答案和详解如下：

1.Which of the following is least accurate regarding the risk of hedge funds?

A)   Risk management should be performed on a periodic basis.

B)   The difficulty in valuing derivatives creates operational risk for hedge funds.

C)   Counterparty risk is a problem for securities traded on the NASDAQ exchange.

D)   Most historical data for hedge funds consists of a stable period in the financial markets.

The correct answer was C)

Counterparty risk is a problem when securities are traded off an exchange because there is no exchange to limit credit risk. Risk management is not just assessed before the investment, it is an ongoing process. The more complex securities such as derivatives may be especially hard to value and require sophisticated mathematical models to derive a fair value. A problem with these models is that they can break down in volatile markets. This creates operational risk for hedge funds. Most data for hedge funds only goes back as far as the late 1980s or early 1990s. Coincidentally, the historical period in the interim consists of a fairly stable period in the financial markets, so it is difficult to understand what the future risks from a hedge fund might be.

2.Which of the following is most accurate in describing the betas of emerging market arbitrage hedge funds? These funds have:

A)   high betas in up markets and low betas in down markets.

B)   low betas in up markets and positive betas in down markets.

C)   low betas in both up and down markets.

D)   high betas in both up and down markets.

The correct answer was B)

Examining emerging market arbitrage hedge funds in up and down markets, it has been found that emerging markets arbitrage funds actually have low betas in up markets and positive betas in down markets. This indicates that they don’t fully participate in bull markets while also producing losses in bear markets. Thus, not only are they not market neutral, but their performance pattern is disadvantageous.

3.Which of the following most accurately describes the equity market risk exposure of fixed income arbitrage hedge funds? Most fixed income arbitrage hedge funds have:

A)   little or no equity market risk exposure.

B)   an equity market risk exposure because they are long Treasuries and short higher credit risk issues that have an equity market risk exposure.

C)   an equity market risk exposure because they are short Treasuries and long higher credit risk issues that have an equity market risk exposure.

D)   an equity market risk exposure because they are long Treasuries and long higher credit risk issues that have an equity market risk exposure.

The correct answer was C)

Most fixed income arbitrage hedge funds have an equity market risk exposure because they are short Treasuries and long higher credit risk issues. When economies slow, credit spreads widen and the loss from the short Treasury position creates a net loss for a fixed income hedge fund, especially if the bond issuers on the long side experience financial difficulty.

4.Which of the following most accurately describes the risks for fixed income hedge funds? The largest risk factor is:

A)   a widening of credit spreads, although during the 1990s credit spreads were fairly stable.

B)   interest rate risk, although during the 1990s interest rates were fairly stable.

C)   a widening of credit spreads, although during the 1990s credit spreads were fairly volatile.

D)   interest rate risk, although during the 1990s interest rates were fairly volatile.

The correct answer was A)

For fixed income hedge funds, it has been found that the largest risk factor is a widening of credit spreads. During the 1990s, which represents the largest span of data available for hedge funds, credit spreads were fairly stable. So the risk of fixed income hedge funds may be greater in the future. The widening of credit spreads can persist for several periods.