically relates to the liquidity of alternative investments is that they are illiquid and require longer holding periods. Alternative investments, such as private equity, hedge funds, real estate, and commodities, often do not trade on public exchanges like stocks or bonds. This lack of a readily available market can lead to challenges in selling these assets quickly. Investors in alternative investments usually need to commit their capital for an extended duration, during which the investment may not be easily convertible to cash. This is due to factors such as the infrequency of transactions, the need for valuations that are not readily available, and potential lock-up periods imposed by fund managers. Consequently, understanding this characteristic is essential for assessing the risk and return profile of alternative investments, as well as for planning liquidity needs effectively, especially in a diversified investment portfolio.