Fin 3013 Chapter 4

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 fied for the life of the fund!
". Mutual fund
#. Mone$ mar%et fund
C. Managed investment compan$
&. 'nit investment trust

(. )))))) are partnerships of investors with portfolios that are larger than most individual
investors *ut are still too small to warrant managing on a separate *asis.
". Commingled funds
#. Closed-end funds
C. +,I-s
&. Mutual funds

.. " )))))))))) is a private investment pool open onl$ to wealth$ or institutional investors
that is eempt from /,C regulation and can therefore pursue more speculative policies than
mutual funds.
". commingled pool
#. unit trust
C. hedge fund
&. mone$ mar%et fund

4. "dvantages of investment companies to investors include all *ut which one of the
following!
". +ecord %eeping and administration
#. 0ow cost diversification
C. 1rofessional management
&. 2uaranteed rates of return

4-1
3. Which of the following t$picall$ emplo$ significant amounts of leverage!
I. 4edge funds
II. +,I-s
III. Mone$ mar%et funds
I5. ,6uit$ mutual funds
". I and II onl$
#. II and III onl$
C. III and I5 onl$
&. I7 II and III onl$

8. -he 9"5 of which funds is fied at :1 per share!
". ,6uit$ funds
#. Mone$ mar%et funds
C. Fied income funds
&. Commingled funds

;. -he two principal t$pes of +,I-s are e6uit$ trusts which ))))))))))))))) and mortgage
trusts which ))))))))))))))).
". invest directl$ in real estate< invest in mortgage and construction loans
#. invest in mortgage and construction loans< invest directl$ in real estate
C. use etensive leverage< distri*ute less than =3> of income to shareholders
&. distri*ute less than =3> of income to shareholders< use etensive leverage

?. " contingent deferred sales charge is commonl$ called a )))).
". front-end load
#. *ac%-end load
C. 1(*-1 charge
&. top end sales commission

4-(
=. In the './. there are approimatel$ ))))))) mutual funds offered *$ less than )))))))
fund families.
". 1(7000< 800
#. ;7000< 100
C. ?7000< 300
&. =7000< .00

10. In 1===7 the /,C esta*lished rules that should ma%e a mutual fund prospectus ))))))).
". easier to read and understand
#. much more detailed
C. disappear over the net 10 $ears
&. irrelevant to investors

11. Mutual funds provide the following for their shareholders@
". &iversification
#. 1rofessional management
C. +ecord %eeping and administration
&. Mutual funds provide diversification7 professional management7 and record %eeping and
administration

1(. -he average maturit$ of fund investments in a mone$ mar%et mutual fund is ))))))).
". slightl$ more than one month
#. slightl$ more than one $ear
C. a*out = months
&. *etween ( and . $ears

4-.
1.. +an% the following fund categor$ from most ris%$ to least ris%$.
I. ,6uit$ growth fund
II. #alanced fund
III. /ector fund
I5. Mone$ mar%et fund
". I57 I7 III7 II
#. III7 II7 I57 I
C. I7 II7 III7 I5
&. III7 I7 II7 I5

14. Which of the following result in a taa*le event for investors!
I. /hort-term capital gains distri*utions from the fund
II. &ividend distri*utions from the fund
III. 0ong-term capital gains distri*utions from the fund
". I onl$
#. II onl$
C. I and II onl$
&. I7 II and III

13. -he t$pe of mutual fund that primaril$ engages in mar%et timing is called aAan ))))))).
". sector fund
#. inde fund
C. ,-F
&. asset allocation fund

18. "s of (00?7 approimatel$ ))))) of mutual fund assets were invested in e6uit$ funds.
". 3>
#. 34>
C. .0>
&. 1(>

4-4
1;. "s of (00?7 approimatel$ ))))) of mutual fund assets were invested in *ond funds.
". 14>
#. 1=>
C. .;>
&. 4;>

1?. "s of (00?7 approimatel$ ))))) of mutual fund assets were invested in mone$ mar%et
funds.
". 3>
#. (8>
C. 44>
&. 88>

1=. Management fees for open-end and closed-end funds7 t$picall$ range *etween ))))) and
))))).
". 0.(>< 1.3>
#. 0.3>< 3>
C. (>< 3>
&. .>< ?>

(0. -he primar$ measurement unit used for assessing the value of oneBs sta%e in an investment
compan$ is ))))))))))))))))))).
". 9et "sset 5alue
#. "verage "sset 5alue
C. 2ross "sset 5alue
&. -otal "sset 5alue

(1. 9et "sset 5alue is defined as )))))))))))))))))))))))).
". *oo% value of assets divided *$ shares outstanding
#. *oo% value of assets minus lia*ilities divided *$ shares outstanding
C. mar%et value of assets divided *$ shares outstanding
&. mar%et value of assets minus lia*ilities divided *$ shares outstanding

4-3
((. "ssume that $ou have Cust purchased some shares in an investment compan$ reporting
:300 million in assets7 :30 million in lia*ilities7 and 30 million shares outstanding. What is
the 9et "sset 5alue D9"5E of these shares!
". :1(.00
#. :=.00
C. :10.00
&. :1.00

(.. "ssume that $ou have recentl$ purchased 100 shares in an investment compan$. 'pon
eamining the *alance sheet7 $ou note the firm is reporting :((3 million in assets7 :.0 million
in lia*ilities7 and 10 million shares outstanding. What is the 9et "sset 5alue D9"5E of these
shares!
". :(3.30
#. :((.30
C. :1=.30
&. :1.=3

(4. -he 5anguard 300 Inde Fund trac%s the performance of the /F1 300. -o do so the fund
*u$s shares in each /F1 300 compan$ )))))))))).
". in proportion to the mar%et value weight of the firmBs e6uit$ in the /F1300
#. in proportion to the price weight of the stoc% in the /F1300
C. *$ purchasing an e6ual num*er of shares of each stoc% in the /F1 300
&. *$ purchasing an e6ual dollar amount of shares of each stoc% in the /F1300

(3. Which of the following is not a t$pe of managed investment compan$!
". 'nit investment trusts
#. Closed-end funds
C. Open-end funds
&. 4edge funds

4-8
(8. Which of the following funds invest in stoc%s of fast growing companies!
". #alanced funds
#. 2rowth e6uit$ funds
C. +,I-s
&. ,6uit$ income funds

(;. " fund that invests in securities worldwide7 including the 'nited /tates is called aAan
)))))).
". international fund
#. emerging mar%et fund
C. glo*al fund
&. regional fund

(?. -he greatest percentage of mutual fund assets are invested in )))))))).
". *ond funds
#. e6uit$ funds
C. h$*rid funds
&. mone$ mar%et funds

(=. /ponsors of unit investment trusts earn a profit *$ ))))))))))))))))))).
". deducting management fees from fund assets
#. deducting a percentage of an$ gains in asset value
C. selling shares in the trust at a premium to the cost of ac6uiring the underl$ing assets
&. charging portfolio turnover fees

.0. Investors who wish to li6uidate their holdings in a unit investment trust ma$
))))))))))))))))))).
". sell their shares *ac% to the trustee at a discount
#. sell their shares *ac% 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-;
.1. Investors who wish to li6uidate their holdings in a closed-end fund ma$
))))))))))))))))))).
". sell their shares *ac% to the fund at a discount if the$ wish
#. sell their shares *ac% to the fund at net asset value
&. sell their shares at a premium to net asset value if the$ wish

.(. )))))))))) fund is defined as one where the fund charges a sales commission to either
*u$ into or eit the fund.
". " load
#. " no-load
C. "n inde
&. " specialiGed sector fund

... )))))))))) is a false statement regarding open-end mutual funds.
". -he$ offer investors a guaranteed rate of return
#. -he$ offer investors a well diversified portfolio
C. -he$ redeem shares at their net asset value
&. -he$ offer low cost diversification

.4. )))))))))) funds stand read$ to redeem or issue shares at their net asset value.
". Closed-end
#. Inde
C. Open-end
&. 4edge

.3. +evenue sharing with respect to mutual funds refers to ))))))))).
". fund companies pa$ing *ro%ers if the *ro%er recommends the fund to investors
#. allowing certain classes of investors to engage in mar%et timing
C. charging loads to new investors in a mutual fund
&. directl$ mar%eting funds over the Internet

4-?
.8. 4igher portfolio turnover
I. results in greater ta lia*ilit$ for investors
II. results in greater trading costs for the fund7 which investors have to pa$ for
III. is a characteristic of asset allocation funds
". I onl$
#. II onl$
C. I and II onl$
&. I7 II and III

.;. 0ow load mutual funds have front-end loads of no more than ))))).
". (>
#. .>
C. 4>
&. 3>

.?. Most real estate investment trusts D+,I-sE have a de*t ratio of around ))))))))).
". 10 >
#. .0 >
C. 30 >
&. ;0 >

.=. Measured *$ assets7 a*out ))))) of funds are mone$ mar%et funds.
". 13>
#. (3>
C. 40>
&. 80>

4-=
40. Which of the following is not a t$pe of real estate investment trust!
I. ,6uit$ trust
II. &e*t trust
III. Mortgage trust
I5. 'nit trust
". I and II onl$
#. II onl$
C. II and I5 onl$
&. I7 II and III

41. )))))))))))))))))))))) are often called mutual funds.
#. Open-end investment companies
C. Closed-end investment companies
&. +,I-s

4(. Mutual funds account for roughl$ )))))) percent of investment compan$ assets.
". .0
#. 30
C. ;0
&. =0

4.. "n official description of a particular mutual fundBs planned investment polic$ can *e
found in the fundBs ))))))))))))).
". prospectus
#. indenture
C. investment statement
&. 1(*-1 forms

4-10
44. Mutual funds that hold *oth e6uities and fied-income securities in relativel$ sta*le
proportions are called )))))))))))))))))))).
". income funds
#. *alanced funds
C. asset allocation funds
&. inde funds

43. Mutual funds that var$ the proportions of funds invested in particular mar%et sectors
according to the fund managerBs forecast of the performance of that mar%et sector7 are called
)))))))))))))))))))).
". asset allocation funds
#. *alanced funds
C. inde funds
&. income funds

48. /pecialiGed sector funds concentrate their investments in ))))))))))))))))).
". *onds of a particular maturit$
#. geographical segments of the real estate mar%et
C. government securities
&. securities issued *$ firms in a particular industr$

4;. If a mutual fund has multiple class shares7 which class t$picall$ has a front end load!
". Class "
#. Class #
C. Class C
&. Class &

4?. -he commission7 or front-end load7 paid when $ou purchase shares in mutual funds7 ma$
not eceed )))))))))).
". .>
#. 8>
C. ?.3>
&. 10>

4-11
4=. Hou are considering investing in one of several mutual funds. "ll the funds under
consideration have various com*inations of front-end and *ac%-end loads andAor 1(*-1 fees.
-he longer $ou plan on remaining in the fund $ou choose7 the more li%el$ $ou will prefer a
fund with a )))))))))) rather than a ))))))))))7 ever$thing else e6ual.
". 1(*-1 fee< front-end load
#. front-end load< 1(*-1 fee
C. *ac%-end load7 front-end load
&. 1(*-1 fee< *ac%-end load

30. 'nder /,C rules7 the managers of certain funds are allowed to deduct charges for
advertising7 *ro%erage commissions7 and other sales epenses7 directl$ from the fund assets
rather than *illing investors. -hese fees are %nown as )))))))))))).
". direct operating epenses
#. *ac%-end loads
C. 1(*-1 charges
&. front-end loads

31. In (0007 the /,C instituted new rules that re6uire funds to disclose ))))).
". 1(*-1 fees
#. the ta impact of portfolio turnover
C. front-end loads
&. *ac%-end loads

3(. /,C rule 1(*-1 allows managers of certain funds to deduct )))))))))) epenses from
fund assets7 however7 these epenses ma$ not eceed )))))))))) of the fundBs average net
assets per $ear.
". mar%eting< 1>
#. mar%eting< 3>
C. administrative< 0.3>
&. administrative< (>

4-1(
3.. Consider a mutual fund with :.00 million in assets at the start of the $ear7 and 1( million
shares outstanding. If the gross return on assets is 1?> and the total epense ratio is (> of the
$ear end value7 what is the rate of return on the fund!
". 13.84>
#. 18.00>
C. 1;.(3>
&. 1;.30>

34. Consider a no-load mutual fund with :(00 million in assets and 10 million shares at the
start of the $ear7 and :(30 million in assets and 11 million shares at the end of the $ear.
&uring the $ear investors have received income distri*utions of :( per share7 and capital gains
distri*utions of :0.(3 per share. "ssuming that the fund carries no de*t7 and that the total
epense ratio is 1>7 what is the rate of return on the fund!
". .8.(3>
#. (4.=0>
C. (..?3>
&. -here is not sufficient information to answer this 6uestion

33. Consider a no-load mutual fund with :400 million in assets7 30 million in de*t7 and 13
million shares at the start of the $ear< and :300 million in assets7 40 million in de*t7 and 1?
million shares at the end of the $ear. &uring the $ear investors have received income
distri*utions of :0.30 per share7 and capital gains distri*utions of :0..0 per share. "ssuming
that the fund carries no de*t7 and that the total epense ratio is 0.;3>7 what is the rate of
return on the fund!
". 1(.0=>
#. 1(.==>
C. ?.(3>

38. Mutual fund returns ma$ *e granted pass-through status7 if ))))))))))))))))).
". at least =0 percent of all income is distri*uted to shareholders
#. at least .0 percent of fund income is derived from sale of securities held for less than .
months
C. certain diversification criteria are met
&. "ll of these must *e true for pass-through status to *e granted

4-1.
3;. "Aan ))))) is an eample of an echange-traded fund.
". /1&+ or spider
#. samurai
C. 5anguard
&. open-end fund

3?. If $ou place an order to *u$ or sell a share of a mutual fund during the trading da$ the
order will *e eecuted at
". the 9"5 calculated at the mar%et close at 4@00 pm 9ew Hor% time.
#. the real time 9"5.
C. the 9"5 dela$ed 13 minutes.
&. the 9"5 calculated at the open of the net da$Bs trading.

3=. With respect to mutual funds7 late trading refers to the practice of )))))))).
". trading after the close of './. mar%ets *ut *efore overseas mar%ets have closed
#. trading after the close of overseas mar%ets7 *ut *efore './. mar%ets have closed
C. accepting *u$ or sell orders after the mar%et closes and 9"5 has alread$ *een determined
for the da$
&. pa$ing capital gains distri*utions to certain investors onl$ after pa$ing privileged investors
first

80. In the 1=;0 stud$7 Mal%iel found that mutual funds that do well in one period7 have an
approimatel$ )))))))) chance of doing well in the su*se6uent ear period.
". ..>
#. 3(>
C. 83>
&. ?3>

81. In a recent stud$7 Mal%iel finds that evidence of persistence in the performance of mutual
funds7 )))))))))))))))) in the 1=?0s.
". grows stronger
#. remains a*out the same
C. *ecomes slightl$ wea%er
&. virtuall$ disappears

4-14
8(. -he ratio of trading activit$ of a portfolio to the assets of the portfolio7 is called
)))))))))))).
". the reinvestment ratio
#. the trading rate
C. the portfolio turnover
&. the ta $ield

8.. Which of the following ,-Fs trac%s the /F1 300 inde!
". Iu*es
#. &iamonds
C. 5ipers
&. /piders

84. -he /tone 4ar*or Fund is a closed-end investment compan$ with a portfolio currentl$
worth :.00 million. It has lia*ilities of :3 million and = million shares outstanding. If the
fund sells for :.0 a share7 what is its premium or discount as a percent of 9"5!
". =.(8> premium
#. ?.4;> premium
C. =.(8> discount
&. ?.4;> discount

83. -he difference *etween *alanced funds and asset allocation funds is that ))))).
". *alanced funds invest in *onds while asset allocation funds do not
#. asset allocation funds invest in *onds while *alanced funds do not
C. *alanced funds have relativel$ sta*le proportions of stoc%s and *onds while the proportions
ma$ var$ dramaticall$ for asset allocation funds
&. *alanced funds ma%e no capital gains distri*utions and asset allocation funds ma%e *oth
dividend and capital gains distri*utions

4-13
88. -he Wildwood Fund sells Class " shares with a front-end load of 3> and Class # /hares
with a 1(*-1 fees of 1> annuall$. If $ou plan to sell the fund after 4 $ears7 are Class " or
Class # shares the *etter choice! "ssume a 10> annual return net of epenses.
". Class "
#. Class #
C. -here is no difference.
&. -here is insufficient information given.

8;. " mutual fund has total assets outstanding of :8= million. &uring the $ear the fund *ought
and sold assets e6ual to :1;.(3 million. -his fundBs turnover rate was ))))).
". (3.00>
#. (?.30>
C. 1?.8.>
&. ...40>

8?. Which t$pe of investment fund is commonl$ %nown to invest in options and futures in
large scale!
". Commingled funds
#. 4edge funds
C. ,-Fs
&. +,I-/

8=. "dvantages of ,-Fs over mutual funds include all *ut which one of the following!
". ,-Fs trade continuousl$ so investors can trade throughout the da$
#. ,-Fs can *e sold short or purchased on margin7 unli%e fund shares
C. ,-F providers do not have to sell holdings to fund redemptions
&. ,-F values can diverge from 9"5

4-18
;0. 4arold has Cust ta%en his compan$ pu*lic and owns a large 6uantit$ of restricted stoc%.
For purposes of diversification7 what fund might he help create in order to diversif$ his
holdings!
". Commingled funds
#. 4edge funds
C. ,-F
&. +,I-s

;1. Which of the following funds is most li%el$ to have a de*t ratio of ;0> or higher!
". #ond fund
#. Commingled fund
C. Mortgage *ac%ed securities
&. +,I-

;(. "*out ))))))))) of mutual fund assets are invested in no-load funds.
". ..>
#. 40>
C. 30>
&. 83>

;.. From 1=;1 to (00; the average return on the Wilshire 3000 inde was ))))))))) the
return of the average mutual fund.
". identical to
#. 1> higher than
C. 1> lower than
&. .> lower than

;4. "n open-end fund has a 9"5 of :18.30 per share. -he fund charges a 8> load. What is
the offering price!
". :14.3;
#. :13.=3
C. :1;.33
&. :18.4=

4-1;
;3. -he offer price of an open-end fund is :1?.00 and the fund is sold with a front-end load of
3>! What is the fundBs 9"5!
". :1?.;4
#. :1;.10
C. :13.40
&. :18.3;

;8. " mutual fund has :30 million in assets at the *eginning of the $ear and 1 million shares
outstanding throughout the $ear. -hroughout the $ear assets grow at 1(>. -he fund imposes a
1(*-1 fee on all shares e6ual to 1>. -he fee is imposed on $ear end asset values. If there are
no distri*utions what is the end of $ear 9"5 for the fund!
". :30.00
#. :33.44
C. :38.1(
&. :34.33

;;. -he assets of a mutual fund are :(3 million. -he lia*ilities are :4 million. If the fund has
;007000 shares outstanding and pa$s a :. dividend7 what is the dividend $ield!
". 3>
#. 10>
C. 13>
&. (0>

;?. Which of the following funds are usuall$ most ta efficient!
". ,6uit$ funds
#. #ond Funds
C. ,-Fs
&. /pecialiGed sector funds

4-1?
;=. Hou invest in a mutual fund that charges a .> front end load7 1> total annual fees7 and a
(> *ac% end load7 which decreases 0.3> per $ear. 4ow much will $ou pa$ in fees on a
:107000 investment that does not grow7 if $ou cash out after three $ears of no gain!
". 10.
#. (1=
C. 33.
&. 8.3

?0. Hou invest in a mutual fund that charges a .> front end load7 1> total annual fees7 and a
0> *ac% end load on Class " shares. -he same fund charges 0> front end load7 1> total
annual fees7 and a (> *ac% end load on Class # shares. What are the total fees in $ear one on
a Class " investment of :(07000 with no growth in value!
". 83?
#. ;=4
C. ??3
&. =0(

a Class # investment of :(07000 if $ou redeem shares with no growth in value!
". 3=8
#. ;=4
C. ??3
&. =0(

?(. Hou pa$ :(17800 to the 0aramie Fund which has a 9"5 of :1?.00 per share at the
*eginning of the $ear. -he fund deducted a front-end load of 4>. -he securities in the fund
increased in value *$ 10> during the $ear. -he fundBs epense ratio is 1..> and is deducted
from $ear end asset values. What is $our rate of return on the fund if $ou sell $our shares at
the end of the $ear!
". 4..3>
#. 4.(.>
C. 8.43>
&. 3.8.>

4-1=
?.. Which one of the following statements a*out returns reported *$ mutual funds is not
correct!
". +eported returns are net of management epenses
#. +eported returns are net of 1(*-1 fees
C. +eported returns are net of *ro%erage fees paid on the fundBs trading activit$
&. +eported returns are net of load charges

?4. -he top Morningstar mutual fund performance rating is )))))))).
". five stars
#. four stars
C. three stars
&. two stars

?3. Hou are considering investing in a no load mutual fund with an annual epense ratio of
0.8> and an annual 1(*-1 fee of 0.;3>. Hou could also invest in a *an% C& pa$ing 8.3> per
$ear. What minimum annual rate of return must the fund earn to ma%e $ou *etter off in the
fund than in the C&!
". ;.10>
#. ;.43>
C. ;.(3>
&. ;.?3>

Chapter 04 Mutual Funds and Other Investment Companies "nswer Je$

Multiple Choice Questions

4-(0
1. Which one of the following invests in a portfolio that is fied for the life of the fund!
". Mutual fund
#. Mone$ mar%et fund
C. Managed investment compan$
D. 'nit investment trust

Difficulty: Easy

(. )))))) are partnerships of investors with portfolios that are larger than most individual
investors *ut are still too small to warrant managing on a separate *asis.
A. Commingled funds
#. Closed-end funds
C. +,I-s
&. Mutual funds

Difficulty: Easy

.. " )))))))))) is a private investment pool open onl$ to wealth$ or institutional investors
that is eempt from /,C regulation and can therefore pursue more speculative policies than
mutual funds.
". commingled pool
#. unit trust
C. hedge fund
&. mone$ mar%et fund

Difficulty: Easy

4. "dvantages of investment companies to investors include all *ut which one of the
following!
". +ecord %eeping and administration
#. 0ow cost diversification
C. 1rofessional management
D. 2uaranteed rates of return

Difficulty: Easy

4-(1
3. Which of the following t$picall$ emplo$ significant amounts of leverage!
I. 4edge funds
II. +,I-s
III. Mone$ mar%et funds
I5. ,6uit$ mutual funds
A. I and II onl$
#. II and III onl$
C. III and I5 onl$
&. I7 II and III onl$

Difficulty: Medium

8. -he 9"5 of which funds is fied at :1 per share!
". ,6uit$ funds
B. Mone$ mar%et funds
C. Fied income funds
&. Commingled funds

Difficulty: Easy

;. -he two principal t$pes of +,I-s are e6uit$ trusts which ))))))))))))))) and mortgage
trusts which ))))))))))))))).
A. invest directl$ in real estate< invest in mortgage and construction loans
#. invest in mortgage and construction loans< invest directl$ in real estate
C. use etensive leverage< distri*ute less than =3> of income to shareholders
&. distri*ute less than =3> of income to shareholders< use etensive leverage

Difficulty: Medium

?. " contingent deferred sales charge is commonl$ called a )))).
". front-end load
B. *ac%-end load
C. 1(*-1 charge
&. top end sales commission

Difficulty: Easy

4-((
=. In the './. there are approimatel$ ))))))) mutual funds offered *$ less than )))))))
fund families.
". 1(7000< 800
#. ;7000< 100
C. ?7000< 300
&. =7000< .00

Difficulty: Medium

10. In 1===7 the /,C esta*lished rules that should ma%e a mutual fund prospectus ))))))).
A. easier to read and understand
#. much more detailed
C. disappear over the net 10 $ears
&. irrelevant to investors

Difficulty: Easy

11. Mutual funds provide the following for their shareholders@
". &iversification
#. 1rofessional management
C. +ecord %eeping and administration
D. Mutual funds provide diversification7 professional management7 and record %eeping and
administration

Difficulty: Easy

1(. -he average maturit$ of fund investments in a mone$ mar%et mutual fund is ))))))).
A. slightl$ more than one month
#. slightl$ more than one $ear
C. a*out = months
&. *etween ( and . $ears

Difficulty: Easy

4-(.
1.. +an% the following fund categor$ from most ris%$ to least ris%$.
I. ,6uit$ growth fund
II. #alanced fund
III. /ector fund
I5. Mone$ mar%et fund
". I57 I7 III7 II
#. III7 II7 I57 I
C. I7 II7 III7 I5
D. III7 I7 II7 I5

Difficulty: Medium

14. Which of the following result in a taa*le event for investors!
I. /hort-term capital gains distri*utions from the fund
II. &ividend distri*utions from the fund
III. 0ong-term capital gains distri*utions from the fund
". I onl$
#. II onl$
C. I and II onl$
D. I7 II and III

Difficulty: Easy

13. -he t$pe of mutual fund that primaril$ engages in mar%et timing is called aAan ))))))).
". sector fund
#. inde fund
C. ,-F
D. asset allocation fund

Difficulty: Medium

4-(4
18. "s of (00?7 approimatel$ ))))) of mutual fund assets were invested in e6uit$ funds.
". 3>
B. 34>
C. .0>
&. 1(>

Difficulty: Easy

1;. "s of (00?7 approimatel$ ))))) of mutual fund assets were invested in *ond funds.
A. 14>
#. 1=>
C. .;>
&. 4;>

Difficulty: Easy

1?. "s of (00?7 approimatel$ ))))) of mutual fund assets were invested in mone$ mar%et
funds.
". 3>
B. (8>
C. 44>
&. 88>

Difficulty: Easy

1=. Management fees for open-end and closed-end funds7 t$picall$ range *etween ))))) and
))))).
A. 0.(>< 1.3>
#. 0.3>< 3>
C. (>< 3>
&. .>< ?>

Difficulty: Easy

4-(3
(0. -he primar$ measurement unit used for assessing the value of oneBs sta%e in an investment
compan$ is ))))))))))))))))))).
A. 9et "sset 5alue
#. "verage "sset 5alue
C. 2ross "sset 5alue
&. -otal "sset 5alue

Difficulty: Easy

(1. 9et "sset 5alue is defined as )))))))))))))))))))))))).
". *oo% value of assets divided *$ shares outstanding
#. *oo% value of assets minus lia*ilities divided *$ shares outstanding
C. mar%et value of assets divided *$ shares outstanding
D. mar%et value of assets minus lia*ilities divided *$ shares outstanding

Difficulty: Easy

((. "ssume that $ou have Cust purchased some shares in an investment compan$ reporting
:300 million in assets7 :30 million in lia*ilities7 and 30 million shares outstanding. What is
the 9et "sset 5alue D9"5E of these shares!
". :1(.00
B. :=.00
C. :10.00
&. :1.00

Difficulty: Easy

4-(8
(.. "ssume that $ou have recentl$ purchased 100 shares in an investment compan$. 'pon
eamining the *alance sheet7 $ou note the firm is reporting :((3 million in assets7 :.0 million
in lia*ilities7 and 10 million shares outstanding. What is the 9et "sset 5alue D9"5E of these
shares!
". :(3.30
#. :((.30
C. :1=.30
&. :1.=3

Difficulty: Easy

(4. -he 5anguard 300 Inde Fund trac%s the performance of the /F1 300. -o do so the fund
*u$s shares in each /F1 300 compan$ )))))))))).
A. in proportion to the mar%et value weight of the firmBs e6uit$ in the /F1300
#. in proportion to the price weight of the stoc% in the /F1300
C. *$ purchasing an e6ual num*er of shares of each stoc% in the /F1 300
&. *$ purchasing an e6ual dollar amount of shares of each stoc% in the /F1300

Difficulty: Easy

(3. Which of the following is not a t$pe of managed investment compan$!
A. 'nit investment trusts
#. Closed-end funds
C. Open-end funds
&. 4edge funds

Difficulty: Easy

4-(;
(8. Which of the following funds invest in stoc%s of fast growing companies!
". #alanced funds
B. 2rowth e6uit$ funds
C. +,I-s
&. ,6uit$ income funds

Difficulty: Easy

(;. " fund that invests in securities worldwide7 including the 'nited /tates is called aAan
)))))).
". international fund
#. emerging mar%et fund
C. glo*al fund
&. regional fund

Difficulty: Easy

(?. -he greatest percentage of mutual fund assets are invested in )))))))).
". *ond funds
B. e6uit$ funds
C. h$*rid funds
&. mone$ mar%et funds

Difficulty: Easy

(=. /ponsors of unit investment trusts earn a profit *$ ))))))))))))))))))).
". deducting management fees from fund assets
#. deducting a percentage of an$ gains in asset value
C. selling shares in the trust at a premium to the cost of ac6uiring the underl$ing assets
&. charging portfolio turnover fees

Difficulty: Easy

4-(?
.0. Investors who wish to li6uidate their holdings in a unit investment trust ma$
))))))))))))))))))).
". sell their shares *ac% to the trustee at a discount
B. sell their shares *ac% to the trustee at net asset value
&. sell their shares at a premium to net asset value

Difficulty: Easy

.1. Investors who wish to li6uidate their holdings in a closed-end fund ma$
))))))))))))))))))).
". sell their shares *ac% to the fund at a discount if the$ wish
#. sell their shares *ac% to the fund at net asset value
&. sell their shares at a premium to net asset value if the$ wish

Difficulty: Easy

.(. )))))))))) fund is defined as one where the fund charges a sales commission to either
*u$ into or eit the fund.
A. " load
#. " no-load
C. "n inde
&. " specialiGed sector fund

Difficulty: Easy

... )))))))))) is a false statement regarding open-end mutual funds.
A. -he$ offer investors a guaranteed rate of return
#. -he$ offer investors a well diversified portfolio
C. -he$ redeem shares at their net asset value
&. -he$ offer low cost diversification

Difficulty: Easy

4-(=
.4. )))))))))) funds stand read$ to redeem or issue shares at their net asset value.
". Closed-end
#. Inde
C. Open-end
&. 4edge

Difficulty: Easy

.3. +evenue sharing with respect to mutual funds refers to ))))))))).
A. fund companies pa$ing *ro%ers if the *ro%er recommends the fund to investors
#. allowing certain classes of investors to engage in mar%et timing
C. charging loads to new investors in a mutual fund
&. directl$ mar%eting funds over the Internet

Difficulty: Easy

.8. 4igher portfolio turnover
I. results in greater ta lia*ilit$ for investors
II. results in greater trading costs for the fund7 which investors have to pa$ for
III. is a characteristic of asset allocation funds
". I onl$
#. II onl$
C. I and II onl$
D. I7 II and III

Difficulty: Medium

.;. 0ow load mutual funds have front-end loads of no more than ))))).
". (>
B. .>
C. 4>
&. 3>

Difficulty: Easy

4-.0
.?. Most real estate investment trusts D+,I-sE have a de*t ratio of around ))))))))).
". 10 >
#. .0 >
C. 30 >
D. ;0 >

Difficulty: Easy

.=. Measured *$ assets7 a*out ))))) of funds are mone$ mar%et funds.
". 13>
B. (3>
C. 40>
&. 80>

Difficulty: Easy

40. Which of the following is not a t$pe of real estate investment trust!
I. ,6uit$ trust
II. &e*t trust
III. Mortgage trust
I5. 'nit trust
". I and II onl$
#. II onl$
C. II and I5 onl$
&. I7 II and III

Difficulty: Easy

41. )))))))))))))))))))))) are often called mutual funds.
B. Open-end investment companies
C. Closed-end investment companies
&. +,I-s

Difficulty: Easy

4-.1
4(. Mutual funds account for roughl$ )))))) percent of investment compan$ assets.
". .0
#. 30
C. ;0
D. =0

Difficulty: Easy

4.. "n official description of a particular mutual fundBs planned investment polic$ can *e
found in the fundBs ))))))))))))).
A. prospectus
#. indenture
C. investment statement
&. 1(*-1 forms

Difficulty: Easy

44. Mutual funds that hold *oth e6uities and fied-income securities in relativel$ sta*le
proportions are called )))))))))))))))))))).
". income funds
B. *alanced funds
C. asset allocation funds
&. inde funds

Difficulty: Easy

43. Mutual funds that var$ the proportions of funds invested in particular mar%et sectors
according to the fund managerBs forecast of the performance of that mar%et sector7 are called
)))))))))))))))))))).
A. asset allocation funds
#. *alanced funds
C. inde funds
&. income funds

Difficulty: Easy

4-.(
48. /pecialiGed sector funds concentrate their investments in ))))))))))))))))).
". *onds of a particular maturit$
#. geographical segments of the real estate mar%et
C. government securities
D. securities issued *$ firms in a particular industr$

Difficulty: Easy

4;. If a mutual fund has multiple class shares7 which class t$picall$ has a front end load!
A. Class "
#. Class #
C. Class C
&. Class &

Difficulty: Medium

4?. -he commission7 or front-end load7 paid when $ou purchase shares in mutual funds7 ma$
not eceed )))))))))).
". .>
#. 8>
C. ?.3>
&. 10>

Difficulty: Easy

4=. Hou are considering investing in one of several mutual funds. "ll the funds under
consideration have various com*inations of front-end and *ac%-end loads andAor 1(*-1 fees.
-he longer $ou plan on remaining in the fund $ou choose7 the more li%el$ $ou will prefer a
fund with a )))))))))) rather than a ))))))))))7 ever$thing else e6ual.
". 1(*-1 fee< front-end load
B. front-end load< 1(*-1 fee
C. *ac%-end load7 front-end load
&. 1(*-1 fee< *ac%-end load

Difficulty: Medium

4-..
30. 'nder /,C rules7 the managers of certain funds are allowed to deduct charges for
advertising7 *ro%erage commissions7 and other sales epenses7 directl$ from the fund assets
rather than *illing investors. -hese fees are %nown as )))))))))))).
". direct operating epenses
#. *ac%-end loads
C. 1(*-1 charges
&. front-end loads

Difficulty: Easy

31. In (0007 the /,C instituted new rules that re6uire funds to disclose ))))).
". 1(*-1 fees
B. the ta impact of portfolio turnover
C. front-end loads
&. *ac%-end loads

Difficulty: Medium

3(. /,C rule 1(*-1 allows managers of certain funds to deduct )))))))))) epenses from
fund assets7 however7 these epenses ma$ not eceed )))))))))) of the fundBs average net
assets per $ear.
A. mar%eting< 1>
#. mar%eting< 3>
C. administrative< 0.3>
&. administrative< (>

Difficulty: Easy

4-.4
3.. Consider a mutual fund with :.00 million in assets at the start of the $ear7 and 1( million
shares outstanding. If the gross return on assets is 1?> and the total epense ratio is (> of the
$ear end value7 what is the rate of return on the fund!
A. 13.84>
#. 18.00>
C. 1;.(3>
&. 1;.30>

Difficulty: Hard

34. Consider a no-load mutual fund with :(00 million in assets and 10 million shares at the
start of the $ear7 and :(30 million in assets and 11 million shares at the end of the $ear.
&uring the $ear investors have received income distri*utions of :( per share7 and capital gains
distri*utions of :0.(3 per share. "ssuming that the fund carries no de*t7 and that the total
epense ratio is 1>7 what is the rate of return on the fund!
". .8.(3>
B. (4.=0>
C. (..?3>
/ince this is a no-load fund7 all charges are alread$ em*edded in gross return. -hus7 gross
return and net return are the same.

Difficulty: Medium

4-.3
33. Consider a no-load mutual fund with :400 million in assets7 30 million in de*t7 and 13
million shares at the start of the $ear< and :300 million in assets7 40 million in de*t7 and 1?
million shares at the end of the $ear. &uring the $ear investors have received income
distri*utions of :0.30 per share7 and capital gains distri*utions of :0..0 per share. "ssuming
that the fund carries no de*t7 and that the total epense ratio is 0.;3>7 what is the rate of
return on the fund!
A. 1(.0=>
#. 1(.==>
C. ?.(3>
/ince this is a no-load fund7 all charges are alread$ em*edded in gross return. -hus7 gross
return and net return are the same.

Difficulty: Hard

38. Mutual fund returns ma$ *e granted pass-through status7 if ))))))))))))))))).
". at least =0 percent of all income is distri*uted to shareholders
#. at least .0 percent of fund income is derived from sale of securities held for less than .
months
C. certain diversification criteria are met
D. "ll of these must *e true for pass-through status to *e granted

Difficulty: Easy

4-.8
3;. "Aan ))))) is an eample of an echange-traded fund.
A. /1&+ or spider
#. samurai
C. 5anguard
&. open-end fund

Difficulty: Medium

3?. If $ou place an order to *u$ or sell a share of a mutual fund during the trading da$ the
order will *e eecuted at
A. the 9"5 calculated at the mar%et close at 4@00 pm 9ew Hor% time.
#. the real time 9"5.
C. the 9"5 dela$ed 13 minutes.
&. the 9"5 calculated at the open of the net da$Bs trading.

Difficulty: Medium

3=. With respect to mutual funds7 late trading refers to the practice of )))))))).
". trading after the close of './. mar%ets *ut *efore overseas mar%ets have closed
#. trading after the close of overseas mar%ets7 *ut *efore './. mar%ets have closed
C. accepting *u$ or sell orders after the mar%et closes and 9"5 has alread$ *een determined
for the da$
&. pa$ing capital gains distri*utions to certain investors onl$ after pa$ing privileged investors
first

Difficulty: Easy

80. In the 1=;0 stud$7 Mal%iel found that mutual funds that do well in one period7 have an
approimatel$ )))))))) chance of doing well in the su*se6uent ear period.
". ..>
#. 3(>
C. 83>
&. ?3>

Difficulty: Medium

4-.;
81. In a recent stud$7 Mal%iel finds that evidence of persistence in the performance of mutual
funds7 )))))))))))))))) in the 1=?0s.
". grows stronger
#. remains a*out the same
C. *ecomes slightl$ wea%er
D. virtuall$ disappears

Difficulty: Easy

8(. -he ratio of trading activit$ of a portfolio to the assets of the portfolio7 is called
)))))))))))).
". the reinvestment ratio
#. the trading rate
C. the portfolio turnover
&. the ta $ield

Difficulty: Easy

8.. Which of the following ,-Fs trac%s the /F1 300 inde!
". Iu*es
#. &iamonds
C. 5ipers
D. /piders

Difficulty: Medium

4-.?
84. -he /tone 4ar*or Fund is a closed-end investment compan$ with a portfolio currentl$
worth :.00 million. It has lia*ilities of :3 million and = million shares outstanding. If the
fund sells for :.0 a share7 what is its premium or discount as a percent of 9"5!
". =.(8> premium
#. ?.4;> premium
C. =.(8> discount
D. ?.4;> discount
9"5 K D:.0070007000 - :370007000EA=70007000 K :.(.;?
&iscount K :.(.;? - :.0 K :(.;?

Difficulty: Hard

83. -he difference *etween *alanced funds and asset allocation funds is that ))))).
". *alanced funds invest in *onds while asset allocation funds do not
#. asset allocation funds invest in *onds while *alanced funds do not
C. *alanced funds have relativel$ sta*le proportions of stoc%s and *onds while the
proportions ma$ var$ dramaticall$ for asset allocation funds
&. *alanced funds ma%e no capital gains distri*utions and asset allocation funds ma%e *oth
dividend and capital gains distri*utions

Difficulty: Easy

4-.=
88. -he Wildwood Fund sells Class " shares with a front-end load of 3> and Class # /hares
with a 1(*-1 fees of 1> annuall$. If $ou plan to sell the fund after 4 $ears7 are Class " or
Class # shares the *etter choice! "ssume a 10> annual return net of epenses.
". Class "
B. Class #
C. -here is no difference.
&. -here is insufficient information given.

Difficulty: Medium

8;. " mutual fund has total assets outstanding of :8= million. &uring the $ear the fund *ought
and sold assets e6ual to :1;.(3 million. -his fundBs turnover rate was ))))).
A. (3.00>
#. (?.30>
C. 1?.8.>
&. ...40>
:1;.(3A:8= K (3.00>

Difficulty: Easy

4-40
8?. Which t$pe of investment fund is commonl$ %nown to invest in options and futures in
large scale!
". Commingled funds
B. 4edge funds
C. ,-Fs
&. +,I-/

Difficulty: Easy

8=. "dvantages of ,-Fs over mutual funds include all *ut which one of the following!
". ,-Fs trade continuousl$ so investors can trade throughout the da$
#. ,-Fs can *e sold short or purchased on margin7 unli%e fund shares
C. ,-F providers do not have to sell holdings to fund redemptions
D. ,-F values can diverge from 9"5

Difficulty: Medium

;0. 4arold has Cust ta%en his compan$ pu*lic and owns a large 6uantit$ of restricted stoc%.
For purposes of diversification7 what fund might he help create in order to diversif$ his
holdings!
A. Commingled funds
#. 4edge funds
C. ,-F
&. +,I-s

Difficulty: Medium

;1. Which of the following funds is most li%el$ to have a de*t ratio of ;0> or higher!
". #ond fund
#. Commingled fund
C. Mortgage *ac%ed securities
D. +,I-

Difficulty: Easy

4-41
;(. "*out ))))))))) of mutual fund assets are invested in no-load funds.
". ..>
#. 40>
C. 30>
D. 83>

Difficulty: Medium

;.. From 1=;1 to (00; the average return on the Wilshire 3000 inde was ))))))))) the
return of the average mutual fund.
". identical to
B. 1> higher than
C. 1> lower than
&. .> lower than

Difficulty: Hard

;4. "n open-end fund has a 9"5 of :18.30 per share. -he fund charges a 8> load. What is
the offering price!
". :14.3;
#. :13.=3
C. :1;.33
&. :18.4=

Difficulty: Medium

4-4(
;3. -he offer price of an open-end fund is :1?.00 and the fund is sold with a front-end load of
3>! What is the fundBs 9"5!
". :1?.;4
B. :1;.10
C. :13.40
&. :18.3;
D:1?.00ED1 - 0.03E K :1;.10

Difficulty: Medium

;8. " mutual fund has :30 million in assets at the *eginning of the $ear and 1 million shares
outstanding throughout the $ear. -hroughout the $ear assets grow at 1(>. -he fund imposes a
1(*-1 fee on all shares e6ual to 1>. -he fee is imposed on $ear end asset values. If there are
no distri*utions what is the end of $ear 9"5 for the fund!
". :30.00
B. :33.44
C. :38.1(
&. :34.33

Difficulty: Hard

;;. -he assets of a mutual fund are :(3 million. -he lia*ilities are :4 million. If the fund has
;007000 shares outstanding and pa$s a :. dividend7 what is the dividend $ield!
". 3>
B. 10>
C. 13>
&. (0>
1rice per share K D(3 million - 4 millionEA;007000 K .0 per share
&ividend $ield K .A.0 K 10>

Difficulty: Medium

4-4.
;?. Which of the following funds are usuall$ most ta efficient!
". ,6uit$ funds
#. #ond Funds
C. ,-Fs
&. /pecialiGed sector funds

Difficulty: Medium

;=. Hou invest in a mutual fund that charges a .> front end load7 1> total annual fees7 and a
(> *ac% end load7 which decreases 0.3> per $ear. 4ow much will $ou pa$ in fees on a
:107000 investment that does not grow7 if $ou cash out after three $ears of no gain!
". 10.
#. (1=
C. 33.
D. 8.3
total fees K 107000 - D107000 .=;E D.==E D.==E D.==E D.==3E K 8.3

Difficulty: Hard

a Class " investment of :(07000 with no growth in value!
". 83?
B. ;=4
C. ??3
&. =0(
First $ear fees K (07000 - D(07000 .=; .==E K ;=4

Difficulty: Medium

4-44
a Class # investment of :(07000 if $ou redeem shares with no growth in value!
A. 3=8
#. ;=4
C. ??3
&. =0(
-otal fees after one $ear K (07000 - D(07000 0.=? 0.==E K 3=8

Difficulty: Medium

?(. Hou pa$ :(17800 to the 0aramie Fund which has a 9"5 of :1?.00 per share at the
*eginning of the $ear. -he fund deducted a front-end load of 4>. -he securities in the fund
increased in value *$ 10> during the $ear. -he fundBs epense ratio is 1..> and is deducted
from $ear end asset values. What is $our rate of return on the fund if $ou sell $our shares at
the end of the $ear!
". 4..3>
B. 4.(.>
C. 8.43>
&. 3.8.>

Difficulty: Hard

?.. Which one of the following statements a*out returns reported *$ mutual funds is not
correct!
". +eported returns are net of management epenses
#. +eported returns are net of 1(*-1 fees
C. +eported returns are net of *ro%erage fees paid on the fundBs trading activit$
D. +eported returns are net of load charges

Difficulty: Medium

4-43
?4. -he top Morningstar mutual fund performance rating is )))))))).
A. five stars
#. four stars
C. three stars
&. two stars

Difficulty: Easy

?3. Hou are considering investing in a no load mutual fund with an annual epense ratio of
0.8> and an annual 1(*-1 fee of 0.;3>. Hou could also invest in a *an% C& pa$ing 8.3> per
$ear. What minimum annual rate of return must the fund earn to ma%e $ou *etter off in the
fund than in the C&!
". ;.10>
#. ;.43>
C. ;.(3>
D. ;.?3>
r L 8.3 M 0.08 M 0.0;3 K ;.?3>

Difficulty: Medium

4-48

Fin 3013 Chapter 4

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Fin 3013 Chapter 4

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Chapter 04 - Mutual Funds and Other Investment Companies

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