Deck 23: Mutual Fund Operations

Question 1

A mutual fund consisting only of stocks of firms that are in a specific industry is an example of a ____ fund.

A) specialty
B) growth
C) capital appreciation
D) growth and income

Answer 1

A

Question 2

Mutual funds whose bonds have a ____ average time to maturity are ____ sensitive to interest rate fluctuations.

A) longer; less
B) shorter; less
C) shorter; more
D) A and C

Answer 2

B

Question 3

Which of the following statements is incorrect?

A) Mutual funds serve as a key financial intermediary.
B) Managers of mutual funds do not analyze economic and industry trends.
C) Because of their diversification, management expertise, and liquidity, mutual funds have grown at a rapid pace.
D) Some mutual funds offer check-writing privileges.

Answer 3

B

Question 4

The net asset value of a mutual fund is estimated once every week.

Question 5

Mutual funds

A) are unregulated.
B) are required to disclose the names of their portfolio managers in the prospectus.
C) are not required to disclose any information about their past performance.
D) are exempt from all taxes.

Question 6

Most closed-end funds invest in

A) stock and bonds.
B) money market securities.
C) gold.
D) derivatives.

Question 7

An investor who believes that technology stocks will perform well but does not want to select individual technology stocks might invest in:

A) Spiders.
B) Webs.
C) Cubes.
D) Diamonds.

Question 8

Mutual funds that are willing to repurchase their shares from investors at any time are referred to as

A) closed-end funds.
B) load mutual funds.
C) no-load mutual funds.
D) open-end mutual funds.

Question 9

Mutual funds that include both non-U.S. stocks and U.S. stocks are called ____ funds.

A) global
B) foreign
C) combined
D) mixed

Question 10

A front-end load is a withdrawal fee assessed when you withdraw money from the mutual fund.

Question 11

If investors sell their mutual fund shares after the net asset value of the fund increases, the return is called

A) share price appreciation.
B) capital gains distribution.
C) dividends.
D) split net asset value.

Question 12

Mutual funds with ____ expense ratios tend to ____ others that have a similar investment objective.

A) lower; underperform
B) higher; outperform
C) lower; outperform
D) A and B

Question 13

Exchange-traded funds (ETFs)?

A) are traded on an exchange, and their share price changes throughout the day.
B) represent only bonds.
C) are actively managed.
D) None of the above is correct.

Question 14

The majority of mutual fund assets are in the form of

A) common stocks.
B) preferred stocks.
C) U.S. government bonds.
D) municipal bonds.

Question 15

Mutual funds composed of bonds that offer periodic coupon payments are

A) income funds.
B) specialty funds.
C) dividend funds
D) growth funds.

Question 16

To cover managerial and other expenses, mutual funds typically charge

A) management fees of less than 2 percent of total assets per year.
B) commissions of typically 8 to 10 percent on purchases or sales of securities.
C) management fees of typically more than 10 percent of total assets per year.
D) a one-time load of 5% upon the initial investment in the mutual fund.

Question 17

Which of the following is not disclosed in a mutual fund prospectus?

A) the minimum amount of investment required
B) the investment objective of the mutual fund
C) the fees incurred by the mutual fund
D) All of the above are disclosed.

Question 18

Mutual funds composed of stocks that have potential for very high growth, but may also be unproven, are called

A) income funds.
B) capital appreciation funds.
C) specialty funds.
D) dividend funds.

Question 19

Shares of open-end mutual funds are purchased and sold on exchanges.

Question 20

Money market funds invest mostly in

A) stocks.
B) long-term bonds.
C) real estate.
D) short-term securities.

Question 21

Which of the following are most likely to invest in mortgages?

A) stock mutual funds
B) real estate investment trusts
C) load funds
D) money market funds

Question 22

Investors can sell exchange-traded funds short.

Question 23

____ are beneficial for investors who want to invest in tax-exempt securities.

A) Municipal bond funds
B) Growth and income funds
C) International and global funds
D) Money market funds

Question 24

Which of the following statements is incorrect?

A) Commercial paper is commonly purchased by money market funds.
B) From an investor's perspective, money market funds usually have a low level of credit risk.
C) Money market funds tend to have low interest rate risk compared to bond funds.
D) If mutual fund managers expect interest rates to decrease in the future, they should use funds generated from maturing securities today to purchase new securities with shorter maturities.

Question 25

A mutual fund prospectus is not required to disclose the

A) minimum amount of investment required.
B) return on the fund since its inception in comparison to the returns of other funds in its category.
C) investment objective of the mutual fund.
D) exposure of the mutual fund to various types of risk.
E) fees incurred by the mutual fund and passed on to investors.

Question 26

If a mutual fund distributes at least ____ percent of its taxable income to shareholders, the fund is exempt from taxes on dividends, interest, and capital gains distributed to shareholders.

A) 25
B) 50
C) 75
D) 90

Question 27

Exchange-traded funds can be purchased on margin.

Question 28

When interest rates decline, investors who want to earn a high return may ____ their investments in stock mutual funds and ____ their deposits in depository institutions.

A) reduce; reduce
B) reduce; increase
C) increase; reduce
D) increase; increase

Question 29

The ____ of a mutual fund indicates the value per share.

A) net asset value
B) gross asset value
C) net stock value
D) net bond value
E) none of the above

Question 30

Money market fund assets include all of the following, except

A) stocks.
B) repurchase agreements.
C) Treasury bills.
D) CDs.

Question 31

Equity real estate investment trusts invest

A) in mortgage and construction loans.
B) directly in properties.
C) in common stocks issued by construction companies.
D) in common stocks issued by real estate brokerage firms.

Question 32

_______ are promoted strictly by the mutual fund of concern and do not involve a sales charge.

A) Closed-end funds
B) Load mutual funds
C) No-load mutual funds
D) Open-end mutual funds.

Question 33

Money market funds are normally perceived to have ____ interest rate risk and ____ credit risk.

A) low; high
B) high; high
C) high; low
D) low; low

Question 34

The number of exchange-traded funds has declined over the last several years because the cost of managing them was excessive.

Question 35

The majority of closed-end funds invest in

A) derivatives.
B) bonds and other debt securities.
C) money market securities.
D) international equity securities.

Question 36

Mutual funds composed of _____ bonds with high credit ratings allow investors in high tax brackets to avoid taxes while maintaining a low degree of ______.

A) Treasury; liquidity risk
B) municipal; credit risk
C) high-yield; credit risk
D) international; exchange rate risk

Question 37

A mutual fund's expense ratio represents the ____ divided by the fund's ____.

A) annual fees charged to investors; 12b-1 fees
B) annual fees charged to investors; net asset value
C) initial sales charge (load); 12b-1 fees
D) initial sales charge (load); net asset value

Question 38

Hedge funds that exceed a specified size must register with the

A) Securities and Exchange Commission (SEC).
B) Federal Reserve.
C) Office of Thrift Supervision.
D) Federal Mutual Fund Board.

Question 39

If money market fund managers expect interest rates to increase, they will ____ their average asset maturity.

A) not adjust
B) shorten
C) lengthen
D) shorten (if the expected change is small) or lengthen (if the expected change is large)

Question 40

The composition of asset allocation funds

A) is focused completely on one type of security as specified by the particular mutual fund.
B) is fixed and not altered by the mutual fund managers.
C) A and B
D) none of the above

Question 41

Investors who feel capable of making their own investment decisions often prefer to invest in load funds.

Question 42

Many businesses that go public are partially backed by venture capital before the IPO.

Question 43

The term "mutual funds" is normally used to refer to closed-end funds and does not include open-end funds.

Question 44

Private equity funds use most of their money to invest in stocks of publicly traded companies.

Question 45

The Securities and Exchange Commission's Regulation FD allows a firm to provide advance information about its earnings exclusively to hedge funds.

Question 46

The expenses incurred by a mutual fund are billed separately to investors and are not included in the calculation of the fund's net asset value (NAV).

Question 47

Index mutual funds are not traded throughout the day, while exchange-traded funds are.

Question 48

Portfolio managers are hired by the mutual fund to invest in a portfolio of securities that satisfies the desires of investors.

Question 49

_____ funds contain both stocks and bonds, with the proportions changing automatically as the investor ages.

A) Alternative strategy
B) Automatic allocation
C) Target date
D) Age-in-place

Question 50

Venture capital funds typically invest in stocks of publicly traded companies.

Question 51

Funds that are designed to mimic particular stock indexes and are traded on a stock exchange are known as

A) index mutual funds.
B) exchange-traded funds.
C) money market funds.
D) none of the above

Question 52

Mutual funds must register with the U.S. Treasury and provide interested investors with a prospectus that discloses details about the components of the funds and the risks involved.

Question 53

Exchange-traded funds can be

A) traded throughout the day.
B) purchased on margin.
C) sold short.
D) all of the above

Question 54

Mutual fund managers seek securities that are very liquid so that they can easily sell them in the secondary market at any time.

Question 55

The net asset value (NAV) is estimated each day by first determining the market value of all securities comprising the mutual fund.

Question 56

Closed-end fund managers must hold more cash than open-end mutual fund managers.

Question 57

Closed-end funds are closed to new investment but allow redemptions by shareholders.

Question 58

Large mutual funds can exert some control over the management of firms because they commonly are the largest shareholders.

Question 59

Which of the following statements is incorrect?

A) ETFs are like index mutual funds in that the share price adjusts over time in response to changes in the index level.
B) ETFs normally do not have capital gains and losses that must be distributed to shareholders.
C) The portfolio management of both ETFs and index mutual funds is very complex.
D) ETFs can be traded throughout the day.

Question 60

____ trade at one-tenth of the S&P 500 value.

A) Spiders
B) Cubes
C) Diamonds
D) World Equity Benchmark Shares

Question 61

Which of the following is incorrect about money market funds (MMFs)?

A) The credit risk of MMFs is normally perceived to be lower than that of corporate bonds.
B) MMFs have higher interest rate risk than bond funds.
C) MMFs normally generate positive returns over time.
D) All of the above are correct.

Question 62

____ fund contains a sales charge.

A) Load
B) no-load
C) closed-end
D) open-end
E) none of the above

Question 63

Most studies that assess mutual fund performance find that mutual funds almost always outperform a benchmark market index.

Question 64

Which of the following is not true regarding mutual funds?

A) They are a key financial intermediary.
B) They provide an important service to individual investors seeking to invest funds.
C) Most mutual funds use experienced portfolio managers, so investors do not have to manage the portfolio themselves.
D) They provide a way for individual investors to diversify, but most individual investors are unable to afford the purchase of mutual fund shares.

Question 65

Because money market funds contain instruments with short-term maturities, their market values are not very sensitive to movements in market interest rates.

Question 66

Which of the following is not a way in which mutual funds generate returns for their shareholders?

A) They can pass on any earned income as dividend payments to shareholders.
B) They distribute the capital gains resulting from the sale of securities within the fund.
C) The mutual fund price appreciates.
D) All of the above are ways in which a mutual fund generates returns to its shareholders.

Question 67

The returns on international stock mutual funds are affected only by foreign companies' stock prices and are independent of currency movements.

Question 68

Hedge funds are more heavily regulated than mutual funds.

Question 69

Capital appreciation funds are suited to investors who are more willing to risk a possible loss in value.

Question 70

Index funds are becoming increasingly unpopular because most mutual fund managers consistently outperform indexes.

Question 71

Closed-end funds may sometimes engage in a stock repurchase, in which they purchase shares on the exchange where the shares are listed.

Question 72

Diversification among types of mutual funds usually does little to reduce the volatility of returns on the overall investment.

Question 73

Based on the market value of total assets, which is the dominant type of mutual fund?

A) hi-yield (junk) bond funds
B) hybrid funds
C) stock funds
D) taxable bond funds
E) municipal bond funds

Question 74

Exchange-traded funds differ from open-end funds in that their share price is adjusted only at the end of each day.

Question 75

A mutual fund's performance is usually unrelated to market conditions.

Question 76

Hedge funds try to obtain an information advantage by using expert networks, whereby they hire consultants with expertise in specific industries.

Question 77

Equity REITs are sometimes purchased to hedge against inflation, as rents and property values tend to rise with inflation.

Question 78

Hedge funds:

A) are typically organized as limited partnerships.
B) hedge funds were accused of making market conditions worse during the credit crisis because they commonly took short positions in the stock of financial institutions that held subprime mortgages.
C) commonly rely heavily on financial leverage.
D) generally charge both a management fee and an incentive fee.
E) All of the above are correct.

Question 79

Equity REITs essentially represent fixed-income portfolios, so their market values are heavily influenced by interest rate movements.

Question 80

The ____ of a mutual fund represents the price at which shares can be purchased from a mutual fund.

A) gross asset value
B) net asset value
C) net stock value
D) net bond value