Deck 23: Investment Companies

Question 1

Closed-End Investment Companies

A) repurchase their own outstanding shares.
B) have limited lives.
C) have their shares traded in the secondary market.
D) publish their NAy's on a daily basis.

Answer 1

C

Question 2

The price you would pay for a share of a No-Load Fund is

A) NAV plus 8.5%.
B) NAV.
C) determined by the secondary market.
D) NAV plus 2%.

Answer 2

B

Question 3

To calculate an investment company's share NAV, the divisor is the

A) market value of the investments.
B) number of shares the investment company owns.
C) net worth of the investment company.
D) number of investment company shares outstanding.

Answer 3

D

Question 4

A Unit Investment Trust in the U.S.

A) owns a fixed set of investments.
B) invests only in municipal bonds.
C) retains all dividend and interest earnings.
D) charges a large annual management fee.

Question 5

A closed-end investment company does not stand ready to ____ whenever one of their owners decides to sell them.

A) hire a commissioned agent
B) consult an investment advisor
C) purchase their own shares
D) sponsor a new issue

Question 6

The share price of a closed-end fund differs from the net asset value such that additional ___ and potential return are presented to the investors.

A) tax liability
B) redemption fees
C) sources of risk
D) source of financing

Question 7

The type of account at a brokerage firm that involves the broker providing financial planning, investment management, and securities trading is the ____ account where all fees are combined into one annual fee.

A) margin
B) market
C) trust
D) wrap

Question 8

A Managed Investment Company

A) will hold a fixed set of investments.
B) has a board of directors elected by the shareholders.
C) must be a limited partnership.
D) does not assess annual management fees.

Question 9

The percentage of an investment company's assets that are used to pay for management fees, administrative expenses, and other operating expenses in a given year is known as the ____ ratio.

A) current
B) quick
C) unit investment
D) operating-expense

Question 10

A ____ is the value of the smaller of purchases or sales during a time period divided by the average total asset value during the period.

A) operating expense ratio
B) net asset value rate
C) portfolio turnover rate
D) unit investment ratio

Question 11

An investment company share's NAV changes as frequently as

A) monthly.
B) daily.
C) quarterly.
D) annually.

Question 12

To purchase an outstanding share of a Closed End Investment Company you would pay

A) the price determined in the secondary market.
B) a discount from the NAV.
C) par.
D) the NAV.

Question 13

The difference between the average return on the portfolio and the average return on a benchmark portfolio is known as the

A) ex ante alpha
B) ex post alpha
C) market beta
D) fund beta

Question 14

The term Mutual Fund is typically used for a

A) Closed End Investment Company.
B) Managed Investment Company.
C) Real Estate Investment Trust.
D) Open End Investment Company.

Question 15

The ____ is the market value of an investment company's assets, less any liabilities, divided by the number of shares outstanding.

A) net asset value
B) operating expense ratio
C) portfolio turnover
D) distribution value

Question 16

Investment companies are a type of financial intermediary that obtain funds from ___ and use the money to purchase _____ .

A) investors, financial assets
B) initial public offerings, risk free securities
C) government loans, performance contracts
D) the sale of securities, venture capital projects

Question 17

In order to measure the performance of an investment company, many studies use a ____ portfolio for comparison such as the S&P 500, a risk free asset, or an index.

A) stock index b. benchmark
C) risk free
D) combination of bond and risk free securities

Question 18

The _____ fee is a fee levied by an investment company when a investor sells back to the investment company within a specified period of time after the purchase.

A) distribution
B) operating expense
C) administrative
D) redemption

Question 19

A fee charged by a mutual fund to its shareholders if they sell their shares within a specified time after initially purchasing them is known as the

A) contingent deferred sales charge
B) redemption fee
C) distribution fee
D) deferred load charge

Question 20

A _____ is an investment company that owns a fixed set of securities for the life of the company.

A) closed-end investment company
B) unit investment trust
C) open-end investment company
D) managed investment company

Question 21

Studies show that general funds promising low risk actually have

A) high standard deviations and low betas.
B) low standard deviations and low betas.
C) the same risk as the market.
D) high standard deviations and high betas.

Question 22

Investment companies have been defined and controlled since

A) 1940.
B) 1908.
C) 1972.
D) 1933

Question 23

The value calculated to see if a Mutual Fund has done better than a comparative market is the

A) a priori beta.
B) ex post alpha.
C) a priori gamma.
D) a priori alpha.

Question 24

A listing for a Money Market Mutual Fund does not show

A) average maturity.
B) default risk.
C) compound annual yield based on last 7 days.
D) assets.

Question 25

All of the following are types of investment companies EXCEPT a(an)

A) brokerage firm
B) open-end fund
C) closed-end fund
D) unit investment trust

Question 26

A major advantage for an investor to invest in a "family of funds" is

A) load fees are not allowed.
B) the ability to make timing decisions.
C) benefits are not taxable.
D) more diversification within Each fund.

Question 27

A specialty Money Market Fund would not invest in

A) CD's.
B) short-term municipals.
C) corporate bonds.
D) commercial paper.

Question 28

Studies show that for a typical fund that the percentage of variation of its excess return associated with variation in the S and P 500 is

A) 99%.
B) 60%.
C) 40%.
D) 75%.

Question 29

The typical Money Market Mutual Fund

A) is closed end.
B) has a load charge.
C) does not allow checks to be written on the fund balance.
D) does not assess an annual management fee.

Question 30

The owner of a Unit Investment Trust share

A) must hold the share until it matures.
B) will receive capital gain distributions but no interest income.
C) can trade the shares in any secondary market.
D) can resell the share to the sponsor at the ask price.

Question 31

If a closed-end fund share sells at a constant 20% discount, its dividend yield compared to a comparable open-end share will be

A) the same.
B) higher.
C) higher or lower depending on NAV.
D) lower.

Question 32

Within its diversified assets, a regulated diversified management company can own shares of a company with maximum vote percentage of

A) 25.
B) 2.
C) 5.
D) 50.

Question 33

A Mutual Fund with a back-end load

A) charges only when you purchase the shares.
B) cannot have a front-end load.
C) will assess no annual management fees.
D) pays you the NAV when you sell.

Question 34

The firm that prepares the Mutual Fund Indexes reported in Barron's is

A) Wall Street Journal.
B) Standard and Poor's.
C) Fitch.
D) Lipper.

Question 35

To escape income taxes, the percentage of income and dividend income that a regulated diversified investment company must pay out to its owners must be at least

A) 100%.
B) 89%.
C) 90%.
D) 60%.

Question 36

Studies show that if a fund has a beta of 1.1 for year 1, a good forecast for the beta in year 2 is

A) 1.3.
B) 1.1.
C) .9.
D) 1.0.

Question 37

A type of Mutual Fund that is similar to a Balanced Fund is

A) Flexible Income.
B) Money Market.
C) Hedge.
D) Bond.

Question 38

To calculate a Mutual Fund's excess return, Morningstar uses as a reference the yield of

A) CD's.
B) three month Treasury bills.
C) 20 year Treasury bonds.
D) S and P 500.

Question 39

An SEC study of Mutual Fund performance found

A) managers of load funds did better with the dollars invested than no-load managers.
B) investors in load funds did worse than those in no-loads.
C) high turnover funds did better than low turnover.
D) managers of large asset funds did better than small asset funds.

Question 40

For a regulated, diversified investment company, the maximum percentage of its diversified assets that can be held in one company's securities is

A) 10%.
B) 5%.
C) 1%.
D) 2%.

Question 41

In January, 1992, the NAV for a fund was $15. Over the year it paid no dividends but distributed a capital gain of $.80. At the end of the year, the NAV was $17.50. The rate of return for the year was

A) 22%.
B) 14.2%.
C) 17.4%.
D) 20%.

Question 42

What will determine the size of transaction costs in an investment company?

A) the amount of commission charged
B) the amount of turnover in an investment company's portfolio
C) they are minimal and therefore immaterial
D) past performance

Question 43

Long-term studies of a Mutual Funds' performance tend to support the statement that

A) above average performers remain above average.
B) investors can rely on past performance to forecast the future.
C) investors should seek actively managed funds.
D) the capital market is efficient.

Question 44

An asset allocation fund will attempt to _______ the market but focus on _______ instead of current income.

A) time, total return
B) beat, matching historical returns
C) beat, reduced risk
D) time, matching historical returns

Question 45

A Hedge Fund

A) holds only high-grade preferred stocks.
B) participates in short selling.
C) specializes in foreign stocks.
D) is indexed to a market index.

Question 46

A Load Fund with an 8.5% charge has an effective charge of

A) 7.8%.
B) 8.5%.
C) 12.4%.
D) 4.7%.

Question 47

For the typical Mutual Fund, the ex post alpha averages

A) 0%.
B) -4%.
C) +4%.
D) -2%.

Question 48

Which one of the following is the most common form of unit investment trust found in the United States?

A) the money market
B) convertible bond
C) stock unit
D) bond unit

Question 49

An investor signs a contract to invest $1,000 per year for 10 years. There is an 8.5% load charge. During the first year, the Mutual Fund must invest at least

A) $500.
B) $850.
C) $250.
D) $150.

Question 50

An investor pays $15 for a share of a fund, and there is a $1.20 load charge. The manager's performance will be measured based on an investment of

A) $14.90.
B) $15.10.
C) $13.80.
D) $16.20.

Question 51

The relationship between the abnormal returns for mutual funds and the operating expense ratio may be characterized as

A) strongly positive
B) strongly negative
C) weakly positive
D) weakly negative

Question 52

Regarding investment companies

A) closed-end funds typically trade at net asset value
B) open-end funds have shares that can trade at a premium above net asset value when demand exceeds supply
C) open-end funds can issue additional shares upon demand and eliminate shares when they are redeemed
D) open-end funds have shares that trade on organized exchanges as well as over-the-counter.

Question 53

Management and administrative expenses will result in a fund manager's

A) net return being greater than the gross return.
B) reducing his gross performance ex post alpha.
C) gross return being greater than the net return.
D) increasing his beta.

Question 54

What is the primary advantage of a unit investment trust over managed investment companies?

A) it owns a variable set of financial assets for a specific period of time
B) the initial costs may be very high but the on-going costs are very low
C) it offers active management
D) the low cost of investing

Question 55

At their initial offering closed-end funds typically sell at a

A) discount to their net asset value
B) premium to their net asset value
C) discount to the exchange-listed price
D) premium to their book value

Question 56

The difference between a closed-end fund and a unit investment trust is

A) the closed-end fund will buy back its own shares for the owners
B) the unit investment trust will buy back shares at the net asset value
C) the closed-end fund does not stand prepared to buy back its shares
D) the closed-end fund will buy back its own shares at the net asset value

Question 57

What is probably the most important factor to consider in selecting an investment company?

A) its investment policy
B) its board of directors
C) its historical record of performance
D) its historical financial statements

Question 58

An investor buys a share of a fund for $18. There is a $1.50 load charge. His rate of return should be measured based on

A) $18.00.
B) $17.50.
C) $19.50.
D) $18.50.

Question 59

In January, 1991, the NAV for a fund was $12. Over the year, the fund paid dividends of $.48 and made a capital gain distribution of $1.06. At the end of the year, the NAV was $11.50. For the year, the rate of return was

A) 7.6%.
B) 9.3%.
C) 6.2%.
D) 8.7%.

Question 60

A study of actively managed Balanced Mutual Funds found that the typical fund was

A) able to increase its return by market timing.
B) more profitable than ones that were passively managed.
C) with a higher beta than the market.
D) consistently able to find under-valued common stocks. DIFFICULT

Question 61

From all appearances the correlation between the investment company's past performance and future successful performance appears to be

A) highly positive
B) negative
C) zero
D) weakly positive

Question 62

Why do the market prices of a closed-end investment company shares defy explanation by market efficiency proponents?

A) No widely accepted explanation for the premiums or discounts has been developed
B) Investors usually pay less than the "fair" value of the shares
C) net asset values frequently are calculated using mysterious accounting methodologies
D) Shares sell at a premium more often than at a discount

Question 63

Why do the stated percentage load charges of mutual funds not fully reflect the percentage costs of the sales fees?

A) mutual fund load charges are paid after the investor's assets are invested.
B) as the investor has fewer dollars to invest after paying the load charges, the load charges therefore are a lower percentage of the actual invested amount than originally invested
C) certain mutual funds increase their sponsor's revenues at the expense of existing shareholders
D) mutual fund load charges are paid before the investor's assets are invested and the charges are therefore a higher percentage of the actual invested amount after paying the load