Deck 7: Investment Companies: Mutual Funds

Question 1

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

Answer 1

False

Question 2

Investment companies pay no taxes on their earnings.

Answer 2

True

Question 3

The 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 3

True

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

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

Question 7

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

Question 8

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

Question 9

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

Question 10

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

Question 11

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

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

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

Question 14

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

Question 15

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

Question 16

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

Question 17

Dividends are the primary source of returns from an investment in a mutual fund.

Question 18

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

Question 19

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

Question 20

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

Question 21

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

Question 22

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

Question 23

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

Question 24

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 these choices

Question 25

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

Question 26

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 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

The Treynor index assumes that portfolios are not well diversified.

Question 32

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

Question 33

Mutual funds reduce unsystematic risk,but not systematic risk.

Question 34

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

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

Question 35

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

Question 36

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

Question 37

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

Question 38

High portfolio turnover is associated with high tax efficiency.

Question 39

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 40

If a mutual fund portfolio manager earns a return that exceeds the return on the S&P 500 stock index,that investor outperformed the market on a risk-adjusted basis.

Question 41

The net asset value of a mutual fund rises with

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

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

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 44

An index fund limits its portfolio to

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

Question 45

If the individual seeks to reduce risk,that investor should not acquire which of the following types of funds?

A) money market mutual fund
B) sector fund
C) balanced fund
D) index fund

Question 46

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 47

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 48

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 these choices

Question 49

If an investor purchases shares in a no-load fund for $36,receives cash distributions of $1,and redeems the shares after one year for $42,what is the percentage return on the investment?

Question 50

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 51

Since 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 52

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 53

One means to adjust for risk is to

A) standardize funds' return 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) divide each funds' return by the return on the market

Question 54

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 systematic risk the fund bears

Question 55

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 specific style

Question 56

A mutual fund's net asset value is $50,but the fund charges an exit fee of 1 percent of net asset value and a load fee of 4 percent of net asset value.An individual purchases the shares.During the year the fund distributes $2.34.The net asset value rises to $58.38 and the investor redeems the shares.
a.What is the percentage return the fund can report that was achieved by its portfolio managers?

b.What is the percentage return the individual earned on the investment?

c.Why are the two percentages different?

Question 57

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 58

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 59

Mutual fund A earned 10 percent while B earned 8 percent.The standard deviations of the returns were 10 percent and 7 percent,respectively.According to the Sharpe ratio,which fund performed better?