Question 1

Many financial planners recommend that investors pick a mutual fund with an expense ratio that is:

Accepted Answer

Financial planners generally recommend selecting a mutual fund with an expense ratio of 1 percent or less because it will help investors keep costs low and maximize returns. Expense ratios are the fees charged by mutual funds to cover their operating costs, and higher expenses can significantly reduce an investor's returns over time. Therefore, a low expense ratio is generally considered to be a good indicator of a mutual fund that is well-managed and has a strong track record of performance.

Question 2

When one investment company manages a group of mutual funds, it is called a(n):

Accepted Answer

A family of funds is a group of mutual funds that are managed by the same investment company. This allows investors to easily diversify their portfolio by choosing from a variety of funds offered within the same family. The other options listed do not accurately describe this type of investment arrangement.

Question 3

A municipal bond fund:

Accepted Answer

A municipal bond fund provides investors with federally tax-free interest income, making it a popular choice for investors seeking tax-efficient income. However, the risk level can vary depending on the underlying credit quality of the municipal bonds in the portfolio. It is not backed by the federal government, and therefore is not considered a risk-free investment. Additionally, municipal bond funds invest in a variety of municipal bonds issued by state and local governments, not just Treasury bonds.

Question 4

A mutual fund that invests in common stocks and bonds with the primary objectives of conserving capital, providing income, and long-term growth is called a(n) ____________ fund.

Accepted Answer

A balanced fund is designed to provide a mix of income, capital preservation, and long-term growth. By investing in both equities and fixed income securities, a balanced fund can provide stable returns while also mitigating some of the risks associated with investing solely in stocks or bonds. Growth funds, on the other hand, are focused on achieving high returns through investments in rapidly-growing companies, while income funds focus on providing a steady stream of income through investments in fixed income securities. Industry funds are specialized funds that invest exclusively in a particular industry, while money market funds are focused on short-term, low-risk investments.

Question 5

A mutual fund that invests in the common stocks of companies in the same industry is called a(n) ____________ fund.

Accepted Answer

A sector fund focuses on a particular sector of the economy, such as technology, healthcare, or energy. By investing in companies within the same industry, sector funds aim to achieve higher returns through industry-specific growth opportunities. Therefore, a sector fund is the best choice for the given question.

Question 6

A mutual fund that invests in common stocks of rapidly growing corporations with higher-than-average revenue and earnings growth is called a(n) ____________ fund.

Accepted Answer

A mutual fund that invests in common stocks of rapidly growing companies with higher-than-average revenue and earnings growth is called a growth fund.

Question 7

Which one of the following funds would be considered the safest investment?

Accepted Answer

Money market funds are considered the safest investment as they invest in low-risk securities such as government bonds, certificates of deposit, and commercial paper with a maturity period of less than one year. They are also highly liquid, providing easy access to funds when needed.

Question 8

The typical expense ratio for an index fund is:

Accepted Answer

The typical expense ratio for an index fund is 0.50 percent or less. This is because index funds are designed to track a specific index, so they require less active management compared to other types of funds, resulting in lower fees.

Question 9

Another name for a mutual fund that charges a contingent deferred sales load is a class ____________ fund.

Accepted Answer

Class B mutual funds typically have a contingent deferred sales load, which means investors will pay a fee when they sell their shares, usually within a few years of purchasing them. This fee gradually decreases over time and eventually goes away altogether, so long-term investors may find that Class B shares are a good choice. Class A, C, D, and E shares may all have different fee structures and sales loads.

Question 10

Martin Campbell wants to invest in mutual funds, but is also worried about diversification. Which fund would you recommend to him?

Accepted Answer

A fund of funds invests in multiple mutual funds, providing diversification across various asset classes and investment styles. This would be a suitable choice for Martin Campbell's concern about diversification.

Question 11

Which one of the following statements is false?

Accepted Answer

This statement is false because there is no set time frame for when a manager should be changed. It ultimately depends on the performance of the fund and the manager's track record. Changing managers just for the sake of "new ideas" may not always be the best decision.

Question 12

A mutual fund that invests in stocks issued by companies with a long history of paying dividends is called a(n) ____________ fund.

Accepted Answer

The given description matches with the characteristics of an equity income fund, which invests in companies with a history of paying dividends. A balanced fund invests in a mix of stocks and bonds, an industry fund focuses on a specific industry, a sector fund invests in a particular sector, and a money market fund invests in short-term, low-risk securities.

Question 13

Which one of the following statements is false?

Accepted Answer

The statement "There is no need to evaluate mutual fund investments because investment companies hire the best professional managers they can to manage their funds" is false. It is important for individual investors to continually evaluate their mutual fund investments, even if they have professional management, to ensure that their investment objectives are being met and to make any necessary adjustments.

Question 14

A mutual fund that only invests in companies outside the United States is called a(n) ____________ fund.

Accepted Answer

A mutual fund that only invests in companies outside the United States is called an international fund. Choice A (growth-income) and B (income) do not necessarily imply investments outside the United States, and choice D (industry) refers to investing in a specific sector or industry within a specific country. Choice E (global) refers to investing in companies worldwide, including those in the United States.

Question 15

Henrietta Marston plans to retire in the year 2050. She is considering a fund that will be more aggressive now and become more conservative as she approaches retirement. Which of the following funds would you recommend to her?

Accepted Answer

A Lifecycle fund is designed to be more aggressive in the early years and gradually become more conservative as the investor approaches retirement. This means that it is well-suited for Henrietta Marston's retirement plans. Choice A, B, and C are not suitable because they do not provide a gradual shift from aggressive to conservative investing to match her retirement goals. A fund of funds may or may not be well-suited depending on its investment strategy, so it cannot be recommended without further information.

Question 16

All the different fees and fund operating costs are often referred to as a(n):

Accepted Answer

The different fees and fund operating costs are commonly referred to as the expense ratio, which is the percentage of a fund's assets that are used to cover its expenses.

Question 17

Which one of the following statements is true?

Accepted Answer

Most mutual funds are managed funds, meaning they are actively managed by a fund manager or team of managers who make investment decisions on behalf of the fund's investors. This is in contrast to index funds, which simply track a specific market index and do not require active management. Therefore, option A is the only statement that is true.

Question 18

Last month Nellie Jacobson's divorce became final. As part of the settlement, she received $150,000. She would like to invest in mutual funds, but since she is 62 years old, she is concerned with the safety of her "nest egg." Which of the following mutual funds would you recommend?

Accepted Answer

Since Nellie is concerned with the safety of her investment, a short-term U.S. bond fund would be the best choice. This type of mutual fund typically invests in high-quality, short-term debt securities issued by the U.S. government, which are considered a safer investment than stocks or high-yield bonds. Additionally, the short-term nature of the securities means lower interest rate risk.

Question 19

A mutual fund that invests in investment-grade corporate debt with maturities between 5 and 10 years is called a(n) ____________ fund.

Accepted Answer

The description provided fits an intermediate corporate bond fund, which invests in investment-grade corporate debt with maturities between 5 and 10 years. Long-term bond funds invest in bonds with longer maturities, typically 10 to 30 years. Growth funds invest in stocks with potential for capital appreciation. Sector funds concentrate on specific industries. Income funds seek to generate regular income through interest, dividends, or other means.

Question 20

Another name for a mutual fund that doesn't charge a load, but does charge an ongoing higher 12b-1 fee is a class ____________ fund.

Accepted Answer

Class C funds typically do not charge a front-end load but have higher ongoing 12b-1 fees compared to other classes.

Quiz 16: Investing in Mutual Funds

Many financial planners recommend that investors pick a mutual fund with an expense ratio that is:

When one investment company manages a group of mutual funds, it is called a(n) :

A municipal bond fund:

A mutual fund that invests in common stocks and bonds with the primary objectives of conserving capital, providing income, and long-term growth is called a(n) ____________ fund.

A mutual fund that invests in the common stocks of companies in the same industry is called a(n) ____________ fund.

A mutual fund that invests in common stocks of rapidly growing corporations with higher-than-average revenue and earnings growth is called a(n) ____________ fund.

Which one of the following funds would be considered the safest investment?

The typical expense ratio for an index fund is:

Another name for a mutual fund that charges a contingent deferred sales load is a class ____________ fund.

Martin Campbell wants to invest in mutual funds, but is also worried about diversification. Which fund would you recommend to him?

Which one of the following statements is false?

A mutual fund that invests in stocks issued by companies with a long history of paying dividends is called a(n) ____________ fund.

Which one of the following statements is false?

A mutual fund that only invests in companies outside the United States is called a(n) ____________ fund.

Henrietta Marston plans to retire in the year 2050. She is considering a fund that will be more aggressive now and become more conservative as she approaches retirement. Which of the following funds would you recommend to her?

All the different fees and fund operating costs are often referred to as a(n) :

Which one of the following statements is true?

Last month Nellie Jacobson's divorce became final. As part of the settlement, she received $150,000. She would like to invest in mutual funds, but since she is 62 years old, she is concerned with the safety of her "nest egg." Which of the following mutual funds would you recommend?

A mutual fund that invests in investment-grade corporate debt with maturities between 5 and 10 years is called a(n) ____________ fund.

Another name for a mutual fund that doesn't charge a load, but does charge an ongoing higher 12b-1 fee is a class ____________ fund.