What risk profile is associated with the returns of fixed-income arbitrage funds?

Fixed-income arbitrage funds typically have a moderate risk profile when it comes to their returns. This risk level arises from the nature of the strategies used by these funds, which involve exploiting price discrepancies between related fixed-income securities. While these strategies can generate consistent returns, they inherently carry some level of risk due to interest rate movements, credit risks, and liquidity factors.

The varying Sharpe ratios associated with fixed-income arbitrage funds further highlight their moderate risk profile. A Sharpe ratio measures the risk-adjusted return of an investment, allowing investors to assess how much excess return they are receiving for the additional volatility they endure compared to a risk-free asset. In this context, fixed-income arbitrage funds often exhibit different Sharpe ratios depending on market conditions and the specific strategies employed, indicating that while they aim for profitability, the returns can fluctuate based on market dynamics.

The other choices describe risk profiles that are not representative of fixed-income arbitrage funds. For instance, a high risk with minimal correlation to market trends suggests a more aggressive strategy typically found in hedge funds or equity funds, while low risk with guaranteed returns implies fixed income securities that do not engage in arbitrage tactics. Extreme risk with high volatility characterizes speculative or high-leverage trading strategies, which is