SIE Understanding Products and Their Risks Question 84: Answer and Explanation

Question: 84

How does a subscription agreement help an investor who is considering purchases shares in a hedge fund?

• A. It explains why the investment is registered with the SEC.
• B. It explains why the investment is not registered with the Department of the Treasury.
• C. It evaluates the risk of the investment.
• D. It explains why an investor may only purchase no more than $25,000 worth of ownership.

Correct Answer: C

Explanation:

C: Choice C is correct because the hedge fund may use focused investments in a specific firm or industry rather than diversification, arbitrage (buying and selling an asset in two markets or two assets at the same time), short selling (borrowing an asset and selling it), trading in currency or commodities, or margin (borrowing funds to purchase assets). Choice A is incorrect because the investment is not registered with the SEC, or else the subscription agreement would not be necessary, as a prospectus would describe the investment's risks and characteristics. Choice B is incorrect because the subscription agreement explains why the investment is not registered with the SEC. Choice D is incorrect because the minimum investment may be $100,000 or as much as $1,000,000.