Deck 17: Professional Money Management, Alternative Assets, and Industry Ethics

Question 1

All investment firms charge annual management fees to compensate the professional manager of the fund.

Answer 1

True

Question 2

A portfolio is generally managed by the board of directors of an investment company.

Answer 2

False

Question 3

The market price of shares of a closed-end fund is typically determined by supply and demand.

Answer 3

False

Question 4

In an investment company, the invested funds belong to many individuals.

Question 5

Income distributions and capital gains distributions are the only source of returns for mutual funds.

Question 6

An open-end investment company differs from a closed-end investment company by the way they operate after the initial public offering.

Question 7

The offering price for a share of a load fund equals the net asset value of the share.

Question 8

The market price of shares of a closed-end fund is typically determined by supply and demand.

Question 9

The total market value of all assets of a mutual fund divided by the number of shares of the fund is known as the net asset value.

Question 10

A no-load fund imposes a substantial sales charge and sells shares at their NAV.

Question 11

Open-end investment companies continue to sell and repurchase shares after their initial public offering.

Question 12

Closed-end investment companies never sell at discounts to their NAV.

Question 13

Open-end and closed-end investment companies are similar in that both companies will repurchase shares on demand.

Question 14

Management and advisory firms can advise clients on how to structure their own portfolios.

Question 15

A closed-end investment company is normally referred to as a mutual fund.

Question 16

Diversifying a portfolio to eliminate unsystematic risk is one of the major benefits of investing in mutual funds.

Question 17

High portfolio turnover lowers mutual fund costs.

Question 18

When securities are held in an investment company the appropriate way to value a client's investment is by net asset value (NAV).

Question 19

The total market value of all assets of a mutual fund divided by the number of shares of the fund is known as the net asset value.

Question 20

An open-end investment company functions like any other public firm.

Question 21

Which of the following is an approach to asset management?

A) management and advisory firms
B) investment banks
C) strategic management
D) stock brokerage firms
E) chartered banks

Question 22

The main difference between a closed-end fund and an open-end fund is

A) the way each is traded after the initial public offering.
B) there is no significant difference.
C) the minimum initial investment.
D) the type of allowable investments.
E) the way in which each is regulated by the SEC.

Question 23

The primary purpose of government regulations and voluntary standards in the professional asset management industry is to ensure that managers deal with all investors fairly and equitably and that information about investment performance is accurately reported.

Question 24

Hedge funds have no limitations on when and how often capital can be contributed or removed from the partnership.

Question 25

It is quite common for investors to form a "portfolio" of managers with different capabilities.

Question 26

Fund of funds gives investors access to hedge fund managers who may otherwise be unavailable to them.

Question 27

A common hedge fund strategy known as long-short equity is a type of arbitrage strategy.

Question 28

Open-end mutual funds that charge a sales fee when the fund is initially offered to the investor are known as

A) 12b-1.
B) americus trusts.
C) unit investment trusts.
D) load funds.
E) contingency funds.

Question 29

A function your portfolio manager may perform for you is to maintain the diversification of your portfolio within your desired risk class.

Question 30

Hedge funds are far less liquid than mutual fund shares.

Question 31

An investment company is

A) a corporation that handles the administrative functions for a fund.
B) a corporation that has its major assets in a portfolio of securities.
C) a corporation that invests in financial services firms.
D) a corporation that arranges IPOs.
E) a corporation that handles the trust functions for a fund.

Question 32

An investor should be cautious when selecting a fund based solely on the manager's past performance because past performance may not be repeated in the future.

Question 33

In the case of private management firms,

A) investors deal with a fund company and do not have separate accounts tailored to their specific needs.
B) investors deal with a fund company and have separate accounts tailored to their specific needs.
C) investors deal with an asset manager and do not have separate accounts tailored to their specific needs.
D) investors deal with an asset manager and have separate accounts tailored to their specific needs.
E) None of these are correct.

Question 34

An investment management company is

A) a corporation that handles the administrative functions for a fund.
B) a corporation that has its major assets in a portfolio of securities.
C) a corporation that invests in financial services firms.
D) a corporation that arranges IPOs.
E) a corporation that handles the trust functions for a fund.

Question 35

In the case of investment companies,

A) investors deal with a fund company and do not have separate accounts tailored to their specific needs.
B) investors deal with a fund company and have separate accounts tailored to their specific needs.
C) investors deal with an asset manager and do not have separate accounts tailored to their specific needs.
D) investors deal with an asset manager and have separate accounts tailored to their specific needs.
E) None of these are correct.

Question 36

Agency conflicts always exist in the investment management business because the entire industry is based on handling someone else's money.

Question 37

The returns received by the average individual investor on funds managed by investment companies will probably be superior to the average results for a specific U.S. or international market.

Question 38

An open-end investment company is commonly referred to as a(n)

A) balanced fund.
B) mutual fund.
C) money market fund.
D) accessible fund.
E) unit trust.

Question 39

Convertible arbitrage hedge funds profit from disparities in the relationship between prices for convertible bonds and fixed-income bonds.

Question 40

The closed-end fund index is

A) value weighted and based on market values.
B) value weighted and based on NAVs.
C) price weighted and based on market values.
D) price weighted and based on NAVs.
E) equally weighted and based on market values.

Question 41

Funds that adjust the asset allocation weights in the portfolio to match the needs of an investor who is nearing retirement are known as

A) balanced funds.
B) flexible portfolio funds.
C) lifetime funds.
D) money market funds.
E) target date funds.

Question 42

The market price of a closed-end investment company has generally been

A) 5 to 20 percent below the NAV.
B) 25 to 35 percent below the NAV.
C) equal to the NAV (within a 2 percent range).
D) 5 to 20 percent above the NAV.
E) 25 to 35 percent above the NAV.

Question 43

A money market fund would be likely to invest in a portfolio containing all of the following EXCEPT

A) commercial paper.
B) banker's acceptances.
C) U.S. Treasury bills.
D) bank certificates of deposit.
E) U.S. Treasury notes.

Question 44

A 12b-1 plan allows funds to

A) charge a redemption fee.
B) deduct 7 to 8 percent commission at the initial offering.
C) deduct .75 percent of the average net assets per year.
D) charge a contingent deferred sales load.
E) switch from closed-end to open-end.

Question 45

In the case of closed-end investment companies, shares of the company

A) are determined by the investment company.
B) can be bought from or sold to the investment company at the NAV.
C) are determined by supply and demand.
D) are traded like those of a private firm.
E) All of these are correct.

Question 46

The gross return of closed-end investments companies has typically been

A) 10-20 percent less than their NAV.
B) 10-15 percent less than their NAV.
C) 5-20 percent less than their NAV.
D) about the same as the net return.
E) less than the net return.

Question 47

When the offer price and the NAV of a mutual fund are equal, it is an indication that

A) the fund's assets are in equilibrium.
B) the fund is trading at par.
C) it is strictly a coincidence.
D) the fund has no initial fee.
E) the fund is backloaded.

Question 48

Investment companies or mutual funds that continue to sell and repurchase shares after their initial public offerings are referred to as

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

Question 49

A mutual fund typically performs all of the following functions, EXCEPT that it

A) provides alternative risk-return options.
B) eliminates unsystematic risk.
C) provides diversification.
D) derives a risk-adjusted performance that is consistently superior to risk-adjusted net return of the aggregate market.
E) administers the account, keeps records, and provides timely information.

Question 50

A major question in modern finance regarding closed-end investment companies is

A) why do these funds sell at a premium?
B) why do the premiums differ between funds?
C) what are the returns available to investors from funds that sell at a large discount?
D) what are the returns available to investors from funds that sell at a large premium?
E) what is the average premium?

Question 51

Net asset value (NAV) is determined by

A) the total market value of all its assets multiplied by the number of fund shares outstanding.
B) the total market value of all its assets divided by the number of fund shares outstanding.
C) the total market value of all its assets divided by the number of shareholders.
D) supply and demand for the investment company stock in the secondary market.
E) supply and demand for the investment company stock in the primary market.

Question 52

Mutual fund performance studies have shown that most funds

A) have risks and returns that are inconsistent with their stated objectives.
B) have risks and returns that are consistent with their stated objectives.
C) do not have stated objectives.
D) have experienced risk-adjusted returns above the market.
E) have changed their objectives over time.

Question 53

Funds that attempt to provide current income, safety of principal and liquidity are known as

A) balanced funds.
B) flexible funds.
C) income funds.
D) money market funds.
E) index funds.

Question 54

Which of the following statements regarding the closed-end investment company's net asset value (NAV) is FALSE?

A) NAV is computed throughout the day based on prevailing market prices for the portfolio of securities.
B) The market price of the shares is determined by how they trade on the exchange.
C) NAV and market price of a closed-end fund are almost never the same.
D) No new investment dollars are available for the investment company unless it makes another public sale of securities.
E) All of these are correct.

Question 55

The following are examples of mutual fund companies:

A) private equity.
B) bond funds.
C) hedge funds.
D) venture capital.
E) buyout-oriented private equity.

Question 56

In the case of open-end investment companies, shares of the company

A) trade on the secondary market.
B) can be bought from or sold to the investment company at the NAV.
C) are determined by the investment company.
D) are bought without a sales fee.
E) show that no new investment dollars are available after the IPO.

Question 57

The offering price of a load fund equals the NAV of the fund

A) less an initial requirement.
B) plus a sales charge.
C) plus a sales charge and an administrative fee.
D) less a negotiated discount.
E) at its stated value.

Question 58

Funds that normally contain a combination of common stock and fixed income securities are known as

A) section 401(k) plans.
B) balanced funds.
C) contractual plans.
D) income funds.
E) flexible funds.

Question 59

All investment companies charge an annual

A) 12b-1 fee.
B) marketing and distribution.
C) management fee.
D) maintenance fee.
E) market adjustment.

Question 60

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Suppose ABC Mutual fund owned only four stocks as follows:

Refer to Exhibit 24.1. The fund originated by selling $100,000 of stock at $10.00 per share. What is its current NAV?

A) $1.47
B) $14.75
C) $16.03
D) $27.62
E) $234.12

Question 61

On January 2, 2017, you invest $10,000 in Megabucks Mutual Fund, a load fund that charges a fee of 2 percent. The fund's returns were 13 percent in 2017, 11 percent in 2018, and 8 percent in 2019. On December 31, 2019, you redeem all your shares. The dollar value is

A) $13,600.00.
B) $13,275.51.
C) $13,297.67.
D) $13,995.75.
E) $10,000.00.

Question 62

On January 2, 2017, you invest $100,000 in Righteous, a load fund that charges a fee of 7 percent. The fund's returns were 12.8 percent in 2017, 13.9 percent in 2018, and 7.9 percent in 2019. On December 31, 2019, you redeem all your Righteous shares. The dollar value is

A) $12,800.00.
B) $12,892.50.
C) $100,000.00.
D) $128,925.00.
E) $10,000.00.

Question 63

Suppose you consider investing $10,000 in a load fund from which a fee of 3 percent is deducted and you expect the fund to earn 12 percent over the next year. Alternatively, you could invest in a no-load fund that is expected to earn 10 percent and which takes a 0 percent redemption fee. Which is better and by how much?

A) load fund by $151
B) no load fund by $136
C) funds are equal
D) no load fund by $421
E) load fund by $115

Question 64

On January 2, 2017, you invest $50,000 in the Lizbiz Mutual Fund, a load fund that charges a fee of 5 percent. The fund's returns were 14.6 percent in 2017, -6.4 percent in 2018, and 15.2 percent in 2019. On December 31, 2019, you redeem all your shares. The dollar value is

A) $66,722.27.
B) $15,200.00.
C) $58,695.74.
D) $33,366.25.
E) $10,000.00.

Question 65

Consider the Compliance Bond Fund that consists of the seven bonds shown below and has no liabilities. If initially the value of the fund was $2,500,000 and the original shares were offered to the public with a NAV of $25 per share, what is the current NAV of the fund?

A) $27.11
B) $25.00
C) $26.11
D) $21.67
E) $26.27

Question 66

Suppose you consider investing $5,000 in a load fund from which a fee of 8 percent is deducted and you expect the fund to earn 12 percent over the next year. Alternatively, you could invest in a no-load fund that is expected to earn 10 percent and which takes a 1/2 percent redemption fee. Which is better and by how much?

A) load fund by $320.50
B) load fund by $575.50
C) funds are equal
D) no load fund by $320.50
E) no load fund by $575.50

Question 67

Suppose Under Mutual Fund owns only the three stocks shown below with no liabilities. The fund originated by selling $500,000 of stock at $50.00 per share. What is its current NAV?

A) $12.53
B) $15.29
C) $152.90
D) $125.30
E) $150.50

Question 68

On January 2, 2017, you invest $10,000 in the Tiger Fund, a load fund that charges a fee of 6 percent. The fund's returns were 25 percent in 2017, 35 percent in 2018, and -5 percent in 2019. On December 31, 2019, you redeem all your shares of Tiger. The dollar value is

A) $5,200.89.
B) $13,345.89.
C) $7,931.25.
D) $15,896.34.
E) $8,646.91.

Question 69

On January 2, 2017, you invest $10,000 in the W.O.W. Mutual Fund, a load fund that charges a fee of 5 percent. The fund's returns were 13.6 percent in 2017, 12.2 percent in 2018, and 8.3 percent in 2019. On December 31, 2019, you redeem all your W.O.W. shares. The dollar value is

A) $13,600.00.
B) $13,664.13.
C) $10,000.00.
D) $131,136.40.
E) $13,113.64.

Question 70

Suppose you consider investing $1,000 in a load fund that charges a fee of 2 percent, and you expect the fund to earn 11 percent over the next year. Alternatively, you could invest in a no-load fund with similar risk that is expected to earn 7 percent and charges a 1/2 percent redemption fee. Which is better and by how much?

A) funds are equal
B) no-load fund by $36.98
C) load fund by $45.25
D) load fund by $23.15
E) no-load fund by $15.52

Question 71

Consider X Bond Fund which consists of the five bonds shown below with no liabilities. If initially the value of the fund was $1,000,000 and the original shares were offered to the public with a NAV of $25 per share, what is the current NAV of the fund?

A) $25.00
B) $27.68
C) $25.68
D) $28.76
E) $26.78

Question 72

On January 2, 2017, you invest $10,000 in the Dog Mutual Fund, a load fund that charges a fee of 7 percent. The fund's returns were 12.8 percent in 2017, 13.9 percent in 2018, and 7.9 percent in 2019. On December 31, 2019, you redeem all your shares. The dollar value is

A) $12,800.00.
B) $12,892.50.
C) $100,000.00.
D) $128,925.00.
E) $10,000.00.

Question 73

Suppose you consider investing $15,000 in a load fund from which a fee of 5 percent is deducted and you expect the fund to earn 12 percent over the next year. Alternatively, you could invest in a no-load fund that is expected to earn 10 percent and which takes a 1/2 percent redemption fee. Which is better and by how much?

A) load fund by $318.45
B) no load fund by $457.50
C) funds are equal
D) load fund by $415.10
E) no load fund by $211.51

Question 74

Consider the Defiance Bond Fund that consists of the three bonds shown below and has no liabilities. If initially the value of the fund was $250,000 and the original shares were offered to the public with a NAV of $25 per share, what is the current NAV of the fund?

A) $25.00
B) $38.91
C) $39.81
D) $31.98
E) $39.91

Question 75

On January 2, 2017, you invest $50,000 in A Mutual Fund, a load fund that charges a fee of 7 percent. The fund's returns were 12.8 percent in 2017, 13.9 percent in 2018, and 7.9 percent in 2019. On December 31, 2019, you redeem all your shares in A. The dollar value is

A) $64,462.57.
B) $644,625.70.
C) $50,000.00.
D) $6,446.25.
E) $10,000.00.

Question 76

Suppose you consider investing $1,000 in a load fund which charges a fee of 2 percent, and you expect the fund to earn 14 percent over the next year. Alternatively, you could invest in a no-load fund with similar risk that is expected to earn 9 percent and charges a 1/2 percent redemption fee. Which is better and by how much?

A) funds are equal
B) load fund by $32.65
C) load fund by $50.55
D) no-load fund by $64.55
E) no-load fund by $44.30

Question 77

Suppose Mega Mutual Fund owns only the four stocks shown below with no liabilities. The fund originated by selling $300,000 of stock at $30.00 per share. What is its current NAV?

A) $106.10
B) $12.94
C) $129.40
D) $10.61
E) $16.94

Question 78

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Suppose ABC Mutual fund owned only four stocks as follows:

Refer to Exhibit 24.1. What is the offering price for the fund if the NAV is $25.25 and the load is 6 percent?

A) $26.19
B) $23.74
C) $25.25
D) $26.77
E) $24.13

Question 79

$100,000.00.On January 2, 2017, you invest $100,000 in the Jeffers Mutual Fund, a load fund that charges a fee of 5 percent. The fund's returns were -4.6 percent in 2017, -6.4 percent in 2018, and 35 percent in 2019. On December 31, 2019, you redeem all your shares. The dollar value is

A) $95,600.57.
B) $102,515.90.
C) $83,297.75.
D) $133,995.75.
E) $100,000.00.

Question 80

Given the following fees and expected returns for fund X and assuming an initial investment of $1000, calculate the value of the investment at the end of five years.

A) $1069.82
B) $1550.77
C) $1042.36
D) $1689.95
E) $1389.95