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

Question 1

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

Answer 1

True

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

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

Answer 3

False

Question 4

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 5

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

Question 6

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

Question 7

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

Question 8

Unit trusts may be self-liquidating.

Question 9

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

Question 10

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

Question 11

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

Question 12

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

Question 13

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

Question 14

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

Question 15

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

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

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

Question 21

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 22

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

Question 23

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 24

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

Question 25

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 26

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

Question 27

A hedge fund is a conservative type of mutual fund.

Question 28

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 29

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 30

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 31

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

Question 32

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 33

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

Question 34

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

Question 35

A global fund invests solely in foreign securities.

Question 36

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 37

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

Question 38

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 39

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 40

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 41

An American investor may take a position in foreign equities by acquiring
1. iShares specializing in foreign country indexes
2. international mutual funds
3. country closed-end investment companies

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

Question 42

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 43

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 44

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 45

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 46

You buy a REIT for $50 a share. The REIT distributes $3.00 consisting of return of capital. You are in the 30 percent 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 47

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 ($200)return of capital, $1.20 ($120)in income, and $0.80 ($80)in long-term capital gains. The investor's income tax bracket is 30 percent. The long-term capital gains tax rate is 15 percent. What is the investor's second year tax obligation?

Question 48

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 49

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 50

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