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Answer: There is not enough evidence to conclude that investors of hedge funds are compensated for fraud risk by receiving higher returns.
B is correct. There's no evidence that supports that investors are compensated for fraud risk through higher returns or lower fees. The statement A is incorrect because disclosures regarding past regulatory or legal violations are effective in predicting fraud. Statement C is incorrect as it is not accurate to infer that conflicts of interest cause fraud, or that their prohibition would deter fraud, even though certain characteristics like conflicts of interest can predict fraud. Statement D is incorrect because the SEC now provides access to historical data, contrary to the situation before 2007. The study mentioned in the reading suggests that improving public access to comprehensive historical disclosures could increase the benefits these disclosures were meant to provide.
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A professional advisor is currently reviewing the mandatory reports that hedge funds are required to submit to the United States Securities and Exchange Commission (SEC). The advisor is particularly focusing on the techniques available for investors to identify and minimize the risk of fraudulent activities by analyzing these reports. Which of the following statements is correct?
A
Disclosures of past regulatory or legal violations are not effective in predicting fraud because circumstances almost always change.
B
There is not enough evidence to conclude that investors of hedge funds are compensated for fraud risk by receiving higher returns.
C
Regulatory and legal prohibitions prevent fraud, and insufficient requirements on disclosure of violations cause fraud.
D
Regulatory and legal violation disclosures benefit only a small fraction of investors who have access to high-cost contemporaneous data