In the event of financial distress, open-ended mutual fund investors
A)have an incentive to cash in their shares quickly since they are paid on a first come, first served basis.
B)have an incentive to avoid a run since that will deplete the fund net asset value.
C)have an incentive to cash in their shares quickly since that will increase the fund's net asset value.
D)will switch into low risk bank deposits.
E)have an incentive to avoid a run since the Federal Reserve guarantees mutual fund holdings.

Question

Quizplus · Accepted Answer

Open-ended mutual fund investors have an incentive to avoid a run since that will deplete the fund net asset value. If all investors try to redeem their shares simultaneously, the fund will have to sell off its holdings to raise cash, which may result in a substantial decline in the net asset value (NAV) of the fund, hurting all remaining investors. Therefore, it is in the best interest of investors to avoid causing a run.

In the Event of Financial Distress, Open-Ended Mutual Fund Investors