Deck 12: Mutual Funds and Exchange-Traded Funds

Question 1

Over the last 42 years, the S&P 500 Index has outperformed

A) 25% of all non-index funds.
B) 50% of all non-index funds.
C) 75% of all non-index funds.
D) 90% of all non-index funds.

Answer 1

D

Question 2

Closed-end funds are illiquid because no withdrawals are permitted.

Answer 2

False

Question 3

Advantages of index funds include which of the following?
I) Low management fees.
II) They outperform most actively managed funds.
III) They have a balanced mix of stocks and bonds.
IV) Securities in the portfolio are selected by professional analysts.

A) I and IV only
B) I and II only
C) I, III, and IV only
D) I, II, III and IV

Answer 3

B

Question 4

Mutual fund investors delegate all of the following decisions to the fund's managers EXCEPT

A) which companies and industries to invest in.
B) when to buy and sell individual stocks.
C) how many securities to hold in the portfolio.
D) how to allocate investments among different classes of assets such as stocks, bonds, cash and real estate.

Question 5

Which of the following are advantages offered by mutual funds?
I. professional portfolio management
II. dividend reinvestment
III. consistent returns in excess of the overall market rate of return
IV. modest capital outlay for investors

A) I and II only
B) I and IV only
C) II, III and IV only
D) I, II and IV only

Question 6

Actively managed mutual funds mostly outperform those that merely track an index.

Question 7

Investors purchase shares in an open end mutual fund directly from the fund.

Question 8

The purchase price of a closed-end mutual fund is equivalent to the net asset value of the fund.

Question 9

Index fund investors should purchase at least two funds with the same objective to assure proper diversification.

Question 10

The mutual fund, and not the investor, is responsible for all income taxes on capital gains and dividends earned by the fund.

Question 11

Survivorship bias creates the illusion of superior performance

A) by mere random selection.
B) because unsuccessful funds within the same group are closed out or merged with successful funds.
C) because they choose inappropriate benchmarks.
D) because returns on calculated using only the best years.

Question 12

What are some of the advantages of investing through mutual funds? Name at least three.

Question 13

When an investor buys shares in a mutual fund, he or she becomes a part owner of a portfolio of securities.

Question 14

Nearly all mutual funds operate as regulated investment companies. This means that

A) they are no-load funds.
B) portfolio decisions are mandated by government authorities.
C) they do not pay taxes on their income.
D) their investments are guaranteed by the FDIC.

Question 15

Mutual funds are available that invest in stocks only, bonds only and various combinations of equities and fixed income securities.

Question 16

Which one of the following statements concerning mutual funds is correct?

A) The selection of individual securities remains with the mutual fund investor.
B) Mutual funds were first created in the 1980s.
C) The mutual fund industry is the largest financial intermediary in the United States.
D) Mutual funds are generally highly concentrated portfolios.

Question 17

Compared to stocks, mutual funds offer investors a relatively limited range of choices.

Question 18

One drawback of investing in mutual funds is the

A) annual management fee.
B) lack of liquidity of fund shares.
C) amount required for the initial investment.
D) lack of information on the performance of the fund.

Question 19

Which of the following statements best describes the legal organization of mutual funds?

A) Funds are organized as a single entity that handles all functions such as custody and investment decisions.
B) Funds split their basic functions such as record keeping and investment decisions among two or more companies.
C) Funds are owned by the company that manages them.
D) A distributor keeps track of investment and redemption requests from shareholders and maintains other shareholder records.

Question 20

Mutual funds provide an affordable way to diversify a portfolio.

Question 21

The number of shares available in an exchange-traded fund (ETF) can be increased or decreased according to demand for the shares.

Question 22

Which of the following characteristics apply to exchange-traded funds (ETFs)?
I) Unlimited number of outstanding shares.
II) Typically track the performance of some index.
III) Market prices reflect demand for the fund rather than NAV.
IV) Shares are purchased from and redeemed by the investment company managing the fund.

A) I and II only
B) II and III only
C) I, II and III only
D) I, II and IV only

Question 23

Trading in closed-end investment companies takes place between investors in the open market.

Question 24

A type of fund that invests in real estate and/or mortgages is known as a

A) REIT.
B) ETF.
C) sector fund.
D) hedge fund.

Question 25

Two mutual funds are quoted as follows. Given these quotes, which one of the following is true?

A) Both funds are load funds.
B) Fund A is a no-load fund.
C) Fund B is a no-load fund.
D) Both funds are no-load funds.

Question 26

Open end mutual funds may charge which of the following fees?
I) A front-end load at the time of purchase.
II) A back-end load when shares are sold.
III) Annual fees based on marketing and distribution costs.
IV) Annual performance fees up to 20% of increases in net asset value.

A) I, II and IV only
B) I, II, and III only
C) I, III and IV only
D) I, II, III and IV

Question 27

A closed end fund is selling at a premium when the NAV exceeds the market price.

Question 28

Like closed-end funds, ETFs can sell at a premium or discount to their net asset values.

Question 29

Back-end loads

A) are charged when an investor buys their mutual fund shares.
B) are charged if an investor sells his or her shares within the first few years.
C) were designed to help no-load funds cover their marketing expenses.
D) encourage short-term trading.

Question 30

Hedge funds are a type pf mutual fund for wealthy investors and therefore subject to most of the same regulations and disclosure requirements as other mutual funds.

Question 31

Like ordinary stocks, exchange -traded funds (ETFs) can be sold short.

Question 32

The commission charged when shares of an open-end mutual fund are purchased is called a

A) management fee.
B) back-end load.
C) front-end load.
D) 12(b)-1 fee.

Question 33

Which of the following characteristics apply to closed-end mutual funds?
I) Unlimited number of outstanding shares.
II) Transactions are between shareholders.
III) Market prices may be higher or lower than NAV.
IV) Fund will repurchase shares at any time.

A) I and IV only
B) II and III only
C) I, II and III only
D) II, III and IV only

Question 34

A closed-end fund with an NAV of $10.25 and a market price of $8.20 is selling at a discount of 20%.

Question 35

Advantages that ETFs have over funds that track the same index include
I) Trades are executed promptly at the current NAV.
II) The portfolio is carefully curated by a professional manager.
III) Commissions on trades may be lower than management fees.
IV) They can be sold and converted to cash more quickly than mutual fund shares.

A) I and III only
B) I, III and IV only
C) II, III and IV
D) I, II, III and IV

Question 36

The net asset value of a mutual fund increased from $12.03 to $13.53, but its price per share increased by only $1.26. This information indicates that the fund

A) paid out $1 in capital gains.
B) paid out $1 in dividends.
C) is a closed-end fund.
D) is an open-end fund.

Question 37

An open-end investment company

A) is involved in all trades of its shares.
B) sells shares at a discounted NAV price.
C) trades like a stock on the exchanges.
D) has a set number of shares.

Question 38

The net asset value is the price per share an investor will pay to acquire shares in a no-load, open-end fund.

Question 39

Mutual fund fees are disclosed in the fund prospectus.

Question 40

Hedge funds are subject to the same regulations and disclosure requirements as mutual funds.

Question 41

Soon after the Great Recession of 2008-2009, demand for fixed income funds decreased while demand for equity funds increased.

Question 42

Value funds seek stocks
I) with low dividend yields.
II) with high dividend yields.
III) with low P/E ratios.
IV) of newly discovered firms.

A) I and III only
B) II and III only
C) II, III and IV only
D) I, II, III and IV

Question 43

Explain why closed-end funds can sell at prices other than the fund's NAV.

Question 44

Hedge funds often employ investing strategies such as
I) short selling.
II) margin trading.
III) option trading.
IV) hedging.

A) I and III only
B) II and III only
C) I, II and IV only
D) I, II, III and IV

Question 45

Funds that invest in real estate and mortgages are known as

A) hedge funds.
B) capital appreciation funds.
C) REITs.
D) limited partnerships.

Question 46

Risk-seeking investors seeking maximum capital appreciation with little, if any current income, should invest in

A) value funds.
B) growth funds.
C) aggressive growth funds.
D) equity-income funds.

Question 47

Mutual funds can carry a number of different types of sales charges and fees. Briefly explain the following such expenses.
(a) a front-end load
(b) a back-end load
(c) a 12(b)-1 fee

Question 48

Performance fees based on profits earned by the fund are typical of

A) hedge funds.
B) exchange-traded funds.
C) closed-end investment companies.
D) open end mutual funds.

Question 49

Use this information to answer the following questions.
(a) Which fund does NOT charge a front-end load?
(b) Which fund can best be described as a low-load fund?
(c) What can you say about Fund B with respect to the type of investments it most likely holds?
(d) If you want to buy a fund and hold it for five years, which one of these funds should you purchase based on fund costs? Assume the funds earn a positive rate of return each year.

Question 50

Investors in hedge funds have the legal status of

A) shareholders.
B) limited partners.
C) general partners.
D) trustees.

Question 51

The primary objective of growth mutual funds is capital appreciation with a high level of current income.

Question 52

Which type of mutual fund consists of both stocks and bonds with a combined objective of current income and long-term capital gains?

A) equity-income
B) balanced
C) value
D) bond

Question 53

The portfolio of a growth and income fund is likely to contain

A) an equal mix of stocks and fixed income securities.
B) a high percentage of stocks in established companies and a small amount of fixed income securities.
C) stocks of recently listed companies with rapid growth in revenues.
D) a high percentage of preferred stocks and bonds selling at a discount.

Question 54

Socially responsible funds only hold stocks of companies that meet the fund's ethical guidelines.

Question 55

Which of the following statements is(are) correct concerning hedge funds?
I) They are highly regulated.
II) They hedge all positions to limit risks.
III) Management and other fees are extremely low compared to other types of funds.
IV) Access is limited to institutions and high net worth or high income individuals.

A) I, II and III only
B) II and IV only
C) IV only
D) I, II, III and, IV

Question 56

Index funds merely attempt to match the performance of some benchmark, not to outperform it.

Question 57

Which type of fund is always passively managed?

A) a closed-end fund
B) a growth fund
C) a value fund
D) an index fund

Question 58

In spite of lower fees, index funds underperform actively managed funds in most years.

Question 59

An aggressive growth mutual fund is least likely to purchase a stock

A) with a high P/E ratio.
B) with a high anticipated rate of growth.
C) of an unseasoned firm.
D) with a high dividend yield.

Question 60

What are the primary disadvantages of owning mutual fund shares?

Question 61

Automatic investment plans makes it easier for investors to save money.

Question 62

Capital gains and dividends earned within mutual funds are taxed at the same rate as ordinary income.

Question 63

One characteristic of most index funds is that such funds typically

A) produce a large dollar amount of realized capital gains every year.
B) have a very low-cost structure with respect to management fees and transaction fees.
C) charge high front-end loads.
D) are designed to "beat the market."

Question 64

Socially responsible funds are distinguished from other mutual funds because they

A) invest only in over-the-counter stocks.
B) do not charge any sales commission or management fees.
C) invest only in companies that meet specified moral, ethical, or environmental standards.
D) will sell their shares only to investors who sign a statement saying they do not smoke tobacco or use alcohol.

Question 65

Madison believes that the leisure industry (resorts, travel, restaurants, etc.) is about to experience extraordinary growth because baby boomers are entering their retirement years. She should invest in

A) an asset allocation fund.
B) a fixed income fund.
C) a sector fund.
D) an aggressive growth fund.

Question 66

Donna B., a highly paid executive in her 40's, has invested 20% of her 401-K in an intermediate bond fund and 60% in an S&P 500 index fund. She would like to invest the remaining 20% so as to maximize diversification while accepting some risk in pursuit of large gains. A good choice might be

A) a technology sector fund.
B) a global fund.
C) an emerging markets fund.
D) a DJIA index fund.

Question 67

An investor primarily interested in storing funds with no risk might choose a

A) a municipal bond fund.
B) an index fund.
C) a short-term Government securities fund.
D) a hedge fund.

Question 68

The conversion privilege allows investors to switch from one fund to another without fees if and only if the funds are managed by the same company such as Fidelity or Vanguard.

Question 69

B) invest in bonds with durations that match the target date.
C) liquidate their assets and distribute the proceeds when the target date is reached.
D) guarantee a minimum net asset value once the target date is reached. Answer: A
Learning Outcome: F-01 Describe the different financial markets and the role of the financial managers
AACSB: Application of knowledge Question Status: Previous Edition Learning Goal: Learning Goal 3
Every mutual fund has a stated investment objective. Disclosure of the investment objective is required by the SEC, and is used to classify a mutual fund into one of several categories. Briefly explain the investment objective of each of the following categories.
(a) growth funds
(b) aggressive growth funds
(c) equity-income funds
(d) balanced funds

Question 70

Dividends and capital gains earned by mutual fund investors are taxed when the shares are redeemed.

Question 71

One characteristic of bond funds is the

A) requirement of a minimum initial investment of $5,000 or more.
B) high anticipated short-term growth potential.
C) fluctuation in value in response to changing interest rates.
D) extremely aggressive trading approach.

Question 72

To participate in an automatic investment plan, investors must allow the investment company to have access to a bank account or their paycheck.

Question 73

A fund that is designed to match the performance of a measure such as the S & P 500 or the Russell 2000 is called a(n)

A) index fund.
B) targeted fund.
C) sector fund.
D) block fund.

Question 74

One type of mutual fund spreads investors' money across equity markets, bond markets, and money markets. Moreover, as market conditions change, the amount of money invested in each market sector will change. This type of mutual fund is known as a(n)

A) socially responsible fund.
B) fiscally responsible fund.
C) growth-and-income fund.
D) asset allocation fund.

Question 75

Funds that invest in a portfolio of companies from the same or closely related industries are known as

A) aggressive growth funds.
B) sector funds.
C) emerging market funds.
D) asset allocation funds.

Question 76

Total assets invested in fixed income funds declined in the period 2008-2018 largely because of

A) a high percentage of defaults in fixed incomes securities.
B) a shortage of newly issued, high quality bonds.
C) new regulations imposed after the financial crisis of 2007-2008.
D) persistently low interest rates.

Question 77

Compared to yields on general purpose money funds, the yields on tax-exempt money funds are

A) about the same.
B) 5 to 10 percent higher.
C) 5 to 10 percent lower.
D) 20 to 30 percent lower.

Question 78

Investors who seek double (federal and state) tax-free income should invest in bond funds.

A) convertible
B) indexed
C) mortgage-backed
D) single-state municipal

Question 79

Systematic withdrawal plans from mutual funds usually require a minimum investment of at least $100,000.

Question 80

Which of the following are advantages of international funds?
I) greater diversification
II) potentially higher returns
III) income is taxed at a lower rate
IV) ease of investing compared to buying individual foreign securities

A) I and III only
B) I, III and IV only
C) I, II and IV only
D) II, III and IV only