Chapter 04 - Mutual Funds and Other Investment Companies
Chapter 04 Mutual Funds and Other Investment Companies Answer Key
1. Whih one o! the !ollowin" invests in a port!olio that is !i#ed !or the li!e o! the !und$ A. Mutual !und %. Money mar&et !und C. Mana"ed investment ompany D. 'nit investment trust (. )))))) are partnerships o! investors with port!olios that are lar"er than most individual investors *ut are still too small to warrant mana"in" on a separate *asis. A. Commin"led !unds %. Closed-end !unds C. +,I-s .. Mutual !unds /. A )))))))))) is a private investment pool open only to wealthy or institutional investors that is e#empt !rom 0,C re"ulation and an there!ore pursue more speulative poliies than mutual !unds. A. ommin"led pool %. unit trust C. hed"e !und .. money mar&et !und 4. Advanta"es o! investment ompanies to investors inlude all *ut whih one o! the !ollowin"$ A. +eord &eepin" and administration %. 1ow ost diversi!iation C. 2ro!essional mana"ement D. 3uaranteed rates o! return 4. Whih o! the !ollowin" typially employ si"ni!iant amounts o! levera"e$ I. 5ed"e !unds II. +,I-s III. Money mar&et !unds I6. ,7uity mutual !unds A. I and II only %. II and III only C. III and I6 only .. I8 II and III only 4-1 Chapter 04 - Mutual Funds and Other Investment Companies 9. -he :A6 o! whih !unds is !i#ed at ;1 per share$ A. ,7uity !unds B. Money mar&et !unds C. Fi#ed inome !unds .. Commin"led !unds <. -he two prinipal types o! +,I-s are e7uity trusts whih ))))))))))))))) and mort"a"e trusts whih ))))))))))))))). A. invest diretly in real estate= invest in mort"a"e and onstrution loans %. invest in mort"a"e and onstrution loans= invest diretly in real estate C. use e#tensive levera"e= distri*ute less than >4? o! inome to shareholders .. distri*ute less than >4? o! inome to shareholders= use e#tensive levera"e @. A ontin"ent de!erred sales har"e is ommonly alled a )))). A. !ront-end load B. *a&-end load C. 1(*-1 har"e .. top end sales ommission >. In the '.0. there are appro#imately ))))))) mutual !unds o!!ered *y less than ))))))) !und !amilies. A. 1(8000= 900 %. <8000= 100 C. @8000= 400 .. >8000= /00 10. In 1>>>8 the 0,C esta*lished rules that should ma&e a mutual !und prospetus ))))))). A. easier to read and understand %. muh more detailed C. disappear over the ne#t 10 years .. irrelevant to investors 11. Mutual !unds provide the !ollowin" !or their shareholdersA A. .iversi!iation %. 2ro!essional mana"ement C. +eord &eepin" and administration D. Mutual !unds provide diversi!iation8 pro!essional mana"ement8 and reord &eepin" and administration 1(. -he avera"e maturity o! !und investments in a money mar&et mutual !und is ))))))). A. sli"htly more than one month %. sli"htly more than one year C. a*out > months .. *etween ( and / years 4-( Chapter 04 - Mutual Funds and Other Investment Companies 1/. +an& the !ollowin" !und ate"ory !rom most ris&y to least ris&y. I. ,7uity "rowth !und II. %alaned !und III. 0etor !und I6. Money mar&et !und A. I68 I8 III8 II %. III8 II8 I68 I C. I8 II8 III8 I6 D. III8 I8 II8 I6 14. Whih o! the !ollowin" result in a ta#a*le event !or investors$ I. 0hort-term apital "ains distri*utions !rom the !und II. .ividend distri*utions !rom the !und III. 1on"-term apital "ains distri*utions !rom the !und A. I only %. II only C. I and II only D. I8 II and III 14. -he type o! mutual !und that primarily en"a"es in mar&et timin" is alled aBan ))))))). A. setor !und %. inde# !und C. ,-F D. asset alloation !und 19. As o! (00@8 appro#imately ))))) o! mutual !und assets were invested in e7uity !unds. A. 4? B. 44? C. /0? .. 1(? 1<. As o! (00@8 appro#imately ))))) o! mutual !und assets were invested in *ond !unds. A. 14? %. 1>? C. /<? .. 4<?
1@. As o! (00@8 appro#imately ))))) o! mutual !und assets were invested in money mar&et !unds. A. 4? B. (9? C. 44? .. 99? 4-/ Chapter 04 - Mutual Funds and Other Investment Companies 1>. Mana"ement !ees !or open-end and losed-end !unds8 typially ran"e *etween ))))) and ))))). A. 0.(?= 1.4? %. 0.4?= 4? C. (?= 4? .. /?= @? (0. -he primary measurement unit used !or assessin" the value o! oneCs sta&e in an investment ompany is ))))))))))))))))))). A. :et Asset 6alue %. Avera"e Asset 6alue C. 3ross Asset 6alue .. -otal Asset 6alue (1. :et Asset 6alue is de!ined as )))))))))))))))))))))))). A. *oo& value o! assets divided *y shares outstandin" %. *oo& value o! assets minus lia*ilities divided *y shares outstandin" C. mar&et value o! assets divided *y shares outstandin" D. mar&et value o! assets minus lia*ilities divided *y shares outstandin" ((. Assume that you have Dust purhased some shares in an investment ompany reportin" ;400 million in assets8 ;40 million in lia*ilities8 and 40 million shares outstandin". What is the :et Asset 6alue E:A6F o! these shares$ A. ;1(.00 B. ;>.00 C. ;10.00 .. ;1.00 (/. Assume that you have reently purhased 100 shares in an investment ompany. 'pon e#aminin" the *alane sheet8 you note the !irm is reportin" ;((4 million in assets8 ;/0 million in lia*ilities8 and 10 million shares outstandin". What is the :et Asset 6alue E:A6F o! these shares$ A. ;(4.40 %. ;((.40 C. ;1>.40 .. ;1.>4 4-4 Chapter 04 - Mutual Funds and Other Investment Companies (4. -he 6an"uard 400 Inde# Fund tra&s the per!ormane o! the 0G2 400. -o do so the !und *uys shares in eah 0G2 400 ompany )))))))))). A. in proportion to the mar&et value wei"ht o! the !irmCs e7uity in the 0G2400 %. in proportion to the prie wei"ht o! the sto& in the 0G2400 C. *y purhasin" an e7ual num*er o! shares o! eah sto& in the 0G2 400 .. *y purhasin" an e7ual dollar amount o! shares o! eah sto& in the 0G2400 (4. Whih o! the !ollowin" is not a type o! mana"ed investment ompany$ A. 'nit investment trusts %. Closed-end !unds C. Open-end !unds .. 5ed"e !unds (9. Whih o! the !ollowin" !unds invest in sto&s o! !ast "rowin" ompanies$ A. %alaned !unds B. 3rowth e7uity !unds C. +,I-s .. ,7uity inome !unds (<. A !und that invests in seurities worldwide8 inludin" the 'nited 0tates is alled aBan )))))). A. international !und %. emer"in" mar&et !und C. "lo*al !und .. re"ional !und (@. -he "reatest perenta"e o! mutual !und assets are invested in )))))))). A. *ond !unds B. e7uity !unds C. hy*rid !unds .. money mar&et !unds (>. 0ponsors o! unit investment trusts earn a pro!it *y ))))))))))))))))))). A. dedutin" mana"ement !ees !rom !und assets %. dedutin" a perenta"e o! any "ains in asset value C. sellin" shares in the trust at a premium to the ost o! a7uirin" the underlyin" assets .. har"in" port!olio turnover !ees /0. Investors who wish to li7uidate their holdin"s in a unit investment trust may ))))))))))))))))))). A. sell their shares *a& to the trustee at a disount B. sell their shares *a& to the trustee at net asset value C. sell their shares on the open mar&et .. sell their shares at a premium to net asset value 4-4 Chapter 04 - Mutual Funds and Other Investment Companies /1. Investors who wish to li7uidate their holdin"s in a losed-end !und may ))))))))))))))))))). A. sell their shares *a& to the !und at a disount i! they wish %. sell their shares *a& to the !und at net asset value C. sell their shares on the open mar&et .. sell their shares at a premium to net asset value i! they wish /(. )))))))))) !und is de!ined as one where the !und har"es a sales ommission to either *uy into or e#it the !und. A. A load %. A no-load C. An inde# .. A speialiHed setor !und //. )))))))))) is a false statement re"ardin" open-end mutual !unds. A. -hey o!!er investors a "uaranteed rate o! return %. -hey o!!er investors a well diversi!ied port!olio C. -hey redeem shares at their net asset value .. -hey o!!er low ost diversi!iation /4. )))))))))) !unds stand ready to redeem or issue shares at their net asset value. A. Closed-end %. Inde# C. Open-end .. 5ed"e
4-9 Chapter 04 - Mutual Funds and Other Investment Companies /4. +evenue sharin" with respet to mutual !unds re!ers to ))))))))). A. !und ompanies payin" *ro&ers i! the *ro&er reommends the !und to investors %. allowin" ertain lasses o! investors to en"a"e in mar&et timin" C. har"in" loads to new investors in a mutual !und .. diretly mar&etin" !unds over the Internet /9. 5i"her port!olio turnover I. results in "reater ta# lia*ility !or investors II. results in "reater tradin" osts !or the !und8 whih investors have to pay !or III. is a harateristi o! asset alloation !unds A. I only %. II only C. I and II only D. I8 II and III /<. 1ow load mutual !unds have !ront-end loads o! no more than ))))). A. (? B. /? C. 4? .. 4? /@. Most real estate investment trusts E+,I-sF have a de*t ratio o! around ))))))))). A. 10 ? %. /0 ? C. 40 ? D. <0 ? />. Measured *y assets8 a*out ))))) o! !unds are money mar&et !unds. A. 14? B. (4? C. 40? .. 90? 40. Whih o! the !ollowin" is not a type o! real estate investment trust$ I. ,7uity trust II. .e*t trust III. Mort"a"e trust I6. 'nit trust A. I and II only %. II only C. II and I6 only .. I8 II and III
4-< Chapter 04 - Mutual Funds and Other Investment Companies 41. )))))))))))))))))))))) are o!ten alled mutual !unds. A. 'nit investment trusts B. Open-end investment ompanies C. Closed-end investment ompanies .. +,I-s 4(. Mutual !unds aount !or rou"hly )))))) perent o! investment ompany assets. A. /0 %. 40 C. <0 D. >0 4/. An o!!iial desription o! a partiular mutual !undCs planned investment poliy an *e !ound in the !undCs ))))))))))))). A. prospetus %. indenture C. investment statement .. 1(*-1 !orms 44. Mutual !unds that hold *oth e7uities and !i#ed-inome seurities in relatively sta*le proportions are alled )))))))))))))))))))). A. inome !unds B. *alaned !unds C. asset alloation !unds .. inde# !unds 44. Mutual !unds that vary the proportions o! !unds invested in partiular mar&et setors aordin" to the !und mana"erCs !oreast o! the per!ormane o! that mar&et setor8 are alled )))))))))))))))))))). A. asset alloation !unds %. *alaned !unds C. inde# !unds .. inome !unds 49. 0peialiHed setor !unds onentrate their investments in ))))))))))))))))). A. *onds o! a partiular maturity %. "eo"raphial se"ments o! the real estate mar&et C. "overnment seurities D. seurities issued *y !irms in a partiular industry
4-@ Chapter 04 - Mutual Funds and Other Investment Companies 4<. I! a mutual !und has multiple lass shares8 whih lass typially has a !ront end load$ A. Class A %. Class % C. Class C .. Class . 4@. -he ommission8 or !ront-end load8 paid when you purhase shares in mutual !unds8 may not e#eed )))))))))). A. /? %. 9? C. @.4? .. 10? 4>. Iou are onsiderin" investin" in one o! several mutual !unds. All the !unds under onsideration have various om*inations o! !ront-end and *a&-end loads andBor 1(*-1 !ees. -he lon"er you plan on remainin" in the !und you hoose8 the more li&ely you will pre!er a !und with a )))))))))) rather than a ))))))))))8 everythin" else e7ual. A. 1(*-1 !ee= !ront-end load B. !ront-end load= 1(*-1 !ee C. *a&-end load8 !ront-end load .. 1(*-1 !ee= *a&-end load 40. 'nder 0,C rules8 the mana"ers o! ertain !unds are allowed to dedut har"es !or advertisin"8 *ro&era"e ommissions8 and other sales e#penses8 diretly !rom the !und assets rather than *illin" investors. -hese !ees are &nown as )))))))))))). A. diret operatin" e#penses %. *a&-end loads C. 1(*-1 har"es .. !ront-end loads 41. In (0008 the 0,C instituted new rules that re7uire !unds to dislose ))))). A. 1(*-1 !ees B. the ta# impat o! port!olio turnover C. !ront-end loads .. *a&-end loads 4(. 0,C rule 1(*-1 allows mana"ers o! ertain !unds to dedut )))))))))) e#penses !rom !und assets8 however8 these e#penses may not e#eed )))))))))) o! the !undCs avera"e net assets per year. A. mar&etin"= 1? %. mar&etin"= 4? C. administrative= 0.4? .. administrative= (?
4-> Chapter 04 - Mutual Funds and Other Investment Companies 4/. Consider a mutual !und with ;/00 million in assets at the start o! the year8 and 1( million shares outstandin". I! the "ross return on assets is 1@? and the total e#pense ratio is (? o! the year end value8 what is the rate o! return on the !und$ A. 14.94? %. 19.00? C. 1<.(4? .. 1<.40? 44. Consider a no-load mutual !und with ;(00 million in assets and 10 million shares at the start o! the year8 and ;(40 million in assets and 11 million shares at the end o! the year. .urin" the year investors have reeived inome distri*utions o! ;( per share8 and apital "ains distri*utions o! ;0.(4 per share. Assumin" that the !und arries no de*t8 and that the total e#pense ratio is 1?8 what is the rate o! return on the !und$ A. /9.(4? B. (4.>0? C. (/.@4? .. -here is not su!!iient in!ormation to answer this 7uestion 0ine this is a no-load !und8 all har"es are already em*edded in "ross return. -hus8 "ross return and net return are the same. 4-10 Chapter 04 - Mutual Funds and Other Investment Companies 44. Consider a no-load mutual !und with ;400 million in assets8 40 million in de*t8 and 14 million shares at the start o! the year= and ;400 million in assets8 40 million in de*t8 and 1@ million shares at the end o! the year. .urin" the year investors have reeived inome distri*utions o! ;0.40 per share8 and apital "ains distri*utions o! ;0./0 per share. Assumin" that the !und arries no de*t8 and that the total e#pense ratio is 0.<4?8 what is the rate o! return on the !und$ A. 1(.0>? %. 1(.>>? C. @.(4? .. -here is not su!!iient in!ormation to answer this 7uestion 0ine this is a no-load !und8 all har"es are already em*edded in "ross return. -hus8 "ross return and net return are the same. 49. Mutual !und returns may *e "ranted pass-throu"h status8 i! ))))))))))))))))). A. at least >0 perent o! all inome is distri*uted to shareholders %. at least /0 perent o! !und inome is derived !rom sale o! seurities held !or less than / months C. ertain diversi!iation riteria are met D. All o! these must *e true !or pass-throu"h status to *e "ranted 4<. ABan ))))) is an e#ample o! an e#han"e-traded !und. A. 02.+ or spider %. samurai C. 6an"uard .. open-end !und 4@. I! you plae an order to *uy or sell a share o! a mutual !und durin" the tradin" day the order will *e e#euted at A. the :A6 alulated at the mar&et lose at 4A00 pm :ew Ior& time. %. the real time :A6. C. the :A6 delayed 14 minutes. .. the :A6 alulated at the open o! the ne#t dayCs tradin".
4-11 Chapter 04 - Mutual Funds and Other Investment Companies 4>. With respet to mutual !unds8 late tradin" re!ers to the pratie o! )))))))). A. tradin" a!ter the lose o! '.0. mar&ets *ut *e!ore overseas mar&ets have losed %. tradin" a!ter the lose o! overseas mar&ets8 *ut *e!ore '.0. mar&ets have losed C. aeptin" *uy or sell orders a!ter the mar&et loses and :A6 has already *een determined !or the day .. payin" apital "ains distri*utions to ertain investors only a!ter payin" privile"ed investors !irst 90. In the 1><0 study8 Mal&iel !ound that mutual !unds that do well in one period8 have an appro#imately )))))))) hane o! doin" well in the su*se7uent ear period. A. //? %. 4(? C. 94? .. @4? 91. In a reent study8 Mal&iel !inds that evidene o! persistene in the per!ormane o! mutual !unds8 )))))))))))))))) in the 1>@0s. A. "rows stron"er %. remains a*out the same C. *eomes sli"htly wea&er D. virtually disappears
9(. -he ratio o! tradin" ativity o! a port!olio to the assets o! the port!olio8 is alled )))))))))))). A. the reinvestment ratio %. the tradin" rate C. the port!olio turnover .. the ta# yield 9/. Whih o! the !ollowin" ,-Fs tra&s the 0G2 400 inde#$ A. Ju*es %. .iamonds C. 6ipers D. 0piders 4-1( Chapter 04 - Mutual Funds and Other Investment Companies 94. -he 0tone 5ar*or Fund is a losed-end investment ompany with a port!olio urrently worth ;/00 million. It has lia*ilities o! ;4 million and > million shares outstandin". I! the !und sells !or ;/0 a share8 what is its premium or disount as a perent o! :A6$ A. >.(9? premium %. @.4<? premium C. >.(9? disount D. @.4<? disount :A6 K E;/0080008000 - ;480008000FB>80008000 K ;/(.<@ .isount K ;/(.<@ - ;/0 K ;(.<@ 94. -he di!!erene *etween *alaned !unds and asset alloation !unds is that ))))). A. *alaned !unds invest in *onds while asset alloation !unds do not %. asset alloation !unds invest in *onds while *alaned !unds do not C. *alaned !unds have relatively sta*le proportions o! sto&s and *onds while the proportions may vary dramatially !or asset alloation !unds .. *alaned !unds ma&e no apital "ains distri*utions and asset alloation !unds ma&e *oth dividend and apital "ains distri*utions 99. -he Wildwood Fund sells Class A shares with a !ront-end load o! 4? and Class % 0hares with a 1(*-1 !ees o! 1? annually. I! you plan to sell the !und a!ter 4 years8 are Class A or Class % shares the *etter hoie$ Assume a 10? annual return net o! e#penses. A. Class A B. Class % C. -here is no di!!erene. .. -here is insu!!iient in!ormation "iven.
4-1/ Chapter 04 - Mutual Funds and Other Investment Companies 9<. A mutual !und has total assets outstandin" o! ;9> million. .urin" the year the !und *ou"ht and sold assets e7ual to ;1<.(4 million. -his !undCs turnover rate was ))))). A. (4.00? %. (@.40? C. 1@.9/? .. //.40? ;1<.(4B;9> K (4.00? 9@. Whih type o! investment !und is ommonly &nown to invest in options and !utures in lar"e sale$ A. Commin"led !unds B. 5ed"e !unds C. ,-Fs .. +,I-0 9>. Advanta"es o! ,-Fs over mutual !unds inlude all *ut whih one o! the !ollowin"$ A. ,-Fs trade ontinuously so investors an trade throu"hout the day %. ,-Fs an *e sold short or purhased on mar"in8 unli&e !und shares C. ,-F providers do not have to sell holdin"s to !und redemptions D. ,-F values an diver"e !rom :A6 <0. 5arold has Dust ta&en his ompany pu*li and owns a lar"e 7uantity o! restrited sto&. For purposes o! diversi!iation8 what !und mi"ht he help reate in order to diversi!y his holdin"s$ A. Commin"led !unds %. 5ed"e !unds C. ,-F .. +,I-s <1. Whih o! the !ollowin" !unds is most li&ely to have a de*t ratio o! <0? or hi"her$ A. %ond !und %. Commin"led !und C. Mort"a"e *a&ed seurities D. +,I- <(. A*out ))))))))) o! mutual !und assets are invested in no-load !unds. A. //? %. 40? C. 40? D. 94? 4-14 Chapter 04 - Mutual Funds and Other Investment Companies </. From 1><1 to (00< the avera"e return on the Wilshire 4000 inde# was ))))))))) the return o! the avera"e mutual !und. A. idential to B. 1? hi"her than C. 1? lower than .. /? lower than <4. An open-end !und has a :A6 o! ;19.40 per share. -he !und har"es a 9? load. What is the o!!erin" prie$ A. ;14.4< %. ;14.>4 C. ;1<.44 .. ;19.4>
<4. -he o!!er prie o! an open-end !und is ;1@.00 and the !und is sold with a !ront-end load o! 4?$ What is the !undCs :A6$ A. ;1@.<4 B. ;1<.10 C. ;14.40 .. ;19.4< E;1@.00FE1 - 0.04F K ;1<.10 <9. A mutual !und has ;40 million in assets at the *e"innin" o! the year and 1 million shares outstandin" throu"hout the year. -hrou"hout the year assets "row at 1(?. -he !und imposes a 1(*-1 !ee on all shares e7ual to 1?. -he !ee is imposed on year end asset values. I! there are no distri*utions what is the end o! year :A6 !or the !und$ A. ;40.00 B. ;44.44 C. ;49.1( .. ;44.44
4-14 Chapter 04 - Mutual Funds and Other Investment Companies <<. -he assets o! a mutual !und are ;(4 million. -he lia*ilities are ;4 million. I! the !und has <008000 shares outstandin" and pays a ;/ dividend8 what is the dividend yield$ A. 4? B. 10? C. 14? .. (0? 2rie per share K E(4 million - 4 millionFB<008000 K /0 per share .ividend yield K /B/0 K 10? <@. Whih o! the !ollowin" !unds are usually most ta# e!!iient$ A. ,7uity !unds %. %ond Funds C. ,-Fs .. 0peialiHed setor !unds <>. Iou invest in a mutual !und that har"es a /? !ront end load8 1? total annual !ees8 and a (? *a& end load8 whih dereases 0.4? per year. 5ow muh will you pay in !ees on a ;108000 investment that does not "row8 i! you ash out a!ter three years o! no "ain$ A. 10/ %. (1> C. 44/ D. 9/4 total !ees K 108000 - E108000 # .><F # E.>>F # E.>>F # E.>>F # E.>>4F K 9/4 @0. Iou invest in a mutual !und that har"es a /? !ront end load8 1? total annual !ees8 and a 0? *a& end load on Class A shares. -he same !und har"es 0? !ront end load8 1? total annual !ees8 and a (? *a& end load on Class % shares. What are the total !ees in year one on a Class A investment o! ;(08000 with no "rowth in value$ A. 94@ B. <>4 C. @@4 .. >0( First year !ees K (08000 - E(08000 # .>< # .>>F K <>4 @1. Iou invest in a mutual !und that har"es a /? !ront end load8 1? total annual !ees8 and a 0? *a& end load on Class A shares. -he same !und har"es 0? !ront end load8 1? total annual !ees8 and a (? *a& end load on Class % shares. What are the total !ees in year one on a Class % investment o! ;(08000 i! you redeem shares with no "rowth in value$ A. 4>9 %. <>4 C. @@4 .. >0( 4-19 Chapter 04 - Mutual Funds and Other Investment Companies -otal !ees a!ter one year K (08000 - E(08000 # 0.>@ # 0.>>F K 4>9 @(. Iou pay ;(18900 to the 1aramie Fund whih has a :A6 o! ;1@.00 per share at the *e"innin" o! the year. -he !und deduted a !ront-end load o! 4?. -he seurities in the !und inreased in value *y 10? durin" the year. -he !undCs e#pense ratio is 1./? and is deduted !rom year end asset values. What is your rate o! return on the !und i! you sell your shares at the end o! the year$ A. 4./4? B. 4.(/? C. 9.44? .. 4.9/? @/. Whih one o! the !ollowin" statements a*out returns reported *y mutual !unds is not orret$ A. +eported returns are net o! mana"ement e#penses %. +eported returns are net o! 1(*-1 !ees C. +eported returns are net o! *ro&era"e !ees paid on the !undCs tradin" ativity D. +eported returns are net o! load har"es @4. -he top Mornin"star mutual !und per!ormane ratin" is )))))))). A. !ive stars %. !our stars C. three stars .. two stars @4. Iou are onsiderin" investin" in a no load mutual !und with an annual e#pense ratio o! 0.9? and an annual 1(*-1 !ee o! 0.<4?. Iou ould also invest in a *an& C. payin" 9.4? per year. What minimum annual rate o! return must the !und earn to ma&e you *etter o!! in the !und than in the C.$ A. <.10? %. <.44? C. <.(4? D. <.@4? r L 9.4 M 0.09 M 0.0<4 K <.@4?