1.Compared to traditional ways to invest, hedge funds general1y are, as a vehicle for investment:
　　A. More risky, because they are smaIler and less diversified.
　　B. Less risky, because they are managed by small, more efficient teams.
　　C. More risky, because they are more leveraged.
　　D. Less risky, because they hedge their positions.
　　2.A hedge fund with $100 miIlion in equity is Iong $200 million in some stocks and short $150 miIlion in other stocks. The gross leverage and net leverage are,respectively,
　　A. 2.0 and 0.5
　　B. 2.0 and 1.5
　　C. 3.5 and 0.5
　　D. 3.5 and 1.5
　　3.Bond A has al1 effective duration of 12.13 and a 2-year key rate exposure of $4.04.
　　You would like to hedge it with a security with an effective duration of2.48 and a
　　2-year key rate exposure of 0.81 per $100 face value. What amount of face value
　　would be used to hedge the 2-year exposure?
　　A. $102.
　　B. $163.
　　C. $489.
　　D. $499.
　　Answer:
　　1.C
　　GARP was looking for C as the correct answer. It is true that hedge funds are more highlyleveraged than traditional managed portfolios, which makes them more risky.
　　2.C
　　The gross leverage is (200 + 150)/100 = 3.5.
　　The net leverage is (200 - 150)/100 = 0.5.
　　3.D
　　Solve for the face value (F) using the foìlowing formula:
　　F (0.811100)=$4.04
　　F = $499
　　Thus the correct response is d. The other answers are incorrect b巳cause they utilize the effective duration, which is not needed in this problem.