Fundamentals of Investing, 11e (Gitman/Joehnk/Smart)
Chapter 12 Mutual Funds: Professionally Managed Portfolios
1) Mutual funds provide a simplified means of diversifying a portfolio.
2) When an investor buys shares in a mutual fund, he or she becomes a part owner of a portfolio
of securities.
3) Mutual funds rank second only to banks as being the largest financial intermediary in the
United States.
4) The mutual fund market is dominated by funds that invest in diversified bond portfolios.
5) The transfer agent for a mutual fund physically safeguards the securities being bought and
sold by that firm.
6) Mutual funds tend to outperform the market.
7) The mutual fund, and not the investor, is responsible for all income taxes on capital gains and
dividends earned by the fund.
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.
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
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.
11) Which one of the following statements is correct concerning players in the mutual fund
industry?
A) Security analysts and traders work for the management company.
B) Normally a bank serves as the custodian.
C) The management company maintains the shareholder records.
D) The mutual fund shareholders are the owners of the management company.
12) During the 5 year market cycle of 2004-2008, in which category of funds did a majority of
funds outperform the market average?
A) large cap funds.
B) small cap funds.
C) asset allocation funds.
D) in no category did a majority of funds outperform the market average.
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.
14) To operate as a regulated investment company and enjoy the related tax benefits, a mutual
fund must annually distribute to its shareholders
A) half of its realized capital gains, and interest and dividend income.
B) none of its realized capital gains, but all of its interest and dividend income.
C) all of its realized capital gains, and at least 90 percent of its interest and dividend income.
D) all of its realized capital gains and interest and dividend income.
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.
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.
17) What are some of the advantages of investing through mutual funds? Name at least three.
1) Investors purchase shares in an open end mutual fund directly from the fund.
2) The purchase price of a closed-end mutual fund is equivalent to the net asset value of the fund.
3) The discount or premium on a closed-end mutual fund can be as much as 25 percent.
4) Trading in closed-end investment companies takes between investors in the open market.
5) Like ordinary stocks, exchange traded funds (ETFs) can be sold short.
6) Hedge funds are subject to the same regulations and disclosure requirements as mutual funds.
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7) Most exchange-traded funds are index funds.
8) Mutual fund fees are disclosed in the fund prospectus.
9) The net asset value is the price per share an investor will pay to acquire shares in a no-load,
open-end fund.
10) The longer you intend to hold a fund, the more willing you should be to accept a front-end
load charge in exchange for lower annual management and 12(b)-1 fees.
11) 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.
12) 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.
13) Which of the following characteristics apply to closed-end mutual funds?
I. unlimited number of outstanding shares
II. transactions between shareholders
III. market prices may be higher or lower than NAV
IV. fund repurchase of 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
14) Which of the following characteristics apply to exchange traded funds (ETF’s)?
I. unlimited number of outstanding shares
II. typically track the performance of some index
III. market prices may be higher or lower than NAV
IV. may invest in the whole index or use a sample of securities to track the index as closely as
possible
A) I and II only
B) II and III only
C) I, II and III only
D) I, II, and IV only
15) Closed-end funds are
A) less liquid than open-end funds.
B) best purchased when they are selling at a premium.
C) purchased directly from the funds’ manager.
D) traded at NAV.
16) Which one of the following statements concerning ETFs is correct?
A) ETFs are based solely on US indexes.
B) The ETF based on the Standard & Poors 500 Index is priced at 1/10 the value of that index.
C) Spiders are based on the DJIA.
D) The ETF based on the Dow is priced at 1/10 of the value of the DJIA.
17) Which of the following statements is(are) correct concerning exchange-traded funds (ETFs)?
I. You can buy and sell ETFs any time during trading hours.
II. ETFs are actively managed.
III. ETFs have high portfolio turnover rates.
IV. ETFs rarely distribute any capital gains.
A) I, II and IV only
B) I and IV only
C) II and III only
D) I, III, and IV only
18) The commission charged when shares of an open-end mutual fund are purchased is called a
A) management fee.
B) back-end load.
C) front-end load.
D) 12(b)-1 fee.
19) Back-end loads
A) are charged when an investor buys their mutual fund shares.
B) are charged if an investor sells his or her shares within the first few years.
C) were designed to help no-load funds cover their marketing expenses.
D) encourage short-term trading.
20) One characteristic of 12(b)-1 charges is that they are payable
A) only in years that the mutual fund shows an increase in net asset value.
B) each year regardless of the performance of the mutual fund.
C) only during the first year the fund is owned.
D) only when shares in the fund are sold.
21) Two mutual funds are quoted in the newspaper as follows.
Given these quotes, which one of the following is true?
A) Both funds are load funds.
B) Fund A is a no-load fund.
C) Fund B is a no-load fund.
D) Both funds are no-load funds.
22) A type of fund that invests in real estate and/or mortgages is known as a
A) REIT.
B) ETF.
C) sector fund.
D) hedge fund.
23) A “t” in the newspaper behind a fund’s name indicates that the fund charges a
A) front-end load.
B) back-end load.
C) front-end load and also a 12(b)-1 fee.
D) back-end load and also a 12(b)-1 fee.
24) Performance fees based on profits earned by the fund are typical of
A) hedge funds.
B) exchange traded funds.
C) closed-end investment companies.
D) open end mutual funds.
25) Which of the following statements is(are) correct concerning hedge funds?
I. they are highly regulated.
II. they hedge all positions to limit risks.
III. management and other fees are extremely low compared to other types of funds.
IV. access is limited to institutions and high net worth or high income individuals.
A) I, II and III only
B) II and IV only
C) IV only
D) I, II, III, and, IV
26) Investors in hedge funds have the legal status of
A) shareholders.
B) limited partners.
C) general partners.
D) trustees.
27) Mutual funds can carry a number of different types of sales charges and fees. Briefly explain
the following such expenses.
(a) a front–end load
(b) a back-end load
(c) a 12(b)-1 fee
28) Explain why closed-end funds can sell at prices other than the fund’s NAV.
29) Use this information to answer the following questions.
(a) Which fund does not charge a front-end load?
(b) Which fund can best be described as a low-load fund?
(c) What can you say about Fund B with respect to the type of investments it most likely holds?
(d) If you want to buy a fund and hold it for five years, which one of these funds should you
purchase based on fund costs? Assume the funds earn a positive rate of return each year.
30) What are the primary disadvantages of owning mutual fund shares?
1) The primary objective of growth mutual funds is capital appreciation with a high level of
current income.
2) Morningstar, a leading. mutual fund industry publication, classifies funds by the number of
shareholders and the total amount of money invested in the fund.
3) Index funds merely attempt to match the performance of some benchmark, not to outperform
it.
4) The maximum average maturity of the holdings within a money market account must be 6
months or less.
5) Socially responsible funds tend to underperform the market.
6) A unit investment trust
A) engages in short-term trading within a particular sector.
B) offers a low-cost, diversified portfolio.
C) is an unmanaged portfolio of securities.
D) is used only for fixed-income securities.
7) Risk-seeking investors seeking maximum capital appreciation with little, if any current
income, should invest in
A) value funds.
B) growth funds.
C) aggressive growth funds.
D) equity-income funds.
8) An aggressive growth mutual fund is least likely to purchase a stock
A) with a high P/E ratio.
B) with a high anticipated rate of growth.
C) of an unseasoned firm.
D) with a high dividend yield.
9) Aggressive mutual funds often employ investing strategies such as
I. short selling.
II. margin trading.
III. option trading.
IV. hedging.
A) I and III only
B) II and III only
C) I, II, and IV only
D) I, II, III and IV
10) Value funds seek stocks
I. with low dividend yields.
II. with potential for growth.
III. with low P/E ratios.
IV. of newly discovered firms.
A) I and III only
B) II and III only
C) II, III and IV only
D) I, II, III and IV
11) The primary objective of an equity-income fund is
A) capital gains.
B) current income with capital preservation.
C) potentially high capital gains with limited income.
D) high risk-return trade-offs.