FBLA Securities and Investments Practice Test 2025 – Complete Exam Prep

The potential characteristic of hedge funds that can increase their risk is their use of leverage. Leverage refers to the practice of borrowing capital to invest, which can amplify both gains and losses. When hedge funds use leverage, they can increase their exposure to market fluctuations and other risks. For example, if a hedge fund uses borrowed money to invest in securities and those investments decline in value, the losses can be significantly larger than if the fund had only used its own capital. This heightened risk associated with leverage can lead to substantial financial consequences, particularly in volatile markets, thus making it a critical aspect to consider in understanding the risk profile of hedge funds.

In contrast, the other choices do not inherently increase risk in the same manner. Emphasis on fundamental analysis is generally a method to reduce risk by making informed investment decisions based on financial and economic factors. Regulation by the SEC provides oversight meant to protect investors and enhance market integrity, which can mitigate risk rather than increase it. A focus on domestic investments does not directly introduce risk; instead, it may lessen certain types of risks associated with foreign investments, such as currency risk or geopolitical risk.