Deck 22: Mutual Fund: Objectives, Types, NAV, Turnover Ratio, and More

Question 1

Pools of money invested in a portfolio that is fixed for the life of the fund are called

A) closed-end funds.
B) open-end funds.
C) unit investment trusts.
D) REITS.
E) redeemable trust certificates.

Answer 1

C

Question 2

Which one of the following statements regarding open-end mutual funds is false?

A) The funds redeem shares at net asset value.
B) The funds offer investors professional management.
C) The funds offer investors a guaranteed rate of return.
D) b and c.
E) a and b.

Answer 2

C

Question 3

Closed end funds are frequently issued at a ______ to NAV and subsequently trade at a __________ to NAV.

A) discount,discount
B) discount,premium
C) premium,premium
D) premium,discount
E) No consistent relationship has been observed.

Answer 3

D

Question 4

Investors wishing to minimize taxes should look for funds with

A) high turnover.
B) low turnover.
C) high dividend payout.
D) both a and c.
E) both b and c.

Question 5

Which one of the following is not an objective of a stock mutual fund?

A) Maximization of capital gains.
B) Growth.
C) Growth and income.
D) Income and security.
E) None of these.

Question 6

Management fees and other expenses of mutual funds may include

A) front-end loads.
B) back-end loads.
C) other charges.
D) a and b only.
E) a,b and c.

Question 7

Which one of the following statements regarding closed-end mutual funds is false?

A) The funds invest in large volumes of several securities.
B) The funds redeem shares at their net asset value.
C) The funds offer investors professional management.
D) a and b.
E) None of these.

Question 8

A mutual fund had average daily assets of $2.0 billion in 2003.The fund sold $500 million worth of stock and purchased $700 million worth of stock during the year.The funds turnover ratio is

A) 27.5%.
B) 12%.
C) 15%.
D) 25%.
E) 20%.

Question 9

Pinnacle Fund had year-end assets of $825,000,000 and liabilities of $25,000,000.If Pinnacle's NAV was $32.18,how many shares must have been held in the fund?

A) 21,619,346.92
B) 22,930,546.28
C) 24,860,161.59
D) 25,693,645.25
E) 26,124,567.73

Question 10

Professional investment analysts suggest that investors should look for certain characteristics when choosing a mutual fund.These include:

A) market timing
B) consistency of style
C) consistency of performance
D) a,b and c
E) b and c

Question 11

Which of the following statements about real estate limited partnerships (RELP)is false?

A) RELPs invest in real estate or loans secured by real estate.
B) RELPs raise capital by borrowing from banks and issuing mortgages.
C) RELPs are similar to open-end funds,with shares redeemable at NAV.
D) All of these are true.
E) Both a and b are true.

Question 12

Investors in closed-end funds who wish to liquidate their positions must

A) sell their shares through a broker.
B) sell their shares to the issuer at a discount to Net Asset Value.
C) sell their shares to the issuer at a premium to Net Asset Value.
D) sell their shares to the issuer for Net Asset Value.
E) hold their shares to maturity.

Question 13

Which of the following functions do mutual fund companies perform for their investors?

A) Record keeping and administration
B) Diversification and divisibility
C) Professional management
D) Lower transaction costs
E) All of these.

Question 14

Which one of the following statements regarding open-end mutual funds is false?

A) The funds offer investors professional management.
B) The funds do not offer investors a guaranteed rate of return.
C) The funds redeem shares at gross asset value.
D) B and C
E) A and B

Question 15

Multiple Mutual Fund had year-end assets of $457,000,000 and liabilities of $17,000,000.There were 24,300,000 shares in the fund at year end.What was Multiple Mutual's Net Asset Value?

A) $18.11
B) $18.81
C) $69.96
D) $7.00
E) $181.07

Question 16

Diversified Portfolios had year-end assets of $279,000,000 and liabilities of $43,000,000.If Diversified's NAV was $42.13,how many shares must have been held in the fund?

A) 43,000,000
B) 6,488,372
C) 5,601,709
D) 1,182,203
E) None of these.

Question 17

Growth Fund had year-end assets of $862,000,000 and liabilities of $12,000,000.There were 32,675,254 shares in the fund at year-end.What was Growth Fund's Net Asset Value?

A) $28.17
B) $25.24
C) $19.62
D) $26.01
E) $21.56

Question 18

At issue,offering prices of open-end funds will often be

A) less than NAV due to loads and commissions.
B) greater than NAV due to loads and commissions.
C) less than NAV due to limited demand.
D) greater than NAV due to excess demand.
E) less than or greater than NAV with no apparent pattern.

Question 19

Most actively managed mutual funds,when compared to a market index such as the Wilshire 5000,

A) beat the market return in all years.
B) beat the market return in most years.
C) exceed the return on index funds.
D) do not outperform the market
E) None of these is a correct statement.

Question 20

Diversified U.S.stock funds have an average turnover rate of close to

A) 5%
B) 20%
C) 50%
D) 90%
E) more than 100%

Question 21

Hedge funds typically ______ relative mispricing of specific securities and ______ broad market exposure.

A) bet on;bet on
B) hedge;hedge
C) hedge;bet on
D) bet on;hedge
E) none of these

Question 22

Which of the following is true regarding equity mutual funds:
I)They invest primarily in stock.
II)They may hold fixed-income securities as well as stock.
III)Most hold money market securities as well as stock.
IV)Two types of equity funds are income funds and growth funds.

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

Question 23

Jargon Rapid Growth is a mutual fund that has traditionally accepted funds from new investors and issued new shares at net asset value.Jeremy Jargon manages the fund himself and has become concerned that its level of assets has become too high for his management abilities.He issues a statement that Jargon will no longer accept funds from new investors,but will continue to accept additional investments from current shareholders.Which of the following is true about Jargon Rapid Growth fund?

A) Jargon used to be an open-end fund but has now become a closed-end fund.
B) Jargon has always been an open-end fund and will remain an open-end fund.
C) Jargon has always been a closed-end fund and will remain a closed-end fund.
D) Jargon is an open-end fund but would change to a closed-end fund if it wouldn't accept additional funds from current investors.
E) Jargon is violating SEC policy by refusing to accept new investors.

Question 24

Couch Potato Furniture purchased 100 shares of Natural Spring mutual fund at a net asset value of $56 per share.During the year Patty received dividend income distributions of $3.00 per share and capital gains distributions of $5.20 per share.At the end of the year the shares had a net asset value of $53 per share.What was Couch Potato's rate of return on this investment?

A) 5.43%
B) 9.29%
C) 7.19%
D) 12.44%
E) 9.91%

Question 25

A mutual fund had year-end assets of $750,000,000 and liabilities of $7,500,000.There were 40,000,000 shares in the fund at year-end.What was the mutual fund's Net Asset Value?

A) $9.63
B) $18.56
C) $16.42
D) $17.87
E) $17.26

Question 26

______ are the dominant form of investing in securities markets for most individuals and ______ have enjoyed far greater growth rate in the last decade.

A) Hedge funds;hedge funds
B) Mutual funds;hedge funds
C) Hedge funds;mutual funds
D) Mutual funds;mutual funds
E) none of these

Question 27

Commingled funds are

A) amounts invested in equity and fixed-income mutual funds.
B) funds that may be purchased at intervals of 3,6,or 12 month intervals at the discretion of management.
C) amounts invested in domestic and global equities.
D) closed-end funds that may be repurchased only once every two years at the discretion of mutual fund management.
E) partnerships of investors that pool their funds,which are then managed for a fee.

Question 28

Assume that at retirement you have accumulated $500,000 in a variable annuity contract.The assumed investment return is 6% and your life expectancy is 15 years.What is the hypothetical constant benefit payment?

A) $30,000.00
B) $33,333.33
C) $51,481.38
D) $52,452.73.
E) cannot tell without additional information.

Question 29

Which of the following is not an advantage of mutual funds?

A) They offer a variety of investment styles.
B) They offer small investors the benefits of diversification.
C) They treat income as "passed through" to the investor for tax purposes.
D) A,B and C are all advantages of mutual funds.
E) Neither A nor B nor C are advantages of mutual funds.

Question 30

To a taxpayer in the 34% tax bracket,a tax-free bond available at a price of 100 and a coupon rate of 10% has a taxable equivalent yield of _________.

A) 6.6%
B) 10.0%
C) 13.4%
D) 15.2%
E) none of these

Question 31

Which of the following characteristics apply to unit investment trusts?
I)Most are invested in fixed-income portfolios.
II)They are actively managed portfolios.
III)The sponsor pools securities,then sells public shares in the trust.
IV)The portfolio is fixed for the life of the fund.

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

Question 32

Patty O'Furniture purchased 100 shares of Green Isle mutual fund at a net asset value of $42 per share.During the year Patty received dividend income distributions of $2.00 per share and capital gains distributions of $4.30 per share.At the end of the year the shares had a net asset value of $40 per share.What was Patty's rate of return on this investment?

A) 5.43%
B) 10.24%
C) 7.19%
D) 12.44%
E) 9.18%

Question 33

Assume that you purchased shares of a mutual fund at a net asset value of $10.00 per share.During the year you received dividend income distributions of $0.05 per share and capital gains distributions of $0.06 per share.At the end of the year the shares had a net asset value of $8.16 per share.What was your rate of return on this investment?

A) -18.24%
B) -16.1%
C) 16.10%
D) -17.3%
E) 17.3%

Question 34

Like mutual funds,hedge funds

A) allow private investors to pool assets to be managed by a fund manager.
B) are commonly organized as private partnerships.
C) are subject to extensive SEC regulations.
D) are typically only open to wealthy or institutional investors.
E) B and D

Question 35

Unlike mutual funds,hedge funds

A) allow private investors to pool assets to be managed by a fund manager.
B) are commonly organized as private partnerships.
C) are subject to extensive SEC regulations.
D) are typically only open to wealthy or institutional investors.
E) B and D

Question 36

Investors' Choice Fund had NAV per share of $37.25 on January 1,2001.On December 31 of the same year the fund's rate of return for the year was 17.3%.Income distributions were $1.14 and the fund had capital gain distributions of $1.35.Without considering taxes and transactions costs,what ending NAV would you calculate for Investors' Choice?

A) $41.20
B) $33.88
C) $43.69
D) $42.03
E) $46.62

Question 37

The fee that U.S.mutual funds use to help pay for advertising and promotional literature is called a

A) front-end load fee
B) back-end load fee
C) operating expense fee
D) 12b-1 fee
E) structured fee

Question 38

The Profitability Fund had NAV per share of $17.50 on January 1,2001.On December 31 of the same year the fund's NAV was $19.47.Income distributions were $0.75 and the fund had capital gain distributions of $1.00.Without considering taxes and transactions costs,what rate of return did an investor receive on the Profitability fund last year?

A) 11.26%
B) 15.54%
C) 16.97%
D) 21.26%
E) 9.83%

Question 39

Which of the following would increase the net asset value of a mutual fund share,assuming all other things remain unchanged?

A) an increase in the number of fund shares outstanding
B) an increase in the fund's accounts payable
C) a change in the fund's management
D) an increase in the value of one of the fund's stocks
E) a decrease in the fund's 12b-1 fee

Question 40

A mutual fund had NAV per share of $16.75 on January 1,2009.On December 31 of the same year the fund's rate of return for the year was 26.6%.Income distributions were $1.79 and the fund had capital gain distributions of $2.80.Without considering taxes and transactions costs,what ending NAV would you calculate?

A) $17.44
B) $13.28
C) $14.96
D) $17.25
E) $16.62

Question 41

Shares in hedge funds are priced

A) at NAV
B) a significant premium to NAV
C) a significant discount from NAV
D) B or C
E) none of these

Question 42

The risk profile of hedge funds _____,making performance evaluation _____.

A) can shift rapidly and substantially;challenging
B) can shift rapidly and substantially;straightforward
C) is stable;challenging
D) is stable;straightforward
E) none of these

Question 43

Hedge funds often have ______ provisions as long as _____,which preclude redemption.

A) crackdown,2 months
B) lock-up;2 months
C) crackdown;several years
D) lock-up;several years
E) none of these

Question 44

Hedge funds are ______ transparent than mutual funds because of ______ strict SEC regulation on hedge funds.

A) more;more
B) more;less
C) less;less
D) less;more
E) none of these

Question 45

Hedge funds differ from mutual funds in terms of _____.

A) transparency
B) investors
C) investment strategy
D) liquidity
E) all of these

Question 46

Hedge funds ______ engage in market timing ______ take extensive derivative positions.

A) cannot;and cannot
B) cannot;but can
C) can;and can
D) can;but cannot
E) none of these

Question 47

Hedge fund strategies can be classified as _____.

A) directional and non-directional
B) stock or bond
C) arbitrage or speculation
D) B and C
E) A and B

Question 48

Hedge funds are prohibited from investing or engaging in

A) distressed firms
B) convertible bonds
C) currency speculation
D) merger arbitrage
E) none of these

Question 49

If the yield on mortgage-backed securities was abnormally high compared to Treasury bonds,a hedge fund pursuing a relative value strategy would ______.

A) short sell the Treasury and short sell the mortgage-backed securities
B) short sell the Treasury and buy the mortgage-backed securities
C) buy the Treasury and buy the mortgage-backed securities
D) buy the Treasury and short sell the mortgage-backed securities
E) C only since short sales are prohibited

Question 50

Hedge funds traditionally have ______ than 100 investors and ______ to the general public.

A) more;advertise
B) more;do not advertise
C) less;advertise
D) less;do not advertise
E) none of these

Question 51

A hedge fund pursuing a ______ strategy is trying to exploit relative mispricing within a market,but is hedged to avoid taking a stance on the direction of the broad market.

A) directional
B) non-directional
C) market neutral
D) arbitrage or speculation
E) none of these

Question 52

An example of a ______ strategy is the mispricing of a futures contract that must be corrected by contract expiration.

A) market neutral
B) directional
C) relative value
D) divergence
E) convergence

Question 53

Hedge funds may invest or engage in

A) distressed firms
B) convertible bonds
C) currency speculation
D) merger arbitrage
E) all of these

Question 54

A hedge fund pursuing a ______ strategy is attempting to exploit temporary misalignments in relative pricing.

A) directional
B) non-directional
C) stock or bond
D) arbitrage or speculation
E) none of these

Question 55

A hedge fund attempting to profit from a change in the spread between mortgages and Treasuries is using a ______ strategy.

A) market neutral
B) directional
C) relative value
D) divergence
E) convergence

Question 56

______ are subject to the Securities act of 1933 and the Investment Company Act of 1940 to protect unsophisticated investors.

A) Hedge funds
B) Mutual funds
C) ADRs
D) A and C
E) B and C

Question 57

The minimum investment in some new hedge funds is as low as $______,compared to a traditional minimum of $______.

A) 50,000;500,000 to 1 million
B) 25,000;250,000 to 1 million
C) 175,000;400,000 to 1 million
D) 10,000;750,000
E) 5,000;2 million

Question 58

______ must periodically provide the public with information on portfolio composition.

A) Hedge funds
B) Mutual funds
C) ADRs
D) A and C
E) A and B

Question 59

Hedge funds are typically set up as ______ and provide ______ information about portfolio composition and strategy to their investors.

A) limited partnerships;minimal
B) limited partnerships;extensive
C) investment trusts;minimal
D) investment trusts;extensive
E) none of these

Question 60

A hedge fund pursuing a ______ strategy is betting one sector of the economy will outperform other sectors.

A) directional
B) non-directional
C) stock or bond
D) arbitrage or speculation
E) none of these

Question 61

Assume newly issued 30-year-on-the-run bonds sell at lower yields (higher prices)than 29 ½ year bonds with a nearly identical duration.A hedge fund that sells 29 ½ year bonds and buys 30 year bonds is taking a _____.

A) market neutral position
B) conservative position
C) bullish position
D) bearish position
E) none of these

Question 62

Assume that you manage a $1.3 million portfolio that pays no dividends,has a beta of 1.45 and an alpha of 1.5% per month.Also,assume that the risk-free rate is 0.025% (per month)and the S&P 500 is at 1220.If you expect the market to fall within the next 30 days you can hedge your portfolio by ______ S&P 500 futures contracts (the futures contract has a multiplier of $250).

A) selling 1
B) selling 6
C) buying 1
D) buying 6
E) selling 4

Question 63

______ bias arises when the returns of unsuccessful funds are left out of the sample.

A) Survivorship
B) Backfill
C) Omission
D) Incubation
E) none of these

Question 64

Assume that you manage a $2 million portfolio that pays no dividends,has a beta of 1.25 and an alpha of 2% per month.Also,assume that the risk-free rate is 0.05% (per month)and the S&P 500 is at 1300.If you expect the market to fall within the next 30 days you can hedge your portfolio by ______ S&P 500 futures contracts (the futures contract has a multiplier of $250).

A) selling 1
B) selling 8
C) buying 1
D) buying 8
E) selling 6

Question 65

______ bias arises because hedge funds only report returns to database publishers if they want to.

A) Survivorship
B) Backfill
C) Omission
D) Incubation
E) none of these

Question 66

Assume newly issued 30-year-on-the-run bonds sell at higher yields (lower prices)than 29 ½ year bonds with a nearly identical duration.A hedge fund that buys 29 ½ year bonds and sells 30 year bonds is taking a _____.

A) market neutral position
B) conservative position
C) bullish position
D) bearish position
E) none of these

Question 67

Hedge fund incentive fees are essentially

A) put options on the portfolio with a strike price equal to the current portfolio value
B) put options on the portfolio with a strike price equal to the expected future portfolio value
C) call options on the portfolio with a strike price equal to the expected future portfolio value
D) call options on the portfolio with a strike price equal to the current portfolio value
E) straddles

Question 68

Statistical arbitrage is a version of a ______ strategy.

A) market neutral
B) directional
C) relative value
D) divergence
E) convergence

Question 69

Lo (2201)examined up and down betas of hedge funds and concluded that up market betas were ______ down market betas.

A) generally larger than
B) generally smaller than
C) the same size as
D) twice the size of
E) half the size of

Question 70

Assume that you manage a $2 million portfolio that pays no dividends,has a beta of 1.3 and an alpha of 2% per month.Also,assume that the risk-free rate is 0.05% (per month)and the S&P 500 is at 1500.If you expect the market to fall within the next 30 days you can hedge your portfolio by ______ S&P 500 futures contracts (the futures contract has a multiplier of $250).

A) selling 1
B) selling 7
C) buying 1
D) buying 7
E) selling 11

Question 71

If the yield on mortgage-backed securities was abnormally low compared to Treasury bonds,a hedge fund pursuing a relative value strategy would ______.

A) short sell the Treasury and short sell the mortgage-backed securities
B) short sell the Treasury and buy the mortgage-backed securities
C) buy the Treasury and buy the mortgage-backed securities
D) buy the Treasury and short sell the mortgage-backed securities
E) C only since short sales are prohibited

Question 72

A bet on particular mispricing across two or more securities,with extraneous sources of risk such as general market exposure hedged away is a _____.

A) pure play
B) relative play
C) long shot
D) sure thing
E) B and D

Question 73

______ uses quantitative techniques and often automated trading systems to seek out many temporary misalignments among securities.

A) Covered interest arbitrage
B) Locational arbitrage
C) Triangular arbitrage
D) Statistical arbitrage
E) All arbitrage

Question 74

Hedge funds exhibit a pattern known as a

A) January effect
B) Santa effect
C) size effect
D) book-to-market
E) none of these

Question 75

Regarding hedge fund incentive fees,hedge fund managers ______ if the portfolio return is very large and ______ if the portfolio return is negative.

A) get nothing;get nothing
B) refund the fee;get the fee
C) get the fee;lose nothing except the incentive fee
D) get the fee;lose the management fee
E) none of these

Question 76

Assume that you manage a $3 million portfolio that pays no dividends,has a beta of 1.45 and an alpha of 1.5% per month.Also,assume that the risk-free rate is 0.025% (per month)and the S&P 500 is at 1220.If you expect the market to fall within the next 30 days you can hedge your portfolio by ______ S&P 500 futures contracts (the futures contract has a multiplier of $250).

A) selling 1
B) selling 14
C) buying 1
D) buying 14
E) selling 6

Question 77

Market neutral bets can result in ______ volatility because hedge funds use _____.

A) very low;hedging techniques to eliminate risk
B) low;risk management techniques to reduce risk
C) considerable;risk management techniques to reduce risk
D) considerable;considerable leverage
E) none of these

Question 78

The previous value of a portfolio that must be reattained before a hedge fund can charge incentive fees is known as a _____.

A) benchmark
B) water stain
C) water mark
D) high water mark
E) low water mark

Question 79

The typical hedge fund fee structure is

A) a management fee of 1% to 2%
B) an annual incentive fee equal to 20% of investment profits beyond a stipulated benchmark performance
C) a 12-b1 fee of 1%
D) A and B
E) A and C

Question 80

Performance evaluation of hedge funds is complicated by _____.

A) liquidity premiums
B) survivorship bias
C) unreliable market valuations of infrequently traded assets
D) unstable risk attributes
E) all of these