Deck 5: Financial Services: Mutual Funds and Hedge Funds

Question 1

Mutual funds achieve economies of scale for individual investors by realizing the benefits of lower transaction costs and commissions as compared to those incurred by individual investors.

Answer 1

True

Question 2

The proportionate mix of total assets invested in long-term versus short-term mutual funds has varied over the last twenty years.

Answer 2

True

Question 3

Equity mutual funds may contain common stock, but not preferred stock.

Answer 3

False

Question 4

In 1998, the SEC required that portions of mutual fund prospectuses must be written in easily understood "plain" English.

Question 5

Most individuals who invest in mutual funds for the first time realize that mutual fund investments carries some risk.

Question 6

Mutual fund supermarkets often allow investors to purchase funds within large number of fund companies with no transaction fees.

Question 7

Short-term mutual funds invest solely in tax-exempt securities.

Question 8

A change from commercial bank deposits to money market mutual funds typically allows an investor to benefit from higher yields, but with the cost of losing deposit insurance coverage.

Question 9

As of 2012, Commercial banks are not allowed to own or invest in mutual funds.

Question 10

A mutual fund objective statement provides general information about the types of securities a mutual fund will hold as assets.

Question 11

Open-end mutual funds are the major type of mutual funds.

Question 12

Since 2002, the amount of assets invested in load funds have exceeded those invested in no-load funds.

Question 13

Fees of load funds that are used to cover the costs of trading in securities are called 12b-1 fees.

Question 14

Long-term mutual funds invest primarily in long-term, fixed-income securities such as corporate and/or government bonds.

Question 15

The SEC requires that prospectuses or advertisements regarding a mutual fund contain information that returns of the mutual fund carry some risk.

Question 16

One of the goals of mutual funds is to achieve superior diversification through fund and risk pooling compared to what individual investors can achieve.

Question 17

Mutual funds that are load funds use sales agents, and thus always have an up-front commission charge.

Question 18

The return from investing in mutual funds can include dividends, gains from the sale of the mutual fund assets, and gains from the sale of the mutual fund shares.

Question 19

Mutual funds are financial intermediaries that invest in diversified portfolios of assets.

Question 20

The net asset value of a mutual fund is determined four times each business day.

Question 21

The front-end or back-end loads charged by some mutual funds often are combined with 12b-1 fees.

Question 22

Directed brokerage is a trading abuse where a mutual fund and a brokerage agree to promote sales of certain funds in exchange for orders of specific stocks and bonds.

Question 23

The Securities Act of 1933 requires that a mutual fund furnish full and accurate information on all financial and corporate matters to prospective fund purchasers.

Question 24

The chief compliance officer of a mutual fund reports directly to the senior executives of the fund management company.

Question 25

As a result of trading and fee assignment abuses by the mutual fund industry, the SEC established new rules regarding fund governance and conflicts of interest in 2004 and 2005.

Question 26

Class C shares of a mutual fund usually convert to Class A shares after some length of time which may be as long as 6 to 8 years.

Question 27

The National Securities Markets Improvement Act of 1996 exempts mutual funds from oversight by state securities regulators and reduced their regulatory burden.

Question 28

Mutual funds often offer multiple share classes which differentiate between different methods of paying the sales loads and management fees.

Question 29

The Securities Act of 1933 sets rules and procedures regarding a mutual fund's prospectus sent to potential investors.

Question 30

All classes of mutual fund shares may legally charge an annual 12b-1 fee.

Question 31

Mutual fund share distributions and transactions are supervised and cleared by the National Association of Securities Dealers (NASD).

Question 32

Historical evidence indicates that the benefits of greater management attention in load funds do not outweigh the disadvantages of the load fee.

Question 33

Mutual funds are required to hire chief compliance officers whose job is to monitor whether the mutual fund company follows exchange and regulatory rules.

Question 34

The SEC now requires mutual fund portfolio managers to report their personal trading in individual stocks, but not in the portfolios they manage.

Question 35

Class B shares of a mutual fund are typically charged a back-end load when the shares are redeemed.

Question 36

The SEC requires mutual funds to disclose the risk to investors of frequent trading in fund shares.

Question 37

As of 2012, the total investment in long-term mutual funds is less than the total investment in money market mutual funds.

Question 38

The Investment Advisors Act of 1940 sets out rules to prevent conflicts of interest, fraud, and excessive fees or charges for mutual fund shares.

Question 39

Historical evidence indicates that load funds perform better than no-load funds.

Question 40

The Securities Exchange Act of 1934 requires a mutual fund to file a registration statement with the SEC.

Question 41

The short-term mutual fund sector includes

A)money market mutual funds.
B)hybrid funds.
C)equity funds.
D)bond funds.
E)tax-exempt municipal bond funds.

Question 42

The number of funds and assets size of the mutual fund industry have grown dramatically since 1970 because of the introduction of

A)money market mutual funds in 1972.
B)tax-exempt money market mutual funds in 1979.
C)special-purpose equity, bond, and derivative funds.
D)401-k retirement plans sponsored by employers.
E)All of the above.

Question 43

Retirement funds under management of mutual funds manage approximately what percentage of the mutual fund assets.

A)One-tenth
B)One-quarter
C)One-half
D)Three-quarters
E)Zero.

Question 44

U.S. mutual fund companies have made significant progress in entering Japan and Europe.

Question 45

An open-ended fund has stocks of three companies: 200 shares of IBM currently valued at $50.00, 100 shares of GE currently values at $20 and 100 shares of Digital currently valued at $30. The fund has 500 shares outstanding. What is the net asset value (NAV) of the fund?

A)$30.00.
B)$60.00.
C)$120.00.
D)$12.00.
E)$37.50.

Question 46

The returns obtained by investors of mutual funds include the following except

A)interest income earned on assets.
B)dividend income earned on assets.
C)capital gains on assets sold by the fund.
D)capital appreciation in the underlying value of the assets held in the portfolio.
E)refunds of load charges and management fees.

Question 47

Which of the following is one of the characteristics of household mutual fund owners as of 2012?

A)The typical fund-owning household has $120,000 invested.
B)52 percent of the families are headed by someone without a college degree.
C)The median age of mutual fund holders is 51.
D)21 percent of investors that conducted equity fund transactions used the internet.
E)All of the above.

Question 48

Closed-end investment companies

A)have a fixed number of shares.
B)can trade at a price that is greater than, equal to, or less than the NAV.
C)will trade at a different price as the number of shares of the fund changes.
D)A and C only.
E)A and B only.

Question 49

An investor invests $100,000 in a mutual fund that has a 5 percent front-end load, charges a management fee of 0.5 percent, and a 12b-1 fee of 0.25 percent. The investor plans to leave the investment for one year. What is the dollar amount of the total shareholder cost?

A)$5,000.
B)$5,500.
C)$5,750.
D)$750.
E)$500.

Question 50

Open-end mutual funds guarantee

A)investors a minimum rate of return.
B)investors a minimum Net Asset Value (NAV).
C)to redeem investors' shares upon demand at the daily Net Asset Value (NAV).
D)to earn the rate of return promised in the prospectus.
E)that there will be no load charges.

Question 51

Regarding the relative asset size and asset growth rate of mutual fund sectors,

A)long-term funds had more assets at the end of 2012, but short-term funds had grown at a faster rate since 1980.
B)long-term funds had more assets at the end of 2012, and long-term funds had grown at a faster rate since 1980.
C)short-term funds had more assets at the end of 2012, but long-term funds had grown at a faster rate since 1980.
D)short-term funds had more assets at the end of 2012, and short-term funds had grown at a faster rate since 1980.
E)More than one of the above is correct.

Question 52

The long-term mutual fund sector includes

A)money market mutual funds.
B)equity funds.
C)bond funds.
D)Answers B and C only.
E)All of the above.

Question 53

Fees investors are charged to cover administration and shareholder services are called

A)12b-1 fees.
B)management fees.
C)sales loads.
D)preemptive taxes.
E)transaction fees.

Question 54

A mutual fund that charges investors a fee similar to a commission charge is called a

A)12b-1 fee.
B)no-load fund.
C)load fund.
D)long-term fund.
E)short-term fund.

Question 55

The first mutual fund was founded in this city in 1924.

A)New York, New York
B)San Francisco, California
C)Boston, Massachusetts
D)London, England
E)Paris, France

Question 56

In total, about the percentage of all retirement plan investments are in institutional funds.

A)20 percent
B)40 percent
C)6.0 percent
D)80 percent
E)Zero percent

Question 57

Worldwide investments in mutual funds have grown at a rate faster than in the United States over the last decade.

Question 58

The rate of investing in mutual funds tends to be positively correlated with economic activity in the U.S., but is negatively correlated with economic activity in other countries.

Question 59

Open-end mutual funds

A)require that NAV consider the amount of discount or premium in the share value.
B)calculate the NAV based on the total value of assets held divided by the number of fund shares outstanding.
C)may experience fluctuations in the number of shares outstanding on a daily basis.
D)All of the above.
E)Answers B and C only.

Question 60

As compared to purchasing an individual stock, a no-load mutual fund investor will usually get

A)commission less reinvestment opportunities.
B)better diversification.
C)no-cost switching between funds within the same fund family.
D)lower commission costs.
E)All of the above

Question 61

Which of the following is the regulation that allowed the SEC to restrict program trading when it deems necessary?

A)Securities Exchange Act.
B)Investment Advisers Act.
C)Investment Company Act.
D)Insider Trading and Securities Fraud Enforcement Act.
E)Market Reform Act.

Question 62

Which of the following is the practice that involves short-term trading of mutual funds seeking to take advantage of short-term discrepancies between the price of a mutual fund's shares and out-of-date values on the securities in the fund's portfolio?

A)Market timing.
B)Insider trading.
C)Late trading.
D)Directed brokerage.
E)Spinning.

Question 63

Identify the primary regulator (s) of mutual funds.

A)Fed.
B)SEC.
C)NASD.
D)State regulators.
E)Stock exchanges.

Question 64

Mutual funds that purchase Treasury bills, bank negotiable certificates of deposit, commercial paper, and other short-term securities would be classified as

A)contractual institutions.
B)investment institutions.
C)money market funds.
D)securities dealers.
E)PC insurance companies.

Question 65

What agency acts as the distributor or "clearinghouse" for mutual fund transactions?

A)SEC.
B)NASD.
C)FedWire.
D)NYSE.
E)U.S.Treasury.

Question 66

The largest proportion of assets of money market mutual funds in 2012 was

A)security repos.
B)time and savings deposits.
C)checkable deposits and currency.
D)credit market instruments.
E)foreign deposits.

Question 67

Which of the following observations is true of open-end mutual funds?

A)They have a fixed number of shares outstanding.
B)The value of shares changes with the demand for the fund by investors.
C)Investors buy and sell shares on a stock exchange.
D)The demand for shares determines the number outstanding.
E)Shares may trade at a premium or discount.

Question 68

The front-end load on these type of shares is charged on new sales and is not generally incurred when these shares are exchanged for another mutual fund within the same fund family.

A)Class A shares.
B)Class B shares.
C)Class C shares.
D)Class D shares.
E)Either Class A or Class C shares.

Question 69

A mutual fund has the following share characteristics: Shares are offered at the NAV with no front-end load, a 12b-1 fee of 1 percent is charged, a back-end load of 1 percent is charged only if the shares are sold by the investor within one year of purchase, and the shares do not convert to any other class of shares. These shares would be classified as

A)Class A shares.
B)Class B shares.
C)Class C shares.
D)Class D shares.
E)either Class A or Class C shares.

Question 70

Which of the following observations is true of a no-load fund?

A)Purchase is subject to a sales charge.
B)Sales charges may be as high as 8.5 percent.
C)They market shares of the fund directly to investors.
D)They use sales agents.
E)They have up-front commission charges.

Question 71

Which practice is especially common in international funds as traders can exploit differences in time zones?

A)Directed brokerage.
B)Insider trading.
C)Late trading.
D)Market timing.
E)Spinning.

Question 72

The type of abusive activity that involves arrangements between mutual fund companies and brokerage houses is

A)market timing.
B)late trading.
C)directed brokerage.
D)improper fee assessment.
E)None of the above.

Question 73

New SEC rules call for shareholder reports to include

A)clear information to investors on brokerage commissions and discounts.
B)information on how the fund compares with industry averages on fees and loads.
C)information on eligibility for breakpoint discounts.
D)All of the above.
E)Only two of the above.

Question 74

The net asset value of a mutual fund is found by

A)subtracting the daily market value of the fund's asset portfolio from the previous days' value.
B)dividing the cumulative value of all asset positions held by the fund by the total number of asset shares held by the fund.
C)computing the daily market value of the fund's total asset portfolio and then dividing this amount by the number of mutual fund shares outstanding.
D)comparing the daily market value of the fund's total asset portfolio with that of its peers.
E)subtracting expenses, commissions, and dividends from the fund's total asset portfolio.

Question 75

The largest asset category of mutual funds as of 2012 was

A)corporate equities.
B)credit market instruments.
C)U.S.government securities.
D)corporate and foreign bonds.
E)municipal securities.

Question 76

Mutual fund shares that are offered for sale at the NAV without a front-end load, but which charge a combination of 12b-1 fees and a back-end load, and whose back-end load typically remains in effect for 6 to 8 years, are

A)Class A shares.
B)Class B shares.
C)Class C shares.
D)Class D shares.
E)either Class A or Class C shares.

Question 77

Duties of a mutual fund chief compliance officer include

A)policing the trading by non-fund managers.
B)ensuring the accuracy of information provided to fund managers.
C)reviewing fund business practices such as marketing and administration.
D)reporting any wrongdoing directly to fund directors.
E)All of the above.

Question 78

As a result of illegal and abusive activities in recent years, new rules and regulations were imposed on mutual fund companies in 2004. These rules were intended to

A)close legal loopholes that some fund managers had abused.
B)improve fund governance.
C)give investors more information about conflicts of interest.
D)ensure the accuracy of information given to regulators.
E)All of the above.

Question 79

The NAV of a closed-end investment company shares is determined at any point in time by

A)the number of shares available.
B)the value of the underlying shares owned by the company.
C)the demand for the investment company's shares.
D)Answers A and B only.
E)Answers B and C only.

Question 80

The type of abusive activity that involves cases where investors were able to buy or sell mutual fund shares long after the price had been set each day is

A)market timing.
B)late trading.
C)directed brokerage.
D)improper fee assessment.
E)None of the above.