Deck 17: Investing in Mutual Funds

Question 1

The net asset value (NAV) per share of a mutual fund is determined by the market value of securities owned minus liabilities divided by the number of mutual fund shares outstanding.

Answer 1

True

Question 2

The price per share for a closed-end mutual fund can differ from the fund's NAV per share.

Answer 2

True

Question 3

In most cases, the fees charged by load funds go to stockbrokers or other financial advisers who execute transactions for investors.

Answer 3

True

Question 4

There is no limit on the number of open-end mutual fund shares that a company can offer.

Question 5

Two advantages of investing in mutual funds are diversification and professional management.

Question 6

Closed-end mutual funds have a limited number of shares that are sold when the funds are first created; the shares are then resold over the stock exchanges.

Question 7

A mutual fund is a diversified portfolio of stocks and/or bonds depending on what the manager has purchased.

Question 8

Of the management, advertising, and administrative fees charged by mutual funds, normally the management fee is the smallest.

Question 9

In general, it is prudent to purchase a no-load fund instead of a load fund.

Question 10

While not all mutual funds have loads or commissions, they all have management fees and expenses that are charged to the mutual fund shareholders.

Question 11

Mutual funds pool money from investors to purchase portfolios of investments.

Question 12

An advantage of investing in mutual funds is that they all have the objective of preserving capital.

Question 13

Some mutual funds have much higher expenses or expense ratios than others, and this expense can affect your overall returns.

Question 14

Which of the following is not a reason for investing in mutual funds?

A) Small amount of funds needed
B) Portfolio manager expertise
C) Specific investment goals
D) Overly diversified

Question 15

Studies on mutual funds have found that load funds perform better than no-load funds.

Question 16

Open-end mutual fund companies sell directly to investors and repurchase shares whenever investors wish to sell them.

Question 17

The difference between stock mutual funds and bond mutual funds lies in the percentage of stocks and bonds that each fund purchases.

Question 18

No-load mutual funds sell directly to investors and charge a somewhat smaller management fee than load funds.

Question 19

In assessing different mutual funds, the returns vary, but the expenses are fixed.

Question 20

On average, mutual funds have an expense ratio of about 3%.

Question 21

The amount by which a closed-end fund's share price in the secondary market is below the fund's NAV is called the

A) market value.
B) premium.
C) discount.
D) par value.

Question 22

Mutual funds that sell shares directly to investors and repurchase shares investors want to sell are called ________ funds.

A) open-market
B) open-end
C) closed-end
D) fair value

Question 23

The ________ is the market value of the securities that a mutual fund has purchased minus any liabilities.

A) book value
B) net asset value
C) gross asset value
D) net worth value

Question 24

On the average, actively managed mutual funds have an expense ratio of about

A) 1.25%
B) 2.5%.
C) 3%.
D) 5%.

Question 25

To calculate the NAV, the market value of the portfolio less liabilities is divided by the ________ to arrive at a per-share basis.

A) original number of shares
B) shares currently issued by the fund
C) maximum shares to be issued
D) average number of shares in comparable funds

Question 26

Which of the following is not a true statement about mutual funds?

A) All require a minimum investment.
B) All have the same investment goals.
C) The calculation of net asset value is the same.
D) All have a management expense ratio.

Question 27

Which of the following characteristics is not true of closed-end funds?

A) They offer guaranteed returns to shareholders.
B) They do not repurchase shares from investors.
C) They are bought and sold on stock exchanges.
D) They may sell above or below NAV.

Question 28

The amount by which a closed-end fund's share price in the secondary market is above the fund's NAV is called the

A) market value.
B) premium.
C) discount.
D) par value.

Question 29

You invested $1,000 in a mutual fund with a 4% load when the NAV was $20 per share. If you sell your shares at an NAV of $24 per share, what is the return on your investment?

A) 14.8%
B) 15%
C) 12.5%
D) 10.8%

Question 30

The net asset value (NAV) is reported in financial newspapers and on financial Web sites

A) as a combined NAV for the total fund family.
B) on a per-share basis by fund.
C) as a percentage of the fund's price.
D) on a weekly basis due to the complexity of computation.

Question 31

Which of the following expenses is usually the highest for a mutual fund?

A) Management fees
B) Administrative fees
C) 12b-1 fees
D) Referral fees

Question 32

Stock brokers typically do not recommend no-load funds because

A) the return is lower than on load funds and brokers want to sell only the best funds to their clients.
B) federal law prohibits brokers from selling no-load funds.
C) no-load funds do not pay an upfront fee to the broker for selling them.
D) there is no secondary market for them.

Question 33

Advantages of investing in mutual funds include all of the following, except

A) diversification of your investment.
B) professional management.
C) meeting specific investment goals.
D) there is virtually no risk of loss.

Question 34

The component of expense ratios that includes a fee charged by some mutual funds to pay brokers is

A) a management fee.
B) a 12b-1 fee.
C) an administrative expense.
D) a referral fee.

Question 35

A family of mutual funds is

A) a group of funds all of which have the same objective.
B) a number of funds with different objectives operated by one investment company.
C) an arrangement whereby a number of competing investment companies pool their resources.
D) quite rare in the mutual fund industry.

Question 36

An open-end mutual fund may do all of the following, except

A) sell shares directly to investors.
B) charge a fee to buy, but not sell, shares.
C) repurchase shares from investors who want to sell their shares.
D) have its shares traded on the New York Stock Exchange.

Question 37

Regarding load and no-load mutual funds,

A) load funds usually outperform no-load funds.
B) no-load funds perform at least as well as load funds even when the fees are ignored.
C) the two types of funds perform about the same considering the fees.
D) load funds may be bought directly, whereas no-load funds must be purchased through a broker.

Question 38

A mutual fund has a beginning balance of $100 million, earns interest of $10 million, receives dividends of $15 million, and has expenses of $5 million. If 10 million shares are outstanding, what is the NAV?

A) $10.50
B) $11.00
C) $12.00
D) $12.50

Question 39

In calculating the net asset value (NAV), which of the following is true?

A) Dividends are subtracted and expenses added.
B) Interest is subtracted and expenses are added.
C) Dividends are added and expenses are subtracted.
D) Interest and other expenses are not included.

Question 40

Existing shares of closed-end mutual fund companies are purchased

A) from the investment company directly.
B) from the investment company through a broker.
C) from other investors in the stock market.
D) from a bank.

Question 41

A mutual fund that does not charge investors a fee and sells direct to investors is a(n) ________ mutual fund.

Question 42

How much money would you need to purchase 400 shares of a mutual fund with an NAV of $55 per share and a 3% load?

A) $22,000
B) $21,450
C) $23,200
D) $22,680

Question 43

An international stock mutual fund is one that owns shares in companies from the United States and other countries.

Question 44

If a mutual fund's NAV is $50 and its expense ratio is 2%, what are the total expenses per share?

A) $2
B) $10
C) $1
D) $5

Question 45

The price of shares in a mutual fund is referred to as the ________.

Question 46

Socially responsible mutual funds are those whose managers have taken and passed a strict financial ethics test.

Question 47

Mutual funds that are traded on stock exchanges are called ________.

Question 48

Capital appreciation funds tend to invest in stocks that distribute little or no dividends so that earnings can be reinvested for expansion.

Question 49

Some index funds have relatively high expense ratios of 1.25% even though they are not actively managed.

Question 50

When evaluating mutual funds which are investing in the same types of securities/markets, you should compare

A) historical performance.
B) management fees.
C) 12b-1 expenses.
D) All of these factors should be considered.

Question 51

A stock mutual fund that pays higher than normal dividends is called a growth fund.

Question 52

Index mutual funds tend to have lower expenses than other types of mutual funds.

Question 53

A mutual fund that buys only the stocks of gold mining companies is a good example of a sector fund.

Question 54

Balanced growth and income funds contain both growth stocks and stocks that pay high dividends.

Question 55

Capital appreciation funds are mutual funds that focus on stocks that are expected to grow at a very high rate.

Question 56

Corporate bond funds focus on bonds issued by high-quality firms and, therefore, tend to have a low degree of default risk.

Question 57

Municipal bond funds have tax advantages over other kinds of mutual funds.

Question 58

On January 1, you invest $10,000 in an open-end mutual fund selling for $25 per share that has a 2% load, 1.5% management fee and 1% 12b-1 expense s. If the fund NAV appreciates to $28 by the time you sell it on December 31, what was your return on investment?

A) 9.76%
B) 11.2%
C) 8.7%
D) 14%

Question 59

Index stock funds always contain the stock of every company in a particular index.

Question 60

Which of the following is not a characteristic of a closed-end mutual fund?

A) Once the fund closes the shares of the fund trade on the stock market just like a stock.
B) The shares may sell above NAV on the secondary market.
C) Investors can easily sell their share back to the fund on a daily basis at NAV.
D) The shares may sell below NAV on the secondary market.

Question 61

Index funds incur ________ expenses and are ________ managed compared to other funds.

A) fewer; not actively
B) fewer; actively
C) more; not actively
D) more; actively

Question 62

High yield (junk) bond funds focus on relatively risky bonds issued by firms that are subject to

A) default risk.
B) interest rate risk.
C) exchange risk.
D) management risk.

Question 63

Which of the following funds would probably have the highest potential risk and return?

A) Index funds representing the entire stock market
B) Capital appreciation funds
C) Equity income funds
D) Balanced growth and income funds

Question 64

Technology funds focus on technology-based firms. Which of the following statements regarding these firms is not true?

A) Many of these firms are relatively young.
B) They have a low degree of risk.
C) They have potential for high returns.
D) They do not have a consistent record of strong performance.

Question 65

Which of the following is not a reason why index funds typically incur lower expenses than other mutual funds?

A) Index funds are not actively managed.
B) There are no expenses for research.
C) The portfolio is revised infrequently, so transaction costs are low.
D) The Securities and Exchange Commission sets a limit on index fund expenses.

Question 66

________ funds are mutual funds that attempt to mirror the movements of existing broad market indicators.

A) Internet
B) Stock
C) Index
D) International

Question 67

You are investing for your retirement 20 years hence. You would be most interested in a fund whose investment objective is focused on

A) long-term growth.
B) capital conservation.
C) income generation.
D) a balance of some growth but mostly high dividends.

Question 68

Index funds are popular for all of the following reasons, except

A) their performance relative to other mutual funds.
B) they incur low expenses.
C) they are not actively managed.
D) performance is frequently lower than that of actively managed portfolios.

Question 69

You are considering investing in a no-load mutual fund that focuses on growth stocks or in an index fund. The growth stock fund had a gross annual return of 15% and expenses of 2%. The index fund had a gross annual return of 12% and expenses of 1%. Assuming equal risk, you should buy

A) the index fund.
B) the growth fund.
C) some of both.
D) neither; the expenses are too high.

Question 70

International bond funds

A) focus on bonds issued by non-U.S. firms or governments.
B) may hold bonds that offer a higher yield than U.S. bonds.
C) are subject to exchange rate risk.
D) All of the above are correct.

Question 71

Which of the following stock mutual funds focus on medium-size companies that are more established than small-cap firms, but may have less growth potential?

A) Equity income funds
B) Sector funds
C) Mid-size capitalization funds
D) Balanced growth and income funds

Question 72

An investor who wants to invest in a particular sector but does not have strong opinions about which stocks to purchase within that sector would be likely to choose a(n)

A) balanced growth and income fund.
B) mid-cap fund.
C) exchange-traded fund that represents that particular sector.
D) growth fund.

Question 73

Which of the following is a stock mutual fund?

A) Ginnie Mae fund
B) Growth fund
C) Municipal securities fund
D) Treasury securities fund

Question 74

The difference between an international and a global fund is

A) global funds invest in both U.S. firms and those of other countries whereas international funds focus on firms outside the United States.
B) international funds invest in U.S. firms and those of other counties while global funds invest only in foreign firms.
C) international funds invest in Treasury securities but no U.S. firms while global funds invest in both.
D) There is no difference except in name.

Question 75

Index funds offer tax advantages because they ________ in much trading and, therefore, ________ capital gains.

A) engage; generate
B) do not engage; generate
C) engage; do not generate
D) do not engage; do not generate

Question 76

A small-cap fund focuses on firms that are relatively small and its investment objectives somewhat overlap capital appreciation funds.

Question 77

Investing in one of which of the following funds will typically give you the least diversification?

A) Growth funds
B) Capital appreciation funds
C) Equity income funds
D) Sector funds

Question 78

Which of the following is not true of global and international bond funds?

A) They may be subject to interest rate risk.
B) They may be subject to exchange rate risk.
C) Their expenses may be higher than those of domestic bond funds.
D) They are especially attractive to investors in high tax bracket.

Question 79

Which of the following stock funds would probably have the lowest risk and return?

A) International funds
B) Capital appreciation funds
C) Equity income funds
D) Sector funds

Question 80

________ mutual funds invest in both foreign bonds and U.S. bonds.

A) International bond
B) Index
C) Treasury bond
D) Global bond