Deck 6: Investment Companies: Mutual Funds

Question 1

The per share net asset value of a mutual fund depends on the difference between the fund's assets and liabilities and the number of shares outstanding.

Answer 1

True

Question 2

If a mutual fund specializes in the securities of one sector of the economy, unsystematic risk may not be reduced.

Answer 2

True

Question 3

In order to sell securities to the general public, a mutual fund must register its securities and prepare a prospectus detailing its objectives and costs to investors.

Answer 3

True

Question 4

A small cap fund has total assets of less than $100 million.

Question 5

When a seller executes a repurchase agreement, the seller agrees to repurchase the asset at a lower price.

Question 6

The shares of load mutual fund sell for a discount from their net asset value.

Question 7

Dividends and capital gains are the sources of return from an investment in a mutual fund.

Question 8

Treasury bills are issued by state treasuries and have no risk of default.

Question 9

An index fund seeks to duplicate the composition of an index such as the S&P 500.

Question 10

Investments in mutual funds permit the investor to avoid market risk.

Question 11

If an investment company were liquidated, the investor should receive the net asset value.

Question 12

The shares of a mutual fund often sell for discount from net asset value.

Question 13

The only costs associated with investing in a mutual fund are the commissions to buy and sell the shares.

Question 14

The income earned by a mutual fund is taxed through the stockholders' income tax returns.

Question 15

The shares of no-load mutual funds sell for their net asset value.

Question 16

The net asset value of a mutual fund rises when it distributes capital gains.

Question 17

One of the major advantages associated with liquid money market securities is safety of principal.

Question 18

Money market mutual funds acquire short-term money market instruments such as commercial paper.

Question 19

The "load" fee charged by a mutual fund is paid when the shares are sold.

Question 20

Investment companies pay no taxes on their earnings.

Question 21

A high beta coefficient for a mutual fund is desirable if the investor is seeking a conservative investment.

Question 22

An exit fee (e.g., 3 percent)has the same impact on an investor's return as an equal load fee (e.g., 3 percent).

Question 23

Mutual funds report their returns on a before-tax basis.

Question 24

No-load funds with 12b-1 fees are able to charge their existing shareholders for marketing expenses.

Question 25

Mutual funds reduce unsystematic risk but not systematic risk.

Question 26

The Jensen index compares actual performance to the risk-adjusted required performance.

Question 27

High tax efficiency suggests that a fund's after-tax return is comparable to its before-tax return.

Question 28

Acquiring shares in no load funds is one means to avoid 12b-1 fees.

Question 29

An index fund seeks to duplicate an aggregate measure of the market or a segment of the market.

Question 30

Beta coefficients may be computed for investment companies and used to compute risk-adjusted rates of return.

Question 31

If a mutual fund portfolio earned a return that exceeded the return on the S&P 500 stock index, you may conclude that the fund outperformed the market on a risk-adjusted basis.

Question 32

Funds that perform well in one year earn consistently higher returns in subsequent years.

Question 33

The Sharpe index standardizes performance by the portfolio's beta.

Question 34

A Eurodollar CD is a certificate of deposit issued in the United States by a foreign bank.

Question 35

The Sharpe index assumes that portfolios are not well diversified.

Question 36

High portfolio turnover is associated with high tax efficiency.

Question 37

The S&P 500 stock index may be an inappropriate benchmark for a small-cap fund.

Question 38

Empirical studies of returns earned by mutual funds suggest they consistently outperform the market.

Question 39

If mutual fund shares are purchased just prior to the fund's annual distribution, the investor becomes responsible for taxes on the distribution.

Question 40

The advantages offered by investment companies include
1. professional management
2. avoidance of income taxes by the investor
3. portfolio diversification

A)1 and 2
B)1 and 3
C)2 and 3
D)all of the above

Question 41

Money market mutual funds invest in
1. commercial paper
2. repurchase agreements
3. corporate bonds

A)1 and 2
B)1 and 3
C)2 and 3
D)all of the above

Question 42

Commercial paper is generally

A)a short-term unsecured debt of a corporation
B)a short-term secured debt of a corporation
C)a long-term unsecured debt of a corporation
D)a long-term secured debt of a corporation

Question 43

Which of the following is not a short-term, liquid asset?

A)negotiable certificate of deposit
B)U.S. Treasury bills
C)corporate stock
D)commercial paper

Question 44

Mutual funds                  realized capital gains and income (e.g., dividends received)

A)retain
B)reinvest
C)distribute
D)distribute or reinvest

Question 45

An exit fee has the same impact of

A)a load fee of the same percentage
B)a 12b-1 fee with the same percentage
C)commissions paid by a mutual fund to buy securities
D)management fees

Question 46

Empirical studies of returns earned by investment companies indicate that

A)no funds outperform the market consistently
B)most funds are less risky than the market
C)most funds outperform the market consistently
D)few funds outperform the market consistently

Question 47

If mutual funds make investments in efficient financial markets, they

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

Question 48

One means to adjust for risk is

A)standardize funds' returns by their beta coefficients
B)compute their rates of return including both income and capital gain distributions
C)standardize funds' costs by an aggregate index of mutual fund expenses
D)to divide each funds' return by the return on the market

Question 49

An index fund limits its portfolio to

A)high quality securities
B)stocks that respond to changes in the consumer prices (i.e., Consumer Price Index)
C)stocks included in an aggregate measure of stock prices
D)stocks of firms in a particular industry

Question 50

Rates of return reported by mutual funds

A)are reported after taxes
B)consider the impact of loading fees
C)are based on change in net asset value and the fund's distributions
D)are adjusted for the fund's systematic risk

Question 51

Mutual funds with beta coefficients greater 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 52

A style portfolio manager offers two things:

A)investment skill and market timing
B)the specific style combined with a low beta
C)a high beta and investment timing
D)investment skill combined with the style

Question 53

If an investor's excess return is negative,

A)the realized return was less than the return earned by the market
B)the required return exceeded the realized return
C)the investor constructed a poorly diversified portfolio
D)the investor's portfolio had excessive diversification

Question 54

The cost of investing in a mutual fund includes
1. the loading charges
2. commissions when the fund buys and sells securities
3. management fees

A)1 and 2
B)1 and 3
C)2 and 3
D)all of the above

Question 55

Which of the following should not have default risk?

A)money market mutual funds
B)commercial paper
C)negotiable certificates of deposit
D)treasury bills

Question 56

No load mutual funds may increase fees through
1. sales charges
2. commissions
3. 12b-1 plans

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

Question 57

Which of the following is not an investment company?

A)a money market mutual fund
B)an index fund
C)a commercial bank
D)a growth mutual fund

Question 58

The net asset value of a mutual fund increases with

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

Question 59

Which of the following is true?

A)Mutual funds report returns before adjusting for taxes.
B)12b-1 fees exceed a fund's NAV.
C)Small cap funds cannot have load fees.
D)Exchange-traded funds exchange their portfolios.

Question 60

Open-end investment companies

A)have a fixed number of shares
B)issue new stock whenever investors buy shares
C)may sell for a discount from net asset value
D)redeem shares at the investor's cost

Question 61

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?

Question 62

A mutual fund with a beta coefficient of 0.8

A)invests in an index of the stock market
B)invests only in debt instruments
C)has less systematic risk
D)has less unsystematic risk

Question 63

Which of the following is a consideration when selecting a mutual fund?
1. portfolio turnover
2. 12b-1 fees
3. unrealized losses in the fund's portfolio

A)1 and 2
B)1 and 3
C)2 and 3
D)all of the above

Question 64

Which of the following is a reason for selecting a mutual fund?

A)avoidance of market risk
B)high tax efficiency
C)charging 12b-1 fees instead of load fees
D)often realizing portfolio gains

Question 65

Index funds tend to track

A)the stock market as a whole
B)the bond market
C)a specific measure of the market
D)the return on other index funds