Deck 3: Indirect Investing: a Global Activity

Question 1

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

A) investors hold the securities till maturity.
B) investors trade between themselves.
C) investors sell their shares back to the company.
D) banks will cash their shares as long as they have accounts at the bank.

Answer 1

C

Question 2

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.

Answer 2

A

Question 3

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 3

C

Question 4

Which of the following ETF's (exchange traded fund) provides exposure to 500 U.S.large-capitalization companies?

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

Question 5

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 6

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 7

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

A) They are mostly passive portfolios.
B) They are sometimes managed portfolios.
C) They often track a particular sector of the market.
D) They are priced based on Net Asset Value.

Question 8

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) closed-end companies have a more fixed capitalization.

Question 9

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.

Question 10

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 11

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 12

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 13

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

A) pooled investing
B) diversification
C) managed portfolios
D) reduced expenses

Question 14

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 15

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 16

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 17

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 18

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 19

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 20

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 21

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 22

Single-country funds have traditionally:

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

Question 23

No-loads 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 24

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 25

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

Question 26

ETFs are managed investment portfolios that offer investors targeted diversification.

Question 27

Most unit investment trusts are considered active investments.

Question 28

A loading fee is a:

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

Question 29

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) SMAs.

Question 30

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 31

A 12b-1 fee is a:

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

Question 32

Which of the following types of mutual fund shares typically does not charge a front-end sales charge but does 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 33

No-load funds sell:

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

Question 34

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

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

Question 35

Which of the following statements regarding fund expenses and performance is true?

A) The higher-performing funds generally have the highest expenses.
B) The stock funds generally have higher expenses than bond funds.
C) The index funds generally have higher expenses than non-index funds.
D) The lower performing funds generally have the highest expenses.

Question 36

In the mutual fund industry, the most common performance measure is a hypothetical rate of return which 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 37

Which of the following types of funds tends 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 38

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

Question 39

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

Question 40

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

Question 41

The major advantage of Separately Managed Accounts (SMA) is control and the direct owner may be able to specify investment restrictions.

Question 42

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

Question 43

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

Question 44

Almost 70 percent of all U.S. households owned mutual funds as of 2005.

Question 45

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

Question 46

It is possible under the new Morningstar ratings that one class of shares of a mutual fund can have a different rating that another class of shares of the same mutual fund.

Question 47

Investment company managers seek to increase the size of the funds being managed since the cost of overseeing additional amounts of money rises less than the revenue rate.

Question 48

Many ETFs report little or no capital gains over the years giving them greater tax efficiency than many mutual funds.

Question 49

Loaded funds generally outperform the no-load funds.

Question 50

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

Question 51

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

Question 52

Under its new system, Morningstar ranks funds against comparable funds in approximately 50 categories.

Question 53

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

Question 54

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

Question 55

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

Question 56

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

Question 57

Index funds tend to have lower expenses than other funds because they don't incur the costs of professional portfolio management.

Question 58

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

Question 59

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 60

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

Question 61

Three common characteristics of Class A shares are: ______________________,
____________________________________, and _____________________________ .

Question 62

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

Question 63

An investor who buys shares in a closed fund for less than the net asset value per share of the fund is said to be buying shares at a _____________________.

Question 64

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

Question 65

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 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 66

List the four basic types of mutual funds: _______________________________,
______________________________, _______________________________, and
____________________________________.

Question 67

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

Question 68

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)?

Question 69

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

Question 70

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

Question 71

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

Question 72

Briefly explain the fees charged by funds.

Question 73

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

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

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

Question 76

You have decided to invest in an aggressive growth fund for long-run future needs. You have a publication listing a number of such funds with their most recent 12-month total returns. Is this a good predictor of future performance?

Question 77

An aggressive equity mutual fund began the year with a net asset value (NAV) of $6.50 per share. During the year it received $0.15 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 year-end NAV.

Question 78

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