Question 1

Which of the following is an approach to asset management?

Accepted Answer

Management and advisory firms specialize in providing asset management services to individuals and institutions. They help their clients to create and manage investment portfolios by providing investment advice, evaluating risks and returns, and monitoring market trends. Investment banks, stock brokerage firms, and chartered banks may also offer asset management services, but their primary focus is on capital raising, trading, and other financial activities. Strategic management is a broader discipline that encompasses a range of activities, including asset management, but it does not refer specifically to the practice of managing assets for investment purposes.

Question 2

The main difference between a closed-end fund and an open-end fund is

Accepted Answer

The main difference between a closed-end fund and an open-end fund is the way each is traded after the initial public offering. Closed-end funds trade like stocks, with their prices determined by supply and demand in the market, while open-end funds are bought and sold at their net asset value, which is determined at the end of each trading day.

Question 3

The primary purpose of government regulations and voluntary standards in the professional asset management industry is to ensure that managers deal with all investors fairly and equitably and that information about investment performance is accurately reported.

Accepted Answer

The primary purpose of government regulations and voluntary standards in the professional asset management industry is indeed to ensure fair and equitable dealing with all investors and accurate reporting of investment performance.

Question 4

Hedge funds have no limitations on when and how often capital can be contributed or removed from the partnership.

Accepted Answer

Hedge funds typically have specific guidelines on when and how capital can be contributed or withdrawn, often including lock-up periods, notice periods, and restrictions on the frequency of withdrawals to ensure stability in the fund's operations.

Question 5

It is quite common for investors to form a "portfolio" of managers with different capabilities.

Accepted Answer

Investors often diversify their investments by selecting different fund managers with different expertise and investment strategies to form a portfolio. This helps to reduce risks and increase potential returns.

Question 6

Fund of funds gives investors access to hedge fund managers who may otherwise be unavailable to them.

Accepted Answer

Fund of funds invests in a portfolio of multiple hedge funds, providing investors with exposure to a variety of strategies and managers who may not be accessible otherwise.

Question 7

A common hedge fund strategy known as long-short equity is a type of arbitrage strategy.

Accepted Answer

Long-short equity is not primarily an arbitrage strategy; it involves taking long positions in undervalued stocks and short positions in overvalued stocks, aiming to profit from both, rather than exploiting price differences of the same asset in different markets, which is typical of arbitrage strategies.

Question 8

Open-end mutual funds that charge a sales fee when the fund is initially offered to the investor are known as

Accepted Answer

Load funds charge a sales fee when the fund is initially offered to an investor. This fee is typically a percentage of the total investment amount and can range from 1% to 5.75%. The fee goes towards compensating the financial advisor or broker who sold the fund to the investor.

Question 9

A function your portfolio manager may perform for you is to maintain the diversification of your portfolio within your desired risk class.

Accepted Answer

Portfolio managers are responsible for maintaining the diversification of their clients' portfolios within their desired risk class to ensure that their investments are spread across different asset classes and sectors to minimize risk and maximize returns.

Question 10

Hedge funds are far less liquid than mutual fund shares.

Accepted Answer

Hedge funds typically have restrictions on how often investors can withdraw their money, while mutual fund shares can be bought or sold on a daily basis. This makes hedge funds less liquid than mutual funds.

Question 11

An investment company is

Accepted Answer

An investment company is a corporation that has its major assets in a portfolio of securities. It invests money on behalf of its shareholders who, in turn, share in the profits and losses. Investment companies may offer a variety of investment options, including mutual funds, closed-end funds, and exchange-traded funds. They typically hire investment professionals to manage the fund's assets and handle the administrative functions.

Question 12

An investor should be cautious when selecting a fund based solely on the manager's past performance because past performance may not be repeated in the future.

Accepted Answer

Past performance is not a guarantee of future success and there are many factors that can affect a manager's performance. Therefore, it is important to consider other factors such as the fund's investment strategy, fees, and track record before making an investment decision.

Question 13

In the case of private management firms,

Accepted Answer

Private management firms, also known as asset management firms, typically offer separate accounts that are tailored to the specific needs of each investor. This allows for a more customized investment approach and greater flexibility in managing the portfolio. The investors deal directly with an asset manager who oversees their individual account.

Question 14

An investment management company is

Accepted Answer

An investment management company is a corporation that handles the administrative functions for a fund.

Question 15

In the case of investment companies,

Accepted Answer

Investment companies, such as mutual funds, pool money from many investors to buy securities. Investors in these companies deal with the fund company directly and own shares in the fund rather than having individual, tailored accounts.

Question 16

Agency conflicts always exist in the investment management business because the entire industry is based on handling someone else's money.

Accepted Answer

Agency conflicts arise when a person (the principal) hires someone else (the agent) to act on their behalf, but the agent prioritizes their own interests over the principal's. In the investment management business, the investment manager (agent) handles someone else's money (principal), and may prioritize their own interests (maximizing their own fees or incentives) over the client's best interest. Therefore, agency conflicts are inherent to the investment management industry.

Question 17

The returns received by the average individual investor on funds managed by investment companies will probably be superior to the average results for a specific U.S. or international market.

Accepted Answer

According to numerous studies, the average individual investor tends to achieve lower returns than the overall market due to emotions such as fear, greed or panic leading to buying high and selling low, among other factors. Therefore, the returns received by the average individual investor are likely to be inferior to the average results for a specific market.

Question 18

An open-end investment company is commonly referred to as a(n)

Accepted Answer

An open-end investment company is commonly referred to as a mutual fund, which allows investors to buy and sell shares at the current net asset value (NAV) of the fund. Other options listed (balanced fund, money market fund, unit trust) are specific types of mutual funds, but not synonymous with open-end investment companies. "Accessible fund" is not a commonly used term in the investment industry.

Question 19

Convertible arbitrage hedge funds profit from disparities in the relationship between prices for convertible bonds and fixed-income bonds.

Accepted Answer

Convertible arbitrage hedge funds primarily profit from the price discrepancies between convertible securities (like convertible bonds) and the underlying stocks into which they can be converted, not fixed-income bonds.

Question 20

The closed-end fund index is

Accepted Answer

The answer of The closed-end fund index is
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Quiz 17: Professional Money Management, Alternative Assets, and Industry Ethics