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Answer: Hedge Fund 3
## Explanation **Hedge Fund 3** is most likely to mitigate risk because: - **Both Hedge Fund 1 and Hedge Fund 3** reduce serial correlation from 16% to 15%, indicating some diversification benefit. - **Hedge Fund 2** maintains the same serial correlation (16%) as the traditional portfolio. - **Hedge Fund 3** (and Hedge Fund 1) also reduce maximum drawdown from 18% to 17%, providing downside protection. - Among the funds that improve both metrics (serial correlation and maximum drawdown), **Hedge Fund 3** would be the better choice for risk mitigation, though the data shows identical improvements for Funds 1 and 3. Given the question asks for the "most likely" and all three have similar risk-return profiles, Hedge Fund 3 represents the combination of both risk reduction benefits.
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64 An analyst gathers the following information about a traditional stock/bond portfolio and blended portfolios that combine this traditional portfolio with an equal allocation to one of three different hedge funds:
| Portfolio | First-Order Serial Autocorrelation (Rho) | Maximum Drawdown |
|---|---|---|
| Traditional Portfolio | 16% | 18% |
| Traditional Portfolio + Hedge Fund 1 | 15% | 18% |
| Traditional Portfolio + Hedge Fund 2 | 16% | 17% |
| Traditional Portfolio + Hedge Fund 3 | 15% | 17% |
If all three hedge funds have similar risk-return profiles, which fund is most likely to mitigate the risk of the traditional portfolio?
A
Hedge Fund 1
B
Hedge Fund 2
C
Hedge Fund 3