Deck 12: Mutual Funds and Exchange-Traded Funds

Question 1

Mutual fund investors delegate all of the following decisions to the fund's managers EXCEPT

A) which companies and industries to invest in.
B) when to buy and sell individual stocks.
C) how many securities to hold in the portfolio.
D) how to allocate investments among different classes of assets such as stocks, bonds, cash and real estate.

Answer 1

D

Question 2

Which of the following are advantages offered by mutual funds?
I) professional portfolio management
II) dividend reinvestment
III) consistent returns in excess of the overall market rate of return
IV) modest capital outlay for investors

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

Answer 2

D

Question 3

Which of the following statements best describes the legal organization of mutual funds?

A) Funds are organized as a single entity that handles all functions such as custody and investment decisions.
B) Funds split their basic functions such as record keeping and investment decisions among two or more companies.
C) Funds are owned by the company that manages them.
D) A distributor keeps track of investment and redemption requests from shareholders and maintains other shareholder records.

Answer 3

B

Question 4

One drawback of investing in mutual funds is the

A) annual management fee.
B) lack of liquidity of fund shares.
C) amount required for the initial investment.
D) lack of information on the performance of the fund.

Question 5

The discount or premium on a closed-end mutual fund can be as much as 25 percent.

Question 6

Mutual funds rank second only to banks as being the largest financial intermediary in the United States.

Question 7

Nearly all mutual funds operate as regulated investment companies. This means that

A) they are no-load funds.
B) portfolio decisions are mandated by government authorities.
C) they do not pay taxes on their income.
D) their investments are guaranteed by the FDIC.

Question 8

The mutual fund market is dominated by funds that invest in diversified bond portfolios.

Question 9

To operate as a regulated investment company and enjoy the related tax benefits, a mutual fund must annually distribute to its shareholders

A) half of its realized capital gains, and interest and dividend income.
B) none of its realized capital gains, but all of its interest and dividend income.
C) all of its realized capital gains, and at least 90 percent of its interest and dividend income.
D) all of its realized capital gains and interest and dividend income.

Question 10

During the 7 year market cycle of 2006-2012, in which category of funds did a majority of funds outperform the market average?

A) large cap funds
B) small cap funds
C) asset allocation funds
D) In no category did a majority of funds outperform the market average.

Question 11

Investors purchase shares in an open end mutual fund directly from the fund.

Question 12

Mutual funds provide a simplified means of diversifying a portfolio.

Question 13

Mutual funds tend to outperform the market.

Question 14

When an investor buys shares in a mutual fund, he or she becomes a part owner of a portfolio of securities.

Question 15

Which one of the following statements concerning mutual funds is correct?

A) The selection of individual securities remains with the mutual fund investor.
B) Mutual funds were first created in the 1980s.
C) The mutual fund industry is the largest financial intermediary in the United States.
D) Mutual funds are generally highly concentrated portfolios.

Question 16

The purchase price of a closed-end mutual fund is equivalent to the net asset value of the fund.

Question 17

What are some of the advantages of investing through mutual funds? Name at least three.

Question 18

Which one of the following statements is correct concerning players in the mutual fund industry?

A) Security analysts and traders work for the management company.
B) Normally a bank serves as the custodian.
C) The management company maintains the shareholder records.
D) The mutual fund shareholders are the owners of the management company.

Question 19

The transfer agent for a mutual fund physically safeguards the securities being bought and sold by that firm.

Question 20

The mutual fund, and not the investor, is responsible for all income taxes on capital gains and dividends earned by the fund.

Question 21

Like ordinary stocks, exchange traded funds (ETFs) can be sold short.

Question 22

A closed-end fund with an NAV of $9.60 and a market price of $10.25 is selling at a premium of 6.8%.

Question 23

Closed-end funds are required to provide a prospectus to all new shareholders as long as the fund is trading at a premium.

Question 24

Mutual fund fees are disclosed in the fund prospectus.

Question 25

Which one of the following statements concerning ETFs is correct?

A) ETFs are based solely on U.S. indexes.
B) The ETF based on the Standard & Poor's 500 Index is priced at 1/10 the value of that index.
C) Spiders are based on the DJIA.
D) The ETF based on the Dow is priced at 1/10 of the value of the DJIA.

Question 26

An open-end investment company

A) is involved in all trades of its shares.
B) sells shares at a discounted NAV price.
C) trades like a stock on the exchanges.
D) has a set number of shares.

Question 27

Hedge funds are subject to the same regulations and disclosure requirements as mutual funds.

Question 28

The net asset value is the price per share an investor will pay to acquire shares in a no-load, open-end fund.

Question 29

Which of the following characteristics apply to exchange traded funds (ETFs)?
I) unlimited number of outstanding shares
II) typically track the performance of some index
III) Market prices may be higher or lower than NAV.
IV) May invest in the whole index or use a sample of securities to track the index as closely as possible.

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

Question 30

As a general rule, the time to buy a closed-end mutual fund is when the fund's premium is approximately 5 percent higher than its past average.

Question 31

Closed-end funds are

A) less liquid than open-end funds.
B) best purchased when they are selling at a premium.
C) purchased directly from the funds' manager.
D) traded at NAV.

Question 32

Which of the following statements is(are) correct concerning exchange-traded funds (ETFs)?
I) You can buy and sell ETFs any time during trading hours.
II) ETFs are actively managed.
III) ETFs have high portfolio turnover rates.
IV) ETFs rarely distribute any capital gains.

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

Question 33

Which of the following characteristics apply to closed-end mutual funds?
I) unlimited number of outstanding shares
II) transactions between shareholders
III) Market prices may be higher or lower than NAV.
IV) Fund will repurchase shares at any time.

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

Question 34

Investors who buy or sell exchange-traded funds will do so at a price based on the closing price for the day.

Question 35

Most exchange-traded funds are index funds.

Question 36

A closed end fund is selling at a premium when the NAV exceeds the market price.

Question 37

Trading in closed-end investment companies takes place between investors in the open market.

Question 38

The longer you intend to hold a fund, the more willing you should be to accept a front-end load charge in exchange for lower annual management and 12(b)-1 fees.

Question 39

The commission charged when shares of an open-end mutual fund are purchased is called a

A) management fee.
B) back-end load.
C) front-end load.
D) 12(b)-1 fee.

Question 40

The net asset value of a mutual fund increased from $12.03 to $13.53, but its price per share increased by only $1.26. This information indicates that the fund

A) paid out $1 in capital gains.
B) paid out $1 in dividends.
C) is a closed-end fund.
D) is an open-end fund.

Question 41

The maximum average maturity of the holdings within a money market account must be 6 months or less.

Question 42

Use this information to answer the following questions.
(a) Which fund does NOT charge a front-end load?
(b) Which fund can best be described as a low-load fund?
(c) What can you say about Fund B with respect to the type of investments it most likely holds?
(d) If you want to buy a fund and hold it for five years, which one of these funds should you purchase based on fund costs? Assume the funds earn a positive rate of return each year.

Question 43

An aggressive growth mutual fund is least likely to purchase a stock

A) with a high P/E ratio.
B) with a high anticipated rate of growth.
C) of an unseasoned firm.
D) with a high dividend yield.

Question 44

A unit investment trust

A) engages in short-term trading within a particular sector.
B) offers a low-cost, diversified portfolio.
C) is an unmanaged portfolio of securities.
D) is used only for fixed-income securities.

Question 45

The primary objective of growth mutual funds is capital appreciation with a high level of current income.

Question 46

Mutual funds can carry a number of different types of sales charges and fees. Briefly explain the following such expenses.
(a) a front-end load
(b) a back-end load
(c) a 12(b)-1 fee

Question 47

Index funds merely attempt to match the performance of some benchmark, not to outperform it.

Question 48

Morningstar, a leading. mutual fund industry publication, classifies funds by the number of shareholders and the total amount of money invested in the fund.

Question 49

One characteristic of 12(b)-1 charges is that they are payable

A) only in years that the mutual fund shows an increase in net asset value.
B) each year regardless of the performance of the mutual fund.
C) only during the first year the fund is owned.
D) only when shares in the fund are sold.

Question 50

Which of the following statements is(are) correct concerning hedge funds?
I) They are highly regulated.
II) They hedge all positions to limit risks.
III) Management and other fees are extremely low compared to other types of funds.
IV) Access is limited to institutions and high net worth or high income individuals.

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

Question 51

Back-end loads

A) are charged when an investor buys their mutual fund shares.
B) are charged if an investor sells his or her shares within the first few years.
C) were designed to help no-load funds cover their marketing expenses.
D) encourage short-term trading.

Question 52

What are the primary disadvantages of owning mutual fund shares?

Question 53

Investors in hedge funds have the legal status of

A) shareholders.
B) limited partners.
C) general partners.
D) trustees.

Question 54

Explain why closed-end funds can sell at prices other than the fund's NAV.

Question 55

Risk-seeking investors seeking maximum capital appreciation with little, if any current income, should invest in

A) value funds.
B) growth funds.
C) aggressive growth funds.
D) equity-income funds.

Question 56

A type of fund that invests in real estate and/or mortgages is known as a

A) REIT.
B) ETF.
C) sector fund.
D) hedge fund.

Question 57

Which type of fund is always passively managed?

A) a closed-end fund
B) a growth fund
C) a value fund
D) an index fund

Question 58

Performance fees based on profits earned by the fund are typical of

A) hedge funds.
B) exchange traded funds.
C) closed-end investment companies.
D) open end mutual funds.

Question 59

Socially responsible funds only hold stocks of companies that meet the fund's ethical guidelines.

Question 60

Two mutual funds are quoted as follows. Given these quotes, which one of the following is true?

A) Both funds are load funds.
B) Fund A is a no-load fund.
C) Fund B is a no-load fund.
D) Both funds are no-load funds.

Question 61

Automatic investment plans makes it easier for investors to save money.

Question 62

The primary objective of an equity-income fund is

A) capital gains.
B) current income with capital preservation.
C) potentially high capital gains with limited income.
D) high risk-return trade-offs.

Question 63

Which type of mutual fund consists of both stocks and bonds with a combined objective of current income and long-term capital gains?

A) equity-income
B) balanced
C) value
D) bond

Question 64

Which one of the following statements is correct concerning international funds?

A) A devaluation of the dollar causes returns on foreign investments to improve from a U.S. perspective.
B) International funds are considered low-risk investments.
C) Balance-of-trade positions do NOT affect the rate of return from a U.S. perspective.
D) Technically, global funds can only invest in foreign securities.

Question 65

Aggressive mutual funds often employ investing strategies such as
I) short selling.
II) margin trading.
III) option trading.
IV) hedging.

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

Question 66

Compared to yields on general purpose money funds, the yields on tax-exempt money funds are

A) about the same.
B) 5 to 10 percent higher.
C) 5 to 10 percent lower.
D) 20 to 30 percent lower.

Question 67

A fund that is designed to match the performance of a measure such as the S & P 500 or the Russell 2000 is called a(n)

A) index fund.
B) targeted fund.
C) sector fund.
D) block fund.

Question 68

One characteristic of most index funds is that such funds typically

A) produce a large dollar amount of realized capital gains every year.
B) have a very low-cost structure with respect to management fees and transaction fees.
C) charge high front-end loads.
D) are designed to "beat the market."

Question 69

One advantage gained by investing in a bond fund rather than in individual bonds is the

A) diversification among issuers.
B) most bond funds outperform their benchmarks.
C) immunity from interest rate changes.
D) guarantee that the bonds will be held to maturity to avoid market fluctuations.

Question 70

Socially responsible funds are distinguished from other mutual funds because they

A) invest only in over-the-counter stocks.
B) do not charge any sales commission or management fees.
C) invest only in companies that meet specified moral, ethical, or environmental standards.
D) will sell their shares only to investors who sign a statement saying they do not smoke tobacco or use alcohol.

Question 71

Investors who seek triple (federal, state, and local) tax-free income should invest in ________ bond funds.

A) convertible
B) indexed
C) mortgage-backed
D) single-state municipal

Question 72

Every mutual fund has a stated investment objective. Disclosure of the investment objective is required by the SEC, and is used to classify a mutual fund into one of several categories. Briefly explain the investment objective of each of the following categories.
(a) growth funds
(b) aggressive growth funds
(c) equity-income funds
(d) balanced funds

Question 73

Funds that invest in a portfolio of companies from the same or closely related industries are known as

A) aggressive growth funds.
B) sector funds.
C) emerging market funds.
D) asset allocation funds.

Question 74

Value funds seek stocks
I) with low dividend yields.
II) with potential for growth.
III) with low P/E ratios.
IV) of newly discovered firms.

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

Question 75

To participate in an automatic investment plan, investors must allow the investment company to have access to a bank account or their paycheck.

Question 76

Ashley believes that the price of gas and oil is about to rise and energy company profits will follow. She should invest in

A) an asset allocation fund.
B) an emerging market fund.
C) a sector fund.
D) an aggressive growth fund.

Question 77

One type of mutual fund spreads investors' money across equity markets, bond markets, and money markets. Moreover, as market conditions change, the amount of money invested in each market sector will change. This type of mutual fund is known as a(n)

A) socially responsible fund.
B) fiscally responsible fund.
C) growth-and-income fund.
D) asset allocation fund.

Question 78

Government securities money funds are structured to eliminate

A) interest rate risk.
B) inflation risk.
C) default risk.
D) market risk.

Question 79

One characteristic of bond funds is the

A) requirement of a minimum initial investment of $5,000 or more.
B) high anticipated short-term growth potential.
C) fluctuation in value in response to changing interest rates.
D) extremely aggressive trading approach.

Question 80

Which of the following are advantages of bond funds over individual bonds?
I) greater liquidity
II) maturities matched to the investor's time horizon
III) automatic reinvestment of interest payments
IV) diversification

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