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Fundamentals of Investing, 13e (Smart)
Chapter 12 Mutual Funds and Exchange-Traded Funds
12.1 Learning Goal 1
1) Mutual funds provide an affordable way to diversify a portfolio.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Revised
Learning Goal: Learning Goal 1
2) When an investor buys shares in a mutual fund, he or she becomes a part owner of a
portfolio of securities.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
3) Compared to stocks, mutual funds offer investors a relatively limited range of choices.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 1
4) The mutual fund market is dominated by funds that invest in diversified bond portfolios.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
2
5) Index fund investors should purchase at least two funds with the same objective to assure
proper diversification.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 1
6) Mutual funds tend to outperform the market.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
7) The mutual fund, and not the investor, is responsible for all income taxes on capital gains
and dividends earned by the fund.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
8) Which one of the following statements concerning mutual funds is correct?
A) The selection of individual securities remains with the mutual fund investor.
B) Mutual funds were first created in the 1980s.
C) The mutual fund industry is the largest financial intermediary in the United States.
D) Mutual funds are generally highly concentrated portfolios.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
3
9) Which of the following are advantages offered by mutual funds?
I. professional portfolio management
II. dividend reinvestment
III. consistent returns in excess of the overall market rate of return
IV. modest capital outlay for investors
A) I and II only
B) I and IV only
C) II, III and IV only
D) I, II and IV only
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
10) One drawback of investing in mutual funds is the
A) annual management fee.
B) lack of liquidity of fund shares.
C) amount required for the initial investment.
D) lack of information on the performance of the fund.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
11) A majority of funds managed by certain financial services companies appears to outperform
their benchmarks because of
A) highly qualified professional managers.
B) survivorship bias.
C) inappropriate choices of benchmarks.
D) all of the above.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 1
4
12) During the 75-year market cycle of 2009-2014, in which category of funds did a majority of
funds outperform the market average?
A) large cap funds
B) small cap equity funds
C) real estate funds
D) none of the above
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Revised
Learning Goal: Learning Goal 1
13) Which of the following statements best describes the legal organization of mutual funds?
A) Funds are organized as a single entity that handles all functions such as custody and
investment decisions.
B) Funds split their basic functions such as record keeping and investment decisions among
two or more companies.
C) Funds are owned by the company that manages them.
D) A distributor keeps track of investment and redemption requests from shareholders and
maintains other shareholder records.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
5
14) Advantages of index funds include which of the following?
I. Low management fees.
II. They outperform most actively managed funds.
III. They have a balanced mix of stocks and bonds.
IV. Securities in the portfolio are selected by professional analysts.
A) I and IV only
B) I and II only
C) I, III, and IV only
D) I, II, III and IV
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 1
15) Mutual fund investors delegate all of the following decisions to the fund’s managers
EXCEPT
A) which companies and industries to invest in.
B) when to buy and sell individual stocks.
C) how many securities to hold in the portfolio.
D) how to allocate investments among different classes of assets such as stocks, bonds, cash
and real estate.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
16) Nearly all mutual funds operate as regulated investment companies. This means that
A) they are no-load funds.
B) portfolio decisions are mandated by government authorities.
C) they do not pay taxes on their income.
D) their investments are guaranteed by the FDIC.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
6
17) What are some of the advantages of investing through mutual funds? Name at least three.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 1
12.2 Learning Goal 2
1) Investors purchase shares in an open end mutual fund directly from the fund.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
2) The purchase price of a closed-end mutual fund is equivalent to the net asset value of the
fund.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
3) The discount or premium on a closed-end mutual fund can be as much as 25 percent.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
7
4) Trading in closed-end investment companies takes place between investors in the open
market.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
5) Closed-end funds and exchange-traded-funds (ETFs) are both liquidated by selling them on
the open market.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 2
6) A closed end fund is selling at a premium when the NAV exceeds the market price.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
7) A closed-end fund with an NAV of $9.60 and a market price of $10.25 is selling at a
premium of 6.8%.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
8
8) The number of shares available in an exchange-traded fund (ETF) can be increased or
decreased according to demand for the shares.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 2
9) Like ordinary stocks, exchange -traded funds (ETFs) can be sold short.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
10) Hedge funds are subject to the same regulations and disclosure requirements as mutual
funds.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
11) Most exchange-traded funds are index funds.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
12) Investors who buy or sell exchange-traded funds will do so at a price based on the closing
price for the day.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
9
13) Mutual fund fees are disclosed in the fund prospectus.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
14) The net asset value is the price per share an investor will pay to acquire shares in a no-load,
open-end fund.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
15) When investors liquidate an exchange-traded fund (ETF) they have held for less than 6
months, they will not pay a redemption fee, but they will pay a commission.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: New Question
Learning Goal: Learning Goal 2
16) An open-end investment company
A) is involved in all trades of its shares.
B) sells shares at a discounted NAV price.
C) trades like a stock on the exchanges.
D) has a set number of shares.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
10
17) The net asset value of a mutual fund increased from $12.03 to $13.53, but its price per
share increased by only $1.26. This information indicates that the fund
A) paid out $1 in capital gains.
B) paid out $1 in dividends.
C) is a closed-end fund.
D) is an open-end fund.
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Previous Edition
Learning Goal: Learning Goal 2
18) Which of the following characteristics apply to closed-end mutual funds?
I. unlimited number of outstanding shares
II. transactions are between shareholders
III. Market prices may be higher or lower than NAV.
IV. Fund will repurchase shares at any time.
A) I and IV only
B) II and III only
C) I, II and III only
D) II, III and IV only
managers
AACSB: 8 Application of knowledge (Able to translate knowledge of business and management
into practice)
Question Status: Revised
Learning Goal: Learning Goal 2