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CHAPTER 19
TRUE/FALSE QUESTIONS
less volatile.
derivative of the security to exploit market pricing differentials.
mutual funds.
government securities.
equivalent mutual funds.
charged.
9. (F) Closed-end investment companies stand ready to redeem their shares at their NAV.
general partner.
16. (F) Hedge funds have been popular diversification investments for small investors.
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subprime mortgage crisis from 2007 to 2009.
on fund distributions nor to U.S. estate taxes.
have high leverages.
MULTIPLE-CHOICE QUESTIONS
a. diversification
b. payment services
c. discount brokerage
d. insurance
a. the ability to diversify an investment portfolio.
b. the ability to add funds on a regular basis such as with a 401K retirement plan.
c. the ability to shift quickly from one type of mutual funds to another with little or no cost
and without rolling over 401K monies.
d. the ability to shift from one mutual fund management company to another.
oriented investors because
a. they provide high return, low risk funds.
b. they provide an opportunity to alter the investment portfolio without the paperwork of
rolling over the pension monies.
c. they provide significant “load” fees for customers.
d. they are not regulated like most mutual funds are.
investing clients.
a. managers
b. families
c. salesmen
d. societies
a. transaction cost economies
b. risk diversification
c. maturity intermediation
d. shared costs of investment management
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present asset value?
a. unit investment trusts
b. open-end investment companies
c. closed-end investment companies
d. real estate investment trusts
e. none of the above
seek authority to
a. offer money market mutual funds.
b. market a complete variety of mutual funds.
c. enter investment banking.
d. sell insurance services.
a. the best price an underwriter can get.
b. their present asset value.
c. their present asset value less a discount.
d. none of the above
by investors who redeem their shares.
a. back-end load
b. contingent deferred sales charge
c. redemption fee
d. all of the above
e. none of the above
a. money market mutual fund
b. open-end investment company.
c. no-load mutual fund.
d. closed-end investment company.
a. charging a small fee for each purchase/sale.
b. charging a fee based on the performance of the fund.
c. charging a fee based on the value of the fund’s assets.
d. charging brokers a fee to sell the shares.
a. actively managed, short-life, liquidity provided by market.
b. not actively managed, long-life, liquidity provided by originator.
c. not actively managed, long-life, very little liquidity.
d. none of the above
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a. demand deposits.
b. time deposits.
c. MMDAs.
d. regular savings accounts.
a. commercial paper and banker’s acceptances.
b. bank CDs.
c. U.S. Treasury bills.
d. repurchase agreements.
e. U.S. Treasury notes and bonds.
a. real, physical assets.
b. money market securities.
c. capital market securities.
d. safe, low-risk government securities.
a. high risk funds; they are able to assume high levels of risk.
b. venture capitalists; they invest in the stock of firms.
c. mutual funds; they can buy an unlimited number of corporate shares.
d. mutual funds; they can issue an unlimited number of shares to investors.
a. the total value of mutual fund shares divided by the number of corporate shares held.
b. the net asset value or the number of shares issued divided by the number of corporate
shares owned.
c. the net asset value or the value of assets divided by shares issued.
d. the net asset value or the number of shares of corporate stock held divided into the total
value of the stock portfolio.
a. can exceed the net asset value per share.
b. is determined by the market.
c. can be less than the net asset value per share.
d. both b and c
e. all of the above
19. (b) A mutual fund “load” refers to
a. the operating expenses charged against the assets.
b. the sales commissions.
c. the sum of the commissions paid for buying and selling the assets of the fund.
d. the fees for the investment manager.
a. increase; liquid
b. increase; common stock
c. decrease; liquid
d. fluctuate; common stock
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a. are taxed at a lower rate than individuals’, a major aspect of their popularity.
b. are taxed only on the interest income, not the capital gains, a major aspect of their
popularity.
c. are not taxed as long as they distribute a very high proportion of earnings to shareholders
who pay taxes on gains and income.
d. are not taxed only as long as they invest in tax-free municipal securities.
a. open-end; interest rates are low.
b. open-end; interest rates are high.
c. closed-end; interest rates are low.
d. closed-end; interest rates are high
23. (d) The rapid growth of real estate investment trusts seems to be associated with
a. low interest rates.
b. favorable tax sheltering.
c. an expanding economy.
d. all of the above
a. they are invested in high quality assets.
b. they are invested in short-term assets.
c. they provide investors opportunities to access their MMMF accounts very quickly via
wire transfers and debit cards.
d. of all of the above.
a. Short-term money market investments
b. Provide excellent liquidity for investors
c. High quality and relatively high yield when the yield curve is inverse
d. all of the above
a. maintaining lines of credit at commercial banks
b. increasing redemption fees
c. working to maintain low NAV
d. redeeming shares with stock
a. an increasing number of retiring baby boomers
b. a widespread shift from defined contribution to defined benefit retirement plans
c. the increased variety of mutual funds offered
d. the attractive rates of return on common stock
e. All of the above are associated with the growth of mutual funds in recent years.
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a. bonds; common stocks
b. common stocks; bonds
c. common stocks; preferred stocks
d. money market securities; common stocks
a. index funds
b. aggressive growth funds
c. growth and income funds
d. international and global equity funds
a. growth and income funds
b. aggressive growth funds
c. balanced funds
d. income-equity funds
e. money market funds
31. (d) A back-end load fund will likely have an initial cost of
a. the NAV less the load.
b. the NAV plus the 12b-1 fees.
c. the NAV plus the back-end load
d. the NAV.
a. Securities and Exchange Commission
b. Security Investors Protection Commission
c. Federal Reserve System
d. Federal Trade Commission
a. $20.00
b. $19.40
c. $20.60
d. $23.00
e. $17.00
which has a front-end load of 3%, and Fund B, which has a back-end load of 3%. Expected
returns and fees of the two funds are identical. Which fund would you choose?
a. Fund A
b. Fund B
c. You are indifferent (total expected returns are the same after accounting for the loads)
d. More information is needed to make the choice.
a. employees in a 401k pension plan.
b. commercial banks
c. high net worth individuals and institutions.
d. investors seeking to hedge their business price risk.
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a. limited partnerships
b. corporations
c. proprietorships
d. any of the above
a. the correlation of returns from the hedge fund and the investor’s portfolio is close to +1.
b. the hedge fund and the portfolio are investing in the same things.
c. the correlation of returns from the hedge fund and the investor’s portfolio is negative.
d. the hedge fund portfolio includes none of the investments of the investor’s portfolio.
a. Mutual funds are registered with the SEC, while hedge funds are not.
b. Unlike mutual funds, hedge funds borrow significant amounts of their capital.
c. Unlike mutual funds, hedge funds concentrate their investment in very few areas.
d. Unlike mutual funds, hedge funds are managed by professional fund managers.
39. (d) If a hedge fund manager focused on short-selling of stocks, he/she would
a. invest in company stock for short-term profits.
b. invest in companies with high future growth prospects.
c. borrow money to invest in stocks.
d. select companies where the future supply of securities might exceed demand.
a. estimate what stocks will appreciate in the near future.
b. capitalize on capital market inefficiencies.
c. estimate the future price of derivative securities.
d. make significant gains from underwriting securities.
a. diversification.
b. contractual rate of return.
c. professional advice.
d. small minimum investment.
a. diversification
b. professional organization and investment selection
c. regular income from securities in the trust
d. frequent portfolio rebalancing
a. high transaction costs.
b. pricing differentials between derivative contracts and the underlying security.
c. technological developments aiding informational efficiencies.
d. similar prices in different geographic locations.
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a. tax advantage
b. high return; low risk
c. low expense ratio
d. ease of buying and selling
a. marketing expenses
b. costs of trading securities
c. management salaries
d. account maintenance costs
a. are subtracted from funds assets each year.
b. can be a maximum of 1% of average net assets per year.
c. increase with higher portfolio turnover (commissions)
d. All of the above is true.
a. REITs total assets started growing in 1974 and peaked in 1984.
b. FREITs have a fixed life.
c. A real estate recession caused many REIT failures.
d. REITs rebounded with low interest rates and real estate revival of 1984 and low interest
rate periods.
a. poor management
b. tax considerations
c. market demand
d. both b and c
e. all of the above
a. They invest in bonds that provide steady coupon cash flows and are quite varied in their
risk level.
b. They could be made up of a portfolio of entirely corporate bonds (risky) or a portfolio of
entirely Treasury issues (no default risk) or of mortgage-backed securities.
c. They may be exposed not only to default risk, but also to interest rate risk.
d. They are attractive to investors close to retirement age as the income stream of fund’s
instruments provides them with necessary income.
e. All of the above are true.
a. Such funds are portfolios of mortgage securities and preferred stock.
b. The proportions of stocks and bonds determine the level of return for each fund.
c. They typically generate a higher proportion of income than growth and income funds and
are less volatile.
d. Investors who have a few more years to retirement and are typically in their early 50s are
attracted to such funds.
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a. The objective of growth funds is to invest in industries and companies that are not mature
and are still experiencing sizable growth.
b. Investors looking for a higher return and a moderate risk are attracted to such funds.
c. Focus is on capital appreciation rather than steady income, so investors’ outlook needs to
be long-term.
d. All of the above are true.
a. They seek a balance between capital gains and current income.
b. They mostly invest in highly rated companies’ stock.
c. They are ideal for investors who are looking for some income, but would also want to
invest in growth stocks.
d. All of the above is true.
a. MMMF
b. open-end investment company
c. no-load mutual fund
d. Exchange-Traded Funds(ETF)
a. MMMF balances were insured by FDIC, unlike bank deposits
b. MMMF were allowed to pay market rates on their balances, while commercial banks
faced interest rate ceilings.
c. MMMF balances were more liquid than any bank deposits.
d. All of the above
owns 1000 shares of Bem & Jarry’s priced at $43, and 2000 shares of Pepsi priced at $50.
The fund itself has 3500 of its own shares outstanding. What is the NAV of a fund’s share?
a. $66
b. $56
c. $46
d. $36
e. $26
front load, a 1% of management fee and a 0.25% of 12b-1 fee. Assume that the
management and 12b-1 fees are charged based on year-end asset value. The gross annual
return on the fund’s shares was 9%. What was your net annual rate of return to the nearest
basis point?
a. 3.33%
b. 7.64%
c. 6.25%
d. 4.52%
e. 4.64%
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1.75% management fee and a 0.5% 12b-1 fee. Assume that the management and 12b-1 fees
are charged on year end assets for simplicity. The gross annual return on the fund’s shares
was 12.50%. What was your net annual rate of return to the nearest basis point?
a. 9.97%
b. 8.25%
c. 6.12%
d. 5.42%
e. 4.56%
ESSAY QUESTIONS
1. Compare and contrast an open-end (mutual fund) investment fund with a closed-end investment
company.
2. How is the marketing channel of distribution different for load mutual funds vs. no-load funds?
3. Why are there so many different mutual funds offered for sale?
4. Why have exchange-traded funds become popular in the last few years? Name one and specify
what it tracks.
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5. How do hedge funds take advantage of capital market inefficiencies and end up making the
markets more efficient?
6. What are the functions that investment companies and mutual funds provide to the public?
7. You invest $1,000,000 in Formosa Growth Fund. The Fund charges a front end load of 5.75%
and an annual expense fee of 1.25% of the average asset value over the year. You believe the
fund’s gross rate of return will be 11% per year. What will your investment portfolio be worth in
one year?