CFA Institute CFA-Level-II Exam - Topic 3 Question 82 Discussion

Bill Henry, CFA, is the CIO of IS University Endowment Fund located in the United States. The Fund's total assets are valued at $3.5 billion. The investment policy uses a total return approach to meet the return objective that includes a spending rate of 5%. In addition, the policy constraints established make tax-exempt instruments an inappropriate investment vehicle. The Fund's current asset mix includes an 18% allocation to private equity. The private equity allocation is shown in Exhibit 1.The private equity allocation is a mixture of funds with different vintages. For example, within the venture capital category, investments have been made in five different funds. Exhibit 2 provides detail about the Alpha Fund with a vintage year of 2006 and committed capital of SI95 million.The Alpha Fund is considering a new investment in Targus Company. Targus is a start-up biotech company seeking $9 million of venture capital financing. Targus's founders believe that, based on the company's new drug pipeline, a company value of $300 million is reasonable in five years. Management at Alpha Fund views Targus Company as a risky investment and is using a discount rate of 40%. After a thorough analysis of Targus's future prospects, Alpha Fund's management believes that there is a possible 15% risk of failure for the company.Which of the following is most likely a characteristic of a venture capital fund?

B) Measureable risk.

A) The typical investment uses leverage.

C) Increasing capital requirements.

CFA Institute CFA-Level-II Exam - Topic 3 Question 82 Discussion

Actual exam question for CFA Institute's CFA-Level-II exam

Question #: 82
Topic #: 3

[All CFA-Level-II Questions]

The private equity allocation is a mixture of funds with different vintages. For example, within the venture capital category, investments have been made in five different funds. Exhibit 2 provides detail about the Alpha Fund with a vintage year of 2006 and committed capital of SI95 million.

The Alpha Fund is considering a new investment in Targus Company. Targus is a start-up biotech company seeking $9 million of venture capital financing. Targus's founders believe that, based on the company's new drug pipeline, a company value of $300 million is reasonable in five years. Management at Alpha Fund views Targus Company as a risky investment and is using a discount rate of 40%. After a thorough analysis of Targus's future prospects, Alpha Fund's management believes that there is a possible 15% risk of failure for the company.

Which of the following is most likely a characteristic of a venture capital fund?

AThe typical investment uses leverage.

BMeasureable risk.

CIncreasing capital requirements.

Show Suggested Answer

Suggested Answer: B

Funded status equals fair value of plan assets minus PBO (395 - 635 = -240). (Study Session 6, LOS 22.c,f)

by Irma at Jun 20, 2024, 06:25 AM

Limited Time Offer

25%

Off

Get Premium CFA-Level-II Questions as Interactive Web-Based Practice Test or PDF

Contribute your Thoughts:

Submit Cancel

Franchesca

7 months ago

Leverage in venture capital? Not always a given!

upvoted 0 times

...

Felicia

8 months ago

I think increasing capital requirements make sense for growth.

upvoted 0 times

...

Thora

8 months ago

Wait, a 40% discount rate? That seems super high!

upvoted 0 times

...

Tennie

8 months ago

Totally agree, especially with that 15% failure risk!

upvoted 0 times

...

Fredric

8 months ago

Venture capital usually involves high risk, right?

upvoted 0 times

...

Krystina

8 months ago

I practiced a similar question where we had to identify characteristics of private equity funds, and I think "increasing capital requirements" might be the right choice here.

upvoted 0 times

...

Helene

9 months ago

I feel like "measurable risk" doesn't really fit with venture capital since it's usually more about uncertainty and potential high returns.

upvoted 0 times

...

Laurel

9 months ago

I think venture capital funds often deal with high-risk investments, so maybe "increasing capital requirements" could be a characteristic?

upvoted 0 times

...

Larae

9 months ago

I remember discussing venture capital characteristics in class, but I'm not entirely sure if leverage is commonly used in these funds.

upvoted 0 times

...

Katy

9 months ago

I'm feeling pretty confident about this one. The information provided on the Alpha Fund's investment in Targus aligns with the definition of venture capital funds - they invest in early-stage, high-risk companies with the potential for significant growth and returns.

upvoted 0 times

...

Tu

9 months ago

The passage also mentions that the Alpha Fund is using a 40% discount rate for the Targus investment, which indicates the high level of risk involved. I'll make sure to highlight that venture capital funds typically invest in riskier, less established companies compared to other private equity strategies.

upvoted 0 times

...

Lyla

9 months ago

Okay, I think I've got this. The passage mentions that the Alpha Fund is considering a risky investment in a start-up biotech company, Targus, which is seeking venture capital financing. This suggests that a key characteristic of venture capital funds is their focus on high-risk, high-potential investments in early-stage companies.

upvoted 0 times

...

Rasheeda

9 months ago

Hmm, I'm a bit confused about the different types of private equity investments mentioned. I'll need to carefully review the details on the Alpha Fund and Targus Company to determine the most likely characteristic of a venture capital fund.

upvoted 0 times

...

Lili

9 months ago

This question seems straightforward. I'll focus on identifying the key characteristics of venture capital funds based on the information provided in the passage.

upvoted 0 times

...

Kip

9 months ago

I'm a little confused by this question. I know there's supposed to be some time between sprints, but I'm not sure if it's a specific amount of time or if it can vary. I'll have to review my Scrum knowledge before answering.

upvoted 0 times

...

Josue

9 months ago

Okay, I think I've got a good strategy here. The key is to focus on verifying the legitimacy of the certificate and protecting the bank's interests. I'll start by contacting the relevant authorities to check if it's been reported as lost or stolen.

upvoted 0 times

...

Rodolfo

9 months ago

Wait, what was the temperature again? I'm a bit confused on the details here.

upvoted 0 times

...

My

9 months ago

Okay, let me think this through. I believe the key is to identify which of the given conditions would meet the exemption criteria in IFRS 10. I'll need to carefully read through each option.

upvoted 0 times

...

Thaddeus

1 year ago

Interesting that the Fund's policy constraints make tax-exempt instruments inappropriate. I wonder if they're trying to maximize their returns at all costs, even if it means taking on more risk.

upvoted 0 times

Cheryll

1 year ago

User 1

upvoted 0 times

...

Howard

1 year ago

User 2

upvoted 0 times

...

Jennifer

1 year ago

User 1

upvoted 0 times

...

Nakita

1 year ago

Haha, I bet the Alpha Fund management is using that 40% discount rate to make themselves feel better about this 'risky investment'. Gotta love some good old-fashioned risk management!

upvoted 0 times

Elli

1 year ago

Risk management is key in venture capital investments.

upvoted 0 times

...

Cyndy

1 year ago

A: Definitely, it's a high-risk, high-reward game they're playing with Targus Company.

upvoted 0 times

...

My

1 year ago

B: I agree, it's all about managing that risk when it comes to venture capital investments.

upvoted 0 times

...

Tarra

1 year ago

A: Yeah, that 40% discount rate is no joke. They're really trying to account for that 15% risk of failure.

upvoted 0 times

...

Lourdes

1 year ago

Yeah, they must really want to account for that 15% risk of failure.

upvoted 0 times

...

Dyan

1 year ago

I agree, that 40% discount rate seems pretty high.

upvoted 0 times

...

Chantell

1 year ago

Increasing capital requirements? That doesn't really sound like a venture capital fund to me. I'd say the use of leverage is a more typical characteristic.

upvoted 0 times

Dorethea

1 year ago

It's true, venture capital funds often use leverage to amplify returns.

upvoted 0 times

...

Harris

1 year ago

Increasing capital requirements might not be as common in venture capital funds.

upvoted 0 times

...

Haydee

1 year ago

I think measurable risk is also important when considering venture capital investments.

upvoted 0 times

...

Marguerita

1 year ago

I agree, leverage is a common characteristic of venture capital funds.

upvoted 0 times

...

Janna

1 year ago

I think the most likely characteristic of a venture capital fund is measureable risk. These funds often invest in high-risk, high-potential startups, and the risk profile is a key consideration.

upvoted 0 times