Fin 3013 Chapter 4

Chapter 04 - Mutual Funds and Other Investment Companies

Chapter 04Mutual Funds and Other Investment Companies

Multiple Choice Questions

1. Which one of the following invests in a portfolio that is fixed for the life of the fund? A. Mutual fundB. Money market fundC. Managed investment companyD. Unit investment trust

2. ______ are partnerships of investors with portfolios that are larger than most individual investors but are still too small to warrant managing on a separate basis. A. Commingled fundsB. Closed-end fundsC. REITsD. Mutual funds

3. A __________ is a private investment pool open only to wealthy or institutional investors that is exempt from SEC regulation and can therefore pursue more speculative policies than mutual funds. A. commingled poolB. unit trustC. hedge fundD. money market fund

4. Advantages of investment companies to investors include all but which one of the following? A. Record keeping and administrationB. Low cost diversificationC. Professional managementD. Guaranteed rates of return

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5. Which of the following typically employ significant amounts of leverage?I. Hedge fundsII. REITsIII. Money market fundsIV. Equity mutual funds A. I and II onlyB. II and III onlyC. III and IV onlyD. I, II and III only

6. The NAV of which funds is fixed at $1 per share? A. Equity fundsB. Money market fundsC. Fixed income fundsD. Commingled funds

7. The two principal types of REITs are equity trusts which _______________ and mortgage trusts which _______________. A. invest directly in real estate; invest in mortgage and construction loansB. invest in mortgage and construction loans; invest directly in real estateC. use extensive leverage; distribute less than 95% of income to shareholdersD. distribute less than 95% of income to shareholders; use extensive leverage

8. A contingent deferred sales charge is commonly called a ____. A. front-end loadB. back-end loadC. 12b-1 chargeD. top end sales commission

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9. In the U.S. there are approximately _______ mutual funds offered by less than _______ fund families. A. 12,000; 600B. 7,000; 100C. 8,000; 500D. 9,000; 300

10. In 1999, the SEC established rules that should make a mutual fund prospectus _______. A. easier to read and understandB. much more detailedC. disappear over the next 10 yearsD. irrelevant to investors

11. Mutual funds provide the following for their shareholders: A. DiversificationB. Professional managementC. Record keeping and administrationD. Mutual funds provide diversification, professional management, and record keeping and administration

12. The average maturity of fund investments in a money market mutual fund is _______. A. slightly more than one monthB. slightly more than one yearC. about 9 monthsD. between 2 and 3 years

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13. Rank the following fund category from most risky to least risky.I. Equity growth fundII. Balanced fundIII. Sector fundIV. Money market fund A. IV, I, III, IIB. III, II, IV, IC. I, II, III, IVD. III, I, II, IV

14. Which of the following result in a taxable event for investors?I. Short-term capital gains distributions from the fundII. Dividend distributions from the fundIII. Long-term capital gains distributions from the fund A. I onlyB. II onlyC. I and II onlyD. I, II and III

15. The type of mutual fund that primarily engages in market timing is called a/an _______. A. sector fundB. index fundC. ETFD. asset allocation fund

16. As of 2008, approximately _____ of mutual fund assets were invested in equity funds. A. 5%B. 54%C. 30%D. 12%

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17. As of 2008, approximately _____ of mutual fund assets were invested in bond funds. A. 14%B. 19%C. 37%D. 47%

18. As of 2008, approximately _____ of mutual fund assets were invested in money market funds. A. 5%B. 26%C. 44%D. 66%

19. Management fees for open-end and closed-end funds, typically range between _____ and _____. A. 0.2%; 1.5%B. 0.5%; 5%C. 2%; 5%D. 3%; 8%

20. The primary measurement unit used for assessing the value of one's stake in an investment company is ___________________. A. Net Asset ValueB. Average Asset ValueC. Gross Asset ValueD. Total Asset Value

21. Net Asset Value is defined as ________________________. A. book value of assets divided by shares outstandingB. book value of assets minus liabilities divided by shares outstandingC. market value of assets divided by shares outstandingD. market value of assets minus liabilities divided by shares outstanding

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22. Assume that you have just purchased some shares in an investment company reporting $500 million in assets, $50 million in liabilities, and 50 million shares outstanding. What is the Net Asset Value (NAV) of these shares? A. $12.00B. $9.00C. $10.00D. $1.00

23. Assume that you have recently purchased 100 shares in an investment company. Upon examining the balance sheet, you note the firm is reporting $225 million in assets, $30 million in liabilities, and 10 million shares outstanding. What is the Net Asset Value (NAV) of these shares? A. $25.50B. $22.50C. $19.50D. $1.95

24. The Vanguard 500 Index Fund tracks the performance of the S&P 500. To do so the fund buys shares in each S&P 500 company __________. A. in proportion to the market value weight of the firm's equity in the S&P500B. in proportion to the price weight of the stock in the S&P500C. by purchasing an equal number of shares of each stock in the S&P 500D. by purchasing an equal dollar amount of shares of each stock in the S&P500

25. Which of the following is not a type of managed investment company? A. Unit investment trustsB. Closed-end fundsC. Open-end fundsD. Hedge funds

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26. Which of the following funds invest in stocks of fast growing companies? A. Balanced fundsB. Growth equity fundsC. REITsD. Equity income funds

27. A fund that invests in securities worldwide, including the United States is called a/an ______. A. international fundB. emerging market fundC. global fundD. regional fund

28. The greatest percentage of mutual fund assets are invested in ________. A. bond fundsB. equity fundsC. hybrid fundsD. money market funds

29. Sponsors of unit investment trusts earn a profit by ___________________. A. deducting management fees from fund assetsB. deducting a percentage of any gains in asset valueC. selling shares in the trust at a premium to the cost of acquiring the underlying assetsD. charging portfolio turnover fees

30. Investors who wish to liquidate their holdings in a unit investment trust may ___________________. A. sell their shares back to the trustee at a discountB. sell their shares back to the trustee at net asset valueC. sell their shares on the open marketD. sell their shares at a premium to net asset value

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31. Investors who wish to liquidate their holdings in a closed-end fund may ___________________. A. sell their shares back to the fund at a discount if they wishB. sell their shares back to the fund at net asset valueC. sell their shares on the open marketD. sell their shares at a premium to net asset value if they wish

32. __________ fund is defined as one where the fund charges a sales commission to either buy into or exit the fund. A. A loadB. A no-loadC. An indexD. A specialized sector fund

33. __________ is a false statement regarding open-end mutual funds. A. They offer investors a guaranteed rate of returnB. They offer investors a well diversified portfolioC. They redeem shares at their net asset valueD. They offer low cost diversification

34. __________ funds stand ready to redeem or issue shares at their net asset value. A. Closed-endB. IndexC. Open-endD. Hedge

35. Revenue sharing with respect to mutual funds refers to _________. A. fund companies paying brokers if the broker recommends the fund to investorsB. allowing certain classes of investors to engage in market timingC. charging loads to new investors in a mutual fundD. directly marketing funds over the Internet

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36. Higher portfolio turnover I. results in greater tax liability for investorsII. results in greater trading costs for the fund, which investors have to pay forIII. is a characteristic of asset allocation funds A. I onlyB. II onlyC. I and II onlyD. I, II and III

37. Low load mutual funds have front-end loads of no more than _____. A. 2%B. 3%C. 4%D. 5%

38. Most real estate investment trusts (REITs) have a debt ratio of around _________. A. 10 %B. 30 %C. 50 %D. 70 %

39. Measured by assets, about _____ of funds are money market funds. A. 15%B. 25%C. 40%D. 60%

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40. Which of the following is not a type of real estate investment trust? I. Equity trust II. Debt trustIII. Mortgage trustIV. Unit trust A. I and II onlyB. II onlyC. II and IV onlyD. I, II and III

41. ______________________ are often called mutual funds. A. Unit investment trustsB. Open-end investment companiesC. Closed-end investment companiesD. REITs

42. Mutual funds account for roughly ______ percent of investment company assets. A. 30B. 50C. 70D. 90

43. An official description of a particular mutual fund's planned investment policy can be found in the fund's _____________. A. prospectusB. indentureC. investment statementD. 12b-1 forms

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44. Mutual funds that hold both equities and fixed-income securities in relatively stable proportions are called ____________________. A. income fundsB. balanced fundsC. asset allocation fundsD. index funds

45. Mutual funds that vary the proportions of funds invested in particular market sectors according to the fund manager's forecast of the performance of that market sector, are called ____________________. A. asset allocation fundsB. balanced fundsC. index fundsD. income funds

46. Specialized sector funds concentrate their investments in _________________. A. bonds of a particular maturityB. geographical segments of the real estate marketC. government securitiesD. securities issued by firms in a particular industry

47. If a mutual fund has multiple class shares, which class typically has a front end load? A. Class AB. Class BC. Class CD. Class D

48. The commission, or front-end load, paid when you purchase shares in mutual funds, may not exceed __________. A. 3%B. 6%C. 8.5%D. 10%

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49. You are considering investing in one of several mutual funds. All the funds under consideration have various combinations of front-end and back-end loads and/or 12b-1 fees. The longer you plan on remaining in the fund you choose, the more likely you will prefer a fund with a __________ rather than a __________, everything else equal. A. 12b-1 fee; front-end loadB. front-end load; 12b-1 feeC. back-end load, front-end loadD. 12b-1 fee; back-end load

50. Under SEC rules, the managers of certain funds are allowed to deduct charges for advertising, brokerage commissions, and other sales expenses, directly from the fund assets rather than billing investors. These fees are known as ____________. A. direct operating expensesB. back-end loadsC. 12b-1 chargesD. front-end loads

51. In 2000, the SEC instituted new rules that require funds to disclose _____. A. 12b-1 feesB. the tax impact of portfolio turnoverC. front-end loadsD. back-end loads

52. SEC rule 12b-1 allows managers of certain funds to deduct __________ expenses from fund assets, however, these expenses may not exceed __________ of the fund's average net assets per year. A. marketing; 1%B. marketing; 5%C. administrative; 0.5%D. administrative; 2%

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53. Consider a mutual fund with $300 million in assets at the start of the year, and 12 million shares outstanding. If the gross return on assets is 18% and the total expense ratio is 2% of the year end value, what is the rate of return on the fund? A. 15.64%B. 16.00%C. 17.25%D. 17.50%

54. Consider a no-load mutual fund with $200 million in assets and 10 million shares at the start of the year, and $250 million in assets and 11 million shares at the end of the year. During the year investors have received income distributions of $2 per share, and capital gains distributions of $0.25 per share. Assuming that the fund carries no debt, and that the total expense ratio is 1%, what is the rate of return on the fund? A. 36.25%B. 24.90%C. 23.85%D. There is not sufficient information to answer this question

55. Consider a no-load mutual fund with $400 million in assets, 50 million in debt, and 15 million shares at the start of the year; and $500 million in assets, 40 million in debt, and 18 million shares at the end of the year. During the year investors have received income distributions of $0.50 per share, and capital gains distributions of $0.30 per share. Assuming that the fund carries no debt, and that the total expense ratio is 0.75%, what is the rate of return on the fund? A. 12.09%B. 12.99%C. 8.25%D. There is not sufficient information to answer this question

56. Mutual fund returns may be granted pass-through status, if _________________. A. at least 90 percent of all income is distributed to shareholdersB. at least 30 percent of fund income is derived from sale of securities held for less than 3 monthsC. certain diversification criteria are metD. All of these must be true for pass-through status to be granted

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57. A/an _____ is an example of an exchange-traded fund. A. SPDR or spiderB. samuraiC. VanguardD. open-end fund

58. If you place an order to buy or sell a share of a mutual fund during the trading day the order will be executed at A. the NAV calculated at the market close at 4:00 pm New York time.B. the real time NAV.C. the NAV delayed 15 minutes.D. the NAV calculated at the open of the next day's trading.

59. With respect to mutual funds, late trading refers to the practice of ________. A. trading after the close of U.S. markets but before overseas markets have closedB. trading after the close of overseas markets, but before U.S. markets have closedC. accepting buy or sell orders after the market closes and NAV has already been determined for the dayD. paying capital gains distributions to certain investors only after paying privileged investors first

60. In the 1970 study, Malkiel found that mutual funds that do well in one period, have an approximately ________ chance of doing well in the subsequent ear period. A. 33%B. 52%C. 65%D. 85%

61. In a recent study, Malkiel finds that evidence of persistence in the performance of mutual funds, ________________ in the 1980s. A. grows strongerB. remains about the sameC. becomes slightly weakerD. virtually disappears

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62. The ratio of trading activity of a portfolio to the assets of the portfolio, is called ____________. A. the reinvestment ratioB. the trading rateC. the portfolio turnoverD. the tax yield

63. Which of the following ETFs tracks the S&P 500 index? A. QubesB. DiamondsC. VipersD. Spiders

64. The Stone Harbor Fund is a closed-end investment company with a portfolio currently worth $300 million. It has liabilities of $5 million and 9 million shares outstanding. If the fund sells for $30 a share, what is its premium or discount as a percent of NAV? A. 9.26% premiumB. 8.47% premiumC. 9.26% discountD. 8.47% discount

65. The difference between balanced funds and asset allocation funds is that _____. A. balanced funds invest in bonds while asset allocation funds do notB. asset allocation funds invest in bonds while balanced funds do notC. balanced funds have relatively stable proportions of stocks and bonds while the proportions may vary dramatically for asset allocation fundsD. balanced funds make no capital gains distributions and asset allocation funds make both dividend and capital gains distributions

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66. The Wildwood Fund sells Class A shares with a front-end load of 5% and Class B Shares with a 12b-1 fees of 1% annually. If you plan to sell the fund after 4 years, are Class A or Class B shares the better choice? Assume a 10% annual return net of expenses. A. Class AB. Class BC. There is no difference.D. There is insufficient information given.

67. A mutual fund has total assets outstanding of $69 million. During the year the fund bought and sold assets equal to $17.25 million. This fund's turnover rate was _____. A. 25.00%B. 28.50%C. 18.63%D. 33.40%

68. Which type of investment fund is commonly known to invest in options and futures in large scale? A. Commingled fundsB. Hedge fundsC. ETFsD. REITS

69. Advantages of ETFs over mutual funds include all but which one of the following? A. ETFs trade continuously so investors can trade throughout the dayB. ETFs can be sold short or purchased on margin, unlike fund sharesC. ETF providers do not have to sell holdings to fund redemptionsD. ETF values can diverge from NAV

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70. Harold has just taken his company public and owns a large quantity of restricted stock. For purposes of diversification, what fund might he help create in order to diversify his holdings? A. Commingled fundsB. Hedge fundsC. ETFD. REITs

71. Which of the following funds is most likely to have a debt ratio of 70% or higher? A. Bond fundB. Commingled fundC. Mortgage backed securitiesD. REIT

72. About _________ of mutual fund assets are invested in no-load funds. A. 33%B. 40%C. 50%D. 65%

73. From 1971 to 2007 the average return on the Wilshire 5000 index was _________ the return of the average mutual fund. A. identical toB. 1% higher thanC. 1% lower thanD. 3% lower than

74. An open-end fund has a NAV of $16.50 per share. The fund charges a 6% load. What is the offering price? A. $14.57B. $15.95C. $17.55D. $16.49

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75. The offer price of an open-end fund is $18.00 and the fund is sold with a front-end load of 5%? What is the fund's NAV? A. $18.74B. $17.10C. $15.40D. $16.57

76. A mutual fund has $50 million in assets at the beginning of the year and 1 million shares outstanding throughout the year. Throughout the year assets grow at 12%. The fund imposes a 12b-1 fee on all shares equal to 1%. The fee is imposed on year end asset values. If there are no distributions what is the end of year NAV for the fund? A. $50.00B. $55.44C. $56.12D. $54.55

77. The assets of a mutual fund are $25 million. The liabilities are $4 million. If the fund has 700,000 shares outstanding and pays a $3 dividend, what is the dividend yield? A. 5%B. 10%C. 15%D. 20%

78. Which of the following funds are usually most tax efficient? A. Equity fundsB. Bond FundsC. ETFsD. Specialized sector funds

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79. You invest in a mutual fund that charges a 3% front end load, 1% total annual fees, and a 2% back end load, which decreases 0.5% per year. How much will you pay in fees on a $10,000 investment that does not grow, if you cash out after three years of no gain? A. 103B. 219C. 553D. 635

80. You invest in a mutual fund that charges a 3% front end load, 1% total annual fees, and a 0% back end load on Class A shares. The same fund charges 0% front end load, 1% total annual fees, and a 2% back end load on Class B shares. What are the total fees in year one on a Class A investment of $20,000 with no growth in value? A. 658B. 794C. 885D. 902

81. You invest in a mutual fund that charges a 3% front end load, 1% total annual fees, and a 0% back end load on Class A shares. The same fund charges 0% front end load, 1% total annual fees, and a 2% back end load on Class B shares. What are the total fees in year one on a Class B investment of $20,000 if you redeem shares with no growth in value? A. 596B. 794C. 885D. 902

82. You pay $21,600 to the Laramie Fund which has a NAV of $18.00 per share at the beginning of the year. The fund deducted a front-end load of 4%. The securities in the fund increased in value by 10% during the year. The fund's expense ratio is 1.3% and is deducted from year end asset values. What is your rate of return on the fund if you sell your shares at the end of the year? A. 4.35%B. 4.23%C. 6.45%D. 5.63%

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83. Which one of the following statements about returns reported by mutual funds is not correct? A. Reported returns are net of management expensesB. Reported returns are net of 12b-1 feesC. Reported returns are net of brokerage fees paid on the fund's trading activityD. Reported returns are net of load charges

84. The top Morningstar mutual fund performance rating is ________. A. five starsB. four starsC. three starsD. two stars

85. You are considering investing in a no load mutual fund with an annual expense ratio of 0.6% and an annual 12b-1 fee of 0.75%. You could also invest in a bank CD paying 6.5% per year. What minimum annual rate of return must the fund earn to make you better off in the fund than in the CD? A. 7.10%B. 7.45%C. 7.25%D. 7.85%

Chapter 04 Mutual Funds and Other Investment Companies Answer Key

Multiple Choice Questions

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1. Which one of the following invests in a portfolio that is fixed for the life of the fund? A. Mutual fundB. Money market fundC. Managed investment companyD. Unit investment trust

Difficulty: Easy

2. ______ are partnerships of investors with portfolios that are larger than most individual investors but are still too small to warrant managing on a separate basis. A. Commingled fundsB. Closed-end fundsC. REITsD. Mutual funds

Difficulty: Easy

3. A __________ is a private investment pool open only to wealthy or institutional investors that is exempt from SEC regulation and can therefore pursue more speculative policies than mutual funds. A. commingled poolB. unit trustC. hedge fundD. money market fund

Difficulty: Easy

4. Advantages of investment companies to investors include all but which one of the following? A. Record keeping and administrationB. Low cost diversificationC. Professional managementD. Guaranteed rates of return

Difficulty: Easy

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5. Which of the following typically employ significant amounts of leverage?I. Hedge fundsII. REITsIII. Money market fundsIV. Equity mutual funds A. I and II onlyB. II and III onlyC. III and IV onlyD. I, II and III only

Difficulty: Medium

6. The NAV of which funds is fixed at $1 per share? A. Equity fundsB. Money market fundsC. Fixed income fundsD. Commingled funds

Difficulty: Easy

7. The two principal types of REITs are equity trusts which _______________ and mortgage trusts which _______________. A. invest directly in real estate; invest in mortgage and construction loansB. invest in mortgage and construction loans; invest directly in real estateC. use extensive leverage; distribute less than 95% of income to shareholdersD. distribute less than 95% of income to shareholders; use extensive leverage

Difficulty: Medium

8. A contingent deferred sales charge is commonly called a ____. A. front-end loadB. back-end loadC. 12b-1 chargeD. top end sales commission

Difficulty: Easy

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9. In the U.S. there are approximately _______ mutual funds offered by less than _______ fund families. A. 12,000; 600B. 7,000; 100C. 8,000; 500D. 9,000; 300

Difficulty: Medium

10. In 1999, the SEC established rules that should make a mutual fund prospectus _______. A. easier to read and understandB. much more detailedC. disappear over the next 10 yearsD. irrelevant to investors

Difficulty: Easy

11. Mutual funds provide the following for their shareholders: A. DiversificationB. Professional managementC. Record keeping and administrationD. Mutual funds provide diversification, professional management, and record keeping and administration

Difficulty: Easy

12. The average maturity of fund investments in a money market mutual fund is _______. A. slightly more than one monthB. slightly more than one yearC. about 9 monthsD. between 2 and 3 years

Difficulty: Easy

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13. Rank the following fund category from most risky to least risky.I. Equity growth fundII. Balanced fundIII. Sector fundIV. Money market fund A. IV, I, III, IIB. III, II, IV, IC. I, II, III, IVD. III, I, II, IV

Difficulty: Medium

14. Which of the following result in a taxable event for investors?I. Short-term capital gains distributions from the fundII. Dividend distributions from the fundIII. Long-term capital gains distributions from the fund A. I onlyB. II onlyC. I and II onlyD. I, II and III

Difficulty: Easy

15. The type of mutual fund that primarily engages in market timing is called a/an _______. A. sector fundB. index fundC. ETFD. asset allocation fund

Difficulty: Medium

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16. As of 2008, approximately _____ of mutual fund assets were invested in equity funds. A. 5%B. 54%C. 30%D. 12%

Difficulty: Easy

17. As of 2008, approximately _____ of mutual fund assets were invested in bond funds. A. 14%B. 19%C. 37%D. 47%

Difficulty: Easy

18. As of 2008, approximately _____ of mutual fund assets were invested in money market funds. A. 5%B. 26%C. 44%D. 66%

Difficulty: Easy

19. Management fees for open-end and closed-end funds, typically range between _____ and _____. A. 0.2%; 1.5%B. 0.5%; 5%C. 2%; 5%D. 3%; 8%

Difficulty: Easy

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20. The primary measurement unit used for assessing the value of one's stake in an investment company is ___________________. A. Net Asset ValueB. Average Asset ValueC. Gross Asset ValueD. Total Asset Value

Difficulty: Easy

21. Net Asset Value is defined as ________________________. A. book value of assets divided by shares outstandingB. book value of assets minus liabilities divided by shares outstandingC. market value of assets divided by shares outstandingD. market value of assets minus liabilities divided by shares outstanding

Difficulty: Easy

22. Assume that you have just purchased some shares in an investment company reporting $500 million in assets, $50 million in liabilities, and 50 million shares outstanding. What is the Net Asset Value (NAV) of these shares? A. $12.00B. $9.00C. $10.00D. $1.00

Difficulty: Easy

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23. Assume that you have recently purchased 100 shares in an investment company. Upon examining the balance sheet, you note the firm is reporting $225 million in assets, $30 million in liabilities, and 10 million shares outstanding. What is the Net Asset Value (NAV) of these shares? A. $25.50B. $22.50C. $19.50D. $1.95

Difficulty: Easy

24. The Vanguard 500 Index Fund tracks the performance of the S&P 500. To do so the fund buys shares in each S&P 500 company __________. A. in proportion to the market value weight of the firm's equity in the S&P500B. in proportion to the price weight of the stock in the S&P500C. by purchasing an equal number of shares of each stock in the S&P 500D. by purchasing an equal dollar amount of shares of each stock in the S&P500

Difficulty: Easy

25. Which of the following is not a type of managed investment company? A. Unit investment trustsB. Closed-end fundsC. Open-end fundsD. Hedge funds

Difficulty: Easy

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26. Which of the following funds invest in stocks of fast growing companies? A. Balanced fundsB. Growth equity fundsC. REITsD. Equity income funds

Difficulty: Easy

27. A fund that invests in securities worldwide, including the United States is called a/an ______. A. international fundB. emerging market fundC. global fundD. regional fund

Difficulty: Easy

28. The greatest percentage of mutual fund assets are invested in ________. A. bond fundsB. equity fundsC. hybrid fundsD. money market funds

Difficulty: Easy

29. Sponsors of unit investment trusts earn a profit by ___________________. A. deducting management fees from fund assetsB. deducting a percentage of any gains in asset valueC. selling shares in the trust at a premium to the cost of acquiring the underlying assetsD. charging portfolio turnover fees

Difficulty: Easy

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30. Investors who wish to liquidate their holdings in a unit investment trust may ___________________. A. sell their shares back to the trustee at a discountB. sell their shares back to the trustee at net asset valueC. sell their shares on the open marketD. sell their shares at a premium to net asset value

Difficulty: Easy

31. Investors who wish to liquidate their holdings in a closed-end fund may ___________________. A. sell their shares back to the fund at a discount if they wishB. sell their shares back to the fund at net asset valueC. sell their shares on the open marketD. sell their shares at a premium to net asset value if they wish

Difficulty: Easy

32. __________ fund is defined as one where the fund charges a sales commission to either buy into or exit the fund. A. A loadB. A no-loadC. An indexD. A specialized sector fund

Difficulty: Easy

33. __________ is a false statement regarding open-end mutual funds. A. They offer investors a guaranteed rate of returnB. They offer investors a well diversified portfolioC. They redeem shares at their net asset valueD. They offer low cost diversification

Difficulty: Easy

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34. __________ funds stand ready to redeem or issue shares at their net asset value. A. Closed-endB. IndexC. Open-endD. Hedge

Difficulty: Easy

35. Revenue sharing with respect to mutual funds refers to _________. A. fund companies paying brokers if the broker recommends the fund to investorsB. allowing certain classes of investors to engage in market timingC. charging loads to new investors in a mutual fundD. directly marketing funds over the Internet

Difficulty: Easy

36. Higher portfolio turnover I. results in greater tax liability for investorsII. results in greater trading costs for the fund, which investors have to pay forIII. is a characteristic of asset allocation funds A. I onlyB. II onlyC. I and II onlyD. I, II and III

Difficulty: Medium

37. Low load mutual funds have front-end loads of no more than _____. A. 2%B. 3%C. 4%D. 5%

Difficulty: Easy

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38. Most real estate investment trusts (REITs) have a debt ratio of around _________. A. 10 %B. 30 %C. 50 %D. 70 %

Difficulty: Easy

39. Measured by assets, about _____ of funds are money market funds. A. 15%B. 25%C. 40%D. 60%

Difficulty: Easy

40. Which of the following is not a type of real estate investment trust? I. Equity trust II. Debt trustIII. Mortgage trustIV. Unit trust A. I and II onlyB. II onlyC. II and IV onlyD. I, II and III

Difficulty: Easy

41. ______________________ are often called mutual funds. A. Unit investment trustsB. Open-end investment companiesC. Closed-end investment companiesD. REITs

Difficulty: Easy

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42. Mutual funds account for roughly ______ percent of investment company assets. A. 30B. 50C. 70D. 90

Difficulty: Easy

43. An official description of a particular mutual fund's planned investment policy can be found in the fund's _____________. A. prospectusB. indentureC. investment statementD. 12b-1 forms

Difficulty: Easy

44. Mutual funds that hold both equities and fixed-income securities in relatively stable proportions are called ____________________. A. income fundsB. balanced fundsC. asset allocation fundsD. index funds

Difficulty: Easy

45. Mutual funds that vary the proportions of funds invested in particular market sectors according to the fund manager's forecast of the performance of that market sector, are called ____________________. A. asset allocation fundsB. balanced fundsC. index fundsD. income funds

Difficulty: Easy

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46. Specialized sector funds concentrate their investments in _________________. A. bonds of a particular maturityB. geographical segments of the real estate marketC. government securitiesD. securities issued by firms in a particular industry

Difficulty: Easy

47. If a mutual fund has multiple class shares, which class typically has a front end load? A. Class AB. Class BC. Class CD. Class D

Difficulty: Medium

48. The commission, or front-end load, paid when you purchase shares in mutual funds, may not exceed __________. A. 3%B. 6%C. 8.5%D. 10%

Difficulty: Easy

49. You are considering investing in one of several mutual funds. All the funds under consideration have various combinations of front-end and back-end loads and/or 12b-1 fees. The longer you plan on remaining in the fund you choose, the more likely you will prefer a fund with a __________ rather than a __________, everything else equal. A. 12b-1 fee; front-end loadB. front-end load; 12b-1 feeC. back-end load, front-end loadD. 12b-1 fee; back-end load

Difficulty: Medium

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50. Under SEC rules, the managers of certain funds are allowed to deduct charges for advertising, brokerage commissions, and other sales expenses, directly from the fund assets rather than billing investors. These fees are known as ____________. A. direct operating expensesB. back-end loadsC. 12b-1 chargesD. front-end loads

Difficulty: Easy

51. In 2000, the SEC instituted new rules that require funds to disclose _____. A. 12b-1 feesB. the tax impact of portfolio turnoverC. front-end loadsD. back-end loads

Difficulty: Medium

52. SEC rule 12b-1 allows managers of certain funds to deduct __________ expenses from fund assets, however, these expenses may not exceed __________ of the fund's average net assets per year. A. marketing; 1%B. marketing; 5%C. administrative; 0.5%D. administrative; 2%

Difficulty: Easy

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53. Consider a mutual fund with $300 million in assets at the start of the year, and 12 million shares outstanding. If the gross return on assets is 18% and the total expense ratio is 2% of the year end value, what is the rate of return on the fund? A. 15.64%B. 16.00%C. 17.25%D. 17.50%

Difficulty: Hard

54. Consider a no-load mutual fund with $200 million in assets and 10 million shares at the start of the year, and $250 million in assets and 11 million shares at the end of the year. During the year investors have received income distributions of $2 per share, and capital gains distributions of $0.25 per share. Assuming that the fund carries no debt, and that the total expense ratio is 1%, what is the rate of return on the fund? A. 36.25%B. 24.90%C. 23.85%D. There is not sufficient information to answer this question

Since this is a no-load fund, all charges are already embedded in gross return. Thus, gross return and net return are the same.

Difficulty: Medium

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55. Consider a no-load mutual fund with $400 million in assets, 50 million in debt, and 15 million shares at the start of the year; and $500 million in assets, 40 million in debt, and 18 million shares at the end of the year. During the year investors have received income distributions of $0.50 per share, and capital gains distributions of $0.30 per share. Assuming that the fund carries no debt, and that the total expense ratio is 0.75%, what is the rate of return on the fund? A. 12.09%B. 12.99%C. 8.25%D. There is not sufficient information to answer this question

Since this is a no-load fund, all charges are already embedded in gross return. Thus, gross return and net return are the same.

Difficulty: Hard

56. Mutual fund returns may be granted pass-through status, if _________________. A. at least 90 percent of all income is distributed to shareholdersB. at least 30 percent of fund income is derived from sale of securities held for less than 3 monthsC. certain diversification criteria are metD. All of these must be true for pass-through status to be granted

Difficulty: Easy

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57. A/an _____ is an example of an exchange-traded fund. A. SPDR or spiderB. samuraiC. VanguardD. open-end fund

Difficulty: Medium

58. If you place an order to buy or sell a share of a mutual fund during the trading day the order will be executed at A. the NAV calculated at the market close at 4:00 pm New York time.B. the real time NAV.C. the NAV delayed 15 minutes.D. the NAV calculated at the open of the next day's trading.

Difficulty: Medium

59. With respect to mutual funds, late trading refers to the practice of ________. A. trading after the close of U.S. markets but before overseas markets have closedB. trading after the close of overseas markets, but before U.S. markets have closedC. accepting buy or sell orders after the market closes and NAV has already been determined for the dayD. paying capital gains distributions to certain investors only after paying privileged investors first

Difficulty: Easy

60. In the 1970 study, Malkiel found that mutual funds that do well in one period, have an approximately ________ chance of doing well in the subsequent ear period. A. 33%B. 52%C. 65%D. 85%

Difficulty: Medium

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61. In a recent study, Malkiel finds that evidence of persistence in the performance of mutual funds, ________________ in the 1980s. A. grows strongerB. remains about the sameC. becomes slightly weakerD. virtually disappears

Difficulty: Easy

62. The ratio of trading activity of a portfolio to the assets of the portfolio, is called ____________. A. the reinvestment ratioB. the trading rateC. the portfolio turnoverD. the tax yield

Difficulty: Easy

63. Which of the following ETFs tracks the S&P 500 index? A. QubesB. DiamondsC. VipersD. Spiders

Difficulty: Medium

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64. The Stone Harbor Fund is a closed-end investment company with a portfolio currently worth $300 million. It has liabilities of $5 million and 9 million shares outstanding. If the fund sells for $30 a share, what is its premium or discount as a percent of NAV? A. 9.26% premiumB. 8.47% premiumC. 9.26% discountD. 8.47% discount

NAV = ($300,000,000 - $5,000,000)/9,000,000 = $32.78Discount = $32.78 - $30 = $2.78

Difficulty: Hard

65. The difference between balanced funds and asset allocation funds is that _____. A. balanced funds invest in bonds while asset allocation funds do notB. asset allocation funds invest in bonds while balanced funds do notC. balanced funds have relatively stable proportions of stocks and bonds while the proportions may vary dramatically for asset allocation fundsD. balanced funds make no capital gains distributions and asset allocation funds make both dividend and capital gains distributions

Difficulty: Easy

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66. The Wildwood Fund sells Class A shares with a front-end load of 5% and Class B Shares with a 12b-1 fees of 1% annually. If you plan to sell the fund after 4 years, are Class A or Class B shares the better choice? Assume a 10% annual return net of expenses. A. Class AB. Class BC. There is no difference.D. There is insufficient information given.

Difficulty: Medium

67. A mutual fund has total assets outstanding of $69 million. During the year the fund bought and sold assets equal to $17.25 million. This fund's turnover rate was _____. A. 25.00%B. 28.50%C. 18.63%D. 33.40%

$17.25/$69 = 25.00%

Difficulty: Easy

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68. Which type of investment fund is commonly known to invest in options and futures in large scale? A. Commingled fundsB. Hedge fundsC. ETFsD. REITS

Difficulty: Easy

69. Advantages of ETFs over mutual funds include all but which one of the following? A. ETFs trade continuously so investors can trade throughout the dayB. ETFs can be sold short or purchased on margin, unlike fund sharesC. ETF providers do not have to sell holdings to fund redemptionsD. ETF values can diverge from NAV

Difficulty: Medium

70. Harold has just taken his company public and owns a large quantity of restricted stock. For purposes of diversification, what fund might he help create in order to diversify his holdings? A. Commingled fundsB. Hedge fundsC. ETFD. REITs

Difficulty: Medium

71. Which of the following funds is most likely to have a debt ratio of 70% or higher? A. Bond fundB. Commingled fundC. Mortgage backed securitiesD. REIT

Difficulty: Easy

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72. About _________ of mutual fund assets are invested in no-load funds. A. 33%B. 40%C. 50%D. 65%

Difficulty: Medium

73. From 1971 to 2007 the average return on the Wilshire 5000 index was _________ the return of the average mutual fund. A. identical toB. 1% higher thanC. 1% lower thanD. 3% lower than

Difficulty: Hard

74. An open-end fund has a NAV of $16.50 per share. The fund charges a 6% load. What is the offering price? A. $14.57B. $15.95C. $17.55D. $16.49

Difficulty: Medium

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75. The offer price of an open-end fund is $18.00 and the fund is sold with a front-end load of 5%? What is the fund's NAV? A. $18.74B. $17.10C. $15.40D. $16.57

($18.00)(1 - 0.05) = $17.10

Difficulty: Medium

76. A mutual fund has $50 million in assets at the beginning of the year and 1 million shares outstanding throughout the year. Throughout the year assets grow at 12%. The fund imposes a 12b-1 fee on all shares equal to 1%. The fee is imposed on year end asset values. If there are no distributions what is the end of year NAV for the fund? A. $50.00B. $55.44C. $56.12D. $54.55

Difficulty: Hard

77. The assets of a mutual fund are $25 million. The liabilities are $4 million. If the fund has 700,000 shares outstanding and pays a $3 dividend, what is the dividend yield? A. 5%B. 10%C. 15%D. 20%

Price per share = (25 million - 4 million)/700,000 = 30 per shareDividend yield = 3/30 = 10%

Difficulty: Medium

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78. Which of the following funds are usually most tax efficient? A. Equity fundsB. Bond FundsC. ETFsD. Specialized sector funds

Difficulty: Medium

79. You invest in a mutual fund that charges a 3% front end load, 1% total annual fees, and a 2% back end load, which decreases 0.5% per year. How much will you pay in fees on a $10,000 investment that does not grow, if you cash out after three years of no gain? A. 103B. 219C. 553D. 635

total fees = 10,000 - (10,000 x .97) x (.99) x (.99) x (.99) x (.995) = 635

Difficulty: Hard

80. You invest in a mutual fund that charges a 3% front end load, 1% total annual fees, and a 0% back end load on Class A shares. The same fund charges 0% front end load, 1% total annual fees, and a 2% back end load on Class B shares. What are the total fees in year one on a Class A investment of $20,000 with no growth in value? A. 658B. 794C. 885D. 902

First year fees = 20,000 - (20,000 x .97 x .99) = 794

Difficulty: Medium

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81. You invest in a mutual fund that charges a 3% front end load, 1% total annual fees, and a 0% back end load on Class A shares. The same fund charges 0% front end load, 1% total annual fees, and a 2% back end load on Class B shares. What are the total fees in year one on a Class B investment of $20,000 if you redeem shares with no growth in value? A. 596B. 794C. 885D. 902

Total fees after one year = 20,000 - (20,000 x 0.98 x 0.99) = 596

Difficulty: Medium

82. You pay $21,600 to the Laramie Fund which has a NAV of $18.00 per share at the beginning of the year. The fund deducted a front-end load of 4%. The securities in the fund increased in value by 10% during the year. The fund's expense ratio is 1.3% and is deducted from year end asset values. What is your rate of return on the fund if you sell your shares at the end of the year? A. 4.35%B. 4.23%C. 6.45%D. 5.63%

Difficulty: Hard

83. Which one of the following statements about returns reported by mutual funds is not correct? A. Reported returns are net of management expensesB. Reported returns are net of 12b-1 feesC. Reported returns are net of brokerage fees paid on the fund's trading activityD. Reported returns are net of load charges

Difficulty: Medium

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84. The top Morningstar mutual fund performance rating is ________. A. five starsB. four starsC. three starsD. two stars

Difficulty: Easy

85. You are considering investing in a no load mutual fund with an annual expense ratio of 0.6% and an annual 12b-1 fee of 0.75%. You could also invest in a bank CD paying 6.5% per year. What minimum annual rate of return must the fund earn to make you better off in the fund than in the CD? A. 7.10%B. 7.45%C. 7.25%D. 7.85%

r > 6.5 + 0.06 + 0.075 = 7.85%

Difficulty: Medium

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Fin 3013 Chapter 4

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Transcript of Fin 3013 Chapter 4