Many sophisticated investors have added alternative investments to their portfolios. Benefits in doing so would include:

A) lower expenses than traditional stock and bond investments.

B) portfolio diversification.

C) greater regulation than traditional investments such as stocks and bonds.

D) returns that generally exceed those of traditional stock and bond investments.

Answer: B) portfolio diversification.

One of your clients wishes to invest in a fund of hedge funds. You could tell him which of the following?

A) Shares of these funds are easy to redeem.

B) Expenses for these funds tend to be higher than those for other funds.

C) He can expect to make a profit whether the markets trend up or trend down.

D) These funds purchase a large amount of preferred stock.

Answer: B) Expenses for these funds tend to be higher than those for other funds.

The prospectus for a fund states that the minimum initial investment is $500,000. This is most likely what type of fund?

A) Balanced.

B) Small-cap growth.

C) Specialized.

D) Hedge.

Answer: D) Hedge.

When reading the prospectus for a fund, you notice that it states that the fund may make portfolio purchases on margin, take short positions, and use arbitrage techniques. This is most likely what type of fund?

A) Index.

B) Hedge.

C) Closed end.

D) Exchange traded.

Answer: B) Hedge.

Which of the following statements concerning hedge funds are TRUE?

I.Purchasers of hedge funds are generally required to be accredited investors.

II. Short sales by the fund are not allowed.

III. Ordinary investors may invest in hedge funds indirectly through funds of hedge funds.

IV. Hedge funds invest actively only when securities prices are moving up.

A) I and IV.

B) II and III.

C) II and IV.

D) I and III.

Answer: D) I and III.

A client has told you that she has been reading in the financial press about something known as an "alternative investment". Which of the following would fit that description?

I. Direct participation programs.

II. ETFs.

III. Hedge funds.

IV. Preferred stock.

A) I, II and III.

B) III and IV.

C) I and III.

D) I and II.

Answer: C) I and III.

One of your advisory clients meets the financial requirements for investing in a hedge fund. Having read so much about their outstanding performance, he asks you to describe any negatives to adding one to his portfolio. You could respond:

A) Expenses tend to run very high diminishing the funds' performance.

B) the designed strategy of many hedge funds is to generate positive returns in both rising and falling markets.

C) with a large variety of available investment styles, investors have a plethora of choices to assist them in meeting their objectives.

D) as part of an asset allocation class, hedge funds may reduce overall portfolio risk and volatility and increase returns.

Answer: A) Expenses tend to run very high diminishing the funds' performance.

A hedge fund and a traditional mutual fund are similar in that:

A) both offer performance incentives to the fund manager.

B) both typically have low initial investment requirements.

C) both use long and short positions, swaps, and arbitrage.

D) their portfolio managers are likely to effectuate trades on a daily basis.

Answer: D) their portfolio managers are likely to effectuate trades on a daily basis.