Deck 20: The Mutual Fund Industry

Question 1

From largest to smallest in terms of total assets,the four classes of mutual funds are

A) equity funds, bond funds, hybrid funds, money market funds.
B) equity funds, money market funds, bond funds, hybrid funds.
C) money market funds, equity funds, hybrid funds, bond funds.
D) bond funds, money market funds, equity funds, hybrid funds.

Answer 1

B

Question 2

Which of the following is a feature of index funds?

A) They have lower fees.
B) They select and hold stocks to match the performance of a stock index.
C) They do not require managers to select stocks and decide when to buy and sell.
D) All of the above.

Answer 2

D

Question 3

A deferred-load mutual fund charges a commission

A) when shares are purchased.
B) when shares are sold.
C) both when shares are purchased and when they are sold.
D) when shares are redeemed.

Answer 3

D

Question 4

Most mutual funds are structured in two ways.The most common structure is a(n)________ fund,from which shares can be redeemed at any time at a price that is tied to the asset value of the fund.A(n)________ fund has a fixed number of nonredeemable shares that are traded in the over-the-counter market.

A) closed-end; open-end
B) open-end; closed-end
C) no-load; closed-end
D) no-load; load
E) load; no-load

Question 5

________ funds are the simplest type of investment funds to manage.

A) Balanced
B) Global equity
C) Growth
D) Index

Question 6

Mutual funds

A) pool the resources of many small investors by selling these investors shares and using the proceeds to buy securities.
B) allow small investors to obtain the benefits of lower transaction costs in purchasing securities.
C) provide small investors a diversified portfolio that reduces risk.
D) do all of the above.
E) do only A and B of the above.

Question 7

Over the past twenty years,mutual fund fees have ________,largely because ________.

A) fallen; SEC fee disclosure rules have led to greater competition
B) risen; investors have learned that funds with high fees provide better performance
C) risen; there has been collusion between large mutual fund companies
D) fallen; advances in information technology have lowered transaction costs

Question 8

The origins of mutual funds can be traced back to the mid to late 1800s in ________.

A) England and Scotland
B) New York City
C) Boston
D) Germany

Question 9

People who take their money out of insured bank deposits to invest in uninsured money market mutual funds have ________ risk because money market funds invest in ________ assets.

A) high; long-term
B) low; short-term
C) high; short-term
D) low; long-term

Question 10

At the beginning of 2013,mutual funds held about ________ of the U.S.stock market was held by mutual funds.

A) 30%
B) 50%
C) 10%
D) 70%

Question 11

The largest share of assets held by money market mutual funds is

A) Treasury bills.
B) certificates of deposit.
C) commercial paper.
D) repurchase agreements.

Question 12

Capital appreciation funds select stocks of ________ and tend to be ________ risky than total return funds.

A) large, established companies that pay dividends regularly; more
B) large, established companies that pay dividends regularly; less
C) companies expected to grow rapidly; more
D) companies expected to grow rapidly; less

Question 13

The majority of mutual fund assets are now owned by

A) individual investors.
B) institutional investors.
C) fiduciaries.
D) business organizations.
E) retirees.

Question 14

Measured by assets,the most popular type of bond fund is the ________ bond fund.

A) state municipal
B) strategic income
C) government
D) high-yield

Question 15

________ enables mutual funds to consistently outperform a randomly selected group of stocks.

A) Managerial expertise
B) Diversification
C) Denomination intermediation
D) None of the above

Question 16

Which of the following is an advantage to investors of an open-end mutual fund?

A) Once all the shares have been sold, the investor does not have to put in more money.
B) The investors can sell their shares in the over-the-counter market with low transaction fees.
C) The fund agrees to redeem shares at any time.
D) The market value of the fund's shares may be higher than the value of the assets held by the fund.

Question 17

Mutual funds offer investors all of the following except

A) greater-than-average returns.
B) diversified portfolios.
C) lower transaction costs.
D) professional investment management.

Question 18

The net asset value of a mutual fund is

A) determined by subtracting the fund's liabilities from its assets and dividing by the number of shares outstanding.
B) determined by calculating the net price of the assets owned by the fund.
C) calculated every 15 minutes and used for transactions occurring during the next 15-minute interval.
D) calculated as the difference between the fund's assets and its liabilities.

Question 19

________ intermediation means that small investors can pool their funds with other investors to purchase high face value securities.

A) Liquidity
B) Financial
C) Denomination
D) Share

Question 20

At the end of 2012 there were over ________ separate mutual funds with total assets over ________.

A) 800; $10 trillion
B) 7,500; $13 trillion
C) 10,000; $10 trillion
D) 1,000; $7 trillion

Question 21

Which of the following is most likely to be a no-load fund?

A) Value funds
B) Hedge funds
C) Growth funds
D) Index funds

Question 22

Conflicts arise in the mutual funds industry because ________ cannot effectively monitor ________.

A) investment advisers; directors
B) directors; shareholders
C) shareholders; investment advisers
D) investment advisers; stocks that will outperform the overall market

Question 23

The near collapse of Long Term Capital Management was caused by

A) the high management fees charged by the fund's two Nobel Prize winners.
B) the fund's high leverage ratio of 20 to 1.
C) a sharp decrease in the spread between corporate bonds and Treasury bonds.
D) a sharp increase in the spread between corporate bonds and Treasury bonds.
E) the fund's shift away from a market-neutral investment strategy.

Question 24

Hedge funds are

A) low risk because they are market-neutral.
B) low risk if they buy Treasury bonds.
C) low risk because they hedge their investments.
D) high risk because they are market-neutral.
E) high risk, even though they may be market-neutral.

Question 25

Mutual fund companies frequently offer a number of separate mutual funds called ________.

A) indexes
B) complexes
C) components
D) actuaries

Question 26

Over ________ of the total daily volume in stocks is due to institutions initiating trades.

A) 70%
B) 50%
C) 25%
D) 90%

Question 27

Which of the following is not a proposal to deal with abuses in the mutual fund industry?

A) Strictly enforce the 4:00 pm net asset value rule.
B) Make redemption fees mandatory.
C) Disclose compensation arrangements for investment advisers.
D) Increase the number of dependent directors.

Question 28

________ bonds combine stocks into one fund.

A) Hybrid
B) Money market
C) Municipal
D) Equity

Question 29

Late trading and market timing

A) allow large, favored investors in a mutual fund to profit at the expense of other investors in the fund.
B) hurt ordinary investors by increasing the number of fund shares and diluting the fund's net asset value.
C) are both A and B of the above.
D) are none of the above.

Question 30

The largest share of total investment in mutual funds is in

A) stock funds.
B) hybrid funds.
C) bond funds.
D) money market funds.

Question 31

When investors switch between funds within the same fund family,mutual funds may charge

A) a contingent deferred sales charge.
B) a redemption fee.
C) an exchange fee.
D) 12b-1 fees.
E) an account maintenance fee.

Question 32

________ means the investors can convert their investment into cash quickly at a low cost.

A) Liquidity intermediation
B) Denomination intermediation
C) Diversification
D) Managerial expertise

Question 33

Government bonds are essentially default risk-free,________ returns.

A) and will yield high
B) and will yield the highest
C) but will have relatively low
D) none of the above

Question 34

The Securities Acts of 1933 and 1934 did not

A) regulate the activities of investment funds.
B) require funds to register with the SEC.
C) include antifraud rules covering the purchase and sale of fund shares.
D) apply to investment funds.

Question 35

The larger the number of shares traded in a stock transaction,the lower the transaction costs per share.

Question 36

At the start of 2014,one share of Berkshire Hathaway's A-shares was trading at over $150,000. ________ in an mutual fund gives a small investor access to these shares.

A) Liquidity intermediation
B) Denomination intermediation
C) Diversification
D) Managerial expertise

Question 37

Late trading is the practice of allowing orders received ________ to trade at the ________ net asset value.

A) before 4:00 pm; 4:00 pm
B) after 4:00 pm; 4:00 pm
C) after 4:00 pm; next day's
D) before 4:00 pm; previous day's

Question 38

All ________ are open-end investment funds that invest only in money market securities.

A) Stock funds
B) Bond funds
C) Money market mutual funds
D) all of the above

Question 39

Market timing

A) takes advantage of time differences between the east and west coasts of the United States.
B) takes advantage of arbitrage opportunities in foreign stocks.
C) takes advantage of the time lag between the receipt and execution of orders.
D) is discouraged by the stiff fees mutual funds charge every investor for buying and then selling shares on the same day.

Question 40

Equity funds can be placed in which class according to the Investment Company Institute?

A) Capital appreciation funds
B) World funds
C) Total return funds
D) All of the above

Question 41

SEC research suggests that about three-fourths of mutual funds let privileged shareholders engage in market timing.

Question 42

Open-end mutual funds are more common than closed-end funds.

Question 43

One factor explaining the rapid growth in mutual funds is that they are financial intermediaries that are not regulated by the federal government.

Question 44

Hedge funds have a minimum investment requirement of between $100,000 and $20 million,with the typical minimum investment being $1 million.

Question 45

Describe the practices of late trading and market timing and explain how these practices harm a mutual fund's shareholders.

Question 46

Mutual funds accounted for $5.3 trillion,or 27%,of the $19.5 trillion U.S.retirement market at the beginning of 2013.

Question 47

The primary purpose of loads is to provide compensation for sales brokers.

Question 48

Several academic research studies show that investors earn higher returns by investing in mutual funds that charge higher fees.

Question 49

How does the governance structure of mutual funds lead to asymmetric information and conflicts of interest?

Question 50

The increase in the number of defined contribution pension funds has slowed the growth of mutual funds.

Question 51

How is a mutual fund's net asset value calculated?

Question 52

What benefits do mutual funds offer investors?

Question 53

Mutual funds are regulated under four federal laws designed to protect investors.

Question 54

The net asset value of a mutual fund is the average market price of the stocks,bonds,and other assets the fund owns.

Question 55

Whether a fund is organized as a closed- or an open-end fund,is will have the same basic organizational structure.

Question 56

A mutual fund's board of directors picks the securities that will be held and makes buy and sell decisions.

Question 57

Money market mutual funds originated when the brokerage firm Merrill Lynch offered its customers an account from which funds could be taken to purchase securities and into which funds could be deposited when securities were sold.

Question 58

A deferred load is a fee charged when shares in a mutual fund are redeemed.

Question 59

How did money market mutual funds originate and why did they become especially popular in the late 1970s and early 1980s?

Question 60

Among the investors in mutual funds,only about 25% cite preparing for retirement as one of their main reasons for holding shares.

Question 61

What are two key differences between a traditional mutual fund and a hedge fund?

Question 62

What is the difference between an open-end and a closed-end mutual fund?

Question 63

What are the five benefits of mutual funds?

Question 64

How is an index fund different from the other four primary investment objective classes for mutual funds?

Question 65

Discuss the four primary classes of mutual funds available to investors.

Question 66

Discuss the proposals that have been made to reduce the conflict of interest abuses in the mutual funds industry.