Question 1

The primary difference between an international fund and a global fund is the fact that:

Accepted Answer

A global fund invests in securities worldwide, including the U.S., whereas an international fund invests outside of the investor's country of residence, excluding U.S. stocks for U.S. investors.

Question 2

Which type of fund should you purchase if you are interested in investing primarily in countries that have relatively new stock markets?

Accepted Answer

An emerging markets fund invests in countries that have relatively new stock markets and are considered to be experiencing rapid economic growth and development. This type of fund allows investors to participate in the potential growth of these economies, but also carries a higher degree of risk due to factors such as political instability and less developed financial regulations.

Question 3

Small-cap funds:

Accepted Answer

Small-cap funds focus more on capital appreciation than on current income. They invest in companies with smaller market capitalizations, which are more likely to grow quickly and generate higher returns, but may not pay significant dividends.

Question 4

Today, you are selling shares of an open-end mutual fund and will be charged a CDSC of 3%. The price you will receive per share is equal to:

Accepted Answer

The CDSC (contingent deferred sales charge) is a fee charged when an investor sells shares in an open-end mutual fund within a certain time period after purchase. In this case, the CDSC is 3%, which means that the investor will receive 97% (100%-3%) of the NAV (net asset value) at the time of sale. The opening NAV and offering price are not relevant, and the closing offering price may be higher or lower than the closing NAV, so it is safer to choose C, which guarantees a price equal to 97% of the closing NAV.

Question 5

Which one of the following costs can a mutual fund shareholder avoid by holding shares for an extended period of time?

Accepted Answer

A contingent deferred sales charge (CDSC) is a fee charged by some mutual funds when a shareholder sells their shares within a certain period of time after purchasing them. Holding shares for an extended period of time can help a shareholder avoid this cost. The other options listed (12b-1 fee, front-end load, management fee, trading costs) are not affected by the length of time the shares are held, and cannot be avoided simply by holding the shares for a longer period of time.

Question 6

When the offering price and the NAV are the same, you know that a mutual fund is not charging which one of the following fees?

Accepted Answer

The front-end load is a fee charged by mutual funds at the time of purchase, and it is calculated as a percentage of the offering price. If the offering price and NAV are the same, it means that there is no front-end load. The other fees listed, such as the management fee, 12b-1 fee, and contingent deferred sales charge, are not based on the offering price or NAV, but rather on the assets under management or the length of time that the investor holds the fund. Trading costs are not directly charged by the mutual fund, but they may indirectly impact the NAV.

Question 7

Which one of the following is not included in the fee table found in a mutual fund prospectus?

Accepted Answer

The fee table found in a mutual fund prospectus typically includes the management fee, 12b-1 fee, front-end load, redemption fee percentage, and other expenses. The turnover rate is not a fee but rather a measure of how frequently the fund buys and sells its holdings.

Question 8

Mutual fund trading costs:

Accepted Answer

Mutual fund trading costs increase in direct relation to the turnover rate, as the fund incurs expenses for buying and selling securities. Option A is incorrect because mutual fund trading costs are not computed as a percentage of a fund's assets. Option B is incorrect because trading costs are not generally set at a flat amount per year. Option C is incorrect because bonus fees for outperforming an index are not a part of trading costs. Option E is also incorrect because sales commissions are a separate expense from trading costs.

Question 9

Contingent deferred sales charges:

Accepted Answer

Contingent deferred sales charges (CDSC) are a type of sales charge or fee that investors pay when they sell mutual fund shares, and it decreases over time. This means they can be avoided if the investor holds onto their shares for a long enough period, typically several years, as specified by the fund's prospectus.

Question 10

The net asset value of a money market mutual fund:

Accepted Answer

The net asset value (NAV) of a money market mutual fund is dependent upon the value of the fund's assets, as it reflects the per-share value of the fund's holdings.

Question 11

Which type of stock fund focuses on maximizing share price increases?

Accepted Answer

Capital appreciation funds focus specifically on maximizing share price increases.

Question 12

Assume a mutual fund is a pure no-load fund. Which of the following costs should an investor still expect to incur?
I. contingent deferred sales charge
II. management fee
III. trading costs
IV. redemption fee

Accepted Answer

Even in a pure no-load fund, investors can expect to incur management fees and trading costs. A contingent deferred sales charge and redemption fee are both types of sales charges that would not apply in a no-load fund.

Question 13

A fund which tracks the S&P 500 would best be classified as which type of fund?

Accepted Answer

The S&P 500 is an index of 500 large-cap companies in the US. Therefore, a fund that tracks the S&P 500 would be classified as an index fund.

Question 14

Money market mutual funds do which one of the following?

Accepted Answer

Money market mutual funds invest in short-term securities, usually with maturities of 90 days or less. While they are considered relatively safe investments, they do not offer a guaranteed rate of return and there is always the possibility of losing money. Money market mutual funds can invest in a variety of securities, including government bonds, but are not limited to them. The cost to buy and sell shares in a money market mutual fund can vary.

Question 15

Which one of the following characteristics best fits an index fund?

Accepted Answer

An index fund is typically passively managed, meaning it tracks a specific market index and does not rely on active management decisions. The other choices do not fit the characteristics of an index fund - A) market outperformer implies active management, B) high expenses are not a characteristic of index funds, D) dividend orientation is not necessarily a characteristic of index funds, and E) high turnover rate implies active management.

Question 16

What are the two best reasons for considering a load fund?

Accepted Answer

A load fund may be a good choice if an investor has a strong preference for a particular fund manager or a specialized type of fund. In these cases, the fees associated with purchasing the fund may be worth it to gain access to the desired investment strategy or manager. However, it is important to carefully consider the total cost of investing in a load fund, including any ongoing expenses and potential performance fees.

Question 17

Which type of stock fund focuses primarily on current income?

Accepted Answer

The Equity Income fund is focused primarily on providing current income to its investors through dividend-paying stocks.

Question 18

A sector fund:

Accepted Answer

A sector fund concentrates on investing in one specific industry or commodity, making it a more focused investment. This can lead to higher potential returns, but also higher risk. Sector funds are not highly diversified, which can contribute to more volatility in performance compared to other types of funds. Past performance is not always the best indicator of future performance, so evaluating a sector fund based solely on its past performance is not ideal.

Question 19

Money market mutual funds:

Accepted Answer

Money market mutual funds can provide "triple-tax-free" income if they invest in municipal securities that are exempt from federal, state, and local taxes.

Question 20

To determine the actual objective of a fund, you should primarily refer to the:

Accepted Answer

The answer of To determine the actual objective of a...

Quiz 4: Mutual Funds and Other Investment Companies