Deck 13: Investing in Mutual Funds and Real Estate

Question 1

By using an automatic reinvestment plan, dividend and capital gains income is used to automatically buy additional shares in the fund.

Answer 1

True

Question 2

Closed-end mutual funds can trade at either a discount or a premium to their net asset values (NAVs).

Answer 2

True

Question 3

There are more closed-end investment companies than there are open-end investment companies.

Answer 3

False

Question 4

A technology fund is an example of a sector fund.

Question 5

Mutual funds and exchange-traded funds (ETFs) provide professional money management.

Question 6

Asset allocation funds invest in stocks, bonds, and money market securities.

Question 7

Mutual funds typically offer more diversification and less risk than investing in one or two individual securities.

Question 8

A mutual fund prospectus is required to fully disclose all fund fees and expenses.

Question 9

The idea of a mutual fund is based on the idea of pooled diversification.

Question 10

A mutual fund cannot charge more than 6.5% in total sales charges and fees.

Question 11

Aggressive growth funds often buy stocks with high price/earnings (P/E) multiples and stocks with volatile price fluctuations.

Question 12

Open-ended mutual funds can be traded on an intraday basis.

Question 13

Sector funds are often attractive to individuals wishing to avoid high exposure to risk.

Question 14

Generally speaking, socially responsible funds (SRFs) abstain from investing in alcohol, gambling, or tobacco stocks.

Question 15

With open-end mutual funds, investors cannot lose more than they invested.

Question 16

Growth-and-income funds invest most of their capital in common stocks.

Question 17

Value funds typically invest in stocks that do not pay dividends and have high price/earnings (P/E) ratios.

Question 18

Growth funds are mutual funds designed for short-term investing.

Question 19

Index funds have high realized capital gains.

Question 20

Low-load funds do not charge a commission upon initial purchase.

Question 21

A(n) _____ sells fund shares, either directly to the public or through authorized dealers.

A) investment advisor
B) custodian
C) transfer agent
D) distributor
E) money manager

Question 22

The most comprehensive measure of money management costs is the _____, which includes the management fee.

A) price/earnings (P/E) ratio
B) expense ratio
C) rate of return
D) portfolio turnover rate
E) ratio of net investment income to average net assets

Question 23

All income from mutual funds that are not held in tax-deferred accounts is taxed at identical tax rates.

Question 24

Exchange-traded funds (ETFs):

A) have become more popular as a form of investment in recent years.
B) are closed-end funds with a fixed number of shares outstanding.
C) always distribute their capital gains to fund holders, resulting in low taxes.
D) are actively managed by investors, resulting in high costs and high taxes.
E) fill their buy and sell orders at the closing prices at the end of the trading day.

Question 25

Dividend income, capital gains distribution, and change in the fund's share price are all potential sources of returns for a mutual fund investor.

Question 26

Which of the following combines some of the operating characteristics of an open-end fund with some of the trading characteristics of a closed-end fund?

A) Preferred fund
B) Common fund
C) Exchange-traded fund (ETF)
D) Net asset fund
E) Unit investment fund

Question 27

A fund's objective is stated in its prospectus.

Question 28

A general-purpose money fund:

A) invests in virtually any type of money market investment vehicle.
B) limits its investments to short-term, tax-exempt municipal securities.
C) limits its investments to short-term securities of the U.S. government and its agencies.
D) invests in stock considered to be undervalued in the market.
E) limits its investments to real estate properties.

Question 29

Selling your back-end load mutual fund shares might result in a charge called the:

A) redemption fee.
B) usage fee.
C) management fee.
D) recordkeeping fee.
E) 12b-1 fee.

Question 30

The current market value of all the securities a mutual fund owns, less any liabilities, on a per-share basis is known as the fund's:

A) compounded value.
B) par value.
C) net asset value (NAV).
D) book value.
E) liquidation value.

Question 31

Which of the following statements about balanced funds is true?

A) Balanced funds are most suitable for investors who can tolerate risk and price volatility.
B) Balanced funds put most of their money into equities.
C) Balanced funds are viewed by many high-income investors as a type of tax-sheltered investment.
D) Balanced funds generally keep 30% to 40% of their portfolios in bonds.
E) Balanced funds look for stocks with relatively low price/earnings (P/E) ratios, high dividend yields, and moderate amounts of financial leverage.

Question 32

A(n) _____ oversees a mutual fund's portfolio and makes the buy and sell decisions.

A) transfer agent
B) distributor
C) investment advisor
D) regulator
E) custodian

Question 33

All mutual funds always charge a:

A) transaction fee.
B) 12b-1 fee.
C) management fee.
D) fee on the sale of the shares.
E) redemption fee.

Question 34

An annual fee charged by a number of open-end mutual funds that's supposed to be used to offset promotion and selling expenses is called the:

A) management fee.
B) back-end load fee.
C) transaction fee.
D) 12b-1 fee.
E) low-load fee.

Question 35

_____ are highly speculative investments that seek large profits from capital gains.

A) Balanced funds
B) Growth funds
C) Equity-income funds
D) Aggressive growth funds
E) Exchange-traded funds (ETFs)

Question 36

Which of the following is a reason to invest in mutual funds?

A) Mutual funds are free of any hidden costs.
B) Mutual funds earn tax-free returns.
C) Mutual funds provide a guaranteed return in spite of market risks.
D) Mutual funds provide diversification of invested funds.
E) Mutual funds do not charge any fees.

Question 37

Purchasing raw land as an investment is highly risky.

Question 38

For tax purposes, real estate is considered an active investment.

Question 39

In order to maximize returns, an investor should stick to investing in load funds instead of no-load funds.

Question 40

The individual manager of a mutual fund or an exchange-traded fund (ETF) has little to do with the fund's success.

Question 41

A(n) _____ is a service offered by mutual funds that enables an investor to earn a fully compounded rate of return on their investments.

A) retirement plan
B) deferred withdrawal plan
C) automatic reinvestment plan
D) automatic investment plan
E) systemic withdrawal plan

Question 42

Exchange-traded funds (ETFs) are often the most cost-effective choice for investors who:

A) are looking to invest in aggressive growth funds.
B) are looking to generate high capital gains.
C) are investing a large sum of money.
D) have a short-term horizon.
E) use full-service brokers.

Question 43

Conversion privileges allow investors to switch from one mutual fund to another within a:

A) management group.
B) fund family.
C) brokerage group.
D) switched fund.
E) convenience group.

Question 44

_____ gives the property owner an allowance for the decline in the physical condition of real estate over time.

A) Depreciation
B) A capital gain
C) A dividend
D) Interest
E) Leverage

Question 45

RACE Mutual fund is a no-load fund that had a net asset value (NAV) of $25.60 1 year ago. Today, the NAV is $28.83. During the year, dividends of $0.72 were paid out, and a capital gain distribution of $0.65 was made. Calculate the approximate yield for RACE. (Show all work.)

Question 46

Leverage involves:

A) using borrowed money to magnify returns.
B) paying only cash for any investment purchase.
C) investing in highly speculative securities.
D) purchasing securities at a premium price.
E) selling investments before their maturity.

Question 47

Investing in real estate is attractive to investors because:

A) it is a highly liquid investment.
B) it permits a high degree of financial leverage.
C) it is exempted from taxation.
D) it requires very low investment.
E) it is highly correlated with the stock markets.

Question 48

Compared to mutual funds, exchange-traded funds (ETFs):

A) are more cost-effective for investors with a short-term horizon.
B) generate higher taxable gains.
C) accommodate investors pursuing narrow market segments.
D) are more diversified.
E) have higher overhead expenses.

Question 49

Mike has decided to purchase a real estate property that is expected to generate a net operating income (NOI) of $63,000 per year. With a 9% cap rate, the property would have an estimated value of:

A) $630,000.
B) $187,000.
C) $700,000.
D) $965,000.
E) $235,000.

Question 50

Which of the following statements regarding real estate investments is true?

A) Real estate investments move in tandem with stocks.
B) Adding real estate to your stock portfolio increases investment diversification.
C) Real estate is an asset with high liquidity.
D) Real estate investments have less scope for financial leverage.
E) Real estate investments cannot depreciate.

Question 51

A real estate investment trust (REIT) that invests in various types of income-producing properties and mortgage loans is a:

A) hybrid REIT.
B) blind pool REIT.
C) real estate REIT.
D) hybrid limited REIT.
E) mortgage REIT.

Question 52

Which of the following bond mutual funds invest in tax-exempt securities?

A) High-yield corporate bond funds
B) Municipal bond funds
C) Convertible bond funds
D) Mortgage-backed bond funds
E) Intermediate-term bond funds

Question 53

Tom takes a loan of $60,000 at 4% annual interest to purchase a property worth $100,000. He earns an annual income of $10,000 after expenses but before interest and income taxes are deducted. If the income tax rate is 30%, calculate Tom's leveraged return on the real estate investment. (Show all work. Round the answer to the nearest whole number.)

A) 30%
B) 25%
C) 10%
D) 19%
E) 13%

Question 54

High-grade corporate bond funds invest chiefly in investment-grade securities rated _____ or better.

A) AA
B) D
C) BBB
D) CCC
E) AAA

Question 55

Carlos holds a portfolio of stocks and bonds. He is planning to buy a real estate property worth $150,000. He can use financial leverage to make this purchase by:

A) paying $75,000 cash in the first installment and selling shares worth $75,000 from his portfolio to pay the second installment.
B) taking a personal loan worth $100,000 and selling bonds worth $50,000 from his portfolio.
C) selling bonds from his portfolio worth $80,000 and writing a check for $70,000.
D) selling stocks from his portfolio worth $50,000 and paying $100,000 in cash.
E) paying $150,000 in cash from his savings account.

Question 56

Jenny's modified adjusted gross income (MAGI) is $120,000 a year, and she owns real estate property that generates a rental income of $10,000 annually. If she pays mortgage interest of $4,000 on her property per year, she might be able to write off up to _____ in depreciation.

A) $4,000
B) $10,000
C) $6,000
D) $14,000
E) $8,000

Question 57

Having money taken at regular intervals from your paycheck and put into a mutual fund is an example of:

A) an automatic investment plan.
B) an authorized deduction plan.
C) a systematic withdrawal plan.
D) conversion privileges.
E) an index plan.

Question 58

Which of the following real estate investment trusts (REITs) is the most attractive to income-oriented investors?

A) Equity
B) Mortgage
C) Back-end load
D) Unit trust
E) Exchange-traded

Question 59

A fund that is structured to match the performance of a certain market segment is known as a(n):

A) balanced fund.
B) money market mutual fund.
C) exchange-traded fund (ETF).
D) index fund.
E) capital fund.

Question 60

If you are a mutual fund investor who needs a steady income, you might take advantage of a fund's:

A) retirement plan.
B) exchange privileges.
C) automatic reinvestment plan.
D) systematic withdrawal plan.
E) conversion privileges.

Question 61

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
The primary investment objective of bond funds is [ growth | income ].

Question 62

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
Exchange-traded funds (EFTs) tend to have [ lower | higher ] expense ratios than mutual funds.

Question 63

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
First-time real estate investors often purchase [ commercial | residential ] properties.

Question 64

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
The actual ownership of a mutual fund is in the hands of the [ management company | shareholders ].

Question 65

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
Distributions derived from dividends earned on a mutual fund's common stock holdings are [ subject to the preferential tax rate of 15% or 20% or less | taxed as ordinary income ].

Question 66

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
The market value of your mutual fund shares will move in the [ same | opposite ] direction as the market value of the underlying securities.

Question 67

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
There are [ more | fewer ] mutual funds in existence today than there are stocks listed on all the stock exchanges in the United States.

Question 68

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
You could drop an automatic investment plan [ at any time | only by fulfilling the original agreement ].

Question 69

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
Individuals would not trade among themselves in [ a closed-end | an open-end ] investment company.

Question 70

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
The share prices of closed-end companies are determined by [ their net asset values (NAVs) only | their NAVs plus supply-and-demand conditions in the market ].

Question 71

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
Real estate typically exhibits [ less | more ] volatility than stocks.

Question 72

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
You [ could | could not ] switch your investments from your Fidelity income fund to a Fidelity growth fund by making a phone call.

Question 73

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
If you choose to have your mutual fund dividends automatically reinvested, you [ may defer taxes on the dividends until you redeem some shares | still owe taxes for the year the dividends are paid ].

Question 74

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
The size of the management fee is usually [ related | unrelated ] to the fund's performance.

Question 75

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
Calculating the value of income-producing property requires estimating the [ net asset value (NAV) | net operating income ( NOI) ].

Question 76

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
Growth funds [ do  | do not ] involve a fair amount of risk exposure.

Question 77

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
A fund that invests in both foreign and U.S. securities would be known as [ an international | a global ] fund.

Question 78

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
The term "mutual fund" commonly denotes [ an open-end | a closed-end ] investment company.

Question 79

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
Usually, the management firm of a mutual fund also serves as the [ custodian | investment advisor ] of the fund.

Question 80

INSTRUCTIONS: Choose the word or phrase in [ ] which will correctly complete the statement. Select A for the first item, B for the second item, and C if neither item will correctly complete the statement.
A fund that invests only in utility stocks could be classified as [ an industry | a sector ] fund.