Lesson Overview
Give candidates a quick classification map for alternatives and their portfolio use.
Level I questions are three-choice multiple choice and are built to reward fast recognition of the relevant rule, relationship, or calculation path. For this lesson, the job is to turn the topic into a repeatable exam move rather than another note to reread.
Mental Model
Alternative asset icons arrange by liquidity, transparency, valuation difficulty, and diversification behavior.
In the Above MPS system, this sits in Payoffs + Risk: Climb the payoffs. Use that shape as the memory hook, then connect it to the precise facts in the question stem.
Exam Playbook
- Name the topic before calculating. Decide whether the stem is asking for a definition, direction of effect, classification, or numerical result.
- Apply the rule that changes the answer. Ignore details that do not affect the relationship being tested.
- Check the answer against the common trap. If the tempting choice matches one of the traps below, slow down before locking it in.
High-Yield Map
- Alternatives often have lower liquidity and more complex valuation.
- Portfolio role depends on correlation, cash-flow profile, and risk source.
- Fees and leverage can materially affect returns.
Common Traps
- Treating all alternatives as the same risk profile.
- Ignoring appraisal smoothing in real estate-style returns.
- Forgetting fee structures.
Repair Drills
- Classify six alternatives by liquidity and valuation challenge.
- Explain the diversification role of each asset class in one sentence.