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 statements regarding open-end mutual funds is false? A. he funds redeem shares at net asset value. !. he funds offer investors professional management. C. he funds offer investors a guaranteed rate of return. ". ! and C. #. A and !. $o investment offers a guaranteed rate of return.
Difficulty: Moderate

%. Which one of the following statements regarding closed-end mutual funds is false? A. he funds alwa&s trade at a discount from $A'. !. he funds redeem shares at their net asset value. C. he funds offer investors professional management. D. A and !. #. $one of the a(ove. Closed-end funds are sold at the prevailing mar)et price.
Difficulty: Moderate

4. Multiple Mutual Funds had &ear-end assets of *4+,-000-000 and lia(ilities of *1,-000-000. here were %4-.00-000 shares in the fund at &ear-end. What was Multiple Mutual/s $et Asset 'alue0 A. *11.11 !. *11.11 C. *23.32 ". *,.00 #. *111.0, 44+,-000-000 - 1,-000-0005 6 %4-.00-000 7 *11.11
Difficulty: Moderate

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Chapter 04 - Mutual Funds and other Investment Companies

2. "iversified 8ortfolios had &ear-end assets of *%,3-000-000 and lia(ilities of *4.-000-000. If "iversified/s $A' was *4%.1.- how man& shares must have (een held in the fund0 A. 4.-000-000 !. 2-411-.,% C. +-201-,03 ". 1-11%-%0. #. $one of the a(ove. 4*%,3-000-000 - 4.-000-0005 6 *4%.1. 7 +-201-,01.332.
Difficulty: Moderate

1. Most activel& managed mutual funds- when compared to a mar)et inde9 such as the Wilshire +000A. (eat the mar)et return in all &ears. !. (eat the mar)et return in most &ears. C. e9ceed the return on inde9 funds. D. do not outperform the mar)et #. $one of the a(ove is a correct statement. Most activel& managed mutual funds fail to e:ual the return earned (& inde9 funds- possi(l& due to higher transactions costs.
Difficulty: Easy

3. 8ools of mone& invested in a portfolio that is fi9ed for the life of the fund are called A. closed-end funds. !. open-end funds. C. unit investment trusts. ". ;#I <. #. redeema(le trust certificates. =nit investment trusts are funds that invest in a portfolio- often fi9ed-income securities- and hold it to maturit&.
Difficulty: Easy

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Chapter 04 - Mutual Funds and other Investment Companies

10. Investors in closed-end funds who wish to li:uidate their positions must A. sell their shares through a (ro)er. !. sell their shares to the issuer at a discount to $et Asset 'alue. C. sell their shares to the issuer at a premium to $et Asset 'alue. ". sell their shares to the issuer for $et Asset 'alue. #. hold their shares to maturit&. Closed-end fund shares are sold on organi>ed e9changes through a (ro)er.
Difficulty: Moderate

1%. At issue- offering prices of open-end funds will often (e A. less than $A' due to loads and commissions. B. greater than $A' due to loads and commissions. C. less than $A' due to limited demand. ". greater than $A' due to e9cess demand. #. less than or greater than $A' with no apparent pattern. ?pen-end funds are redeema(le on demand at $A' so the& should never sell for less than $A'. @owever- loads and commissions can increase the price a(ove $A'.
Difficulty: Difficult

1.. Which of the following statements a(out ;eal #state Investment rusts is true0 A. ;#I s invest in real estate or loans secured (& real estate. !. ;#I s raise capital (& (orrowing from (an)s and issuing mortgages. C. ;#I s are similar to open-end funds- with shares redeema(le at $A'. ". All of the a(ove are true. E. !oth A and ! are true. ;eal #state Investment rusts invest in real estate or real-estate-secured loans. he& ma& raise capital from (an)s and (& issuing mortgages. he& are similar to closed-end funds and shares are t&picall& e9change traded.
Difficulty: Moderate

1+. Which of the following statements a(out Mone& Mar)et Mutual Funds is true0 A. he& invest in commercial paper- C"s- and repurchase agreements. !. he& usuall& offer chec)-writing privileges. C. he& are highl& leveraged and ris)&. ". All of the a(ove are true. E. !oth A and ! are true.
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Chapter 04 - Mutual Funds and other Investment Companies

Mone& Mar)et Mutual Funds invest in commercial paper- C"s- repurchase agreements- and other mone& mar)et securities. he& usuall& offer chec)-writing privileges. heir $A' is is fi9ed at *1 per share.
Difficulty: Moderate

%0. Management fees and other e9penses of mutual funds ma& include A. front-end loads. !. (ac)-end loads. C. 1%(-1 charges. ". A and ! onl&. E. A- ! and C. All of the listed e9penses ma& (e included in the cost of owning a mutual fund.
Difficulty: Easy

%1. he 8rofita(ilit& Fund had $A' per share of *1,.+0 on Aanuar& 1- %00,. ?n "ecem(er .1 of the same &ear the fund/s $A' was *13.4,. Income distri(utions were *0.,+ and the fund had capital gain distri(utions of *1.00. Without considering ta9es and transactions costs- what rate of return did an investor receive on the 8rofita(ilit& fund last &ear0 A. 11.%2B !. 1+.+4B C. 12.3,B D. %1.%2B #. 3.1.B ; 7 4*13.4, - 1,.+0 C .,+ C 1.005 6 *1,.+0 7 %1.%2B
Difficulty: Moderate

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Chapter 04 - Mutual Funds and other Investment Companies

%4. Which of the following is not an advantage of mutual funds0 A. he& offer a variet& of investment st&les. !. he& offer small investors the (enefits of diversification. C. he& treat income as Dpassed throughD to the investor for ta9 purposes. ". A- ! and C are all advantages of mutual funds. #. $either A nor ! nor C are advantages of mutual funds. A disadvantage of mutual funds is that investment income is passed through for ta9 purposes and investors ma& therefore lose the a(ilit& to engage in ta9 management.
Difficulty: Easy

%+. Which of the following would increase the net asset value of a mutual fund shareassuming all other things remain unchanged0 A. an increase in the num(er of fund shares outstanding !. an increase in the fund/s accounts pa&a(le C. a change in the fund/s management D. an increase in the value of one of the fund/s stoc)s #. none of the a(ove A and ! would decrease $A' and C would have an uncertain effect 4and then onl& in the future5. @owever- an increase in the value of one of the fund/s stoc)s would increase $A'.
Difficulty: Easy

%2. Which of the following characteristics appl& to unit investment trusts0 I5 Most are invested in fi9ed-income portfolios. II5 he& are activel& managed portfolios. III5 he sponsor pools securities- then sells pu(lic shares in the trust. I'5 he portfolio is fi9ed for the life of the fund. A. I and I' !. I and II C. I- III- and I' ". I- II- and III #. I- II- III- and I' hree chief characteristics of =I s are that 415 the sponsor pools securities- and then sells pu(lic shares in the trust- 4%5 the portfolio is fi9ed for the life of the fund- and 4.5 most are invested in fi9ed-income portfolios.
Difficulty: Moderate

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Chapter 04 - Mutual Funds and other Investment Companies

%,. Aargon ;apid Erowth is a mutual fund that has traditionall& accepted funds from new investors and issued new shares at net asset value. Aerem& Aargon manages the fund himself and has (ecome concerned that its level of assets has (ecome too high for his management a(ilities. @e issues a statement that Aargon will no longer accept funds from new investors- (ut will continue to accept additional investments from current shareholders. Which of the following is true a(out Aargon ;apid Erowth fund0 A. Aargon used to (e an open-end fund (ut has now (ecome a closed-end fund. B. Aargon has alwa&s (een an open-end fund and will remain an open-end fund. C. Aargon has alwa&s (een a closed-end fund and will remain a closed-end fund. ". Aargon is an open-end fund (ut would change to a closed-end fund if it wouldn/t accept additional funds from current investors. #. Aargon is violating <#C polic& (& refusing to accept new investors. !ecause Aargon accepts funds from investors- it is an open-end fund. ?nce closed-end start trading- the& are onl& traded in the secondar& mar)et. @owever- when the decision was made to stop accepting investments from new investors- it (ecame a closed-fund.
Difficulty: Moderate

.1. he fee that mutual funds use to help pa& for advertising and promotional literature is called a A. front-end load fee. !. (ac)-end load fee. C. operating e9pense fee. D. 1%(-1 fee. #. structured fee. A and ! are used to compensate the sales force and C is used to cover operating e9penses. ;ule 1%(-1 allows a small fee to cover advertising and promotion.
Difficulty: Easy

+1. "ifferences (etween hedge funds and mutual funds are that A. hedge funds are onl& su(Fect to minimal <#C regulation. !. hedge funds are t&picall& open onl& to wealth& or institutional investors. C. hedge funds managers can pursue strategies not availa(le to mutual funds such as short selling- heav& use of derivatives- and leverage. ". are commonl& structured as private partnerships. E. all of the a(ove

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Chapter 04 - Mutual Funds and other Investment Companies

@edge funds are t&picall& open onl& to wealth& or institutional investors- are commonl& structured as private partnerships- are onl& su(Fect to minimal <#C regulation- and can pursue strategies not availa(le to mutual funds such as short selling- heav& use of derivatives- and leverage.
Difficulty: Moderate

+4. ?f the following t&pes of #F s- an investor that wishes to invest in a diversified portfolio that trac)s the <G8 +00 should choose A. <8H. !. "IA. C. III. ". IWM. #. ' I. <8H trac)s the <G8 +00.
Difficulty: Moderate

++. ?f the following t&pes of #F s- an investor that wishes to invest in a diversified portfolio that trac)s the "ow Aones Industrials should choose A. <8H. B. "IA. C. III. ". IWM. #. ' I. "IA trac)s the "AIA.
Difficulty: Moderate

+2. ?f the following t&pes of #F s- an investor that wishes to invest in a diversified portfolio that trac)s the $asda: 100 should choose A. <8H. !. "IA. C. III. ". IWM. #. ' I.

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Chapter 04 - Mutual Funds and other Investment Companies

III trac)s the $asda: 100.

Difficulty: Moderate

21. A mutual funds had average dail& assets of *..0 (illion in %00,. he fund sold *200 million worth of stoc) and purchased *,00 million worth of stoc) during the &ear. he funds turnover ratio is JJJ. A. %,.+B !. 1%B C. 1+B ". %+B E. %0B 200-000-000 6 .-000-000-000 7 %0B
Difficulty: Moderate

2+. Hou purchased shares of a mutual fund at a price of *%0 per share at the (eginning of the &ear and paid a front-end load of +.,+B. If the securities in which the find invested increased in value (& 11B during the &ear- and the funds e9pense ratio was 1.%+B- &our return if &ou sold the fund at the end of the &ear would (e JJJJJJJJJJJJ. A. 4... B. ..44 C. %.4+ ". 2.1, #. $one of the a(ove KL*%0 M .34%+ M 41.11 - .01%+5N - *%0O 6 *%0 7 ..44B
Difficulty: Difficult

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Chapter 04 - Mutual Funds and other Investment Companies

2,. Hou purchased shares of a mutual fund at a price of *1, per share at the (eginning of the &ear and paid a front-end load of +.0B. If the securities in which the find invested increased in value (& 1%B during the &ear- and the funds e9pense ratio was 1.0B- &our return if &ou sold the fund at the end of the &ear would (e JJJJJJJJJJJJ. A. 4.,+ B. +.4+ C. +.2+ ". 4..3 #. $one of the a(ove KL*1, M .3+ M 41.1% - .015N - *1,O 6 *1, 7 +.4+B
Difficulty: Difficult

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