Question 1

When you invest in a typical load fund with an 8.5% load,the fund must appreciate by over 10% in value for you to break even on your investment.

Accepted Answer

Assume a $1000 investment. The commission or load is 8.75% X $1000 or $85. $85/$100 - $85 = .0928 or 9.28%. Therefore the fund must grow by more than 9.28% for you to break even on your investment.

Question 2

The acceptable range for a mutual fund's total yearly expenses is from 2% to 3% of assets.

Accepted Answer

The acceptable range for a mutual fund's total yearly expenses varies widely depending on the type of fund, but many funds aim for expense ratios well below 2%, and index funds often have expense ratios as low as 0.02% to 0.2%.

Question 3

Load mutual funds outperform no-load funds.

Accepted Answer

Studies have shown that over the long-term, load mutual funds do not outperform no-load mutual funds. Additionally, load funds have higher costs due to sales commissions and fees. However, it is important for individual investors to consider their own investment goals and preferences when choosing between load and no-load funds.

Question 4

A closed-end fund stands ready to buy your shares back at all times.

Accepted Answer

A closed-end fund does not stand ready to buy back shares at all times like an open-end fund (also known as a mutual fund) does. Instead, closed-end funds trade like stocks on an exchange and their price is determined by the supply and demand in the market. Investors looking to sell their shares must find a buyer on the exchange, and the fund itself is not involved in the transaction.

Question 5

Morningstar Mutual Fund Survey is considered one of the leading authorities on mutual fund performance.

Accepted Answer

Morningstar Mutual Fund Survey is widely regarded as one of the most respected sources for evaluating and ranking mutual fund performance, making option A true.

Question 6

Load funds,which charge a commission,generally perform no better than no-load funds.

Accepted Answer

Load funds charge a commission, which can eat into the potential returns of the investment. Studies have shown that load funds generally do not perform better than no-load funds, so investors may want to consider the lower-cost option.

Question 7

Shares of a closed-end fund trade on an exchange,just like stocks.

Accepted Answer

Shares of closed-end funds are bought and sold on an exchange, just like stocks. The prices of these shares are determined by supply and demand in the market, and may trade at a premium or discount to their net asset value (NAV).

Question 8

Money market funds are usually load funds.

Accepted Answer

Money market funds are usually no-load funds, meaning they don't charge an upfront commission or fee to purchase shares. Instead, they may charge management fees or other expenses.

Question 9

The prospectus is designed to provide a broad overview of the mutual fund,but is not required to disclose its investment focus or the investment style that it represents.

Accepted Answer

The statement is false. The prospectus is required to disclose the mutual fund's investment focus and investment style.

Question 10

Open-end funds often sell at a discount to net asset value.

Accepted Answer

Transactions with open-end funds are made at the net asset value.

Question 11

At the end of 2009,approximately 43% of U.S.households owned shares in mutual funds.

Accepted Answer

According to a report by the Investment Company Institute, at the end of 2009, approximately 43% of U.S. households owned shares in mutual funds.

Question 12

Exchange-traded funds (ETFs)are similar to index mutual funds,but they trade on stock exchanges like common stock.

Accepted Answer

ETFs are similar to index mutual funds in that they track a specific index or market sector, but they are traded on stock exchanges like common stock. This allows for more flexibility in buying and selling throughout the day and the ability to trade on margin or short sell.

Question 13

Closed-end funds have a fixed number of shares;open-end funds do not.

Accepted Answer

Closed-end funds have a fixed number of shares that are traded on stock exchanges, whereas open-end funds continuously issue and redeem shares based on demand from investors.

Question 14

Between 70% and 75% of all investment funds in the U.S.are open-ended.

Accepted Answer

More than 95% of the investment funds in the United States are open-ended. Actually, the term mutual fund applies specifically to open-end investment companies, although closed-end funds are sometimes loosely labeled as mutual funds as well.

Question 15

Assuming no reinvestment,the total return on mutual fund shares is the total ending value of your shares,divided by the total beginning value of your shares.

Accepted Answer

The total return on mutual fund shares, assuming no reinvestment, is calculated by subtracting the total beginning value of your shares from the total ending value of your shares, and then dividing this result by the total beginning value of your shares. This calculation also typically includes any dividends or interest earned during the period.

Question 16

The smart investor will compare the portfolio of a fund to its stated objectives.

Accepted Answer

Comparing the portfolio of a fund to its stated objectives is a crucial step in determining if the fund is aligned with the investor's goals and risk tolerance.

Question 17

The intent of dollar-cost averaging is to avoid buying high and selling low.

Accepted Answer

Dollar-cost averaging is a strategy of investing a fixed amount of money at regular intervals, regardless of the price of the investment. This helps to avoid buying large amounts at the peak of the market and selling at the bottom during downturns, ultimately leading to more consistent long-term returns.

Question 18

On average,mutual funds tend to outperform the market over the long run.

Accepted Answer

We can conclude from the data that, on average, it is hard to beat the market, and this may account for the increased use of index funds by individual investors, and why they are attracted to no-load, low-expense funds. Mutual funds, on average, do not outperform the market.

Question 19

Good performance by a mutual fund in the past is highly indicative of good performance in the future.

Accepted Answer

Past performance of a mutual fund does not guarantee future performance. Market conditions, economic factors, and other variables can impact the performance of a mutual fund. It is important to conduct thorough research and analysis before investing in any mutual fund.

Question 20

Most common stock closed-end funds trade at a discount to NAV.

Accepted Answer

Most common stock closed-end funds trade at a discount to NAV, meaning their market price per share is lower than the net asset value per share. This is due to various factors such as market conditions, investor sentiment, and fund management.

Quiz 4: Investment Companies: Mutual Funds, exchange-Traded Funds, closed-End Funds, and Unit Investment Trusts