You are on page 1of 46

Chapter 04 - Mutual Funds and Other Investment Companies

Chapter 04 Mutual Funds and Other Investment Companies

Multiple Choice Questions

  • 1. 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

    • 2. 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

3.

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

    • 4. 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

4-1

Chapter 04 - Mutual Funds and Other Investment Companies

  • 5. 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

    • 6. 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

        • 7. The two principal types of REITs are equity trusts which

trusts which _______________.

_______________

and mortgage

  • 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

    • 8. A contingent deferred sales charge is commonly called a ____.

      • A. front-end load

      • B. back-end load

      • C. 12b-1 charge

      • D. top end sales commission

4-2

Chapter 04 - Mutual Funds and Other Investment Companies

9. In the U.S. there are approximately fund families.

_______

mutual funds offered by less than _______

  • A. 12,000; 600

  • B. 7,000; 100

  • C. 8,000; 500

  • D. 9,000; 300

    • 10. In 1999, the SEC established rules that should make a mutual fund prospectus _______.

  • A. easier to read and understand

  • B. much more detailed

  • C. disappear over the next 10 years

  • D. irrelevant to investors

    • 11. Mutual funds provide the following for their shareholders:

  • A. Diversification

  • B. Professional management

  • C. Record keeping and administration

  • D. Mutual funds provide diversification, professional management, and record keeping and

administration

  • 12. The average maturity of fund investments in a money market mutual fund is _______.

  • A. slightly more than one month

  • B. slightly more than one year

  • C. about 9 months

  • D. between 2 and 3 years

4-3

Chapter 04 - Mutual Funds and Other Investment Companies

  • 13. Rank the following fund category 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

  • 14. Which of the following result in a taxable event for investors?

  • I. Short-term capital gains distributions from the fund

II. Dividend distributions from the fund

III. Long-term capital gains distributions from the fund

  • A. I only

  • B. II only

  • C. I and II only

  • D. I, II and III

    • 15. The type of mutual fund that primarily engages in market timing is called a/an _______.

  • A. sector fund

  • B. index fund

  • C. ETF

  • D. asset allocation fund

    • 16. As of 2008, approximately

_____

  • A. 5%

of mutual fund assets were invested in equity funds.

  • B. 54%

  • C. 30%

  • D. 12%

4-4

Chapter 04 - Mutual Funds and Other Investment Companies

17.

As of 2008, approximately

of mutual fund assets were invested in bond funds.

  • A. 14%

  • B. 19%

  • C. 37%

 
  • D. 47%

18.

As of 2008, approximately

of mutual fund assets were invested in money market

funds.

A.

5%

B.

26%

C.

44%

D.

66%

  • 19. Management fees for open-end and closed-end funds, typically range between

and

_____

_____.

  • A. 0.2%; 1.5%

  • B. 0.5%; 5%

  • C. 2%; 5%

  • D. 3%; 8%

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

21. 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

4-5

Chapter 04 - Mutual Funds and Other Investment Companies

  • 22. 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. $12.00

  • B. $9.00

  • C. $10.00

  • D. $1.00

    • 23. Assume that you have recently purchased 100 shares in an investment company. Upon

examining the balance sheet, you note 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

    • 24. 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&P500

  • B. in proportion to the price weight of the stock in the S&P500

  • 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&P500

    • 25. 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

4-6

Chapter 04 - Mutual Funds and Other Investment Companies

  • 26. Which of the following funds invest in stocks of fast growing companies?

    • A. Balanced funds

    • B. Growth equity funds

    • C. REITs

    • D. Equity income funds

      • 27. A fund that invests in securities worldwide, including the United States is called a/an

______.

  • A. international fund

  • B. emerging market fund

  • C. global fund

  • D. regional fund

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

      • A. bond funds

      • B. equity funds

      • C. hybrid funds

      • D. money market funds

        • 29. 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

            • 30. Investors who wish 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

4-7

Chapter 04 - Mutual Funds and Other Investment Companies

  • 31. Investors who wish 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

32.

fund is defined as one where the fund charges a sales commission to either

buy into or exit the fund.

  • A. A load

  • B. A no-load

  • C. An index

  • D. A specialized sector fund

    • 33. 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

34.

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

  • A. Closed-end

  • B. Index

  • C. Open-end

  • D. Hedge

  • 35. 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

4-8

Chapter 04 - Mutual Funds and Other Investment Companies

  • 36. 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

    • 37. Low load mutual funds have front-end loads of no more than _____.

      • A. 2%

      • B. 3%

      • C. 4%

      • D. 5%

        • 38. Most real estate investment trusts (REITs) have a debt ratio of around _________.

          • A. 10 %

          • B. 30 %

          • C. 50 %

          • D. 70 %

            • 39. Measured by assets, about

_____

  • A. 15%

of funds are money market funds.

  • B. 25%

  • C. 40%

  • D. 60%

4-9

Chapter 04 - Mutual Funds and Other Investment Companies

  • 40. 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

  • 41. are often called mutual funds.

______________________

  • A. Unit investment trusts

  • B. Open-end investment companies

  • C. Closed-end investment companies

  • D. REITs

    • 42. Mutual funds account for roughly

______

percent of investment company assets.

  • A. 30

  • B. 50

  • C. 70

  • D. 90

    • 43. 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

4-10

Chapter 04 - Mutual Funds and Other Investment Companies

  • 44. 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

    • 45. 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, are called

____________________.

  • A. asset allocation funds

  • B. balanced funds

  • C. index funds

  • D. income funds

    • 46. Specialized sector funds concentrate their investments in _________________.

      • A. bonds of a particular maturity

      • B. geographical segments of the real estate market

      • C. government securities

      • D. securities issued by firms in a particular industry

        • 47. 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 D

            • 48. The commission, or front-end load, paid when you purchase shares in mutual funds, may

not exceed __________.

  • A. 3%

  • B. 6%

  • C. 8.5%

  • D. 10%

4-11

Chapter 04 - Mutual Funds and Other Investment Companies

  • 49. 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

  • 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

everything else equal.

  • 50. 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

    • 51. In 2000, the SEC instituted new rules that require funds to disclose _____.

      • A. 12b-1 fees

      • B. the tax impact of portfolio turnover

      • C. front-end loads

      • D. back-end loads

        • 52. SEC rule 12b-1 allows managers of certain funds to deduct

fund assets, however, these expenses may not exceed

expenses from

__________ of the fund's average net

__________

assets per year.

  • A. marketing; 1%

  • B. marketing; 5%

  • C. administrative; 0.5%

  • D. administrative; 2%

4-12

Chapter 04 - Mutual Funds and Other Investment Companies

  • 53. 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. 16.00%

  • C. 17.25%

  • D. 17.50%

    • 54. Consider a no-load mutual fund with $200 million in assets and 10 million shares at the

start of the year, and $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 gains distributions of $0.25 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. 36.25%

  • B. 24.90%

  • C. 23.85%

  • D. There is not sufficient information to answer this question

    • 55. 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 $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 $0.50 per share, and capital gains distributions of $0.30 per share. Assuming that the fund carries no debt, and that the total expense ratio is 0.75%, what is the rate of return on the fund?

  • A. 12.09%

  • B. 12.99%

  • C. 8.25%

  • D. There is not sufficient information to answer this question

    • 56. Mutual fund returns may be granted pass-through status, if _________________.

      • A. at least 90 percent of all income is distributed to shareholders

      • B. at least 30 percent of fund income is derived from sale of securities held for less than 3

months

  • C. certain diversification criteria are met

  • D. All of these must be true for pass-through status to be granted

4-13

Chapter 04 - Mutual Funds and Other Investment Companies

57.

A/an

_____

is an example of an exchange-traded fund.

  • A. SPDR or spider

  • B. samurai

  • C. Vanguard

  • D. open-end fund

  • 58. 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 4:00 pm New York time.

  • B. the real time NAV.

  • C. the NAV delayed 15 minutes.

  • D. the NAV calculated at the open of the next day's trading.

    • 59. With respect to mutual funds, late trading refers to the practice of ________.

A.

trading after the close of U.S. markets but before overseas markets have closed

B.

trading after the close of overseas markets, but before U.S. markets have closed

C.

accepting buy or sell orders after the market closes and NAV has already been determined

for the day

D.

paying capital gains distributions to certain investors only after paying privileged investors

first

  • 60. In the 1970 study, Malkiel found that mutual funds that do well in one period, have an

approximately

________

  • A. 33%

chance of doing well in the subsequent ear period.

  • B. 52%

  • C. 65%

  • D. 85%

    • 61. In a recent study, Malkiel finds that evidence of persistence in the performance of mutual

funds,

________________

  • A. grows stronger

in the 1980s.

  • B. remains about the same

  • C. becomes slightly weaker

  • D. virtually disappears

4-14

Chapter 04 - Mutual Funds and Other Investment Companies

  • 62. The ratio of trading activity of a portfolio to the assets of the portfolio, is called

____________.

A.

the reinvestment ratio

B.

the trading rate

C.

the portfolio turnover

D.

the tax yield

  • 63. Which of the following ETFs tracks the S&P 500 index?

    • A. Qubes

    • B. Diamonds

    • C. Vipers

    • D. Spiders

      • 64. 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

    • 65. 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 gains distributions and asset allocation funds make both

dividend and capital gains distributions

4-15

Chapter 04 - Mutual Funds and Other Investment Companies

  • 66. The Wildwood Fund sells Class A shares with a front-end load of 5% and Class B Shares

with a 12b-1 fees 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.

  • A. Class A

  • B. Class B

  • C. There is no difference.

  • D. There is insufficient information given.

    • 67. 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. 25.00%

  • B. 28.50%

  • C. 18.63%

  • D. 33.40%

    • 68. 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

    • 69. 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

4-16

Chapter 04 - Mutual Funds and Other Investment Companies

  • 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

  • 71. 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

72.

About

of mutual fund assets are invested in no-load funds.

  • A. 33%

  • B. 40%

  • C. 50%

  • D. 65%

 
  • 73. From 1971 to 2007 the average return on the Wilshire 5000 index was

return of the average mutual fund.

  • A. identical to

the

_________

  • B. 1% higher than

  • C. 1% lower than

  • D. 3% lower than

    • 74. 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

4-17

Chapter 04 - Mutual Funds and Other Investment Companies

  • 75. The offer price of an open-end fund is $18.00 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

    • 76. 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. $50.00

  • B. $55.44

  • C. $56.12

  • D. $54.55

    • 77. 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%

    • 78. Which of the following funds are usually most tax efficient?

      • A. Equity funds

      • B. Bond Funds

      • C. ETFs

      • D. Specialized sector funds

4-18

Chapter 04 - Mutual Funds and Other Investment Companies

  • 79. 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 0.5% per year. How much will you pay in fees on a

$10,000 investment that does not grow, if you cash out after three years of no gain?

  • A. 103

  • B. 219

  • C. 553

  • D. 635

    • 80. 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 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 one on a Class A investment of $20,000 with no growth in value?

  • A. 658

  • B. 794

  • C. 885

  • D. 902

    • 81. 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 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 one on a Class B investment of $20,000 if you redeem shares with no growth in value?

  • A. 596

  • B. 794

  • C. 885

  • D. 902

    • 82. You pay $21,600 to the Laramie Fund which has a NAV of $18.00 per share at the

beginning of the year. The fund deducted a front-end load of 4%. The securities in the fund

increased in value by 10% during the year. The fund's expense ratio is 1.3% and is deducted from year end asset values. What is your rate of return on the fund if you sell your shares at the end of the year?

  • A. 4.35%

  • B. 4.23%

  • C. 6.45%

  • D. 5.63%

4-19

Chapter 04 - Mutual Funds and Other Investment Companies

  • 83. Which one of the following statements about returns reported by mutual funds is not

correct?

  • A. Reported returns are net of management expenses

  • B. Reported returns are net of 12b-1 fees

  • C. Reported returns are net of brokerage fees paid on the fund's trading activity

  • D. Reported returns are net of load charges

    • 84. The top Morningstar mutual fund performance rating is ________.

      • A. five stars

      • B. four stars

      • C. three stars

      • D. two stars

        • 85. You are considering investing in a no load mutual fund with an annual expense ratio of

0.6% and an annual 12b-1 fee of 0.75%. You could also invest in a bank CD paying 6.5% per

year. What minimum annual rate of return must the fund earn to make you better off in the fund than in the CD?

  • A. 7.10%

  • B. 7.45%

  • C. 7.25%

  • D. 7.85%

Chapter 04 Mutual Funds and Other Investment Companies Answer Key

Multiple Choice Questions

4-20

Chapter 04 - Mutual Funds and Other Investment Companies

  • 1. 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

Difficulty: Easy

  • 2. 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

Difficulty: Easy

3.

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

Difficulty: Easy

  • 4. 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

Difficulty: Easy

4-21

Chapter 04 - Mutual Funds and Other Investment Companies

  • 5. 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

Difficulty: Medium

  • 6. 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

Difficulty: Easy

  • 7. The two principal types of REITs are equity trusts which

trusts which _______________.

_______________

and mortgage

  • 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

Difficulty: Medium

  • 8. A contingent deferred sales charge is commonly called a ____.

  • A. front-end load

B.

back-end load

  • C. 12b-1 charge

  • D. top end sales commission

Difficulty: Easy

4-22

Chapter 04 - Mutual Funds and Other Investment Companies

9. In the U.S. there are approximately fund families.

_______

mutual funds offered by less than _______

  • A. 12,000; 600

  • B. 7,000; 100

C.

8,000; 500

  • D. 9,000; 300

Difficulty: Medium

  • 10. In 1999, the SEC established rules that should make a mutual fund prospectus _______.

  • A. easier to read and understand

  • B. much more detailed

  • C. disappear over the next 10 years

  • D. irrelevant to investors

Difficulty: Easy

  • 11. Mutual funds provide the following for their shareholders:

  • A. Diversification

  • B. Professional management

  • C. Record keeping and administration

  • D. Mutual funds provide diversification, professional management, and record keeping and

administration

Difficulty: Easy

  • 12. The average maturity of fund investments in a money market mutual fund is _______.

  • A. slightly more than one month

  • B. slightly more than one year

  • C. about 9 months

  • D. between 2 and 3 years

Difficulty: Easy

4-23

Chapter 04 - Mutual Funds and Other Investment Companies

  • 13. Rank the following fund category 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

Difficulty: Medium

14.

Which of the following result in a taxable event for investors?

I.

Short-term capital gains distributions from the fund

II. Dividend distributions from the fund III. Long-term capital gains distributions from the fund

A.

I only

B.

II only

C.

I and II only

D.

I, II and III

Difficulty: Easy

15.

The type of mutual fund that primarily engages in market timing is called a/an _______.

A.

sector fund

B.

index fund

C.

ETF

  • D. asset allocation fund

Difficulty: Medium

4-24

Chapter 04 - Mutual Funds and Other Investment Companies

16.

As of 2008, approximately

of mutual fund assets were invested in equity funds.

A.

5%

B.

54%

C.

30%

D.

12%

Difficulty: Easy

 

17.

As of 2008, approximately

of mutual fund assets were invested in bond funds.

A.

14%

B.

19%

C.

37%

D.

47%

Difficulty: Easy

 

18.

As of 2008, approximately

of mutual fund assets were invested in money market

funds.

A.

5%

B.

26%

C.

44%

D.

66%

Difficulty: Easy

 

19.

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

and

_____.

A.

0.2%; 1.5%

B.

0.5%; 5%

C.

2%; 5%

D.

3%; 8%

Difficulty: Easy

4-25

Chapter 04 - Mutual Funds and Other Investment Companies

  • 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

Difficulty: Easy

  • 21. 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

Difficulty: Easy

  • 22. 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. $12.00 B. $9.00 C. $10.00 D. $1.00
A.
$12.00
B.
$9.00
C.
$10.00
D.
$1.00

Difficulty: Easy

4-26

Chapter 04 - Mutual Funds and Other Investment Companies

  • 23. Assume that you have recently purchased 100 shares in an investment company. Upon

examining the balance sheet, you note 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
A.
$25.50
B.
$22.50
C.
$19.50
D.
$1.95

Difficulty: Easy

  • 24. 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&P500

  • B. in proportion to the price weight of the stock in the S&P500

  • 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&P500

Difficulty: Easy

  • 25. 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

Difficulty: Easy

4-27

Chapter 04 - Mutual Funds and Other Investment Companies

  • 26. Which of the following funds invest in stocks of fast growing companies?

  • A. Balanced funds

B.

Growth equity funds

  • C. REITs

  • D. Equity income funds

Difficulty: Easy

  • 27. A fund that invests in securities worldwide, including the United States is called a/an

______.

  • A. international fund

  • B. emerging market fund

C.

global fund

  • D. regional fund

Difficulty: Easy

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

  • A. bond funds

B.

equity funds

  • C. hybrid funds

  • D. money market funds

Difficulty: Easy

  • 29. 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

Difficulty: Easy

4-28

Chapter 04 - Mutual Funds and Other Investment Companies

  • 30. Investors who wish 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

Difficulty: Easy

  • 31. Investors who wish 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

Difficulty: Easy

32.

fund is defined as one where the fund charges a sales commission to either

buy into or exit the fund.

A.

A load

  • B. A no-load

 
  • C. An index

  • D. A specialized sector fund

Difficulty: Easy

  • 33. 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

Difficulty: Easy

4-29

Chapter 04 - Mutual Funds and Other Investment Companies

34.

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

  • A. Closed-end

  • B. Index

C.

Open-end

  • D. Hedge

 

Difficulty: Easy

  • 35. 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

Difficulty: Easy

  • 36. 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

Difficulty: Medium

  • 37. Low load mutual funds have front-end loads of no more than _____.

  • A. 2%

B.

3%

  • C. 4%

  • D. 5%

Difficulty: Easy

4-30

Chapter 04 - Mutual Funds and Other Investment Companies

  • 38. Most real estate investment trusts (REITs) have a debt ratio of around _________.

A.

10 %

B.

30 %

C.

50 %

D.

70 %

Difficulty: Easy

39.

Measured by assets, about

of funds are money market funds.

A.

15%

B.

25%

C.

40%

D.

60%

Difficulty: Easy

40.

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

Difficulty: Easy

41.

are often called mutual funds.

______________________

A.

Unit investment trusts

B.

Open-end investment companies

C.

Closed-end investment companies

D.

REITs

Difficulty: Easy

4-31

Chapter 04 - Mutual Funds and Other Investment Companies

  • 42. Mutual funds account for roughly

______

percent of investment company assets.

  • A. 30

  • B. 50

  • C. 70

D.

90

Difficulty: Easy

  • 43. 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

Difficulty: Easy

  • 44. 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

Difficulty: Easy

  • 45. 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, are called

____________________.

  • A. asset allocation funds

  • B. balanced funds

  • C. index funds

  • D. income funds

Difficulty: Easy

4-32

Chapter 04 - Mutual Funds and Other Investment Companies

  • 46. Specialized sector funds concentrate their investments in _________________.

    • A. bonds of a particular maturity

    • B. geographical segments of the real estate market

    • C. government securities

    • D. securities issued by firms in a particular industry

Difficulty: Easy

  • 47. 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 D

Difficulty: Medium

  • 48. The commission, or front-end load, paid when you purchase shares in mutual funds, may

not exceed __________.

  • A. 3%

  • B. 6%

C.

8.5%

  • D. 10%

Difficulty: Easy

  • 49. 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

  • 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

everything else equal.

Difficulty: Medium

4-33

Chapter 04 - Mutual Funds and Other Investment Companies

  • 50. 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

Difficulty: Easy

  • 51. In 2000, the SEC instituted new rules that require funds to disclose _____.

  • A. 12b-1 fees

B.

the tax impact of portfolio turnover

  • C. front-end loads

  • D. back-end loads

Difficulty: Medium

  • 52. SEC rule 12b-1 allows managers of certain funds to deduct

fund assets, however, these expenses may not exceed

expenses from

__________ of the fund's average net

__________

assets per year.

A.

marketing; 1%

  • B. marketing; 5%

  • C. administrative; 0.5%

  • D. administrative; 2%

Difficulty: Easy

4-34

Chapter 04 - Mutual Funds and Other Investment Companies

  • 53. 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. 16.00% C. 17.25% D. 17.50%
A.
15.64%
B.
16.00%
C.
17.25%
D.
17.50%

Difficulty: Hard

  • 54. Consider a no-load mutual fund with $200 million in assets and 10 million shares at the

start of the year, and $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 gains distributions of $0.25 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. 36.25%

B.

24.90%

  • C. 23.85%

  • D. There is not sufficient information to answer this question

Since this is a no-load fund, all charges are already embedded in gross return. Thus, gross return and net return are the same.

Chapter 04 - Mutual Funds and Other Investment Companies 53. Consider a mutual fund with $300

Difficulty: Medium

4-35

Chapter 04 - Mutual Funds and Other Investment Companies

  • 55. 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 $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 $0.50 per share, and capital gains distributions of $0.30 per share. Assuming

that the fund carries no debt, and that the total expense ratio is 0.75%, what is the rate of return on the fund?

A.

12.09%

  • B. 12.99%

  • C. 8.25%

  • D. There is not sufficient information to answer this question

Since this is a no-load fund, all charges are already embedded in gross return. Thus, gross return and net return are the same.

Chapter 04 - Mutual Funds and Other Investment Companies 55. Consider a no-load mutual fund with

Difficulty: Hard

  • 56. Mutual fund returns may be granted pass-through status, if _________________.

    • A. at least 90 percent of all income is distributed to shareholders

    • B. at least 30 percent of fund income is derived from sale of securities held for less than 3

months

  • C. certain diversification criteria are met

  • D. All of these must be true for pass-through status to be granted

Difficulty: Easy

4-36

Chapter 04 - Mutual Funds and Other Investment Companies

57.

A/an

is an example of an exchange-traded fund.

A.

SPDR or spider

B.

samurai

C.

Vanguard

D.

open-end fund

Difficulty: Medium

 

58.

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 4:00 pm New York time.

B.

the real time NAV.

C.

the NAV delayed 15 minutes.

D.

the NAV calculated at the open of the next day's trading.

Difficulty: Medium

 

59.

With respect to mutual funds, late trading refers to the practice of ________.

A.

trading after the close of U.S. markets but before overseas markets have closed

B.

trading after the close of overseas markets, but before U.S. markets have closed

C.

accepting buy or sell orders after the market closes and NAV has already been determined

for the day

 

D.

paying capital gains distributions to certain investors only after paying privileged investors

first

 

Difficulty: Easy

60.

In the 1970 study, Malkiel found that mutual funds that do well in one period, have an

approximately

chance of doing well in the subsequent ear period.

A.

33%

B.

52%

C.

65%

D.

85%

Difficulty: Medium

4-37

Chapter 04 - Mutual Funds and Other Investment Companies

  • 61. In a recent study, Malkiel finds that evidence of persistence in the performance of mutual

 

funds,

in the 1980s.

________________

A.

grows stronger

B.

remains about the same

C.

becomes slightly weaker

D.

virtually disappears

Difficulty: Easy

 

62.

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

____________.

 

A.

the reinvestment ratio

B.

the trading rate

C.

the portfolio turnover

D.

the tax yield

Difficulty: Easy

 

63.

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

A.

Qubes

B.

Diamonds

C.

Vipers

D.

Spiders

Difficulty: Medium

4-38

Chapter 04 - Mutual Funds and Other Investment Companies

64. 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

NAV = ($300,000,000 - $5,000,000)/9,000,000 = $32.78 Discount = $32.78 - $30 = $2.78

Chapter 04 - Mutual Funds and Other Investment Companies 64. The Stone Harbor Fund is a

Difficulty: Hard

65. 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 gains distributions and asset allocation funds make both

dividend and capital gains distributions

Difficulty: Easy

4-39

Chapter 04 - Mutual Funds and Other Investment Companies

  • 66. The Wildwood Fund sells Class A shares with a front-end load of 5% and Class B Shares

with a 12b-1 fees 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.

  • A. Class A

B.

Class B

  • C. There is no difference.

  • D. There is insufficient information given.

Chapter 04 - Mutual Funds and Other Investment Companies 66. The Wildwood Fund sells Class A

Difficulty: Medium

  • 67. 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.

25.00%

  • B. 28.50%

  • C. 18.63%

  • D. 33.40%

$17.25/$69 = 25.00%

Difficulty: Easy

4-40

Chapter 04 - Mutual Funds and Other Investment Companies

  • 68. 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

Difficulty: Easy

69.

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

Difficulty: Medium

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

Difficulty: Medium

71.

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

Difficulty: Easy

4-41

Chapter 04 - Mutual Funds and Other Investment Companies

72.

About

of mutual fund assets are invested in no-load funds.

  • A. 33%

  • B. 40%

  • C. 50%

D.

65%

Difficulty: Medium

  • 73. From 1971 to 2007 the average return on the Wilshire 5000 index was

return of the average mutual fund.

  • A. identical to

B.

1% higher than

  • C. 1% lower than

  • D. 3% lower than

the

_________

Difficulty: Hard

  • 74. 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
A.
$14.57
B.
$15.95
C.
$17.55
D.
$16.49

Difficulty: Medium

4-42

Chapter 04 - Mutual Funds and Other Investment Companies

  • 75. The offer price of an open-end fund is $18.00 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

($18.00)(1 - 0.05) = $17.10

Difficulty: Medium

  • 76. 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. $50.00 B. $55.44 C. $56.12 D. $54.55
A.
$50.00
B.
$55.44
C.
$56.12
D.
$54.55

Difficulty: Hard

  • 77. 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%

Price per share = (25 million - 4 million)/700,000 = 30 per share Dividend yield = 3/30 = 10%

Difficulty: Medium

4-43

Chapter 04 - Mutual Funds and Other Investment Companies

  • 78. Which of the following funds are usually most tax efficient?

  • A. Equity funds

  • B. Bond Funds

C.

ETFs

  • D. Specialized sector funds

Difficulty: Medium

  • 79. 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 0.5% per year. How much will you pay in fees on a

$10,000 investment that does not grow, if you cash out after three years of no gain?

  • A. 103

  • B. 219

  • C. 553

D.

635

total fees = 10,000 - (10,000 x .97) x (.99) x (.99) x (.99) x (.995) = 635

Difficulty: Hard

  • 80. 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 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 one on

a Class A investment of $20,000 with no growth in value?

  • A. 658

B.

794

  • C. 885

  • D. 902

First year fees = 20,000 - (20,000 x .97 x .99) = 794

Difficulty: Medium

4-44

Chapter 04 - Mutual Funds and Other Investment Companies

  • 81. 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 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 one on a Class B investment of $20,000 if you redeem shares with no growth in value?

A.

596

  • B. 794

  • C. 885

  • D. 902

Total fees after one year = 20,000 - (20,000 x 0.98 x 0.99) = 596

Difficulty: Medium

  • 82. You pay $21,600 to the Laramie Fund which has a NAV of $18.00 per share at the

beginning of the year. The fund deducted a front-end load of 4%. The securities in the fund increased in value by 10% during the year. The fund's expense ratio is 1.3% and is deducted from year end asset values. What is your rate of return on the fund if you sell your shares at the end of the year?

A. 4.35% B. 4.23% C. 6.45% D. 5.63%
A.
4.35%
B.
4.23%
C.
6.45%
D.
5.63%

Difficulty: Hard

  • 83. Which one of the following statements about returns reported by mutual funds is not

correct?

  • A. Reported returns are net of management expenses

  • B. Reported returns are net of 12b-1 fees

  • C. Reported returns are net of brokerage fees paid on the fund's trading activity

  • D. Reported returns are net of load charges

Difficulty: Medium

4-45

Chapter 04 - Mutual Funds and Other Investment Companies

  • 84. The top Morningstar mutual fund performance rating is ________.

A.

five stars

  • B. four stars

  • C. three stars

  • D. two stars

Difficulty: Easy

  • 85. You are considering investing in a no load mutual fund with an annual expense ratio of

0.6% and an annual 12b-1 fee of 0.75%. You could also invest in a bank CD paying 6.5% per

year. What minimum annual rate of return must the fund earn to make you better off in the fund than in the CD?

  • A. 7.10%

  • B. 7.45%

  • C. 7.25%

D.

7.85%

r > 6.5 + 0.06 + 0.075 = 7.85%

Difficulty: Medium

4-46