Deck 6: Investment Companies: Mutual Funds Private

Question 1

In order to sell securities to the general public, a mutual fund must register its securities and prepare a prospectus detailing its objectives and costs to investors.

Answer 1

True

Question 2

The per share net asset value of a mutual fund depends on the difference between the fund's assets and liabilities and the number of shares outstanding.

Answer 2

True

Question 3

The net asset value of a mutual fund rises when it distributes capital gains.

Answer 3

False

Question 4

The shares of a mutual often sell for discount from net asset value.

Question 5

A mutual fund has a fixed capital structure.

Question 6

Dividends and capital gains are the sources of return from an investment in a mutual fund.

Question 7

The shares of load mutual fund sell for a discount from their net asset value.

Question 8

The portfolio manager of a value fund uses analytical techniques such as a price to earnings ratio.

Question 9

A small cap fund has total assets of less than $100 million.

Question 10

If an investment company were liquidated, theinvestor should receive the net asset value.

Question 11

The only costs associated with investing in a mutual fund are the commissions to buy and sell the shares.

Question 12

The income earned by a mutual fund is taxed through the stockholders' income tax returns.

Question 13

A money market mutual fund is an illustration of a no load fund.

Question 14

Investment companies pay no taxes on their earnings.

Question 15

An index fund seeks to duplicate the composition of an index such as the S&P 500.

Question 16

The "load" fee charged by a mutual fund is paid when the shares are sold.

Question 17

If a mutual fund specializes in the securities of one sector of the economy, unsystematic risk may not be reduced.

Question 18

The shares of no load mutual funds sell for their net asset value.

Question 19

Money market mutual funds acquire short-term moneymarket instruments such as commercial paper.

Question 20

Investments in mutual funds permit the investor to avoid market risk.

Question 21

One of the major advantages associated with liquidmoney market securities is safety of principal.

Question 22

A high beta coefficient for a mutual fund is desirable if the investor is seeking a conservative investment.

Question 23

High portfolio turnover is associated with high tax efficiency.

Question 24

Funds that perform well in one year earn consistently higher returns in subsequent years.

Question 25

High tax efficiency suggests that a fund's after-tax return is comparable to its before-tax return.

Question 26

Beta coefficients may be computed for investment companies and used to compute risk adjusted rates of return.

Question 27

An exit fee (e.g., 3 percent) has the same impact on an investor's return as an equal load fee (e.g., 3 percent).

Question 28

The Jensen index compares actual performance to the risk-adjusted required performance.

Question 29

No load funds with 12b 1 fees are able to charge their existing shareholders for marketing expenses.

Question 30

The S&P 500 stock index may be an inappropriate benchmark for a small-cap fund.

Question 31

When a seller executes a repurchase agreement, theseller agrees to repurchase the asset at a lower price.

Question 32

A Eurodollar CD is a certificate of deposit issued in the United States by a foreign bank.

Question 33

Empirical studies of returns earned by mutual funds suggest they consistently outperform the market.

Question 34

Acquiring shares in no load funds is one means to avoid 12b-1 fees.

Question 35

The Sharpe index standardizes performance by the portfolio's beta.

Question 36

Treasury bills are issued by state treasuries and have no risk of default.

Question 37

Mutual funds reduce unsystematic risk but not systematic risk.

Question 38

If mutual fund shares are purchased just prior to the fund's annual distribution, the investor becomes responsible for taxes on the distribution.

Question 39

The Sharpe index assumes that portfolios are not well diversified.

Question 40

Mutual funds report their returns on a before tax basis.

Question 41

Rates of return reported by mutual funds

A) are reported after taxes
B) consider the impact of loading fees
C) are based on change in net asset value and the fund's distributions
D) are adjusted for the fund's systematic risk

Question 42

Which of the following is not a short term,liquid asset

A) negotiable certificate of deposit
B) U.S. Treasury bills
C) corporate stock
D) commercial paper

Question 43

An index fund seeks to duplicate an aggregate measure of the market or a segment of the market.

Question 44

Empirical studies of returns earned by investmentcompanies indicate that

A) no funds outperform the market consistently
B) most funds are less risky than the market
C) most funds outperform the market consistently
D) few funds outperform the market consistently

Question 45

The net asset value of a mutual fund increases with

A) higher stock prices
B) lower stock prices
C) larger number of shares
D) increased liabilities

Question 46

Commercial paper is generally

A) a short-term unsecured debt of a corporation
B) a short-term secured debt of a corporation
C) a long-term unsecured debt of a corporation
D) a long-term secured debt of a corporation

Question 47

Which of the following is not an investment company

A) a money market mutual fund
B) an index fund
C) a commercial bank
D) a growth mutual fund

Question 48

Money market mutual funds invest in1. commercial paper2. repurchase agreements3. corporate bonds

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

Question 49

A style portfolio manager offers two things:

A) investment skill and market timing
B) the specific style combined with a low beta
C) a high beta and investment timing
D) investment skill combined with the style

Question 50

An exit fee has the same impact of

A) a load fee of the same percentage
B) a 12b?1 fee with the same percentage
C) commissions paid by a mutual fund to buy securities
D) management fees

Question 51

If mutual funds make investments in efficientfinancial markets, they

A) cannot outperform the market consistently
B) should not outperform the market consistently
C) will underperform the market when securities prices decline
D) primarily bear unsystematic risk

Question 52

Open end investment companies

A) have a fixed number of shares
B) issue new stock whenever investors buy shares
C) may sell for a discount from net asset value
D) redeem shares at the investor's cost

Question 53

The advantages offered by investment companiesinclude1. professional management2. avoidance of income taxes by the investor3. portfolio diversification

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

Question 54

Mutual funds realized capital gains andincome (e.g., dividends received)

A) retain
B) reinvest
C) distribute
D) distribute or reinvest

Question 55

Mutual funds with beta coefficients greater 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 56

If a mutual fund portfolio earned a return that exceeded the return on the S&P 500 stock index, you may conclude that the fund outperformed the market on a risk-adjusted basis.

Question 57

Which of the following should not have default risk

A) money market mutual funds
B) commercial paper
C) negotiable certificates of deposit
D) treasury bills

Question 58

An index fund limits its portfolio to

A) high quality securities
B) stocks that respond to changes in the consumer prices (i.e., Consumer Price Index)
C) stocks included in an aggregate measure of stock prices
D) stocks of firms in a particular industry

Question 59

No load mutual funds may increase fees through1. sales charges2. commissions3. 12b 1 plans

A) 1 and 2
B) 1 and 3
C) 2 and 3
D) only 3

Question 60

The cost of investing in a mutual fund includes1. the loading charges2. commissions when the fund buys and sellssecurities3. management fees

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

Question 61

If an investor's excess return is negative,

A) the realized return was less than the return earned by the market
B) the required return exceeded the realized return
C) the investor constructed a poorly diversified portfolio
D) the investor's portfolio had excessive diversification

Question 62

Which of the following is a reason for selecting amutual fund

A) its historic return
B) high tax efficiency
C) charging 12b-1 fees instead of load fees
D) often realizing portfolio gains

Question 63

One means to adjust for risk is

A) standardize funds' returns by their beta coefficients
B) compute their rates of return including both income and capital gain distributions
C) standardize funds' costs by an aggregate index of mutual fund expenses
D) to divide each funds' return by the return on the market

Question 64

Which of the following is true

A) Mutual funds report returns before adjusting for taxes.
B) 12b-1 fees exceed a fund's NAV.
C) Small cap funds cannot have load fees.
D) Exchange-traded funds exchange their portfolios.

Question 65

A mutual fund with a beta coefficient of 0.8

A) invests in an index of the stock market
B) invests only in debt instruments
C) has less systematic risk
D) has less unsystematic risk
PROBLEMS
For problems concerning mutual funds, see the problems provided in Chapter 7.

Question 66

Which of the following is a consideration whenselecting a mutual fund 1. portfolio turnover2. 12b-1 fees3. unrealized losses in the fund's portfolio

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

Question 67

Index funds tend to track

A) the stock market as a whole
B) the bond market
C) a specific measure of the market
D) the return on other index funds