Deck 6: Investment Companies: Mutual Fundsprivate

Question 1

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

Answer 1

True

Question 2

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

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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

Question 5

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.

Question 6

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

Question 12

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.

Question 13

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

Question 14

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

Question 15

A mutual fund has a fixed capital structure.

Question 16

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

Question 17

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

Question 18

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

Question 19

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

Question 20

Investment companies pay no taxes on their earnings.

Question 21

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

Question 22

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

Question 23

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

Question 24

Mutual funds report their returns on a before?tax basis.

Question 25

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

Question 26

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

Question 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

The Sharpe index assumes that portfolios are not well diversified.

Question 33

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

Question 34

High portfolio turnover is associated with high tax efficiency.

Question 35

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

Question 36

Mutual funds reduce unsystematic risk but not systematic risk.

Question 37

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

Question 38

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

Question 39

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 40

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

Question 41

The advantages offered by investment companies
Include
1) professional management
2) avoidance of income taxes by the investor
3) portfolio diversification

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

Question 42

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 43

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

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

Question 44

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 45

If mutual funds make investments in efficient
Financial 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 46

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 47

Empirical studies of returns earned by investment
Companies 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 48

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 49

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 50

Money market mutual funds invest in
1) commercial paper
2) repurchase agreements
3) corporate bonds

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

Question 51

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 52

No load mutual funds may increase fees through
1) sales charges
2) commissions
3) 12b?1 plans

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

Question 53

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 54

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 55

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 56

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 57

The cost of investing in a mutual fund includes
1) the loading charges
2) commissions when the fund buys and sells
Securities
3) management fees

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

Question 58

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

Question 59

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 60

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 61

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 62

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 63

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

Question 64

Which of the following is a consideration when
Selecting a mutual fund?
1) portfolio turnover
2) 12b-1 fees
3) 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 65

Which of the following is a reason for selecting a
Mutual fund?

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

Question 66

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 67

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.