Deck 15: Mutual Funds: An Easy Way to Diversify

Question 1

By law, all mutual funds must be broadly diversified.

Answer 1

False

Question 2

All mutual funds carry the same level of diversification and exposure to risk.

Answer 2

False

Question 3

The trade-off for mutual fund diversification is lower-than-market performance.

Answer 3

True

Question 4

Mutual funds provide an inexpensive way for investors to diversify and gain access to professional management.

Question 5

Mutual funds give smaller investors the same ability to diversify and reduce risk as big investors with a great deal of money have.

Question 6

One disadvantage of mutual fund investments is that they are illiquid.

Question 7

Which type of risk can an investor effectively manage by investing in broadly diversified mutual funds?

A) Serial risk
B) Systematic risk
C) Unsystematic risk
D) None of the above is correct.

Question 8

Which of the following is a benefit to investing in a mutual fund?

A) Most small investors don't have the time, knowledge or desire to do the research necessary to purchase individual stocks.
B) Mutual fund transaction fees are considerably lower than the brokerage fees most small investors incur buying and selling individual stocks.
C) Most small investors want to be able to invest relatively small amounts of money on a regular basis.
D) All of the above are correct.
E) Only A and B are correct.

Question 9

The investor services that most mutual funds offer include

A) bookkeeping services.
B) checking accounts.
C) automatic systems to add to or withdraw from your account.
D) All of the above are correct.
E) All but B are correct

Question 10

For your investment program, you have occasionally been holding a few stocks that you purchased from various brokers. Based on this, which advantages of mutual funds would be appealing to you?

A) diversification
B) professional management
C) avoidance of bad brokers
D) Only A and C
E) A, B, and C

Question 11

Because mutual funds trade in such large quantities, they pay far more in terms of commissions.

Question 12

Mutual funds eliminate the systematic risk through diversification.

Question 13

Which of the following is a disadvantage to mutual fund investing?

A) On average they underperform the market returns.
B) Costs may be high and vary dramatically from fund to fund.
C) Not all mutual funds are truly safe.
D) You cannot diversify away systematic risk.
E) All of the above.

Question 14

When you own shares in a mutual fund you make money in which of the following ways?

A) As the value of all of the securities held by the mutual fund increase, the value of each mutual fund share also increases.
B) If a fund receives interest or dividends from its holdings this income is passed on to share holders.
C) If the fund sells a security for more than it originally paid for it, the shareholders receive this in the form of capital gains.
D) You receive a portion of the commissions that the fund manager charges for trades.
E) Only A, B and C are correct.

Question 15

Most small investors don't have the time, expertise, or desire to do the research necessary to invest in individual stocks therefore mutual funds are a good solution.

Question 16

Principle 8 tells us that diversification reduces ________.

A) risk
B) costs
C) profitability
D) earnings
E) none of the above

Question 17

Mutual fund shareholders directly own the fund's securities.

Question 18

Each individual mutual fund hires an investment advisor, generally from the management company, who oversee the particular fund. How is this advisor paid?

A) hourly
B) based on a percentage of the commissions charged on an annual basis
C) based on a percentage of the total value of the fund on an annual basis
D) annually based on the capital gains realized by the fund
E) none of the above

Question 19

Why would someone want to give serious attention to investing in mutual funds? At the same time, why would you not invest in them?

Question 20

The potential lower returns on mutual funds versus the potential returns on individual stocks is due to poor performance by the fund managers.

Question 21

Which of the following funds would be the most appropriate investment for the average small investor?

A) No-load open-end fund
B) No-load closed-end fund
C) Front-end load fund
D) Back-end load fund

Question 22

In what ways do unit investment trusts and real estate investment trusts resemble mutual funds?

Question 23

An ________ is a fixed pool of securities, generally municipal bonds.

A) earning trust
B) unit investment trust
C) equity corporation
D) asset diversification company
E) none of the above

Question 24

The most common and popular form of mutual fund is an open-end mutual fund.

Question 25

A(n) ________ is a fixed pool of securities, generally municipal bonds, with each unit representing a proportionate ownership in that pool.

A) open-end investment company
B) closed-end mutual fund
C) unit investment trust
D) real estate investment trust

Question 26

A mutual fund that does not charge a commission on your ownership shares is referred to as a load fund.

Question 27

A unit investment trust usually invests in ________ and an REIT always invests in ________.

A) real estate; agency bonds
B) real estate; municipal bonds
C) real estate; load mutual funds
D) municipal bonds; real estate
E) municipal bonds; real estate bonds

Question 28

Roberta Cartwright puts money each month into a mutual fund that has very few controls; in that, the managers can invest in whatever they want because this type of fund is not regulated by the SEC. Roberta has a(n) ________ fund.

A) open-end
B) closed-end
C) hedge
D) no-load
E) back-end load

Question 29

Compare and contrast open-end and closed-end mutual funds.

Question 30

An open-end mutual fund has a fixed number of shares which are sold by the mutual fund at its inception.

Question 31

A unit investment trust is a fixed pool of securities, generally municipal bonds, with each unit representing a proportionate ownership in that pool.

Question 32

12b-1 fees are marketing expenses for the mutual fund that are passed on to the fund shareholders.

Question 33

Do the advantages of investing in a Mutual Fund outweigh the disadvantages for the average small investor?

Question 34

A(n) ________ is a mutual fund company that has the ability to issue as many shares as investors are willing to purchase.

A) closed-end mutual fund
B) share repurchase fund
C) open-end mutual fund
D) variable share mutual fund
E) none of the above

Question 35

The term "open end" mutual fund means that this type of investment company can issue an unlimited number of ownership shares.

Question 36

What are the two broad types of risks that are associated with investing? Can you avoid them by investing in Mutual Funds?

Question 37

An equity REIT investment is limited to mortgages on income producing properties.

Question 38

Shares in open-end mutual funds are actively traded in secondary markets.

Question 39

A closed-end fund trades more like common stock than a mutual fund.

Question 40

When you own shares in a mutual fund, you directly own shares of the companies that make up the fund.

Question 41

When comparing which mutual fund to invest in, which of the following would be important to consider?

A) Load
B) Net asset value
C) Expense ratio
D) All of the above are correct
E) Only A and C are correct

Question 42

Which of the following are passed on to fund share holders through 12b-1 fees?

A) commissions
B) advertising expenses
C) promotional fees
D) only B and C
E) all of the above

Question 43

A mutual fund's expense ratio compares the fund's expenses to its total assets.

Question 44

Net asset value is determined by taking the total market value of all the securities held by the mutual fund, subtracting out any liabilities, and dividing the result by the number of shares outstanding.

Question 45

A mutual fund that does not charge a commission to own its shares is called a ________.

A) free issue fund
B) market fund
C) no-load fund
D) no-charge fund
E) free-load fund

Question 46

Mutual funds charge high sales loads because their potential returns are much higher than the returns for individual stocks.

Question 47

Mutual fund fees and expenses will negatively affect the return you receive on your investment.

Question 48

When you own shares of a mutual fund, you can choose to have the dividend and capital gains distributions paid directly to you in the form of cash or you can choose to have them reinvested into additional shares of the fund itself.

Question 49

Total returns on mutual funds can be calculated by adding dividends distributed, capital gains distributed, and ________ and dividing this sum by the beginning NAV.

A) beginning NAV ‑ending NAV
B) ending NAV ‑beginning NAV
C) dividends undistributed + capital gains undistributed
D) beginning NAV + ending NAV
E) ending NAV + beginning NAV

Question 50

All distributions from a mutual fund, whether paid out or reinvested, are taxable in the year in which they occur.

Question 51

Back-end load mutual funds charge a commission when the investor sells the mutual fund.

Question 52

Which of the following statements is true regarding mutual fund load charges?

A) Load funds perform better than no-load funds.
B) Back-end load funds perform better than no-load funds.
C) Load funds perform more poorly than back-end load funds.
D) No-load funds perform just as well as load funds.
E) none of the above

Question 53

Tabitha is just beginning to develop her financial portfolio. She does not want to pay commissions to purchase shares in mutual funds, as her friend you would advise her to invest her dollars in ________ funds.

A) load
B) front-load
C) back-load
D) no-load
E) side-load

Question 54

What is the total return for a mutual fund with the following characteristics?
Beginning NAV = $55.82
Ending NAV = $70.52
Dividends distributed = $2.25
Capital gains distributed = $3.50

A) 29.71%
B) 30.82%
C) 32.26%
D) 36.64%

Question 55

Sometimes, when you purchase shares directly from the mutual fund company itself, there will not be a sales load.

Question 56

The ________ is the value of the mutual fund's holdings, minus any debt, divided by the number of shares outstanding.

A) net worth
B) market value
C) tangible value
D) net asset value
E) none of the above

Question 57

Explain what the three 'classes' of a mutual fund shares are all about.

Question 58

"Classes" of mutual funds have different fee arrangements attached to them.

Question 59

Explain how sales loads and fund expenses can negatively impact your return on investment in a mutual fund.

Question 60

Which of the following will affect your capital gains liability?

A) Turnover ratio
B) Changes in net asset value
C) expense ratio
D) All of the above are correct.
E) Only A and B are correct.

Question 61

A bond mutual fund is an appropriate choice for an investor with an income goal.

Question 62

Brian and Kallie are looking for investments that provide steady income to live on, moderate growth in capital, and moderate stability in their investments. They should look into balanced mutual funds.

Question 63

You purchased 1,000 shares of fund ABC for $35.00 NAV per share. You elected the dividend reinvestment plan and had all dividend and capital gains distributions reinvested in additional shares. You just closed your account and sold 1,100 shares for $30 NAV. What was your total return on this investment?

A) -6.06%
B) -5.71%
C) 5.71%
D) 6.06%

Question 64

You purchased 100 shares of Gibraltar Strength Fund for $12.75 per share. Its current NAV is 18.75 per share. There was a total of $0.25 in dividends and $0.75 in capital gains distributed. What is your total return?

A) 32.00%
B) 37.33%
C) 47.06%
D) 54.90%

Question 65

Briefly describe the cost involved in mutual funds.

Question 66

An aggressive growth fund is an appropriate choice for an investor looking for capital gains.

Question 67

Stock market mutual funds are not very popular and consumers tend to invest in them the least.

Question 68

Explain how a dividend reinvestment plan is similar to compounding and the time value of money.

Question 69

Sixty-five percent of Sally's mutual funds are invested in environmentally friendly companies. We can assume Sally has invested in sector funds.

Question 70

You purchased 100 shares of a fund for $15.50 per share. Its current NAV is 20.75 per share. There were no distributions. What is your total return?

A) 33.87%
B) 22.33%
C) 79.67%
D) 25.51%

Question 71

Zippo Mutual Fund is one of your best performers. It just announced a year-end distribution of $2.50 per share in capital gains and $4.25 in dividends. Assuming the NAV increased from $31.50 to $43.75, calculate your total annual return.

A) 60.32%
B) 46.87%
C) 26.95%
D) 24.53%

Question 72

You purchased 500 shares in a mutual fund for $32 NAV. You elected the dividend reinvestment plan and had all dividend and capital gains distributions reinvested in additional shares. You just closed your account and sold 550 shares for $48 NAV. What was your total return on this investment?

A) 24.03%
B) 34.29%
C) 41.44%
D) 50.86%

Question 73

What are the tax liabilities concerning investing in a mutual fund?

Question 74

You purchased 100 shares of Gibraltar Strength Fund for $20.50 per share. As a result of distribution reinvestment you currently own 120 shares with a NAV of $22.75 per share. What is your total return?

A) 16.67%
B) 20.00%
C) 24.91%
D) 33.17%

Question 75

Exchange traded funds are mutual funds that trade on an exchange just like individual securities and can be bought or sold throughout the trading day.

Question 76

Suppose that the current value of all of a mutual fund's holdings is determined to be $750 million. The fund's liabilities are $125 million and it grew at 20% from last year. It currently has 45 million shares outstanding. What is the fund's NAV?

A) $12.00 per share
B) $13.89 per share
C) $14.40 per share
D) $16.80 per share

Question 77

A sector fund is a mutual fund that tries to maximize the degree of diversification.

Question 78

Money market mutual funds invest primarily in the stocks of publicly traded companies.

Question 79

What does the following mathematical expression yield?
(total market value of all securities ‑liabilities) divided by (total shares outstanding) = ________.

A) asset value
B) net value
C) net asset value
D) net return value
E) asset return value

Question 80

Tax-exempt money market mutual funds invest in only very short-term municipal debt.