Question 1

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

Accepted Answer

Studies indicate that there is no significant statistical difference in the investment performance of load and no-load funds.

Question 2

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

Accepted Answer

Past performance in no way guarantees future performance. A fund that did well in the past may do poorly in the future, and vice versa.

Question 3

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

Accepted Answer

According to the Investment Company Institute (www.ici.org), at the end of 2009, mutual funds were owned by 87 million people, representing 50.4 million U.S. households, or 43% of all households.

Question 4

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 prospectus contains information deemed essential by the SEC in providing "full disclosure" to potential investors regarding the fund's investment objectives and policies, risks, management, and expenses. The prospectus is a required disclosure document.

Question 5

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 6

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

Accepted Answer

Under dollar-cost averaging, the investor buys a fixed dollar's worth of a given security at regular intervals, regardless of the security's price or the current market outlook. By using such a strategy, investors concede they cannot outsmart the market. The intent of dollar-cost averaging is to avoid the common practice of buying high and selling low.

Question 7

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 8

Most common stock mutual funds trade at a discount from the net asset value (NAV).

Accepted Answer

Most common stock mutual funds trade at their NAV and not at a discount. However, some exchange-traded funds (ETFs) and closed-end funds may trade at a discount or premium to their NAV.

Question 9

Load mutual funds outperform no-load funds.

Accepted Answer

Studies indicate that there is no significant statistical difference in the investment performance of load and no-load funds.

Question 10

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 11

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

Accepted Answer

ETFs are indeed similar to index mutual funds, but they differ in that they are traded on stock exchanges like common stock. This allows investors to buy and sell shares of the ETF throughout the trading day, as opposed to mutual funds which are only priced at the end of each trading day.

Question 12

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

Accepted Answer

The shares of closed-end funds trade on security exchanges or over-the-counter just as any other stock might; but when you look for their prices in Barron's, you will find closed-end funds listed under a separate heading, as illustrated in Table 4-2. This makes them more easily identifiable, but you still buy and sell them through a broker and pay a commission.

Question 13

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

Accepted Answer

Investors should be alert to the stated objectives and all other information in the prospectus.

Question 14

Money market funds are usually load funds.

Accepted Answer

Money market funds are no-load, and most require minimum deposits of $500 to $1000.

Question 15

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

Accepted Answer

Perhaps the best way to determine whether a mutual fund is load or no-load is to consult the Morningstar Mutual Fund Survey (if you are only interested in no-load or low-load funds). Morningstar is perhaps the leader on individual fund information.

Question 16

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 17

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

Accepted Answer

A closed-end fund has a fixed number of shares, and purchasers and sellers of shares must trade with each other. You cannot buy the shares directly from the fund (except at the inception of the fund) because of the limitation on shares outstanding. Furthermore, the fund does not stand ready to buy the shares back from you.

Question 18

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 19

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 20

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

Accepted Answer

A closed-end fund has a fixed number of shares, and purchasers and sellers of shares must trade with each other.

Quiz 4: Investment Companies: Mutual Funds, Exchange-Traded Funds, Closed-End Funds, and Unit Investment Trusts