Deck 5: Financial Services: Mutual Funds and Hedge Funds

Question 1

Although exchange traded funds (ETFs) can be traded throughout the day, they cannot be purchased on margin or sold short.

Answer 1

False

Question 2

Mutual funds are financial intermediaries that invest in diversified portfolios of assets.

Answer 2

True

Question 3

One of the goals of mutual funds is to achieve superior diversification through fund and risk pooling compared to what individual investors can achieve.

Answer 3

True

Question 4

Mutual funds achieve economies of scale for individual investors by realizing the benefits of lower transaction costs and commissions as compared to those incurred by individual investors.

Question 5

Most exchange traded funds (ETFs) are long-term mutual funds designed to replicate a particular market index.

Question 6

A mutual fund objective statement provides general information about the types of securities a mutual fund will hold as assets.

Question 7

When an investor purchases shares in an exchange traded fund (ETF), he or she is interacting directly with the fund.

Question 8

Mutual funds that are load funds use sales agents, and thus always have an up-front commission charge.

Question 9

Equity mutual funds may contain common stock, but not preferred stock.

Question 10

In 1998, the SEC required that portions of mutual fund prospectuses must be written in easily understood "plain" English.

Question 11

Long-term mutual funds invest primarily in long-term, fixed-income securities such as corporate and/or government bonds.

Question 12

Open-end mutual funds are the major type of mutual funds.

Question 13

The net asset value of a mutual fund is determined four times each business day.

Question 14

The return from investing in mutual funds can include dividends, gains from the sale of the mutual fund assets, and gains from the sale of the mutual fund shares.

Question 15

A change from commercial bank deposits to money market mutual funds typically allows an investor to benefit from higher yields, but with the cost of losing deposit insurance coverage.

Question 16

Short-term mutual funds invest solely in tax-exempt securities.

Question 17

The SEC requires that prospectuses or advertisements regarding a mutual fund contain information that returns of the mutual fund carry some risk.

Question 18

The proportionate mix of total assets invested in long-term versus short-term mutual funds has varied over the last twenty years.

Question 19

As of 2015, Commercial banks are not allowed to own or invest in mutual funds.

Question 20

Most individuals who invest in mutual funds for the first time realize that mutual fund investments carry some risk.

Question 21

As of 2015, the total investment in long-term mutual funds is less than the total investment in money market mutual funds.

Question 22

Class B shares of a mutual fund are typically charged a back-end load when the shares are redeemed.

Question 23

Mutual fund supermarkets often allow investors to purchase funds within large number of fund companies with no transaction fees.

Question 24

Fees of load funds that are used to cover the costs of trading in securities are called 12b-1 fees.

Question 25

Historical evidence indicates that load funds perform better than no-load funds.

Question 26

The Securities Act of 1933 sets rules and procedures regarding a mutual fund's prospectus sent to potential investors.

Question 27

The Securities Exchange Act of 1934 requires a mutual fund to file a registration statement with the SEC.

Question 28

Historical evidence indicates that the benefits of greater management attention in load funds do not outweigh the disadvantages of the load fee.

Question 29

Mutual fund share distributions and transactions are supervised and cleared by the National Mutual Fund Association (NMFA).

Question 30

Exchange traded funds (ETFs) are registered as investment companies with the Securities Exchange Commission (SEC).

Question 31

Prior to 2010, all hedge funds were required to register with the SEC.

Question 32

The Investment Advisors Act of 1940 sets out rules to prevent conflicts of interest, fraud, and excessive fees or charges for mutual fund shares.

Question 33

As of 2015, hedge fund managers with assets more than $100 million are required to register with the SEC.

Question 34

All classes of mutual fund shares may legally charge an annual 12b-1 fee.

Question 35

The front-end or back-end loads charged by some mutual funds often are combined with 12b-1 fees.

Question 36

The National Securities Markets Improvement Act of 1996 exempts mutual funds from oversight by state securities regulators and reduced their regulatory burden.

Question 37

The Securities Act of 1933 requires that a mutual fund furnish full and accurate information on all financial and corporate matters to prospective fund purchasers.

Question 38

Class C shares of a mutual fund usually convert to Class A shares after some length of time which may be as long as 6 to 8 years.

Question 39

Mutual funds often offer multiple share classes which differentiate between different methods of paying the sales loads and management fees.

Question 40

Since 2002, the amount of assets invested in load funds have exceeded those invested in no-load funds.

Question 41

Worldwide investments in mutual funds have grown at a rate faster than in the United States over the last decade.

Question 42

Retirement funds under management of mutual funds are approximately what percentage of total mutual fund assets?

A)One-tenth
B)One-quarter
C)One-half
D)Three-quarters
E)Zero.

Question 43

The number of funds and assets size of the mutual fund industry have grown dramatically since 1970 because of the introduction of

A)money market mutual funds in 1972.
B)tax-exempt money market mutual funds in 1979.
C)special-purpose equity, bond, and derivative funds.
D)401-k retirement plans sponsored by employers.
E)All of the options.

Question 44

Market neutral-arbitrage funds attempt to hedge market risk by taking offsetting positions, often in different securities of the same issuer.

Question 45

U.S.mutual fund companies have made significant progress in entering Japan and Europe.

Question 46

During the most recent financial crisis, almost 75 percent of hedge funds experienced losses.

Question 47

Hedge funds offer a high degree of privacy for their investors.

Question 48

Mutual funds are required to hire chief compliance officers whose job is to monitor whether the mutual fund company follows exchange and regulatory rules.

Question 49

The first mutual fund was founded in this city in 1924.

A)New York, New York
B)San Francisco, California
C)Boston, Massachusetts
D)London, England
E)Paris, France

Question 50

The rate of investing in mutual funds tends to be positively correlated with economic activity in the U.S., but is negatively correlated with economic activity in other countries.

Question 51

Hedge funds are forbidden to sell a security short or to engage in arbitrage trading.

Question 52

Directed brokerage is a trading abuse where a mutual fund and a brokerage agree to promote sales of certain funds in exchange for orders of specific stocks and bonds.

Question 53

The SEC now requires mutual fund portfolio managers to report their personal trading in individual stocks, but not in the portfolios they manage.

Question 54

The chief compliance officer of a mutual fund reports directly to the senior executives of the fund management company.

Question 55

As a result of trading and fee assignment abuses by the mutual fund industry, the SEC established new rules regarding fund governance and conflicts of interest in 2004 and 2005.

Question 56

Most hedge funds are generalized and rely on hedge fund managers to assign general risk categories such as risky, more risky, and most risky.

Question 57

The SEC proposed a comprehensive package of rule reforms designed to enhance effective liquidity risk management by open-end funds, including mutual funds and exchange-traded funds (ETFs).

Question 58

The SEC requires mutual funds to disclose the risk to investors of frequent trading in fund shares.

Question 59

Most hedge funds rely on the specific expertise of the fund manager.

Question 60

Which of the following statements is not true of passive mutual funds and passive ETFs?

A)use rules-based investing to track and index, typically by holding all of its constituent assets or an automatically selected representative sample of those assets.
B)As of December 2017, passive funds accounted for 35% of combined U.S.mutual fund and ETF assets under management AUM.
C)In the last five decades there has been a significant shift from passive toward more active investment strategies.
D)passive funds have relatively lower costs associated with them.
E)Due to greater regulatory focus on the fees of investment products have encouraged the financial industry to offer more low-cost passive products.

Question 61

A mutual fund has the following share characteristics: Shares are offered at the NAV with no front-end load, a 12b-1 fee of 1 percent is charged, a back-end load of 1 percent is charged only if the shares are sold by the investor within one year of purchase, and the shares do not convert to any other class of shares.These shares would be classified as

A)Class A shares.
B)Class B shares.
C)Class C shares.
D)Class D shares.
E)either Class A or Class C shares.

Question 62

Fees investors are charged to cover administration and shareholder services are called

A)12b-1 fees.
B)management fees.
C)sales loads.
D)preemptive taxes.
E)transaction fees.

Question 63

Closed-end investment companies

A)have a variable number of shares based on demand.
B)can trade at a price that is greater than, equal to, or less than the NAV.
C)will trade at a different price as the number of shares of the fund changes.
D)issues shares that cannot be sold; hence the term "closed."
E).will repurchase shares when investors want to sell.

Question 64

12b-1 fees

A)are determined as a small percentage of the fund's investable assets.
B)are annual fees to cover distribution and marketing costs of the fund.
C)have been approved by the SEC.
D)are capped at a maximum 0.25 percent for no-load funds.
E)All of the options.

Question 65

In 2015 there were approximately _______ exchange traded funds (ETFs) in existence with combined assets valued at _______.

A)510; $1.20 trillion
B)1,550; 2.0 trillion
C)860; $294 billion
D)1,220; $960 billion
E)1,970; $1.64 trillion

Question 66

The long-term mutual fund sector includes

A)money market mutual funds.
B)equity funds.
C)bond funds.
D)equity funds and bond funds.
E)All of the options.

Question 67

Regarding the relative asset size and asset growth rate of mutual fund sectors between 1980 and 2015,

A)long-term funds had more assets at the end of 2015, but short-term funds had grown at a faster rate since 1980.
B)long-term funds had more assets at the end of 2015, and long-term funds had grown at a faster rate since 1980.
C)short-term funds had more assets at the end of 2015, but long-term funds had grown at a faster rate since 1980.
D)short-term funds had more assets at the end of 2015, and short-term funds had grown at a faster rate since 1980.
E)More than one of the above is correct.

Question 68

Mutual fund shares that are offered for sale at the NAV without a front-end load, but which charge a combination of 12b-1 fees and a back-end load, and whose back-end load typically remains in effect for 6 to 8 years, are

A)Class A shares.
B)Class B shares.
C)Class C shares.
D)Class D shares.
E)either Class A or Class C shares.

Question 69

Benefits of investing in an exchange traded fund (ETFI) rather than an open-ended, no-load index mutual fund include all of the following EXCEPT.

A)ability to buy or sell anytime during the trading day
B)lower management fees
C)ability to purchase on margin
D)income tax-exempt status for capital gains
E)ability to sell short

Question 70

An open-ended fund has stocks of three companies: 200 shares of IBM currently valued at $50.00, 100 shares of GE currently values at $20 and 100 shares of Digital currently valued at $30.The fund has 500 shares outstanding.What is the net asset value (NAV) of the fund?

A)$30.00.
B)$60.00.
C)$120.00.
D)$12.00.
E)$37.50.

Question 71

Open-end mutual funds

A)require that NAV consider the amount of discount or premium in the share value.
B)calculate the NAV several time each day based on the total value of assets held divided by the number of fund shares outstanding.
C)may experience fluctuations in the number of shares outstanding on a daily basis.
D)issues shares that can be traded among investors without involving the fund itself.
E)None of the options is correct.

Question 72

Open-end mutual funds guarantee

A)investors a minimum rate of return.
B)investors a minimum Net Asset Value (NAV).
C)to redeem investors' shares upon demand at the daily Net Asset Value (NAV).
D)to earn the rate of return promised in the prospectus.
E)that there will be no load charges.

Question 73

The short-term mutual fund sector includes

A)money market mutual funds.
B)hybrid funds.
C)equity funds.
D)bond funds.
E)tax-exempt municipal bond funds.

Question 74

The debate and research regarding the advantages of load funds versus no-load funds has revealed that

A)the proportion of total assets invested in load funds has decreased over the last 20 years and became less than the assets in no-load funds in 2002.
B)the cost of the load may not be worth the attention and advice given to investors.
C)most mutual fund companies offer the majority of their funds as no-load funds.
D)a load fee should be annualized over the holding period of the fund shares.
E)All of the options.

Question 75

The returns obtained by investors of mutual funds include the following except

A)interest income earned on assets.
B)dividend income earned on assets.
C)capital gains on assets sold by the fund.
D)capital appreciation in the underlying value of the assets held in the portfolio.
E)refunds of load charges and management fees.

Question 76

A mutual fund that charges investors a fee similar to a commission charge is called a

A)12b-1 fee.
B)no-load fund.
C)load fund.
D)long-term fund.
E)short-term fund.

Question 77

Which of the following is one of the characteristics of household mutual fund owners as of 2015?

A)The typical fund-owning household has $103,000 invested.
B)49 percent of the families are headed by someone without a college degree.
C)The median age of mutual fund holders is 51.
D)80 percent have funds invested through an employer-sponsored retirement fund.
E)All of the options.

Question 78

An investor invests $100,000 in a mutual fund that has a 5 percent front-end load, charges a management fee of 0.5 percent, and a 12b-1 fee of 0.25 percent.The investor plans to leave the investment for one year.What is the dollar amount of the total shareholder cost?

A)$5,000.
B)$5,500.
C)$5,750.
D)$750.
E)$500.

Question 79

Approximately what percentage of retirement plan investments are held by institutional funds?

A)20 percent
B)40 percent
C)6.0 percent
D)80 percent
E)Zero percent

Question 80

As compared to purchasing an individual stock, a no-load mutual fund investor will usually get

A)commission less reinvestment opportunities.
B)better diversification.
C)no-cost switching between funds within the same fund family.
D)lower commission costs.
E)All of the options