Deck 4: Mutual Funds and Other Investment Companies

Question 1

________ are partnerships of investors with portfolios that are larger than most individual investors but are still too small to warrant managing on a separate basis.

A) Commingled funds
B) Closed-end funds
C) REITs
D) Mutual funds

Answer 1

A

Question 2

Mutual funds provide the following for their shareholders.

A) diversification
B) professional management
C) record keeping and administration
D) all of these options

Answer 2

D

Question 3

In the United States in 2017, there were approximately ________ mutual funds offered by fewer than ________ fund complexes.

A) 12,000; 650
B) 7,000; 100
C) 8,000; 850
D) 9,000; 300

Answer 3

C

Question 4

Which of the following result in a taxable event for investors?
I) Short-term capital gain distributions from the fund
II) Dividend distributions from the fund
III) Long-term capital gain distributions from the fund

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

Question 5

Part B of a mutual fund prospectus contains information about:
I) Fund holdings by directors and officers
II) Front-end and back-end loads
III) Securities held by the fund at the end of the fiscal year

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

Question 6

A ________ is a private investment pool open only to wealthy or institutional investors that is exempt from SEC regulation and can therefore pursue more speculative policies than mutual funds.

A) commingled pool
B) unit trust
C) hedge fund
D) money market fund

Question 7

The type of mutual fund that primarily engages in market timing is called ________.

A) a sector fund
B) an index fund
C) an ETF
D) an asset allocation fund

Question 8

As of 2017, approximately ________ of mutual fund assets were invested in money market funds.

A) 5%
B) 17%
C) 44%
D) 66%

Question 9

The NAV of which funds is fixed at $1 per share?

A) equity funds
B) money market funds
C) fixed-income funds
D) commingled funds

Question 10

As of 2017, approximately ________ of mutual fund assets were invested in bond funds.

A) 22%
B) 32%
C) 37%
D) 47%

Question 11

Which of the following typically employ significant amounts of leverage?
I) Hedge funds
II) REITs
III) Money market funds
IV) Equity mutual funds

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

Question 12

Rank the following fund categories from most risky to least risky:
I) Equity growth fund
II) Balanced fund
III) Sector fund
IV) Money market fund

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

Question 13

The two principal types of REITs are equity trusts, which ________, and mortgage trusts, which ________.

A) invest directly in real estate; invest in mortgage and construction loans
B) invest in mortgage and construction loans; invest directly in real estate
C) use extensive leverage; distribute less than 95% of income to shareholders
D) distribute less than 95% of income to shareholders; use extensive leverage

Question 14

The average maturity of fund investments in a money market mutual fund is ________.

A) slightly more than 1 month
B) slightly more than 1 year
C) about 9 months
D) between 2 and 3 years

Question 15

A contingent deferred sales load is commonly called a ________.

A) front-end load
B) back-end load
C) 12b-1 charge
D) top-end sales commission

Question 16

Which one of the following invests in a portfolio that is fixed for the life of the fund?

A) mutual fund
B) money market fund
C) managed investment company
D) unit investment trust

Question 17

Management fees for open-end and closed-end funds typically range between ________ and ________.

A) )2%; 2.0%
B) )5%; 5%
C) 2%; 5%
D) 3%; 8%

Question 18

As of 2017, approximately ________ of mutual fund assets were invested in equity funds.

A) 5%
B) 52%
C) 30%
D) 12%

Question 19

Advantages of investment companies to investors include all but which one of the following?

A) record keeping and administration
B) low-cost diversification
C) professional management
D) guaranteed rates of return

Question 20

The primary measurement unit used for assessing the value of one's stake in an investment company is ________.

A) net asset value
B) average asset value
C) gross asset value
D) total asset value

Question 21

Low-load mutual funds have front-end loads of no more than ________.

A) 2%
B) 3%
C) 4%
D) 5%

Question 22

Assume that you have recently purchased 100 shares in an investment company. Upon examining the balance sheet, you note that the firm is reporting $225 million in assets, $30 million in liabilities, and 10 million shares outstanding. What is the net asset value (NAV) of these shares?

A) $25.50
B) $22.50
C) $19.50
D) $1.95

Question 23

The greatest percentage of mutual fund assets are invested in ________.

A) bond funds
B) equity funds
C) hybrid funds
D) money market funds

Question 24

Which of the following funds invest specifically in stocks of fast-growing companies?

A) balanced funds
B) growth equity funds
C) REITs
D) equity income funds

Question 25

Investors who want to liquidate their holdings in a unit investment trust may ________.

A) sell their shares back to the trustee at a discount
B) sell their shares back to the trustee at net asset value
C) sell their shares on the open market
D) sell their shares at a premium to net asset value

Question 26

Assume that you have just purchased some shares in an investment company reporting $500 million in assets, $50 million in liabilities, and 50 million shares outstanding. What is the net asset value (NAV) of these shares?

A) $12
B) $9
C) $10
D) $1

Question 27

The Vanguard 500 Index Fund tracks the performance of the S&P 500. To do so, the fund buys shares in each S&P 500 company ________.

A) in proportion to the market value weight of the firm's equity in the S&P 500
B) in proportion to the price weight of the stock in the S&P 500
C) by purchasing an equal number of shares of each stock in the S&P 500
D) by purchasing an equal dollar amount of shares of each stock in the S&P 500

Question 28

Which of the following is a false statement regarding open-end mutual funds?

A) They offer investors a guaranteed rate of return.
B) They offer investors a well-diversified portfolio.
C) They redeem shares at their net asset value.
D) They offer low-cost diversification.

Question 29

Investors who want to liquidate their holdings in a closed-end fund may ________.

A) sell their shares back to the fund at a discount if they wish
B) sell their shares back to the fund at net asset value
C) sell their shares on the open market
D) sell their shares at a premium to net asset value if they wish

Question 30

Most real estate investment trusts (REITs) have a debt ratio of around ________.

A) 10%
B) 30%
C) 50%
D) 70%

Question 31

Higher portfolio turnover:
I) Results in greater tax liability for investors
II) Results in greater trading costs for the fund, which investors have to pay for
III) Is a characteristic of asset allocation funds

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

Question 32

________ funds stand ready to redeem or issue shares at their net asset value.

A) Closed-end
B) Index
C) Open-end
D) Hedge

Question 33

Net asset value is defined as ________.

A) book value of assets divided by shares outstanding
B) book value of assets minus liabilities divided by shares outstanding
C) market value of assets divided by shares outstanding
D) market value of assets minus liabilities divided by shares outstanding

Question 34

________ fund is defined as one in which the fund charges a sales commission to either buy into or exit from the fund.

A) A load
B) A no-load
C) An index
D) A specialized-sector

Question 35

Which of the following is not a type of managed investment company?

A) unit investment trusts
B) closed-end funds
C) open-end funds
D) hedge funds

Question 36

Sponsors of unit investment trusts earn a profit by ________.

A) deducting management fees from fund assets
B) deducting a percentage of any gains in asset value
C) selling shares in the trust at a premium to the cost of acquiring the underlying assets
D) charging portfolio turnover fees

Question 37

Which of the following is not a type of real estate investment trust?
I) Equity trust
II) Debt trust
III) Mortgage trust
IV) Unit trust

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

Question 38

A fund that invests in securities worldwide, including the United States, is called ________.

A) an international fund
B) an emerging market fund
C) a global fund
D) a regional fund

Question 39

Measured by assets, about ________ of funds are money market funds.

A) 25%
B) 17%
C) 40%
D) 60%

Question 40

Revenue sharing with respect to mutual funds refers to ________.

A) fund companies paying brokers if the broker recommends the fund to investors
B) allowing certain classes of investors to engage in market timing
C) charging loads to new investors in a mutual fund
D) directly marketing funds over the Internet

Question 41

Consider a mutual fund with $300 million in assets at the start of the year and 12 million shares outstanding. If the gross return on assets is 18% and the total expense ratio is 2% of the year-end value, what is the rate of return on the fund?

A) 15.64%
B) 16%
C) 17.25%
D) 17.5%

Question 42

The commission, or front-end load, paid when you purchase shares in mutual funds may not exceed ________.

A) 3.5%
B) 6%
C) 8.5%
D) 10%

Question 43

________ are mutual funds that vary the proportions of funds invested in particular market sectors according to the fund manager's forecast of the performance of that market sector.

A) Asset allocation funds
B) Balanced funds
C) Index funds
D) Income funds

Question 44

According to the 2017 Mutual Fund Fact Book, ________ of total assets were in taxable money market funds and ________ were tax-exempt money market funds.

A) 35%; 14%
B) 12.3%; 75%
C) 15.9%; 0.8%
D) 5%; 47%

Question 45

Consider a no-load mutual fund with $400 million in assets, 50 million in debt, and 15 million shares at the start of the year and with $500 million in assets, 40 million in debt, and 18 million shares at the end of the year. During the year investors have received income distributions of $.50 per share and capital gain distributions of $.30 per share. If the total expense ratio is .75%, what is the rate of return on the fund?

A) 12.09%
B) 12.99%
C) 8.25%
D) The answer cannot be determined from the information given.

Question 46

If you place an order to buy or sell a share of a mutual fund during the trading day, the order will be executed at ________.

A) the NAV calculated at the market close at 4 pm New York time
B) the real time NAV
C) the NAV delayed 15 minutes
D) the NAV calculated at the opening of the next day's trading

Question 47

The SEC requires funds to disclose:
I) After-tax returns for the past year
II) After-tax returns for the last 5-year period
III) The tax impact of portfolio turnover

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

Question 48

In his 1970 study, Malkiel found that mutual funds that do well in one period have an approximately ________ chance of doing well in the subsequent-year period.

A) 33%
B) 52%
C) 65%
D) 85%

Question 49

Mutual funds account for roughly ________ of investment company assets.

A) 30%
B) 50%
C) 70%
D) 90%

Question 50

Specialized-sector funds concentrate their investments in ________.

A) bonds of a particular maturity
B) geographic segments of the real estate market
C) government securities
D) securities issued by firms in a particular industry

Question 51

An official description of a particular mutual fund's planned investment policy can be found in the fund's ________.

A) prospectus
B) indenture
C) investment statement
D) 12b-1 forms

Question 52

Consider a no-load mutual fund with $200 million in assets and 10 million shares at the start of the year and with $250 million in assets and 11 million shares at the end of the year. During the year investors have received income distributions of $2 per share and capital gain distributions of $.25 per share. Assuming that the fund carries no debt, and that the total expense ratio is 1%, what is the rate of return on the fund?

A) 11.19%
B) 23.75%
C) 24.64%
D) The answer cannot be determined from the information given.

Question 53

If a mutual fund has multiple-class shares, which class typically has a front-end load?

A) Class A
B) Class B
C) Class C
D) Class I

Question 54

SEC Rule 12b-1 allows managers of certain funds to deduct ________ expenses from fund assets; however, these expenses may not exceed ________ of the fund's average net assets per year.

A) marketing; 1%
B) marketing; 5%
C) administrative; .5%
D) administrative; 2%

Question 55

________ is an example of an exchange-traded fund.

A) An SPDR or spider
B) A samurai
C) A Vanguard
D) An open-end fund

Question 56

Under SEC rules, the managers of certain funds are allowed to deduct charges for advertising, brokerage commissions, and other sales expenses directly from the fund assets rather than billing investors. These fees are known as ________.

A) direct operating expenses
B) back-end loads
C) 12b-1 charges
D) front-end loads

Question 57

Mutual funds that hold both equities and fixed-income securities in relatively stable proportions are called ________.

A) income funds
B) balanced funds
C) asset allocation funds
D) index funds

Question 58

Mutual fund returns may be granted pass-through status if ________.

A) virtually all income is distributed to shareholders
B) the fund qualifies for pass-through status according to the U.S. tax code
C) the fund is sufficiently diversified
D) All of these options (All of the answers must be true for pass-through status to be granted.)

Question 59

________ are often called mutual funds.

A) Unit investment trusts
B) Open-end investment companies
C) Closed-end investment companies
D) REITs

Question 60

You are considering investing in one of several mutual funds. All the funds under consideration have various combinations of front-end and back-end loads and/or 12b-1 fees. The longer you plan on remaining in the fund you choose, the more likely you will prefer a fund with a ________ rather than a ________, everything else equal.

A) 12b-1 fee; front-end load
B) front-end load; 12b-1 fee
C) back-end load; front-end load
D) 12b-1 fee; back-end load

Question 61

You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 2% back-end load, which decreases .5% per year. How much will you pay in fees on a $10,000 investment that does not grow if you cash out after 3 years of no gain?

A) $103
B) $219
C) $553
D) $635

Question 62

Which type of investment fund is commonly known to invest in options and futures in large scale?

A) commingled funds
B) hedge funds
C) ETFs
D) REITs

Question 63

Advantages of ETFs over mutual funds include all but which one of the following?

A) ETFs trade continuously, so investors can trade throughout the day.
B) ETFs can be sold short or purchased on margin, unlike fund shares.
C) ETF providers do not have to sell holdings to fund redemptions.
D) ETF values can diverge from NAV.

Question 64

From 1971 to 2013 the average return on the Wilshire 5000 Index was ________ the return of the average mutual fund.

A) identical to
B) 1.0% higher than
C) )9% lower than
D) 1.3% higher than

Question 65

Which of the following ETFs tracks the S&P 500 Index?

A) Qubes
B) Diamonds
C) Vipers
D) Spiders

Question 66

The Wildwood Fund sells Class A shares with a front-end load of 5% and Class B shares with a 12b-1 fee of 1% annually. If you plan to sell the fund after 4 years, are Class A or Class B shares the better choice? Assume a 10% annual return net of expenses before the 12b-1 fee is applied.

A) Class A.
B) Class B.
C) There is no difference.
D) The answer cannot be determined from the information given.

Question 67

________ have become the main way for investors to speculate in precious metals.

A) Strategic income funds
B) Balanced funds
C) Specialized-sector funds
D) Exchange-traded funds

Question 68

An open-end fund has a NAV of $16.50 per share. The fund charges a 6% load. What is the offering price?

A) $14.57
B) $15.95
C) $17.55
D) $16.49

Question 69

The difference between balanced funds and asset allocation funds is that ________.

A) balanced funds invest in bonds while asset allocation funds do not
B) asset allocation funds invest in bonds while balanced funds do not
C) balanced funds have relatively stable proportions of stocks and bonds while the proportions may vary dramatically for asset allocation funds
D) balanced funds make no capital gain distributions and asset allocation funds make both dividend and capital gain distributions

Question 70

Harold has just taken his company public and owns a large quantity of restricted stock. For purposes of diversification, what fund might he help create in order to diversify his holdings?

A) commingled funds
B) hedge funds
C) ETF
D) REITs

Question 71

Which of the following funds are usually most tax-efficient?

A) equity funds
B) bond Funds
C) ETFs
D) specialized-sector funds

Question 72

A mutual fund has total assets outstanding of $69 million. During the year the fund bought and sold assets equal to $17.25 million. This fund's turnover rate was ________.

A) 25%
B) 28.5%
C) 18.63%
D) 33.4%

Question 73

The assets of a mutual fund are $25 million. The liabilities are $4 million. If the fund has 700,000 shares outstanding and pays a $3 dividend, what is the dividend yield?

A) 5%
B) 10%
C) 15%
D) 20%

Question 74

The Stone Harbor Fund is a closed-end investment company with a portfolio currently worth $300 million. It has liabilities of $5 million and 9 million shares outstanding. If the fund sells for $30 a share, what is its premium or discount as a percent of NAV?

A) 9.26% premium
B) 8.47% premium
C) 9.26% discount
D) 8.47% discount

Question 75

The offer price of an open-end fund is $18 and the fund is sold with a front-end load of 5%. What is the fund's NAV?

A) $18.74
B) $17.10
C) $15.40
D) $16.57

Question 76

The ratio of trading activity of a portfolio to the assets of the portfolio is called the ________.

A) reinvestment ratio
B) trading rate
C) portfolio turnover
D) tax yield

Question 77

You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 0% back-end load on Class A shares. The same fund charges a 0% front-end load, 1% total annual fees, and a 2% back-end load on Class B shares. What are the total fees in year 1 on a Class A investment of $20,000 with no growth in value?

A) $658
B) $794
C) $885
D) $902

Question 78

A mutual fund has $50 million in assets at the beginning of the year and 1 million shares outstanding throughout the year. Throughout the year assets grow at 12%. The fund imposes a 12b-1 fee on all shares equal to 1%. The fee is imposed on year-end asset values. If there are no distributions, what is the end-of-year NAV for the fund?

A) $50
B) $55.44
C) $56.12
D) $54.55

Question 79

Which of the following funds is most likely to have a debt ratio of 70% or higher?

A) bond fund
B) commingled fund
C) mortgage-backed securities
D) REIT

Question 80

In a recent study, Malkiel found that evidence of persistence in the performance of mutual funds ________ in the 1980s.

A) grew stronger
B) remained about the same
C) became slightly weaker
D) virtually disappeared