Alternative Investment

Alternative Investment refers to a category of investments that falls outside of traditional asset classes such as stocks, bonds, and cash. These are typically less liquid, may have higher risks, and often require more specialized knowledge.

Types of Alternative Investments

• Real Estate: Investment in physical properties or real estate investment trusts (REITs).
• Hedge Funds: Pooling of investments that employ various strategies to earn active return.
• Private Equity: Investment in private companies not listed on public exchanges.
• Commodities: Physical goods such as gold, oil, and agricultural products.
• Cryptocurrencies: Digital currencies that use cryptography for security.
• Art and Collectibles: Investments in artworks, antiques, or rare collectibles.

Explanation of Alternative Investments

Alternative investments are often sought after to diversify a portfolio. They have different risk-return profiles compared to traditional investments:

• Low Correlation: Many alternative investments have low correlation with stock and bond markets, which can potentially reduce overall portfolio volatility.
• Higher Returns: While they can be riskier, alternative investments may offer higher potential returns due to their unique characteristics.
• Liquidity Issues: Many alternative investments are not easily sold or exchanged for cash without a significant loss in value.
• Expertise Required: Investors often need specialized knowledge to effectively evaluate and invest in alternatives.

Example of Alternative Investment

A common example of alternative investment is investing in real estate. An investor purchases a rental property that costs $300,000.

Calculation of ROI (Return on Investment)

To calculate the ROI for the real estate investment, consider the following:

• Initial Investment: $300,000
• Annual Rental Income: $36,000
• Property Expenses (e.g., maintenance, property taxes): $12,000
• Net Income: $36,000 – $12,000 = $24,000

The ROI is calculated as:

ROI = (Net Income / Initial Investment) * 100

Substituting the values:

ROI = ($24,000 / $300,000) * 100 = 8%

This means the investor earns an 8% annual return on their initial investment in the property, excluding any potential appreciation or depreciation of the asset itself.

Alternative investments can provide a valuable addition to a diversified portfolio, allowing investors to explore new avenues for growth and strategy outside of conventional asset classes.