13. Investing in Mutual Funds, ETFs, and Real Estate
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1. The idea of a mutual fund is based on the idea of pooled diversification.
a. True
b. False
2. Mutual funds typically offer more diversification and less risk than purchasing one or two individual securities.
a. True
b. False
3. An investor with a small amount of money should stick to using load funds instead of no-load funds.
a. True
b. False
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4. A fund’s objective is stated in its prospectus.
a. True
b. False
5. Mutual funds and exchange traded funds (ETFs) provide professional investment management.
a. True
b. False
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6. Dividend income, capital gains distributions, and changes in the fund’s share price are all sources of returns for a
mutual fund investor.
a. True
b. False
7. All income from mutual funds that are not held in tax-deferred accounts is taxed at identical tax rates.
a. True
b. False
8. The individual manager of a mutual fund has little to do with the fund’s success.
a. True
b. False
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9. Purchasing raw land as an investment is highly risky.
a. True
b. False
10. For tax purposes, real estate is considered an active investment.
a. True
b. False
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11. Which of the following is a reason to invest in mutual funds?
a. Mutual funds are free of any hidden costs.
b. Mutual funds earn tax-free returns.
c. Mutual funds provide a guaranteed return in spite of market risks.
d. Mutual funds provide diversification of invested funds.
e. Mutual funds do not charge any fees.
12. A(n) _____ sells fund shares either directly to the public or through authorized dealers.
a. investment advisor
b. custodian
c. transfer agent
d. distributor
e. money manager
13. A(n) _____ oversees a mutual fund’s portfolio and makes the buy and sell decisions.
a. transfer agent
b. distributor
c. investment advisor
d. regulator
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e. custodian
14. Which of the following combines some of the operating characteristics of an open-end fund with some of the trading
characteristics of a closed-end fund?
a. Preferred fund
b. Common fund
c. Exchange traded fund
d. Net asset fund
e. Unit investment fund
15. Exchange traded mutual funds (ETFs):
a. are traded throughout the day on stock exchanges.
b. are closed-end funds with a fixed number of shares outstanding.
c. always distribute their capital gains to fund holders, resulting in low taxes.
d. are actively managed by investors, resulting in high costs and high taxes.
e. fill their buy and sell orders at the closing prices at the end of the trading day.
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16. The current market value of all the securities a mutual fund owns, less any liabilities, on a per-share basis is known as
the fund’s:
a. compounded value.
b. par value.
c. net asset value.
d. book value.
e. liquidation value.
17. Redeeming your back-end load mutual fund shares might result in a charge called the:
a. redemption fee.
b. usage fee.
c. management fee.
d. recordkeeping fee.
e. 12b-1 fee.
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18. An annual fee charged by some mutual funds to cover promotion and selling expenses is called the:
a. management fee.
b. back-end load fee.
c. transaction fee.
d. 12b-1 fee.
e. low-load fee.
19. All mutual funds always charge a:
a. transaction fee.
b. 12b-1 fee.
c. management fee.
d. fee on the sale of the shares.
e. redemption fee.
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20. In the online quotes from The Wall Street Journal’s listing of mutual funds, an “r” after the mutual fund name means
that particular mutual fund has a _____ associated with it.
a. front-end load
b. back-end load
c. 12b-1 fee
d. management fee
e. distribution load
21. A fund that is structured to match the performance of a certain market segment is known as a(n) _____ fund.
a. balanced
b. preferred stock
c. exchange traded
d. index
e. capital
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22. _____ funds are highly speculative investments that seek large profits from capital gains.
a. Balanced
b. Growth
c. Equity income
d. Aggressive growth
e. Exchange traded
23. A fund that invests in only one or more industries that are associated with each other is a _____ fund.
a. money market
b. maximum capital
c. sector
d. balanced
e. bond
24. Which of the following bond mutual funds invest in tax-exempt securities?
a. High-yield corporate bond funds
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b. Municipal bond funds
c. Convertible bond funds
d. Mortgage-backed bond funds
e. Intermediate-term bond funds
25. A(n) _____ is a service offered by mutual funds that helps an investor earn compound interest on their investments.
a. retirement plan
b. deferred withdrawal plan
c. automatic reinvestment plan
d. conversion privilege
e. systemic withdrawal plan
26. If you are a mutual fund investor who needs a steady income, you might take advantage of a fund’s:
a. retirement plans.
b. exchange privileges.
c. automatic reinvestment plans.
d. systematic withdrawal plans.
e. conversion plans.
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27. The conversion privilege allows investors to switch from one mutual fund to another within a:
a. management group.
b. fund family.
c. brokerage group.
d. switched fund.
e. convenience group.
28. Having money taken at regular intervals from your paycheck and put into a mutual fund is an example of a(n):
a. automatic investment plan.
b. authorized deduction plan.
c. systematic withdrawal plan.
d. conversion privilege.
e. index plan.
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29. _____ funds are balanced funds that automatically change the asset allocation from more to less equity exposure as an
investor ages.
a. Bond
b. Aggressive growth
c. Value
d. Target-date
e. Intermediate-term
30. A general-purpose money fund:
a. invests in virtually any type of money market investment vehicle.
b. limits its investments to short-term, tax-exempt municipal securities.
c. limits its investments to short-term securities of the U.S. government and its agencies.
d. invests in stock of undervalued companies.
e. limits its investments to real estate properties.
31. Compared to mutual funds, exchange traded funds (ETFs):
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a. are more cost-effective for investors with a short-term horizon.
b. generate higher taxable gains.
c. accommodate investors pursuing narrow market segments.
d. are more diversified.
e. have higher overhead expenses.
32. A real estate investment trust that invests in various types of income-producing properties and mortgage loans is a:
a. hybrid REIT.
b. blind pool REIT.
c. real estate REIT.
d. hybrid limited REIT.
e. mortgage REIT.
33. Which of the following real estate investment trusts (REITs) is the most attractive to income-oriented investors?
a. Equity
b. Mortgage
c. Back-end load
d. Unit trust
e. Exchange traded
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RATIONALE: Mortgage REITs tend to be more income oriented. They emphasize the high current yields they generate
34. Jenny’s adjusted gross income is $120,000 a year and she owns real estate property that generates a rental income of
$10,000 annually. If she pays mortgage interest of $4,000 on her property per year, she can write off up to _____ in
depreciation.
a. $4,000
b. $10,000
c. $6,000
d. $14,000
e. $8,000
35. Which of the following statements regarding real estate investments is true?
a. Real estate investments move in tandem with stocks.
b. Adding real estate to your stock portfolio increases investment diversity.
c. Real estate is an asset with high liquidity.
d. Real estate investments have less scope for financial leverage.
e. Real estate investments cannot depreciate.
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36. Leverage means:
a. using borrowed money to magnify returns.
b. paying only cash for any investment purchase.
c. investing in highly speculative securities.
d. purchasing securities at a premium price.
e. selling investments before their maturity.
37. Investment in real estate is attractive to investors because:
a. it is a highly liquid investment.
b. it permits a high degree of financial leverage.
c. it is exempted from taxation.
d. it requires very low investment.
e. it is highly correlated with the stock markets.
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38. Carlos holds a portfolio of stocks and bonds. He is planning to buy a real estate property worth $150,000. He can use
financial leverage to make this purchase by:
a. paying $75,000 cash in the first installment and selling shares worth $75,000 from his portfolio to pay the second
installment.
b. taking a personal loan worth $100,000 and selling bonds worth $50,000 from his portfolio.
c. selling bonds from his portfolio worth $80,000 and writing a check for $70,000.
d. selling stocks from his portfolio worth $50,000 and paying $100,000 in cash.
e. paying $150,000 in cash from his savings account.
39. Tom takes a loan of $60,000 at 4% annual interest to purchase a property worth $100,000. He earns an annual income
of $10,000 after expenses but before interest and income taxes are deducted. If the income tax rate is 30%, then the
leveraged return on the real estate investment is:
a. 30%.
b. 25%.
c. 10%.
d. 19%.
e. 13%.
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40. Mike has decided to purchase a real estate property that is expected to generate a net operating income (NOI) of
$63,000 per year. With a 9% cap rate, the property would have an estimated value of:
a. $630,000.
b. $187,000.
c. $700,000.
d. $965,000.
e. $235,000.
41. The actual ownership of a mutual fund is in the hands of the:
a. management company.
b. custodians.
c. shareholders.
d. distributors.
e. money manager.
42. _____ gives the property owner an allowance for the decline in the physical condition of real estate over time.
a. Depreciation
b. A capital gain
c. A dividend
d. Interest
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e. Leverage
43. RACE Mutual fund is a no-load fund that had a net asset value of $25.60 1 year ago. Today, the net asset value (NAV)
is $28.83. During the year, dividends of $0.72 were paid out, and a capital gain distribution of $0.65 was made. Calculate
the approximate yield for RACE. (Show all work.)