Deck 17: Mutual Funds and Hedge Funds

Question 1

A 12b-1 fee is an implicit load charge.

Answer 1

True

Question 2

Open-end fund shares often trade at a discount or premium relative to NAV.

Answer 2

False

Question 3

Hybrid mutual funds normally invest significant amounts in

A) common stock.
B) commercial paper.
C) long-term bonds.
D) treasury bills.
E) both A and C

Answer 3

E

Question 4

The market value of a fund's net assets divided by the number of mutual fund shares outstanding is called the NAV of the fund.

Question 5

Hedge funds and REITS often employ significant amounts of leverage, but standard open-end mutual funds do not.
Mutual fund leverage is limited by regulation.

Question 6

Funds that specialize in municipal bonds and certain types of real estate to minimize tax liabilities are called hybrid funds.

Question 7

About ___________ of retirement plan investments are in so-called institutional funds, which are funds that manage retirement plans for an institution's employees.

A) 40%
B) 50%
C) 60%
D) 70%
E) 80%

Question 8

Because of their ability to hedge, the subprime mortgage crisis did not cause any significant losses to hedge funds.

Question 9

Hedge funds can short sell securities, whereas most mutual funds cannot.

Question 10

As the economy weakens, one would expect investment in ____________ funds to increase and investment in _____________ funds to decrease, ceteris paribus.

A) money market mutual; equity
B) equity; bond
C) municipal bond; money market mutual
D) corporate bond; municipal bond
E) long-term; short-term

Question 11

The Federal Mutual Fund Commission (FMFC) is the primary regulator of the mutual fund industry.

Question 12

Offshore hedge funds are not subject to taxation on fund distributions nor to U.S. estate taxes.

Question 13

The shares of a closed-end fund with market value of assets of $200 million and 2 million shares outstanding will always trade at a market value of $100 per share.

Question 14

Hedge funds charge expense fees and performance fees. The average performance fee on hedge funds is ____________.

A) 5%
B) 10%
C) 15%
D) 20%
E) 25%

Question 15

A hedge fund that goes long in a convertible bond and short in the equity of the same firm is employing a market neutral arbitrage strategy.

Question 16

Load funds typically provide investors with higher rates of return and offer more services such as check writing, transfers between funds, etc., than no load funds.

Question 17

Open-end mutual funds guarantee

A) investors a minimum rate of return.
B) investors a minimum NAV.
C) to redeem investor's shares upon demand at current NAV.
D) to earn the rate promised in the prospectus.
E) none of the above

Question 18

If you invest $10,000 in a mutual fund with a NAV of $50 per share and a 5.5% back-end load, you will receive less than 200 shares in the fund.
A back-end load is not paid until fund shares are sold.

Question 19

Households are the largest owner of money market mutual funds.

Question 20

ETFs are a direct competitor to ___________.

A) hedge funds
B) money market mutual funds
C) REITS
D) index funds
E) market neutral funds

Question 21

A(n) ___________ fund must hold substantial cash reserves in order to meet fund redemptions from shareholders.

A) closed-end
B) REIT
C) open-end mutual
D) ETF
E) unit trusts

Question 22

You wish to invest $17,445 in a mutual fund with a NAV of $26.03. The fund charges a front-end load of 4.50%. How many fund shares will you receive?

A) 595
B) 640
C) 616
D) 668
E) 628 ((1 - 0.045) * 17,445)/26.03

Question 23

A money market mutual fund's total assets increase from $100 to $105 when the fund has 100 shares outstanding. Which of the following will happen?

A) The fund's NAV will rise from $100 to $105.
B) The fund's NAV per share will rise from $1 to $1.05.
C) The fund will issue a total of 5 new shares.
D) The fund's NAV will fall 5%.
E) The fund will close to new investors.

Question 24

Which one of the following fund types is likely to have the lowest annual expense ratio?

A) Index funds
B) Equity funds
C) Bond funds
D) Balanced funds
E) Hybrid funds Unmanaged funds have lower expense ratios.

Question 25

An open-end mutual fund owns 1500 share of Krispy Kreme priced at $12. The fund also owns 1,000 shares of Ben & Jerry's priced at $43, and 2,000 shares of Pepsi priced at $50. The fund itself has 3,500 of its own shares outstanding. What is the NAV of a fund's share?

A) $66
B) $56
C) $46
D) $36
E) $26 [(1500*12) + (1000 * 43) + (2000 * 50)]/3500 fund shares = $46

Question 26

You have $16,000 to invest in a mutual fund with a NAV = $45. You choose a fund with a 4% front load, a 1% management fee, and a 0.25% 12b-1 fee. Assume that the management and 12b-1 fees are charged on year-end assets. The gross annual return on the fund's shares was 9%. What was your net annual rate of return to the nearest basis point?

A) 3.33%
B) 7.64%
C) 6.25%
D) 4.52%
E) 4.64% {{[$16,000 * (1-0.04) * 1.09] * (1-0.0125)}/$16,000} - 1 = 3.33%

Question 27

A fund that has a fixed number of shares outstanding and is traded on an exchange is called a(n)

A) open-end mutual fund
B) hybrid fund
C) market timing fund
D) index fund
E) closed-end fund

Question 28

Investors pay load charges to receive

A) higher returns on their investments.
B) additional services from funds.
C) voting shares of stock.
D) advice on which fund to buy.
E) 12b-1 remunerations.

Question 29

The largest proportion of long-term mutual fund assets is held by ___________________.

A) bank trusts and estates
B) the household sector
C) nonfinancial corporate business
D) private pension funds
E) life insurance firms

Question 30

A fund has a NAV of $30 per share but the shares are currently selling for $32. This fund must be

A) an open-ended fund.
B) a closed-end fund.
C) a balanced fund.
D) an aggressive growth fund.
E) a money market mutual fund.

Question 31

By type of fund, there are more ______________ funds than any other.

A) equity
B) bond
C) taxable money market
D) tax-exempt money market
E) hybrid

Question 32

Actively managed funds find it difficult to consistently earn higher risk-adjusted returns than a broad stock market index. The difference in return between actively managed funds and passively managed index funds can be explained by which of the following?
I) Lower expense ratios at index funds
II) Higher turnover ratios at index funds
III) Differences in returns in sectors of the market and the overall market return

A) II only
B) I and III only
C) I and II only
D) II and III only
E) I, II, and III

Question 33

You have $10,000 to invest and you are considering investing in a fund. The fund charges a front-end load of 5.75% and an annual expense fee of 1.25% of the average asset value over the year. You believe the fund's gross rate of return will be 11% per year. If you make the investment, what should your investment be worth in one year?

A) $10,135.48
B) $10,337.46
C) $10,461.75
D) $10,556.23
E) $10,578.92 Investment amount = $10,000 * (1 - 0.0575) = $9,425; FV1:$9,425 * 1.11 = $10,461.75; Average assets = ($10,461.75 + $9,425)/2 = 9,943.375; $9,943.375 * 0.0125 = $124.29; $10,461.75 - $124.29 = $10,337.46

Question 34

You have $12,500 to invest and you are considering investing in Fund X. The fund charges a front-end load of 3% and an annual expense fee of 2.25% of the ending asset value over the year. You believe the fund's gross rate of return will be 8% per year. If you make the investment, what should your investment be worth in one year?

A) $12,125.20
B) $13,095.00
C) $12,654.80
D) $12,800.36
E) $13,162.50 Investment amount = $12,500 * (1 - 0.03) = $12,125; FV1:$12,125 * 1.08 = $13,095.00; After expenses: $13,095.00 * (1 - 0.0225) = $12,800.36

Question 35

ETFs have several advantages over index funds including the ability to:
I) trade throughout the day at continuously updated prices.
II) purchase ETF shares on margin.
II) sell ETF shares short.
IV) sell the shares back to the fund.

A) I, II, and III only
B) I, III, and IV only
C) II, III, and IV only
D) II and III only
E) I, II, III, and IV

Question 36

The market value of a mutual fund's assets divided by the number of fund shares outstanding is equal to the

A) load charge.
B) NAV.
C) expense ratio.
D) 12b-1 fee.
E) management fee.

Question 37

Rank the following in asset size from largest to smallest in 2010.
I) Mutual funds
II) Insurance companies
III) Commercial banks

A) I, II, III
B) I, III, II
C) II, III, I
D) III, II, I
E) III, I, II

Question 38

You have $15,000 to invest in a mutual fund. You choose a fund with a 3.5% front load, a 1.75% management fee, and a 0.5% 12b-1 fee. Assume that the management and 12b-1 fees are charged on year-end assets for simplicity. The gross annual return on the fund's shares was 12.50%. What was your net annual rate of return to the nearest basis point?

A) 9.97%
B) 6.12%
C) 9.25%
D) 5.42%
E) 8.56% {{[$15,000 * (1 - 0.035) * 1.1125] * (1 - 0.0225)}/$15,000} - 1 = 6.12%

Question 39

Money market mutual funds (MMMFs) have caused disintermediation at banks at times. This is because MMMFs

A) sometimes pay higher interest rates than bank deposits.
B) are less risky than bank deposits.
C) are now federally insured, like bank deposits.
D) offer guaranteed rates of return.
E) none of the above

Question 40

The primary regulator of mutual funds is the

A) NASD.
B) CFTC.
C) NYSE.
D) SEC.
E) NSMIA.

Question 41

Hedge funds may be classified into three types based on their investment strategies and risk level. What are the three types and their broad risk levels? Many different strategies exist in each type. List one example strategy in each type.

Question 42

What is the purpose of index funds? How does this differ from other equity mutual funds? Why are index funds growing in popularity?

Question 43

Why are mutual funds popular with individual investors?

Question 44

How do closed-end investment companies differ from open-end mutual funds?

Question 45

How are money market mutual funds similar to and different from bank deposits?

Question 46

In what ways are hedge funds different from mutual funds?

Question 47

On Monday an equity mutual fund has cash of $150 and stocks worth $900. The fund has 100 shares outstanding. On Tuesday the stocks fall in value to $800 and 10 shares are then redeemed by the fund. Assuming that the fund uses its cash first to cover redemptions, what is the one-day rate of return to the remaining fund shareholders, and how much cash and stock does the fund now have?

Question 48

One of the recent trading abuses in the mutual fund industry was allowing selected investors to rapidly trade in and out of a mutual fund in order to profit on stale prices. This practice is called

A) diluted brokerage.
B) front running.
C) directed order flow.
D) soft dollar commissions.
E) market timing.

Question 49

What are the primary differences between index funds and ETFs? What are two examples of ETFs?

Question 50

Why is it important to regulate the mutual fund industry?

Question 51

Why do many mutual funds now offer three different classes of shares? What are the differences and what should you consider in choosing the classes?

Question 52

What new rules have resulted from the mutual fund trading abuses?

Question 53

An investor is considering two mutual funds. Fund A has a 5.75% front-end load and a 1.25% expense ratio. Fund B is no-load, but has a 2.25% expense ratio. If the investor plans on being in either fund for 6 years, which should they choose given that they have $16,000 to invest and both funds have gross returns of 12% per year? Fees are applied at each year-end to year-end asset values, but the load is taken out up-front only once.
A.

Question 54

How are hedge fund expenses different from mutual fund expenses? What are hurdle rates and high water marks at a hedge fund? Why are these used?