Question 1

A "HOLDR" is an example of a market segment exchange-traded fund.

Accepted Answer

HOLDRs (Holding Company Depositary Receipts) were a type of exchange-traded product that held a fixed basket of securities of a certain industry or sector, making it an example of a market segment ETF. However, HOLDRs have been largely replaced by other types of ETFs in recent years.

Question 2

An advantage of trading exchange-traded funds is that you can do so without incurring commission costs.

Accepted Answer

While some brokers offer commission-free ETF trades, not all do, and other fees may still apply, such as expense ratios and bid-ask spreads, making it inaccurate to say you can trade ETFs without incurring any commission costs universally.

Question 3

Broad market exchange-traded funds,while useful,have not gained wide popularity with investors.

Accepted Answer

Broad market exchange-traded funds (ETFs) have gained wide popularity with investors. They offer diversification, low costs, and flexibility, making them a preferred investment option for many.

Question 4

An equity trust invests in equity securities,such as common stocks.

Accepted Answer

The answer of An equity trust invests in equity securities,such...

Question 5

ETFs are more tax efficient than mutual funds.

Accepted Answer

ETFs have unique features such as in-kind redemptions that allow them to be more tax efficient compared to mutual funds. Mutual funds are required to distribute capital gains to their shareholders annually, which can result in tax liabilities for individual investors. ETFs, on the other hand, typically do not have to distribute capital gains because of their creation and redemption process. This can result in less taxable events and increased tax efficiency for investors.

Question 6

If you are comparing fund expenses for two funds with different objectives,it is better to reference the expenses against each fund's earnings rather than its assets.

Accepted Answer

Fund expenses are typically calculated as a percentage of assets under management, not earnings, making it more standardized to compare expenses against assets rather than earnings, which can fluctuate more widely.

Question 7

A unit investment trust is similar to a mutual fund,except shares are bought in units and the trust is more aggressively managed.

Accepted Answer

A unit investment trust is similar to a mutual fund in that it pools money from multiple investors to invest in a portfolio of securities. However, the key difference is that a unit investment trust holds a fixed portfolio of securities with a predetermined maturity date. The trust is not actively managed, meaning that the securities in the portfolio are not bought and sold as frequently as those in a mutual fund. Additionally, shares are bought and sold in units or "shares" of the trust.

Question 8

The most popular UITs are those investing in real estate.

Accepted Answer

The most popular Unit Investment Trusts (UITs) typically invest in fixed income or equity securities, not specifically in real estate. Real estate investment might be a focus for some UITs, but it is not the predominant type across the board.

Question 9

For a fee a HOLR can be converted into the underlying shares.

Accepted Answer

This statement is true. HOLRs (Hold on for Life and Redeemable Securities) are a type of security that can be converted into the underlying stock for a fee. This allows investors to have exposure to the stock, while also providing flexibility to hold or sell the HOLR itself.

Question 10

The following returns were earned last year: Fund A,10%,Fund B,24%,the overall market,14%.Fund A's beta was 0.8 while Fund B's was 2.0.Therefore,the best investment was the overall market.

Accepted Answer

Fund A's return was 10% and its beta was 0.8. The expected return for Fund A is 14% * 0.8 = 11.2%. Fund B's return was 24% and its beta was 2.0. The expected return for Fund B is 14% * 2.0 = 28%. The overall market's return was 14%. Therefore, the best investment was Fund B, not the overall market.

Question 11

Investors can use margin to acquire exchange-traded funds.

Accepted Answer

Yes, investors can use margin to acquire exchange-traded funds, just as they can use margin to acquire individual stocks. Margin is a form of borrowing from a broker to increase purchasing power and potentially increase returns, but it also carries increased risk as losses can be magnified. It's important for investors to understand the risks and limits of using margin.

Question 12

Exchange-traded funds are less tax efficient than many other mutual funds.

Accepted Answer

Exchange-traded funds (ETFs) are known to be more tax efficient than many other mutual funds because of their unique structure. ETFs typically have lower turnover rates, which results in fewer capital gains distributions and lower tax liabilities for the investors. Additionally, ETFs can use in-kind transfers to minimize taxable events when re-balancing their portfolios. Therefore, ETFs are generally considered to be tax-efficient investment vehicles compared to traditional mutual funds.

Question 13

ETFs track specific market indexes.

Accepted Answer

ETFs are designed to track the performance of a specific market index such as the S&P 500, Dow Jones Industrial Average, or NASDAQ.

Question 14

A disadvantage of an exchange-traded fund is their frequent portfolio turnover and high operating costs.

Accepted Answer

Exchange-Traded Funds (ETFs) typically have lower operating costs and less frequent portfolio turnover compared to actively managed mutual funds, making them more cost-efficient for investors.

Question 15

The following returns were earned last year: Fund A,10%,Fund B,20%,the overall market,11%.Fund A's beta was 0.8 while Fund B's was 2.0.Therefore,both funds would have been good investments.

Accepted Answer

Fund A underperformed the market given its lower return (10%) compared to the overall market (11%), despite having a lower risk (beta of 0.8). Fund B, with a higher beta of 2.0, indicates higher risk but provided a higher return (20%) than the market, which could be considered a good investment for those willing to accept the higher risk. The statement's generalization that both funds were good investments does not account for the risk-return trade-off.

Question 16

A mutual fund with a portfolio turnover of 100% is changing its complete portfolio during a period.

Accepted Answer

A mutual fund with a portfolio turnover of 100% is changing its complete portfolio during a period. This means that all investments in the portfolio have been sold and replaced with new investments, resulting in a turnover rate of 100%.

Question 17

A REIT is an equity trust.

Accepted Answer

A REIT (Real Estate Investment Trust) is a type of equity trust that invests in and manages a portfolio of real estate properties, generating revenue for its shareholders through rental income and capital appreciation.

Question 18

An advantage of exchange-traded funds is they occasionally can be purchased at significant discounts to book value.

Accepted Answer

Exchange-Traded Funds (ETFs) trade on stock exchanges at market prices that can differ from their net asset value (NAV), but they are designed to closely track their NAV, not to be purchased at significant discounts or premiums to book value, unlike closed-end funds which can trade at substantial discounts or premiums to their NAV.

Question 19

A real estate investment trust (REIT)is a type of closed-end investment company.

Accepted Answer

A REIT is a type of closed-end investment company that invests in real estate and can be traded on stock exchanges like other types of stocks.

Question 20

A "spider" is an example of a broad market exchange-traded fund.

Accepted Answer

A "spider" refers to SPDR (Standard & Poor's Depositary Receipts), which is an exchange-traded fund (ETF) that tracks the S&P 500 index, making it an example of a broad market ETF.

Quiz 12: Mutual Fundsother Pooling Arrangements: Simplifying, Maybe Improving Investment Performance