Question 1

The major alternatives to mutual funds are ________.

Accepted Answer

All of the given options (exchange-traded funds, segregated accounts, and "folios") are major alternatives to mutual funds. The best choice would depend on the individual's investment goals, risk tolerance, and preferences. It is recommended to consult with a financial advisor before making any investment decisions.

Question 2

The open-end aspect of mutual funds is ________; that is, investors invest funds directly in or withdraw funds from the mutual fund. The open-end aspect of ETFs is ________ in that the investors buy the ETF in a closed-end manner like closed-end funds and then the authorized participant ________ between the ETF and the underlying portfolio, providing the indirect open-end aspect of the ETF.

Accepted Answer

The open-end aspect of mutual funds is direct, meaning investors can directly invest in or withdraw funds from the mutual fund. For ETFs, the open-end aspect is indirect because investors buy and sell ETF shares in the market like closed-end funds. However, authorized participants can arbitrage between the ETF and the underlying assets, providing an indirect open-end mechanism.

Question 3

The role of the ________ is to represent the fund shareholders by jointly overseeing the activities of a company.

Accepted Answer

The board of directors oversees the activities of the company on behalf of its shareholders. In the case of a mutual fund, the board of directors represents the fund shareholders and is responsible for selecting the fund's investment advisor, determining the fund's investment objectives and policies, and approving contracts with service providers such as the transfer agent and distributor/broker-dealer. The investment advisor provides investment advice to the fund, while the distributor/broker-dealer is responsible for marketing and distributing the fund's shares. The transfer agent is responsible for keeping track of shareholder accounts and processing transactions.

Question 4

The price of a share in a closed-end fund is not determined by supply and demand, so the price can fall below or rise above the net asset value per share.

Accepted Answer

The price of a share in a closed-end fund is determined by supply and demand in the market, which can cause it to fall below or rise above the net asset value per share.

Question 5

Recent SEC priorities directly affect mutual funds. Which of the below is NOT one of these?

Accepted Answer

"Portfolio dressing" or "window dressing" is a practice some fund managers use to improve the appearance of a fund's holdings to investors at the end of a reporting period by selling poorly performing stocks and purchasing high-flying stocks. While the SEC focuses on transparency and accurate reporting, the specific practice of disclosing "portfolio dressing" is not listed among its recent priorities. The SEC's priorities are more broadly focused on reporting after-tax returns, fee transparency, and accurate performance reporting.

Question 6

The reasons U.S. and international asset managers have aggressively acquired U.S. funds include ________.

Accepted Answer

The continuing deregulation of the U.S. asset management business has made it more attractive for U.S. and international asset managers to acquire U.S. funds, as it potentially allows for more flexibility and growth opportunities in the market.

Question 7

There is often a difference between the NAV of a ________ underlying portfolios and the price of its funds that are bought and sold. This difference is called a ________ when the price is greater than the NAV.

Accepted Answer

Closed-end funds often have a difference between their NAV and the market price of their shares. When the price is higher than the NAV, it is referred to as a premium.

Question 8

Mutual funds have become very popular with individual investors since the 1980s. However, they are often criticized for two reasons. Which of the below is ONE of these reasons.

Accepted Answer

Mutual funds are criticized for the limitation of purchases and sales at end-of-the-day closing prices, which may not reflect the true market value of the underlying securities.

Question 9

Overall, the NAV of a mutual fund will increase or decrease due to an increase or decrease in the prices of the securities in the portfolio.

Accepted Answer

The NAV (Net Asset Value) of a mutual fund is calculated by dividing the total value of the securities in the portfolio by the number of outstanding units. Therefore, an increase in the prices of the securities in the portfolio will increase the NAV, and a decrease in prices will decrease the NAV.

Question 10

Many high-net-worth individuals object to using mutual funds because of the individual investor's lack of control over taxes, their lack of any input into investment decisions, and the absence of "high-touch" service. The use of ________ respond to all these limitations of mutual funds.

Accepted Answer

Separately Managed Accounts (SMAs) provide individual investors with greater control over taxes, investment decisions, and personalized service compared to mutual funds. SMAs allow high-net-worth individuals to customize their portfolio and manage tax liabilities more efficiently. Additionally, investors can have more direct communication with their portfolio manager, providing a higher level of service. ETFs and RICs are also options but do not fully address all the concerns listed.

Question 11

An investment that embodied a combination of the desirable aspects of mutual funds and closed-end funds would require portfolios to be traded like stocks throughout the day at a price equal to the continuously known ________ and would be, in effect, an ________.

Accepted Answer

The question describes an investment that has portfolios that are traded like stocks throughout the day at a price equal to the continuously known NAV. This type of investment is known as an exchange-traded fund (ETF). ETFs combine the desirable aspects of both mutual funds (which have diversified portfolios) and closed-end funds (which trade like stocks). Therefore, the answer is B, NAV; exchange-traded fund.

Question 12

________ are managed accounts, typically mutual funds or ETFs "wrapped" in a service package, and provide investors with advice and assistance for an asset-based fee rather than the traditional front-end load.

Accepted Answer

The description is specifically mentioning "wrap programs" as the type of account which provide assistance and advice for an asset-based fee instead of a front-end load. The other options, such as wrap channels, supermarkets, and fee-based financial advisors may be related to investment, but do not match the given description as closely as wrap programs.

Question 13

For both equity and bond funds, the lowering of front-end loads along with the growth of alternatives to front-end loads together with more funds adopting ________ fees resulted in them becoming a much larger portion of distribution costs.

Accepted Answer

The statement mentions the growth of alternatives to front-end loads, implying that other forms of fees have become more popular. 12b-1 fees are a type of ongoing fee charged by mutual funds for marketing and distribution expenses, making them a likely choice for the answer. The other options, "mix and match," "contingent deferred sales load," and "management," do not fit the context of the sentence.

Question 14

A mutual fund can reduce a variety of costs related to investment and management of portfolios.

Accepted Answer

Mutual funds pool money from multiple investors and have economies of scale that help to reduce costs related to investment and management. They can also offer investors access to diversified portfolios that would be difficult and costly to replicate on their own.

Question 15

Organizations such as Morningstar and Lipper provide key performance data on mutual funds in ways that prevent meaningful comparisons among them.

Accepted Answer

Morningstar and Lipper aim to provide key performance data on mutual funds in standardized formats, facilitating meaningful comparisons among them for investors.

Question 16

________ allow investors to purchase funds from participating companies without investors having to contact each fund company.

Accepted Answer

Supermarkets in the investment industry refer to fund supermarkets or platforms that offer a range of investment funds from different companies in one place, allowing investors to easily compare and purchase funds without having to contact each individual fund company. This simplifies the investment process for investors and provides a convenient distribution channel for participating fund companies. Option A, distribution channels, is a broader term that encompasses various channels through which companies can distribute their products, including supermarkets. Options C and D, malls and wrap programs, are not directly related to the investment industry or fund distribution.

Question 17

Fund companies and distribution companies have developed new outlets for selling mutual funds and expanded their traditional sales channels. The changes that occurred are evident in the rising share of sales through ________.

Accepted Answer

The answer of Fund companies and distribution companies have developed...

Question 18

All the cost information on a fund, including selling charges and annual expenses, are included in the annual report.

Accepted Answer

The annual report may include some information on costs, but a fund's expense ratio and other details on fees and charges are typically found in the fund's prospectus and other regulatory documents.

Question 19

Which of the below statements is FALSE?

Accepted Answer

This statement is false as ETFs do have ticker symbols which investors can use to trade them.

Question 20

The amount of investment needed to obtain a reduction in the sales charge is called a breakpoint.

Accepted Answer

This statement is true. A breakpoint is a certain threshold of investment amount that allows an investor to pay a lower sales charge on mutual funds.

Quiz 7: Investment Companies and Exchange Traded Funds