6. Hedge funds and financial leverage

Compared to mutual funds, hedge funds are ____ (more/less) open, in terms of accepting additional investment.

Suppose that Thompson Hedge Fund obtains and invests $2.50 of borrowed funds for every $1 of equity invested. In other words, it can invest $3.50 of assets for each $1 of equity. Also suppose that Thompson can achieve a 10% return on assets (ROA).

Given this ROA, the return on Thompsons equity investment is

_____ %.

Suppose that Thompson Hedge Fund obtains and invests $2.50 of borrowed funds for every $1 of equity invested. In other words, it can invest $3.50 of assets for each $1 of equity. However, suppose that Thompson suffers a 10% loss, or a -10% return on assets (ROA).

Given this ROA, the return on Thompsons equity investment is

_____ %.