Deck 23: Mutual Fund Operations

Question 1

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.

Answer 1

D

Question 2

Exchange-traded funds (ETFs)

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

Answer 2

A

Question 3

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.

Answer 3

B

Question 4

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)longer; less AND shorter; more

Question 5

If investors sell their mutual fund shares after the net asset value of the fund increases, the investors benefit from

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

Question 6

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 7

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

Question 8

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 9

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.

Question 10

Most closed-end funds invest in

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

Question 11

Money market funds invest mostly in

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

Question 12

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

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

Question 13

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 14

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

Question 15

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

Question 16

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

Question 17

Mutual funds composed of bonds that offer periodic coupon payments are

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

Question 18

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

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

Question 19

The majority of mutual fund assets are

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

Question 20

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

Question 21

Which of the following statements is NOT correct?

A)Commercial paper is commonly purchased by money market funds.
B)Money market funds usually have a low level of credit risk.
C)Money market funds tend to have lower interest rate risk than bond funds.
D)If money market fund managers expect interest rates to decrease, they should use funds generated from maturing securities to purchase new securities with shorter maturities.

Question 22

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 these are correct.

Question 23

The composition of an asset allocation fund

A)includes nontraditional assets such as derivative securities and global real estate.
B)is fixed and does not change with market conditions.
C)is designed to automatically change as the investor ages.
D)is adjusted by the fund's managers in response to expectations and economic conditions.

Question 24

The majority of closed-end funds invest in

A)derivatives.
B)bonds and other debt securities.
C)stocks representing a particular sector or country.
D)international equity securities.

Question 25

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 26

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 27

____ 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 28

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 29

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 30

Money market fund assets include all of the following, EXCEPT

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

Question 31

Investors can sell exchange-traded funds short.

Question 32

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 33

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 34

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

Question 35

_______ 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 36

The number of exchange-traded funds has declined in recent years because the cost of managing them was excessive.

Question 37

​W hen 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 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

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

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

Question 40

Exchange-traded funds can be purchased on margin.

Question 41

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

Question 42

The Securities and Exchange Commission has established rules that allow public firms to disclose their earnings exclusively to hedge funds a few days before announcing the earnings to the public.

Question 43

Hedge funds commonly engage in short selling.
​

Question 44

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

Question 45

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

Question 46

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 47

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 48

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

Question 49

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

Question 50

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 these are correct.

Question 51

Investors who feel capable of making their own investment decisions normally prefer to invest in load funds instead of no-load funds.

Question 52

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

Question 53

Which of the following statements is NOT correct?

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 54

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

Question 55

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

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

Question 56

Exchange-traded funds can be

A)traded throughout the day.
B)purchased on margin.
C)sold short.
D)All of these are correct.

Question 57

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

Question 58

Portfolio managers are hired by the mutual fund to invest in a portfolio of securities that satisfies the desires of investors.
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Question 59

_____ 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 60

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

Question 61

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

Question 62

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

Question 63

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

Question 64

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

Question 65

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

Question 66

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

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

Question 67

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

Question 68

Which of the following statements is NOT correct?

A)Exchange-traded funds (ETFs)are designed to mimic particular stock indexes and are traded on a stock exchange.
B)ETFs have very high expense ratios.
C)ETFs differ from most open-end and closed-end funds in that they are not actively managed.
D)One disadvantage of ETFs is that each purchase of additional shares must be done through the exchange where they are traded.

Question 69

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

Question 70

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 these are ways in which a mutual fund generates returns to its shareholders.

Question 71

An investment in a(n)____ fund incurs a sales charge.

A)load
B)no-load
C)closed-end
D)open-end
E)None of these are correct.

Question 72

Which of the following is NOT correct about money market funds (MMFs)?

A)The credit risk of MMFs is normally perceived to be lower than that of corporate bond funds.
B)MMFs have higher interest rate risk than long-term bond funds.
C)MMFs are normally characterized as having relatively low risk and low expected returns.
D)All of these are correct.

Question 73

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

Question 74

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

Question 75

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

Question 76

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 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)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 these are correct.

Question 79

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

Question 80

Hedge funds are more heavily regulated than mutual funds.