SIE Understanding Products and Their Risks Question 21: Answer and Explanation

Question: 21

Which of the following describes the goal of hedge funds defined as "absolute return"?

• A. Favorable returns in good markets and bad markets
• B. Closely matching the performance of the S&P 500 Index (within plus or minus 0.5 percent)
• C. Closely matching the performance of the S&P 500 Index (within plus or minus 0.5 percent) and always having a positive return on a calendar year basis
• D. Never having the fund's value go down from the end of one calendar quarter to the end of the next calendar quarter

Correct Answer: A

Explanation:

A: Absolute return refers to the goal of having favorable returns in good markets and bad, usually by hedging, or generating favorable returns by matching an investment with another investment that will do well when the original investment does not. Index mutual funds may pursue the return of an index, such as the S&P 500 Index, by investing in substantially the same stocks although not with the specifics of Choice B or Choice C. Choice D may be a hope for a fund but is not typically stated as a specified goal.