Deck 14: Personal Investing - Investing in Mutual Funds

Question 1

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

Answer 1

False

Question 2

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

Answer 2

True

Question 3

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

Answer 3

True

Question 4

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

Question 5

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

Question 6

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

Question 7

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

Question 8

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 units outstanding.

Question 9

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

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

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

Question 12

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

Question 13

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

Question 14

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

Question 15

There is no limit to the number of open-end mutual fund units a company can offer.

Question 16

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

Question 17

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

Question 18

On average, mutual funds have an expense ratio of about 2.8 percent.

Question 19

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

Question 20

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

Question 21

Choosing a mutual fund or an investment company involves reviewing past performance and comparing fees and expenses charged.

Question 22

Mutual funds that receive dividends and capital gains must distribute these to investors in the same year.

Question 23

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

Question 24

When you own a mutual fund, you are liable for paying taxes on dividends and capital gains, even if these are reinvested in your account and you never actually receive a cheque for them.

Question 25

Capital gains from mutual funds can be received if the mutual fund makes a profit on the shares it sells or if an individual investor realizes a gain on the sale of mutual fund shares.

Question 26

Because a mutual fund is already diversified with perhaps 100 or more different investments, further diversification is not recommended or necessary.

Question 27

Hedge funds, which are not regulated by the Ontario Securities Commission, are available only to wealthy investors and are less risky than ordinary mutual funds.

Question 28

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

Question 29

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

Question 30

Even when the stock market performs poorly, there are many stock mutual funds that perform well.

Question 31

Socially responsible mutual funds are those funds that have taken and passed a strict ethics test for investing in gun or cigarette companies.

Question 32

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

Question 33

Index funds usually have lower capital gains on their investments and therefore are advantageous to investors in higher income tax brackets.

Question 34

Index stock funds always contain every company's stock that make up the particular index.

Question 35

Bond funds have tax advantages over other kinds of mutual funds.

Question 36

Even bond mutual funds with little or no default risk have an interest rate risk.

Question 37

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

Question 38

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

Question 39

Before investing in a mutual fund, you should receive and evaluate the fund's prospectus, which is available for a small charge.

Question 40

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

Question 41

Global bond funds focus on bonds issued by non-Canadian firms.

Question 42

You purchased $2000 of a gold fund and it is now worth $6400.You intend to take your profits with a 3 percent redemption fee. The redemption fee will be $192.

Question 43

Both segregated funds and mutual funds offer creditor protection in the event of bankruptcy.

Question 44

Exchange-traded funds are similar to mutual funds but without net asset value per share.

Question 45

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)eliminating risk of loss.

Question 46

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

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

Question 47

In the newspaper's mutual fund quotations, your fund shows a NAV of $12.96 + .22. Yesterday it was worth $12.74.

Question 48

If you invest $4000 in a mutual fund with a net asset value of $25 per unit, you will purchase 200 units.

Question 49

If you sell a mutual fund it is likely that you will pay a redemption fee on a declining basis for as long as 5 to 10 years after purchase.

Question 50

Segregated funds are different than mutual funds in that they offer a death benefit.

Question 51

Segregated funds usually mature in 10 years and guarantee the principal to a maximum of 75 percent.

Question 52

Segregated funds offer a guarantee of as much as 100 percent of your funds invested on maturity.

Question 53

You purchased a growth fund for $10 per unit and are selling it for $18.50 per unit. Your taxable gain is $6.50 per unit.

Question 54

Tracking error refers to how closely an index fund mirrors the movements of the existing index.

Question 55

There are three components to the management expense ratio (MER): management expense, dealer compensation, and administrative costs.

Question 56

Brokers are less likely to recommend a no-load fund to their clients.

Question 57

A fund with a favourable historical track record is likely to outperform most other funds in the future.

Question 58

Mutual funds that move in the same direction as the TSX index are called sector funds.

Question 59

An investor with a low risk profile should invest in a sector fund.

Question 60

The performance of an equity mutual fund depends on the general movements in bond prices.

Question 61

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 62

Which of the following equity mutual funds invests in a range of medium sized companies?

A)Dividend
B)Sector
C)Mid-Cap
D)Index

Question 63

Which of the following is true about mutual fund expenses?

A)International equity funds often have the highest MERs.
B)The MERS of all kinds of funds are roughly the same.
C)Management fees include all sales and administration expenses.
D)The funds with higher MERs pay the sales people the most.

Question 64

Which of the following is true about MERs?

A)MERs only include manager and sales expenses.
B)Mutual funds with lower MERs tend to outperform those with higher.
C)All types of mutual finds have similar MERs.
D)You need to subtract the MER from the posted return to figure out performance.

Question 65

The net asset value (NAV)is reported

A)on an hourly basis.
B)on a daily basis.
C)in dollars and fractions of dollars.
D)throughout each day.

Question 66

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

A)Index
B)Capital appreciation
C)Dividend
D)Sector

Question 67

You are considering investing in a no-load mutual fund that focuses on growth stocks or in an index fund. The growth stocks fund had a five year average annual return of 11 percent with MER of 2.6 percent. The index fund had a five year average annual return of 11 percent with MER of 1.1 percent. Assuming equal risk, you should buy

A)the index fund.
B)the growth fund.
C)some of both, for diversification, as they performed equally.
D)neither, since the expenses are too high for funds of this type.

Question 68

To calculate the NAV of an open-end fund, the market value of the portfolio less liabilities is divided by which item to arrive at a per-unit basis?

A)Original number of units
B)Units currently outstanding
C)Maximum units to be issued
D)Average number of units in comparable funds

Question 69

Regarding load and no-load mutual funds,

A)load funds usually outperform no-load funds.
B)no-load funds have outperformed load funds on average.
C)the two types of funds perform about the same considering the fees.
D)load funds require a broker, whereas no-load funds must be purchased directly.

Question 70

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

A)Growth funds
B)Large-Cap funds
C)Equity income funds
D)Sector funds

Question 71

Which of the following is a pure stock mutual fund?

A)Asset allocation fund
B)Balanced growth and income
C)Mid-cap fund
D)Money market fund

Question 72

A family of mutual funds is

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

Question 73

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 74

Which of the following funds is a sector fund?

A)An index fund
B)An ethical fund
C)A dividend fund
D)A financial services fund

Question 75

Stockbrokers typically do not sell no-load funds because

A)the return is lower than for load funds.
B)they are prohibited from doing so by securities law.
C)there is no commission paid to the broker.
D)there is no secondary market for them.

Question 76

Which of the following characteristics is true of closed-end funds?

A)They are not regulated.
B)They repurchase units from investors.
C)They are bought and sold through a mutual fund dealer.
D)They may sell above or below NAV.

Question 77

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

A)1)78 percent.
B)2)68 percent.
C)3)21 percent.
D)2)42 percent.

Question 78

The return on an index fund may be less than the return on the index it represents because of

A)tracking errors and costs.
B)management fees.
C)load fees.
D)dividends and taxation.

Question 79

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

A)Dividends are subtracted and expenses are 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 80

Mutual funds, which sell units directly to investors and repurchase units from investors who want to sell, are called

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