Deck 3: Indirect Investing

Question 1

Which of the following generally do not trade on stock exchanges?

A)Unit investment trusts
B)Closed-end investment companies
C)Open-end investment companies
D)Exchange traded funds

Answer 1

C

Question 2

Which of the following is true regarding value funds and growth funds?

A)Value funds seek stocks that are cheap by fundamental standards while growth funds seek stocks with high current earnings.
B)Growth funds typically outperform value funds.
C)Value funds and growth funds tend to perform well at different times.
D)Value funds typically have higher P/E ratios than growth funds.

Answer 2

C

Question 3

Which of the following is not a characteristic of investments companies?

A)Pooled investing
B)Diversification
C)Managed portfolios
D)Reduced expenses

Answer 3

D

Question 4

A group of mutual funds with a common management are known as:

A)fund syndicates.
B)fund conglomerates.
C)fund families.
D)fund complexes.

Question 5

A major difference between a closed-end investment company and an open-end investment company is that:

A)closed-end investment companies are generally much riskier.
B)their security portfolios are substantially different.
C)closed-end investment companies are passive investments and open-ends are not.
D)the capitalization of closed-end companies is more fixed.

Question 6

Index funds provide low-cost,passive investment exposure in a similar fashion to:

A)hybrid mutual funds.
B)money market mutual funds.
C)exchange-traded funds.
D)equity income funds.

Question 7

Which of the following statements concerning the trend in investment company growth is true?

A)The recent trend shows more growth in closed-end investment companies.
B)The recent trend shows more growth in unit investment trusts.
C)The recent trend shows more growth in open-end investment companies.
D)The recent trend shows more growth in exchange traded funds.

Question 8

The most popular type of investment company is a:

A)unit investment trust.
B)mutual fund.
C)closed-end investment company.
D)real estate investment trust.

Question 9

It is not important to have a secondary market for mutual funds because:

A)investors hold the securities until maturity.
B)investors trade between themselves.
C)investors sell their shares back to the company.
D)banks will convert investor shares to cash for bank customers.

Question 10

Which of the following ETFs (exchange traded funds)provides exposure to 500 U.S.large-capitalization companies?

A)Spider
B)Clubs
C)Cubes
D)Diamonds

Question 11

If a mutual fund holds a substantial amount of Treasury bills,it is probably a:

A)tax-exempt fund.
B)conservative bond fund.
C)bond income fund.
D)money market mutual fund.

Question 12

Which of the following is not true regarding ETFs?

A)They trade on exchanges like individual stocks.
B)They can be bought on margin or sold short.
C)ETFs have been adversely affected by growth in closed-end funds.
D)Assets held in ETFs exceed assets held in mutual funds.

Question 13

Which of the following is not one of the features of exchange traded funds (ETFs)?

A)They are mostly passive portfolios.
B)They cannot be traded during the day.
C)They often track a particular sector of the market.
D)Their price cannot vary from net asset value (NAV).

Question 14

Investment companies must register with the SEC under the provisions of the:

A)Securities Act of 1933.
B)Securities Exchange Act of 1934.
C)Maloney Act of 1938.
D)Investment Company Act of 1940.

Question 15

If NAV > market price of a fund,then the fund:

A)is selling at a discount.
B)is selling at a premium.
C)is an index fund.
D)is an ETF.

Question 16

Which of the following is not true regarding money market funds?

A)They charge no sales charge,redemption fee,or management fee.
B)Their maximum average maturity is 90 days.
C)Normally,there are no capital gains or losses on their shares.
D)They represent a relatively low risk investment.

Question 17

In order to avoid paying income taxes,an investment company must:

A)be classified as a non-profit organization.
B)invest only in municipal bonds.
C)pass on interest,dividends,and capital gains to the stockholders.
D)be registered as a closed-end investment company.

Question 18

Net asset value takes into account:

A)both realized and unrealized capital gains.
B)only realized capital gains.
C)only unrealized capital gains.
D)neither realized or unrealized capital gains.

Question 19

Which of the following is a major objective of unit investment trusts?

A)Capital preservation
B)Capital gains
C)Current income
D)Tax deferment

Question 20

An unmanaged fixed-income security portfolio handled by an independent trustee is known as a:

A)junk bond fund.
B)closed-end investment company.
C)unit investment trust.
D)hedge fund.

Question 21

Which of the following types of mutual fund shares typically do not charge a front-end sales charge but do impose a redemption fee that declines over time?

A)Class A shares
B)Class B shares
C)Class C shares
D)Class D shares

Question 22

Which of the following statements regarding mutual funds is true?

A)Higher-performing funds generally have higher expenses.
B)Stock funds generally have higher expenses than bond funds.
C)Index funds generally have higher expenses than non-index funds.
D)Lower performing funds generally have higher expenses.

Question 23

Which of the following types of funds tend to keep 25% of its assets in the securities of U.S.companies?

A)Emerging markets funds
B)Single-country funds
C)International funds
D)Global funds

Question 24

In the mutual fund industry,the most common performance measure is a hypothetical rate of return that assumes performance is constant over the entire period and is known as the:

A)cumulative total return.
B)average annual total return.
C)total indexed return.
D)compounded geometric return.

Question 25

Which brokerage firm was charged in 2004 with allowing late trading of mutual funds for some of its clients?

A)Merrill Lynch
B)E.F.Hutton
C)Charles Schwab
D)Edward D.Jones

Question 26

To qualify as a regulated investment company,a fund must distribute at least 50 percent of its taxable income to the shareholders.

Question 27

Buying shares of a mutual fund is an example of indirect investing.

Question 28

No-load funds charge no sales fee because:

A)they are legally prohibited from doing so.
B)they charge a redemption fee instead.
C)they have no sales force.
D)they charge a 12b-1 fee instead.

Question 29

A 12b-1 fee is a:

A)redemption fee.
B)sales charge.
C)distribution fee.
D)load fee.

Question 30

Most unit investment trusts are considered active investments.

Question 31

A load fee is a(n):

A)type of income tax.
B)management fee.
C)origination fee.
D)sales charge.

Question 32

On average,which type of mutual fund is expected to have the highest performance?

A)Money market funds
B)Bond funds
C)Equity funds
D)Municipal bond funds

Question 33

ETFs are managed investment portfolios that offer investors targeted diversification.

Question 34

Single-country funds have traditionally:

A)outperformed international funds.
B)underperformed international funds.
C)been open-end.
D)been closed-end.

Question 35

A portfolio of directly-owned individual securities guided by an investment manager is known as a(n):

A)IRA.
B)IMA.
C)SMA.
D)DCA.

Question 36

No-load funds sell:

A)at net asset value.
B)below net asset value.
C)above net asset value.
D)at a discount.

Question 37

Under the Securities Act of 1933,investment companies are required to register with the SEC.

Question 38

Unregulated companies that seek to exploit various market opportunities and require a substantial investment from investors are known as:

A)derivatives.
B)options.
C)hedge funds.
D)MMFs.

Question 39

The 2 largest fund supermarkets are:

A)Merrill Lynch and Charles Schwab.
B)Edward D.Jones and Vanguard.
C)Vanguard and Fidelity.
D)Charles Schwab and Fidelity.

Question 40

Each investor in an investment company shares in the returns of the fund's portfolio and also shares in the cost of running the fund.

Question 41

Under the Morningstar rating system,one class of mutual fund shares can have a different rating than another share class of the same mutual fund.

Question 42

Investment company managers seek to increase assets under management (AUM)since the cost of overseeing additional amounts of money rises less than the revenue rate.

Question 43

Both open-end and closed-end investment company shares may sell at a discount from NAV.

Question 44

Hedge funds typically require a large initial investment and may have restrictions on how quickly investors can withdraw their funds.

Question 45

Approximately 85 percent of money market assets are in non-taxable funds.

Question 46

Load funds generally outperform no-load funds.

Question 47

No-load funds charge a one-time expense fee to cover all operating expenses.

Question 48

What are the main differences between a closed-end and an open-end investment company?

Question 49

Global funds tend to hold a higher percentage of their portfolio in U.S.securities than do international funds.

Question 50

Survivorship bias occurs when mutual funds are merged or liquidated,and only the performance of the surviving funds is reported.

Question 51

You would expect a value fund to buy stock based on a sound earnings record while growth funds might invest in companies with no earnings record at all.

Question 52

Closed-end investment companies typically sell additional shares of their own stock every few years.

Question 53

A 12b-1 fee is used to cover a fund's cost of distribution.

Question 54

The net asset value of a mutual fund does not consider unrealized capital gains.

Question 55

Morningstar ranks mutual funds based on their performance relative to comparable funds.

Question 56

Briefly explain the fees charged by mutual funds.

Question 57

Index funds tend to have lower expenses than other funds because they do not incur the costs of professional portfolio management.

Question 58

For investors,ETFs generally offer greater tax efficiency than most mutual funds.

Question 59

Total return for a mutual fund includes capital gains less any reinvested dividends.

Question 60

Investors desiring no-load funds must generally seek them out since there is no sales force.

Question 61

List the four basic types of mutual funds: _________________________,
__________________,_________________,and ___________________.

Question 62

An investor who buys shares in a closed-end fund for less than the fund's net asset value is said to be buying shares at a _____________________.

Question 63

Three common costs incurred by Class A shares are: ______________________,
________________________,and ________________________.

Question 64

List the four distinct types of investment companies: ____________________,_____________________,_____________________,and _____________________.

Question 65

How is the individual investor's income tax position affected by owning investment company shares compared to owning securities directly?

Question 66

Does one mutual fund provide all the diversification that an investor needs?

Question 67

Would you recommend that a 65-year old retiree invest all of his/her retirement assets in an income fund?

Question 68

Is an investor able to achieve significant diversification by purchasing a single-country fund?

Question 69

An environmentally-friendly balanced mutual fund began the year with a net asset value (NAV)of $12.25 per share.During the year,it received $1.00 of dividend and interest income,$0.25 in realized capital gains,and $0.50 in unrealized capital gains.Ninety percent of the income and all of the realized capital gain were distributed to shareholders.Calculate the year-end NAV.

Question 70

Would one expect to find higher P/E ratios in an aggressive growth fund or in growth and income fund?

Question 71

The ___________________________________ requires most investment companies to register with the Securities and Exchange Commission (SEC),the primary federal agency regulating investment companies.

Question 72

An equity mutual fund began the year with a net asset value (NAV)of $6.50 per share.During the year,it received $0.15 of dividend income,$1.25 in realized capital losses,and $0.50 in unrealized capital gains.Ninety percent of the income was distributed to shareholders.Calculate the fund's year-end NAV.

Question 73

You have a publication listing alternative growth funds with their most recent
12-month total returns.Is this a good predictor of future performance for the funds?

Question 74

You invested $10,000 10 years ago into Fly-By-Night Fund,which has reported performance (average annual total return)of 11.12% over this 10-year period.What would your ending wealth position be?

Question 75

What are some advantages investors seek by buying mutual funds or closed-end investment company shares rather than through purchasing securities directly?

Question 76

What is the difference between the insurance offered by the Securities Investor Protection Corporation (SIPC)and that offered by the Federal Deposit Insurance Corporation (FDIC)?