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
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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 _______________ and mortgage
trusts which _______________.
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
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Chapter 04 - Mutual Funds and Other Investment Companies
9. In the U.S. there are approximately _______ mutual funds offered by less than _______
fund families.
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
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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 _____ of mutual fund assets were invested in equity funds.
A. 5%
B. 54%
C. 30%
D. 12%
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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
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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
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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
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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
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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 _____ of funds are money market funds.
A. 15%
B. 25%
C. 40%
D. 60%
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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
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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%
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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 __________, everything else equal.
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
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 __________ expenses from
fund assets, however, these expenses may not exceed __________ of the fund's average net
assets per year.
A. marketing; 1%
B. marketing; 5%
C. administrative; 0.5%
D. administrative; 2%
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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
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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 ________ chance of doing well in the subsequent ear period.
A. 33%
B. 52%
C. 65%
D. 85%
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
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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
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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
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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 _________ the
return of the average mutual fund.
A. identical to
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
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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
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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%
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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
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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
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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 _______________ and mortgage
trusts which _______________.
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
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Chapter 04 - Mutual Funds and Other Investment Companies
9. In the U.S. there are approximately _______ mutual funds offered by less than _______
fund families.
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
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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
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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
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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
Difficulty: Easy
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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
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
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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
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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
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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
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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
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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
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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 __________, everything else equal.
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
Difficulty: Medium
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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 __________ expenses from
fund assets, however, these expenses may not exceed __________ of the fund's average net
assets per year.
A. marketing; 1%
B. marketing; 5%
C. administrative; 0.5%
D. administrative; 2%
Difficulty: Easy
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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%
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.
Difficulty: Medium
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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.
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
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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
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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
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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
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
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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.
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
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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
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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 _________ the
return of the average mutual fund.
A. identical to
B. 1% higher than
C. 1% lower than
D. 3% lower than
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
Difficulty: Medium
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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
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
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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
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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%
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
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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
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