CFA Level II ExamAlternative InvestmentsMedium
An infrastructure fund manager is evaluating a potential investment in a newly constructed toll road. The road is expected to have relatively stable demand but is subject to regulatory oversight regarding toll increases. Which of the following risk factors is most relevant to the fund manager's assessment of this investment?
- ARegulatory Risk
- BTechnology Obsolescence
- CDemand Risk
- DCommodity Price Volatility
Show answer & explanationAnswer & explanation
Correct answer: A. Regulatory Risk
The scenario explicitly states the toll road is 'subject to regulatory oversight regarding toll increases.' This directly points to regulatory risk as a key factor influencing the investment's potential returns and stability, despite stable demand.
Why the other options are wrong
- B. Technology obsolescence is less of a concern for a physical asset like a toll road compared to, for example, a communications network.
- C. Demand risk is mitigated by the statement 'expected to have relatively stable demand,' although it's always a factor for infrastructure, regulatory risk is explicitly highlighted.
- D. Commodity price volatility is generally not a primary risk for a toll road, unless construction costs were still a major factor.
Infrastructure Investment Risks
Specific risks associated with investing in infrastructure assets, including construction risk, demand risk, regulatory risk, political risk, and operational risk.
- Long-term nature of assets.
- Often subject to government regulation.
- High upfront capital expenditure.
Memory trick: Infrastructure faces many hurdles from ground to governance.