1.

Compared to a brownfield infrastructure investment, a greenfield investment most likely has:

 A. higher levels of risk.

B. lower potential returns.

C. more current cash flows.

Explanation

Greenfield vs. brownfield infrastructure characteristics

Greenfield Brownfield

Infrastructure that has yet to be built Expansion or improvement of existing infrastructure

No operating or financial history May already be generating regular cash flow or dividends
Usually higher risk, higher return potential Usually lower risk, lower return potential

The terms brownfield and greenfield refer to the development stage of infrastructure investments. Greenfield investments build new infrastructure
(eg, a new toll road). Brownfield investments expand or improve existing infrastructure (eg, adding a new hospital wing).

Unlike brownfield assets, greenfield assets have no financial or operating history. An investor in a greenfield project may have the promise
that a government will purchase or lease the asset once it is built, or the investor may be planning to own and operate the completed asset.

Given the long time required to construct a greenfield asset, the risks for a greenfield investor are that the completed project may get a lower
price or face lower demand than expected. It may also be difficult to obtain needed financing for a greenfield investment, and construction or
operating costs could be higher than expected.

(Choice B) Greenfield investments have higher potential returns since the latest technology can be used to maximize the efficiency of the asset's
operations and maintenance.

(Choice C) It takes a long time to construct greenfield investments and make them operational. During that time, they typically do not generate
cash flows, whereas brownfield projects may generate predictable cash flows even before they are completed.

Things to remember:
A greenfield investment is an infrastructure investment that has not yet been built. Since a greenfield investment has no financial or operating
history, there is risk that the completed asset may face lower demand or have a lower value than expected. Other risks include difficulty obtaining
financing and higher construction or operating costs.

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2. Which of the following types of alternative investments most likely provides investors the greatest income stability?

A. Direct investment in farmland

B. Direct investment in timberland

 C. Equity real estate investment trusts

Explanation

Equity real estate investments

Category Sources of return Comments

Rental income
Considered commercial property when not owner-
Residential property Property
occupied
appreciation

Rental income
Direct investments Commercial real estate Property Types: offices, retail, industrial, warehouses, hotels
appreciation

Crop income
Good inflation hedges due to both land and crop
Farmland and timberland Property
values
appreciation

Rental income
Pooled Equity real estate investment
Property Stable income on portfolio of commercial properties
investments trusts
appreciation

Equity investment in real estate takes the form of direct investment in individual properties or pooled investment in real estate investment trusts
(REITs).

The net rental income of equity REITs is mostly derived from commercial leases (eg, office buildings, retail malls) and multifamily residences (eg,
apartment complexes). Rental income from these properties is relatively predictable and provides more stable income than other types of real
estate equity investments.

(Choices A and B) Direct ownership of natural resources (eg, farmland, timberland) provides investors with a stream of current income and
potential property appreciation. Current income is derived from sales of harvestable commodities. However, commodity prices and harvests can
be relatively volatile, resulting in less predictable income streams.

Things to remember:
Equity investment in real estate takes the form of direct investment in individual properties or pooled investment in real estate investment trusts
(REITs). These investments usually have an income component. Pooled investments in REITs offer more stable rental income streams than
natural resources (eg, farmland, timberland) since income from crops is susceptible to volatility in commodity prices and harvests.

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3. An investor is seeking an alternative investment that offers historically low correlation with global equities, relatively low volatility, and current
income. Which of the following most appropriately meets these requirements?

 A. Farmland

B. Managed futures

C. Publicly listed real estate investment trust

Explanation

Farmland and timberland investments

Farmland Timberland Common to both

Harvest quantities
Sources of returns Commodity prices Lumber prices
Land price changes

Possibly ESG Inflation hedge

ESG-friendly
Investment Regular income Low correlation with traditional
Long new growth cycle
attributes Harvest inflexibility; at least annual assets
Harvest flexibility
harvest cycle Can hedge with futures

Direct purchase, but for largest

Investment vehicles Publicly traded REITs investors only
Private investment funds

ESG = environmental, social, and governance REIT = Real estate investment trust

The three sources of return on farmland are harvest quantities, commodity prices, and land prices. Farmland provides a consistent income
stream as the crops are harvested, and is considered an inflation hedge since it offers investors exposure to commodity and land prices.
Relative to global equities, attributes that make farmland a desirable investment include low correlations, low annualized volatility, and
comparable rates of return.

(Choice B) Managed futures provide diversification benefits to a typical portfolio, but the returns tend to be volatile.

(Choice C) Publicly listed real estate investment trusts have high correlations to global equities and exhibit high volatility.

Things to remember:
Relative to global equities, attributes that make farmland a desirable investment include low correlations, low annualized volatility, and comparable
rates of return. Farmland also provides a consistent income stream as the crops are harvested and is considered an inflation hedge since it offers
investors exposure to commodity and land prices.

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4. In a floating-rate mortgage on a commercial real estate property, the lender's risk compared to the borrower's risk is best described as:

A. spread risk.

B. interest rate risk.

 C. the loan-to-value ratio.

Explanation

The loan-to-value ratio is one of the most common risk assessment tools used by mortgage lenders. This ratio divides a loan's current value by
the current appraised property value and reflects the size of the lender's investment relative to the borrower's investment.

Since the property is generally the only collateral for the loan, the loan-to-value ratio is especially important in the loan risk assessment process
and ultimately determines the amount of risk (ie, potential for capital losses) assumed by the lender. A common initial loan-to-value ratio in
commercial real estate is 65%–80%, meaning that the borrower has equity in the property of 35%–20%. The greater the ratio, the greater the
lender's risk.

(Choice A) Spread risk refers to the impact on a bond's price from changes in credit spreads, which are not directly relevant here.

(Choice B) In this case, the loan is a floating-rate mortgage, which neutralizes interest rate risk for the lender.

Things to remember:
The loan-to-value ratio divides a loan's current value by the current appraised property value. Since the property is usually the only collateral for
the loan, the loan-to-value ratio is especially important in the loan risk assessment process and ultimately determines the amount of risk assumed
by the lender.

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5. An investor seeking to benefit from the appreciation of commercial real estate would most appropriately buy:

 A. equity real estate investment trusts.

B. mortgage real estate investment trusts.

C. commercial mortgage-backed securities.

Explanation

Pooled real estate investments

Sources of return Description

Loan (mortgage) income

Residential MBS Pools of single-family residential mortgage loans
Secured by property

Loan (mortgage) income

Commercial MBS Pools of commercial/multi-family residential mortgages
Secured by property

Rental income
Equity REITs Stable income on portfolio of commercial properties
Property appreciation

Loan (mortgage) income

Mortgage REITs Portfolio of residential and/or commercial MBS
Secured by property

MBS = mortgage-backed securities; REITs = real estate investment trusts.

Publicly traded, pooled real estate investments are usually structured as real estate investment trusts (REITs) or mortgage-backed securities
(MBS). There are two types of REITS: equity REITs and mortgage REITs.

Equity REITs purchase (ie, own the equity in) commercial real estate.
MBS and mortgage REITs invest in real estate–related debt.

The benefits of property appreciation accrue primarily to the property owners. Of the choices, only equity REITs own commercial real estate and
realize the full benefit of property appreciation.

(Choice B) Mortgage REITs hold portfolios of MBS. As holders of interests in pools of debt instruments, mortgage REITs are owed a share of the
principal and interest of the loan pools; however, they do not participate in property appreciation.

(Choice C) Commercial MBS (CMBS) are interests in single pools of commercial mortgages. CMBS holders have a claim on the interest and
principal of the pooled mortgages, but they do not share in property value gains.

Things to remember:
Publicly traded, pooled real estate investments are mostly structured as real estate investment trusts (REITs) or mortgage-backed securities.
Equity REITs are the only type of pooled real estate investment that participates directly in the appreciation of commercial properties.

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6. An alternative investment that provides diversification benefits and an inflation hedge while also generating consistent income is best described
as an investment in:

 A. farmland.

B. managed futures.

C. a greenfield infrastructure project.

Explanation

Farmland and timberland investments

Farmland Timberland Common to both

Harvest quantities
Sources of returns Commodity prices Lumber prices
Land price changes

Possibly ESG Inflation hedge

ESG-friendly
Investment Regular income Low correlation with traditional
Long new growth cycle
attributes Harvest inflexibility; at least annual assets
Harvest flexibility
harvest cycle Can hedge with futures

Direct purchase, but for largest

Investment vehicles Publicly traded REITs investors only
Private investment funds

ESG = environmental, social, and governance REIT = Real estate investment trust

Real estate is a varied asset class that includes many forms (eg, residential, commercial, land) and investment structures (eg, direct, indirect,
securitized). For example, investments in farmland provide significant diversification benefits to traditional debt and equity portfolios.

There are three principal components of return for farmland: harvest quantities, commodity prices, and land prices. Farmland can be divided into
row crops (eg, corn, wheat) that may be harvested more than once per year and permanent crops (eg, orchards, vineyards). As the crops are
harvested, they provide a consistent income stream. Farmland also represents an inflation hedge since it offers investors exposure to
commodity and land prices.

(Choice B) Managed futures provide diversification benefits and possible income to typical portfolio, but they are not considered an inflation
hedge.

(Choice C) Greenfield infrastructure projects require a significant cash outlay and often take many years to produce revenue, so they are
inappropriate for consistent income.

Things to remember:
Farmland provides diversification benefits and a consistent income stream as crops are harvested; it also represents an inflation hedge since
investors gain exposure to commodity and land prices. The three principal components of return for farmland are harvest quantities, commodity
prices, and land prices.

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7. Compared with a direct investment in real estate, investing in real estate investment trusts (REITs) most likely offers a distinct advantage
regarding:

A. taxes.

B. degree of control.

 C. stability of income.

Explanation

Real estate investing categories

Single-family residences Commercial real estate Farm and timber

Direct equity ownership – Yes Yes

Direct debt investment – Yes –

CMBS
Pooled investment vehicles Joint ventures
RMBS Joint ventures
(debt and equity) Real estate funds
Real estate funds

REITs Yes, mortgage REITs Yes, wide variety of subsectors Yes, timber REITs

RMBS = residential mortgage-backed securities; CMBS = commercial mortgage-backed securities;

REIT = real estate investment trust.

Investors can own real estate

directly through purchasing and managing property, or

indirectly through purchasing shares in a publicly traded REIT.

Real estate investment trusts (REITs) are publicly traded companies that invest in a portfolio of commercial or residential properties, typically
relying on leverage to finance and hold larger portfolios that can enhance returns. In REITs, shares are publicly traded and the investment
portfolio is diversified, providing two key advantages over direct investment: liquidity and income stability.

(Choice A) Tax advantages are not unique to REITs. Both kinds of investments offer tax advantages to investors: direct investments often offer
real estate-specific deductions and deferrals, while REITs avoid corporate taxes if they distribute most of the rental income (ie, at least 90%) to
shareholders.

(Choice B) Degree of control is an advantage unique to direct investment. Direct investment offers control over decisions such as buying, selling,
sources of funding, number of tenants, and whether to undertake capital projects. A REIT, however, makes management decisions for its portfolio
of properties without investor feedback or approval.

Things to remember:
Real estate investing offers several advantages to investors. Some advantages are shared across different forms of real estate investments. For
instance, direct investment and real estate investment trusts (REITs) both provide tax advantages. Other advantages are unique to the type of
real estate investment. For example, a key advantage of direct investment is degree of control, while REITs offer liquidity and income stability.

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8. An infrastructure investor primarily concerned with market liquidity would most appropriately invest in:

A. the expansion of an income-generating toll road.

 B. an exchange-traded fund consisting of utility companies.

C. a hedge fund investing in various types of infrastructure companies.

Explanation

Classification of infrastructure investments

Category Characteristics

Transportation assets (eg, bridges, airports)

Economic
Types of assets Utility assets (eh, water, waste treatment, power generation)

Social Public welfare assets (eg, hospitals, schools)

Brownfield Improving existing infrastructure

Stage of development
Greenfield Building new infrastructure

Direct ownership of a project

Direct Highest upside potential
Highest concentration and liquidity risks
Investment vehicle
Shares of publicly traded infrastructure companies
Indirect Investment can be made through exchange-traded funds, mutual funds
Better liquidity and more diversification than direct investment

Infrastructure investments provide access to returns from assets (eg, roads, airports) that provide essential services intended for public use.
Indirect infrastructure investments are more liquid than direct investments (eg, building or purchasing a hospital). Whether publicly traded (eg,
infrastructure exchange-traded funds (ETFs)) or unlisted (eg, hedge funds), indirect investments require smaller capital outlays and are easier
to exit since they can typically be sold back to the fund or traded on an exchange.

Publicly traded indirect investments are more liquid than unlisted indirect investments, which have a smaller pool of potential investors and may
have redemption restrictions. For investors primarily concerned with market liquidity, a publicly traded indirect investment (eg, ETF consisting of
utility companies) is preferable to an unlisted infrastructure hedge fund (Choice C).

(Choice A) Direct infrastructure investments (eg, expansion of an income-generating toll road) have low market liquidity driven by the need for a
large amount of capital, the time required to exit an investment, and the limited number of potential buyers. These factors can make it difficult to
realize an asset's full market value in a sale, especially for an investor seeking a quick exit; therefore, a direct infrastructure investment is a less
appropriate choice for an investor primarily concerned with market liquidity.

Things to remember:
Due to smaller capital outlays and ease of exit, indirect infrastructure investments are more liquid than direct investments. Publicly traded indirect
investments (eg, exchange-traded funds) are more liquid than unlisted indirect investments (eg, hedge funds).

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9. A portfolio manager is considering adding an infrastructure investment to a pension portfolio to increase the fund's long-term expected return.
Which of the following is the most appropriate investment to add to the portfolio?

A. Direct brownfield investment in a power plant

 B. Direct greenfield investment in a toll road project

C. Publicly listed master limited partnership in existing energy pipeline assets

Explanation

Greenfield vs. brownfield infrastructure characteristics

Greenfield Brownfield

Infrastructure that has yet to be built Expansion or improvement of existing infrastructure

No operating or financial history May already be generating regular cash flow or dividends
Usually higher risk, higher return potential Usually lower risk, lower return potential

The terms brownfield and greenfield refer to the development stage of infrastructure investments. Greenfield projects build new infrastructure
(eg, new toll road). Brownfield projects expand or improve existing infrastructure (eg, adding capacity at a power plant).

Greenfield infrastructure projects have no financial or operating history. Greenfield projects are among the riskiest investments to undertake due
to long lead times (often 5–10 years) and the potential for delays or cost overruns in land acquisition, permits, engineering, and final construction.

Due to the high risks associated with greenfield projects, investors require very high returns for these types of investments. A pension fund with a
very long investment horizon can absorb the risks while reaping the potentially greater expected returns that can be generated over the long life
of these assets.

(Choice A) Relative to greenfield projects, brownfield assets have lower risks due to stable cash flow generation and known operating and
financial histories. These projects tend to be more income producing and/or dividend oriented, but the expected returns are lower.

(Choice C) A publicly listed master limited partnership (MLP) in existing energy pipeline assets is an example of a brownfield asset, with lower
return expectations than a greenfield project. MLPs primarily emphasize income generation.

Things to remember:
Greenfield projects build new infrastructure, while brownfield projects expand or improve existing infrastructure. Since they often have long lead
times and no performance history, greenfield assets carry considerable risk and therefore must offer much higher long-term expected returns than
brownfield assets.

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10. An investor who does not seek current income from an investment in infrastructure should most appropriately:

 A. directly invest in a greenfield hospital project.

B. own shares in an unlisted mutual fund that invests in existing toll roads.

C. invest in an exchange-traded fund that consists of brownfield public utilities.

Explanation

Classification of infrastructure investments

Category Characteristics

Transportation assets (eg, bridges, airports)

Economic
Types of assets Utility assets (eh, water, waste treatment, power generation)

Social Public welfare assets (eg, hospitals, schools)

Brownfield Improving existing infrastructure

Stage of development
Greenfield Building new infrastructure

Direct ownership of a project

Direct Highest upside potential
Highest concentration and liquidity risks
Investment vehicle
Shares of publicly traded infrastructure companies
Indirect Investment can be made through exchange-traded funds, mutual funds
Better liquidity and more diversification than direct investment

A greenfield infrastructure project is one that has not yet been built; a brownfield project already exists. Infrastructure projects typically require
a long construction period, so they tend not to produce current income at the project's inception. This type of investment is appropriate for an
investor who does not seek current income.

Direct investment refers to an ownership interest in the project itself. An indirect investment consists of an investment in an entity such as a
mutual fund or an exchange-traded fund that in turn invests in infrastructure assets.

(Choices B and C) Investments in completed (ie, brownfield) projects can produce immediate current income, and utilities and toll roads typically
produce significant amounts of current income.

Things to remember:
Greenfield infrastructure assets must be built, and a greenfield investor often realizes no current income during an asset's construction.
Brownfield investments, especially those that benefit from regular revenue streams such as utilities and toll roads, are more appropriate for an
investor seeking current income.

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11. An analyst is using a real estate valuation index to estimate the value of an investment property and wishes to avoid sample selection bias.
The analyst's least appropriate choice is to use a(n):

A. REIT index.

B. appraisal index.

 C. repeat sales index.

Explanation

Real estate return indexes are categorized as appraisal, repeat sales, or real estate investment trust (REIT) indexes. Repeat sales indexes are
constructed using the average price change of the same property as a result of a sale or refinancing. This transaction-based approach
provides a timely and accurate valuation for a broad range of properties (eg, residential single-family homes).

A repeat sales index does have limitations, including sample selection bias. The selection process is nonrandom since it uses properties with
prior sales. Thus, the index may have a bias toward properties that turn over at a higher rate but are not necessarily representative of the broader
geographic scope of the index. Selection bias could also occur if sales in a specific area are infrequent, making the results less reliable.

(Choice A) REIT indexes are based on the underlying prices of publicly traded REITs. Although useful for the valuation of the real estate asset
class, valuation of publicly traded REITs may not align with the specific circumstances (eg, geography, quality, property type) for valuing a
particular investment property.

(Choice B) Appraisal indexes rely on appraised property values, which are typically based on comparable properties or cash flow estimates.
Limitations of the appraisal index include the subjectivity of the appraisal process and the reliance on appraisals to calculate returns, all of which
may result in understated return volatility.

Things to remember:
Sample selection bias is a limitation of repeat sales indexes. Since the selection process is nonrandom, a repeat sales index may have a bias
toward certain properties that are not necessarily representative of the broader geographic scope of the index. Selection bias could also occur if
sales in a specific area are infrequent, making the results less reliable.

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12. The type of infrastructure investment most likely to have the highest concentration risk is a(n):

 A. direct investment in a greenfield project.

B. unlisted mutual fund that invests in multiple global brownfield projects.

C. exchange-traded fund (ETF) made up of publicly traded infrastructure companies.

Explanation

Classification of infrastructure investments

Category Characteristics

Transportation assets (eg, bridges, airports)

Economic
Types of assets Utility assets (eh, water, waste treatment, power generation)

Social Public welfare assets (eg, hospitals, schools)

Brownfield Improving existing infrastructure

Stage of development
Greenfield Building new infrastructure

Direct ownership of a project

Direct Highest upside potential
Highest concentration and liquidity risks
Investment vehicle
Shares of publicly traded infrastructure companies
Indirect Investment can be made through exchange-traded funds, mutual funds
Better liquidity and more diversification than direct investment

Infrastructure refers to public-use assets such as schools, hospitals, and roads. Investing in infrastructure is a form of alternative investing.
Greenfield projects represent new assets that will be built; brownfield assets are those that already exist. Most infrastructure investing is
through indirect vehicles such as mutual funds and exchange-traded funds (ETFs), but direct investment is available for some types of projects.

Direct investors are responsible for building the greenfield asset; they own all its upside potential as well as its risks. Infrastructure projects are
extremely capital-intensive, and each project's capital requirements often make it unfeasible for an investor to directly invest in multiple projects.
This limited ability to diversify causes concentration risk.

(Choice B) Unlisted mutual funds make passive investments in infrastructure assets that are not publicly traded, such as hospitals or schools.
These funds diversify among several different investments, so concentration risk is usually not present.

(Choice C) Infrastructure ETFs consist of shares of publicly traded infrastructure companies. The diversification across many companies means
that no single company comprises a significant percentage of the fund. This reduces the possibility of concentration risk.

Things to remember:
Investors can choose between direct and indirect investments in infrastructure projects. Direct investing captures all the project's upside potential
but exposes the investor to the most risk, including concentration risk. Indirect investing can provide more diversification and reduce the investor's
risk.

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13. A private equity real estate fund that primarily redevelops and repurposes shopping malls in secondary and tertiary markets is most likely
structured as a(n):

A. core-plus strategy fund.

 B. finite-life closed-end fund.

C. infinite-life open-end fund.

Explanation

Indirect real estate:

Private equity fund characteristics

Infinite life, open end Finite life, closed end

Beta exposure, income oriented Higher-risk property types and markets, but higher return profile
Buy-and-hold strategy Sell properties once redeveloped, focus on capital appreciation, then
Contribute and redeem throughout the fund's life close the fund
Core strategy: high quality, best markets, and stable return Value-add strategy: modest upgrades and redevelopment or
profile repositioning of property
Core-plus strategy: incorporates an allocation to lower-tier Opportunistic strategy: higher-risk projects, major redevelopments,
markets and higher-risk properties significant vacancies, and speculation

Indirect real restate investing takes many forms, including various public and private pooled investment vehicles, such as real estate-focused
private equity funds. Real estate private equity funds are generally structured as either finite-life closed-end (FLCE) funds or infinite-life open-
end (ILOE) funds.

FLCE funds typically earn returns through the development or redevelopment of higher-risk properties (eg, nursing homes, hotels) in noncore
markets. Once redeveloped, the properties are sold to lock in returns and the fund is then wound down. After their initial investment, investors
are unable to contribute or redeem until the fund is wound down. FLCE funds are positioned as:

Value-add funds, which include modest property upgrades and redevelopment or repositioning of a property.

Opportunistic funds, which are the most aggressive and include projects with much higher risk. Examples include major redevelopments,
vacant properties, and outright speculative construction.

A fund that primarily redevelops and repurposes shopping malls (ie, high risk) in secondary and tertiary markets (ie, noncore) is most likely
structured as an opportunistic finite-life closed-end fund.

ILOE funds have no predetermined end date and investors can contribute and redeem throughout the life of the fund. ILOE funds include core
funds, which focus exclusively on buying and holding the best properties in the best markets (ie, low risk, income focus) and provide general asset
class exposure (ie, beta). Core-plus funds also invest primarily in core properties but add a modest allocation to riskier markets and property
types (Choices A and C).

Things to remember:
Finite-life closed-end funds generally invest in higher-risk property types in noncore markets. Once redeveloped, the properties are sold to lock in
returns and the fund is then wound down. Opportunistic finite-life closed-end fund strategies are more aggressive than value-add strategies.

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14. Which of the following is most likely a limitation of using appraisal indexes to measure returns to real estate?

A. Infrequent trading

 B. Understated volatility

C. Sample selection bias

Explanation

Returns to real estate can be measured using various indexes, which are broadly categorized as appraisal, repeat sales (ie, transactional), or real
estate investment trust (REIT) indexes. Appraisal index returns rely on appraised property values, which are typically based on comparable
properties or cash flow estimates.

Although appraisals are expert estimates of value, both the selection of comparable properties and adjustments made to those properties are
subjective. Also, appraisals are often updated less frequently than needed to reflect current market conditions. These limitations tend to result
in understated return volatility.

(Choice A) The appraisal index is not based on trading shares, so it is unaffected by trading frequency. Trading infrequency is a potential
limitation of REIT indexes since reliability is directly related to the frequency of trading.

(Choice C) An appraisal index is based on appraisals of actual assets in the index, so sample selection is irrelevant. Sample selection bias is a
limitation of repeat sales indexes, which are based on the change in value for sales of the same property during a given period.

Things to remember:
Real estate return indexes are categorized as appraisal, repeat sales, or real estate investment trust indexes. Limitations of the appraisal index
include the subjectivity of the appraisal process and the potential reliance on infrequent appraisals to calculate returns, all of which may result in
understated return volatility.

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