Deck 7: Closed-End Investment Companies, Real Estate Investment Trusts Reits, and Exchange-Traded Funds Etfs-private

Question 1

The discount paid for the shares of a closed?end
investment company is fixed by the fund.

Answer 1

False

Question 2

If a closed-end investment company specializes in the securities of one sector of the economy, systematic risk is reduced.

Answer 2

False

Question 3

If a closed-end investment company were liquidated, the investor should receive the net asset value minus the cost of the liquidation.

Answer 3

True

Question 4

A closed?end investment company's shares cannot sell for a discount from net asset value.

Question 5

As a result of arbitrage, ETFs tend to sell for their net asset value.

Question 6

An equity REIT may not use financial leverage (i.e., its financing is entirely equity).

Question 7

Unit trusts may be self?liquidating.

Question 8

The per share net asset value of the shares in a closed-end investment company depends on the difference between the fund's assets and liabilities and the number of shares outstanding.

Question 9

The cash flow generated by REITs is taxed as income by the federal government.

Question 10

A mortgage trust is a REIT that specializes in mortgage loans.

Question 11

Since ETFs mimic an index, they do not buy individual shares of stock.

Question 12

Real estate investment trusts (REITs) are illustrative of a closed?end investment company.

Question 13

Distributions from a closed-end investment are subject to federal income taxation.

Question 14

A closed?end investment company is not a "mutual fund."

Question 15

Distributions from an investment company may include earnings and capital gains.

Question 16

A unit trust is a passive investment that holds a fixed portfolio of securities such as federal government bonds.

Question 17

The only costs of investing in a closed?end investment company are the commissions to buy and sell the shares.

Question 18

The first exchange-traded funds (ETFs) were a type of index fund.

Question 19

The shares of a closed?end investment company often sell for a discount from their net asset value.

Question 20

A loading fee charged by a mutual fund does not apply to a closed-end investment company.

Question 21

Which of the following is not a consideration for
Investing in real estate investment trusts (REITs)?

A) fluctuations in dividend payments
B) excessive use of debt financing by some REITs
C) fluctuating interest rates affecting securities valuations
D) the federal tax rate paid by the trust

Question 22

If foreign securities markets are as efficient as American securities markets, then foreign investments may offer the U. S. investor no advantages over investing in domestic securities.

Question 23

A global fund invests solely in foreign securities.

Question 24

Closed-end investment companies with beta
Coefficients less than 1.0

A) have outperformed the market
B) have underperformed the market
C) have more systematic risk than the market
D) have less systematic risk than the market

Question 25

Closed?end investment companies
1) have a fixed capital structure
2) issue new stock whenever an individual buys shares
3) may sell for a premium over net asset value
4) must sell for their net asset value

A) 1 and 3
B) 1 and 4
C) 2 and 3
D) 2 and 4

Question 26

Hedge funds are sold primarily to high net worth investors and financial institutions such as pension plans.

Question 27

The shares of hedge funds are often included in an individual investor's IRAs.

Question 28

American investors may acquire shares in mutual funds that specialize in foreign investments.

Question 29

A real estate investment trust

A) pays federal income taxes
B) retains all of its earnings
C) invests in mortgages or rental properties
D) cannot use debt financing

Question 30

Since closed-end investment companies acquire
Securities in efficient financial markets, they

A) cannot outperform the market consistently
B) should not outperform the market consistently
C) will underperform the market when stock prices decline
D) primarily bear unsystematic risk

Question 31

Exchange traded funds

A) redeem their shares
B) only buy exchangeable securities
C) are bought and sold in secondary markets
D) cannot be sold short

Question 32

A leveraged ETF only buys stock in companies with substantial debt.

Question 33

A hedge fund is a conservative type of mutual fund.

Question 34

The shares of closed?end investment companies that invest in foreign securities cannot sell for a premium over their net asset values.

Question 35

The net asset value of a closed-end investment
Company increases with

A) higher stock prices
B) lower stock prices
C) larger number of shares
D) increased liabilities

Question 36

Hedge fund strategies may include buying one stock while shorting another.

Question 37

If a closed-end investment company sells for
A discount,

A) its price exceeds the net asset value
B) its price is less than the net asset value
C) dividend income exceeds capital gains
D) capital gains exceed dividend income.

Question 38

An investor may not sell short the shares of an ETF.

Question 39

If an investor believes that financial markets are
inefficient, that argues for pursuing a more active portfolio strategy and purchasing exchange-traded funds instead of individual stocks.

Question 40

Compared to selecting individual stocks, ETFs ease the process of constructing a well diversified portfolio.

Question 41

A hedge fund

A) is a public financial institution
B) has its shares registered with the Federal Reserve
C) is open to a select number of individual investors
D) has actively traded shares

Question 42

A mutual fund's net asset value is $50, but the fund charges an exit fee of 1 percent of net asset value and a load fee of 4 percent of net asset value. An individual purchases the shares. During the year the fund distributes $2.34. The net asset value rises to $58.38 and the investor redeems the shares.
a. What is the percentage return the fund can report that was achieved by its portfolio managers.
b. What is the percentage return the individual earned on the investment?
c. Why are the two percentages different?

Question 43

If an investor buys shares in a closed-end investment company for $46 and the net asset value is $53, what is
the discount? If the company distributes $1, the net asset
value rises to $58, and the investor sells the shares for a premium of 5 percent over the net asset value, what is the
percentage earned on the investment?

Question 44

Many exchange-traded funds limit their portfolios to

A) high quality securities
B) stocks that respond to changes in consumer prices (the Consumer Price Index or CPI)
C) stocks included in an aggregate measure of stock prices
D) stocks and bonds of companies in a particular industry

Question 45

An investor bought 100 shares of a REIT for $54 a share and two years later sold the shares for $62. The REIT annually distributed $4.00 per share ($400) consisting of $2.00 return of capital $200), $1.20 ($120) in income and $0.80 ($80) in long-term capital gains. The investor's income tax bracket is 30%. The long-term capital gains tax rate is 15 percent. What is the investor's second year's tax obligation?
SOLUTIONS TO THE PROBLEMS

Question 46

An American investor may take a position in foreign
Equities by acquiring

Question 47

The portfolios of international funds

A) stress European securities
B) exclude U. S. securities
C) are a diversified mix of securities from all countries with security markets
D) specialize in the securities of one country

Question 48

If an investor purchases shares in a no load mutual fund for $36, receives cash distributions of $1 and redeems the shares after one year for $42, what is the percentage return on the investment?

Question 49

You buy a REIT for $50 a share. The REIT distributes $3.00 consisting of return of capital. You are in the 30% income tax bracket (which also applies to short-term capital gains) and the 15 percent long-term capital gains bracket. What is the tax implication of this distribution?

Question 50

Exchange-traded funds

A) consistently outperform other funds
B) mimic an index of securities
C) require investors to select individual stocks
D) are illustrations of load funds

Question 51

Hedge funds follow investment strategies such as

A) acquiring shares in mutual funds
B) shorting "overvalued" stocks while buying "undervalued" stocks
C) limiting their portfolios to money market instruments
D) underwriting new issues (IPOs)

Question 52

The net asset value of shares in a closed-end investment company is $36. An investor buys the shares for $34 in the secondary market. The company distributes $1 and after one year, the net asset rises to $42. The investor sells the shares for $44 in the secondary market.
a. What is the discount?
b. What is the percentage return on the investment?
c. In both problems 1 and 2, the investment company's net asset value rose from $36 to $42 and the company distributed $1. Why are the percentage returns different?

Question 53

Mutual fund A earned 10 percent while B earned 8 percent. The standard deviations of the returns were 10 percent and 7 percent, respectively. According to the Sharpe ratio, which fund performed better?