Chapter 23—Mutual Fund Operations
1. Which of the following statements is incorrect?
a.
Mutual funds serve as a key financial intermediary.
b.
Managers of mutual funds do not analyze economic and industry trends.
c.
Because of their diversification, management expertise, and liquidity, mutual funds have
grown at a rapid pace.
d.
Some mutual funds offer check-writing privileges.
2. No-load mutual funds are normally promoted by ____. Load funds are promoted by ____.
a.
registered representatives of a brokerage firm; registered representatives of a brokerage
firm
b.
registered representatives of a brokerage firm; the mutual fund of concern
c.
the mutual fund of concern; registered representatives of a brokerage firm
d.
the mutual fund of concern; the mutual fund of concern
3. To cover managerial expenses, mutual funds typically charge
a.
management fees of less than 2 percent of total assets per year.
b.
commissions of typically 8 to 10 percent of transaction market value per year.
c.
management fees of typically more than 10 percent of total assets per year.
d.
commissions of typically 3 to 5 percent of the transaction market value per year.
4. Mutual funds that are willing to repurchase their shares from investors at any time are referred to as
a.
closed-end funds.
b.
load mutual funds.
c.
no-load mutual funds.
d.
open-end mutual funds.
5. ____ funds do not normally repurchase their shares from investors.
a.
Closed-end
b.
Load mutual
c.
No-load mutual
d.
Open-end mutual
6. Most closed-end funds invest in
a.
stock and bonds.
b.
money market securities.
c.
gold.
d.
derivatives.
7. Exchange-traded funds are like open-end funds in the sense that
a.
their shares are traded on an exchange, and their share price changes throughout the day.
b.
they have a fixed number of shares.
c.
they are not actively managed.
d.
none of the above
8. Hedge funds differ from open-end mutual funds in the sense that
a.
they require a much smaller initial investment.
b.
they are open to additional investments at any time.
c.
their investors cannot sell shares back to the fund at any time they desire.
d.
they invest in very limited set of securities.
9. Shares of open-end mutual funds are purchased and sold on exchanges.
a. True
b. False
10. Mutual funds
a.
are unregulated.
b.
are required to disclose the names of their portfolio managers in the prospectus.
c.
are not required to disclose any information about their past performance.
d.
are exempt from all taxes.
11. Which of the following is not disclosed in the prospectus?
a.
the minimum amount of investment required
b.
the investment objective of the funds
c.
the fees incurred by the mutual fund
d.
all of the above are disclosed
12. The net asset value of a mutual fund is estimated once every week.
a. True
b. False
13. Mutual funds with ____ expense ratios tend to ____ others that have a similar investment objective.
a.
lower; underperform
b.
higher; outperform
c.
lower; outperform
d.
A and B
14. A front-end load is a withdrawal fee assessed when you withdraw money from the mutual fund.
a. True
b. False
15. Money market funds invest mostly in
a.
stocks.
b.
long-term bonds.
c.
real estate.
d.
short-term securities.
16. If investors sell their mutual fund shares after the net asset value of the fund increases, the return is
called
a.
share price appreciation.
b.
capital gains distribution.
c.
dividends.
d.
split net asset value.
17. Mutual funds composed of stocks that have potential for very high growth, but may also be unproven,
are called
a.
income funds.
b.
capital appreciation funds.
c.
specialty funds.
d.
dividend funds.
18. Mutual funds composed of bonds that offer periodic coupon payments are
a.
income funds.
b.
specialty funds.
c.
dividend funds.
d.
growth funds.
19. Mutual funds whose bonds have a ____ average time to maturity are ____ sensitive to interest rate
fluctuations.
a.
longer; less
b.
shorter; less
c.
shorter; more
d.
A and C
20. The net asset value of international stock mutual funds ____ as the dollar strengthens against foreign
currencies. (Assume no change in the prices of foreign stocks.)
a.
increases
b.
decreases
c.
is unaffected
d.
can increase or decrease depending on the dollar’s degree of strength
21. Mutual funds that include some non-U.S. stocks and U.S. stocks are called ____ funds.
a.
global
b.
foreign
c.
combined
d.
mixed
22. A mutual fund consisting only of stocks of firms that are in a specific industry is an example of a ____
fund.
a.
specialty
b.
growth
c.
capital appreciation
d.
growth and income
23. The majority of mutual fund assets are in the form of
a.
common stocks.
b.
preferred stocks.
c.
U.S. government bonds.
d.
municipal bonds.
24. If a mutual fund distributes at least ____ percent of its taxable income to shareholders, the fund is
exempt from taxes on dividends, interest, and capital gains distributed to shareholders.
a.
25
b.
50
c.
75
d.
90
25. When the redemptions of money market mutual fund shares exceeds sales of shares, the fund
accommodates the amount of excessive redemptions by
a.
selling some of the assets contained in the portfolio.
b.
issuing stock.
c.
issuing bonds.
d.
borrowing from banks.
26. Money market fund assets include all of the following, except
a.
stocks.
b.
repurchase agreements.
c.
Treasury bills.
d.
CDs.
27. If money market funds definitely expect interest rates to increase, they will ____ their average asset
maturity.
a.
not adjust
b.
shorten
c.
lengthen
d.
shorten (if the expected change is small) or lengthen (if the expected change is large)
28. Money market funds are normally perceived to have ____ interest rate risk, and ____ default risk.
a.
low; high
b.
high; high
c.
high; low
d.
low; low
29. Equity real estate investment trusts invest
a.
in mortgage and construction loans.
b.
directly in properties.
c.
in common stocks issued by construction companies.
d.
in common stocks issued by real estate brokerage firms.
30. Because ____ real estate investment trusts essentially represent a fixed income portfolio, their market
value will ____ as interest rates increase.
a.
equity; increase
b.
equity; decrease
c.
mortgage; increase
d.
mortgage; decrease
31. When interest rates decline, investors who want to earn a high return may tend to ____ in stock mutual
funds, and ____ deposits in depository institutions.
a.
reduce; reduce
b.
reduce; increase
c.
increase; reduce
d.
increase; increase
32. The composition of asset allocation funds
a.
is focused completely on one type of security as specified by the particular mutual fund.
b.
is fixed and not altered by the mutual fund managers.
c.
A and B
d.
none of the above
33. A mutual fund prospectus does not contain
a.
minimum amount of investment required.
b.
return on the fund since its inception.
c.
investment objective of the mutual fund.
d.
exposure of the mutual fund to various types of risk.
e.
fees incurred by the mutual fund.
34. The ____ of a mutual fund indicates the value per share.
a.
net asset value
b.
gross asset value
c.
net stock value
d.
net bond value
e.
none of the above
35. Mutual funds whose funds are promoted strictly by the mutual fund of concern are called
a.
closed-end funds.
b.
load mutual funds.
c.
no-load mutual funds.
d.
open-end mutual funds.
36. Mutual funds that are composed of bonds that offer periodic coupon payments are called ____ mutual
funds.
a.
tax-free
b.
income
c.
high-yield
d.
growth
e.
none of the above
37. ____ are most likely to invest in mortgages.
a.
Stock mutual funds
b.
Bond mutual funds
c.
Load funds
d.
Closed-end funds
38. Hedge funds that exceed a specified size must register with the
a.
Securities and Exchange Commission (SEC).
b.
Federal Reserve.
c.
Office of Thrift Supervision.
d.
Federal Mutual Fund Board.
39. According to SEC regulations, the majority of the members on a mutual fund’s board of directors must
be
a.
employed by the fund.
b.
outsiders (not employed by the fund).
c.
certified public accountants.
d.
certified financial analysts.
40. An expense ratio represents ____ divided by the fund’s ____.
a.
annual fees charged to investors; 12b-1 fees
b.
annual fees charged to investors; net asset value
c.
initial sales charge (load); 12b-1 fees
d.
initial sales charge (load); net asset value
41. The most common investment by closed-end funds is in
a.
derivatives.
b.
bonds.
c.
money market securities.
d.
international equity securities.
42. ____ are beneficial for investors who want to invest in tax-exempt securities.
a.
Municipal bond funds
b.
Growth and income funds
c.
International and global funds
d.
Money market funds
43. When the demand for a particular closed-end fund is ____, the fund is likely priced at a ____.
a.
high; discount
b.
low; discount
c.
high; premium
d.
B and C are correct
44. Which of the following statements is incorrect?
a.
Commercial paper is commonly purchased by money market funds.
b.
From an investor’s perspective, money market funds usually have a low level of credit
risk.
c.
Money market funds tend to have low interest rate risk compared to bond funds.
d.
If mutual fund managers expect interest rates to decrease in the future, they should use
funds generated from maturing securities today to purchase new securities with shorter
maturities.
45. The number of exchange-traded funds has declined over the last several years because the cost of
managing them was excessive.
a. True
b. False
46. Exchange-traded funds can be purchased on margin.
a. True
b. False
47. Investors can sell exchange-traded funds short.
a. True
b. False
48. Mutual fund managers seek securities that have much liquidity so that they could easily sell them in
the secondary market at any time.
a. True
b. False
49. Closed-end funds are closed to new investment but allow redemptions by shareholders.
a. True
b. False
50. Closed-end fund managers must hold more cash than mutual fund managers.
a. True
b. False
51. Index mutual funds are not traded throughout the day, while exchange-traded funds are.
a. True
b. False
52. Venture capital funds typically invest in stocks of publicly-traded companies.
a. True
b. False
53. Many businesses that go public are partially backed by venture capital before the IPO.
a. True
b. False
54. Private equity funds use most of their money to invest in stocks of publicly-traded companies.
a. True
b. False
55. Vulture funds are a type of private equity fund that purchase distressed assets of a firm that is in or
near bankruptcy.
a. True
b. False
56. Hedge funds commonly engage in short selling.
a. True
b. False
57. ____ are not exchange-traded funds.
a.
Spiders
b.
Growth mutual funds
c.
Diamonds
d.
Sector Spiders
58. Which of the following statements is incorrect?
a.
ETFs are like index mutual funds because the share price adjusts over time in response to
the change in the index level.
b.
Both ETFs and index mutual funds pay dividends in the form of additional shares to
investors.
c.
The portfolio management of both ETFs and index mutual funds is very complex.
d.
ETFs can be traded throughout the day.
59. Funds that are designed to mimic particular stock indexes and are traded on a stock exchange are
known as
a.
index mutual funds.
b.
exchange-traded funds.
c.
money market funds.
d.
none of the above
60. Exchange traded funds can be
a.
traded throughout the day.
b.
purchased on margin.
c.
sold short.
d.
all of the above
61. ____ trade at one-tenth of the S&P 500 value.
a.
Spiders
b.
Cubes
c.
Diamonds
d.
World Equity Benchmark Shares
62. Mutual funds must register with the U.S. Treasury and provide to interested investors a prospectus that
discloses details about the components of the funds and risks involved.
a. True
b. False
63. The net asset value (NAV) is estimated each day by first determining the market value of all securities
comprising the mutual fund.
a. True
b. False
64. Portfolio managers are hired by the mutual fund to invest in a portfolio of securities that satisfies the
desires of investors.
a. True
b. False
65. The expenses incurred by a mutual fund are billed separately to investors, and are not included in the
fund’s net asset value (NAV).
a. True
b. False
66. A front-end load is a withdrawal fee assessed when you withdraw money from the mutual fund.
a. True
b. False
67. Large mutual funds can exert some control over the management of firms because they commonly
represent the largest shareholders.
a. True
b. False
68. Investors who feel capable of making their own investment decisions often prefer to invest in load
funds.
a. True
b. False
69. The term “mutual funds” is normally used to represent closed-end funds, and does not include
open-end funds.
a. True
b. False
70. Exchange-traded funds differ from open-end funds in that their share price is adjusted only at the end
of every day.
a. True
b. False
71. Capital appreciation funds are suited for investors who are more willing to risk a possible loss in value.
a. True
b. False
72. The returns on international stock mutual funds are affected only by foreign companies’ stock prices,
and are independent of currency movements.
a. True
b. False
73. Index funds are becoming increasingly unpopular because most mutual fund managers consistently
outperform indexes.
a. True
b. False
74. A mutual fund’s performance is usually unrelated to market conditions.
a. True
b. False
75. The SEC requires that a majority of the directors of a mutual fund board be independent (not employed
by the fund).
a. True
b. False
76. Diversification among types of mutual funds usually does little to reduce the volatility of returns on
the overall investment.
a. True
b. False
77. Closed-end funds may sometimes engage in a stock repurchase, in which they purchase shares on the
exchange where the shares are listed.
a. True
b. False
78. Because money market funds contain instruments with short-term maturities, their market values are
not very sensitive to movements in market interest rates.
a. True
b. False
79. Equity REITs are sometimes purchased to hedge against inflation, as rents and property values tend to
rise with inflation.
a. True
b. False
80. Equity REITs essentially represent fixed-income portfolios. Thus, their market values will be
influenced by interest rate movements.
a. True
b. False
81. Hedge funds are more heavily regulated than mutual funds.
a. True
b. False
82. Which of the following is not true regarding mutual funds?
a.
They are a key financial intermediary.
b.
They provide an important service to individual investors seeking to invest funds.
c.
Most mutual funds use experienced portfolio managers, so investors do not have to
manage the portfolio themselves.
d.
They provide a way for individual investors to diversify, but most individual investors are
unable to afford the purchase of mutual fund shares.
83. Which of the following statements is incorrect?
a.
Exchange-traded funds (ETFs) are designed to mimic particular stock indexes and are
traded on a stock exchange.
b.
Unlike a closed-end fund, an ETF has a fixed number of shares.
c.
ETFs differ from most open-end and closed-end funds in that they are not actively
managed.
d.
One disadvantage of ETFs is that each purchase of additional shares must be done through
the exchange where they are traded.
84. A mutual fund prospectus does not contain the
a.
minimum amount of investment required.
b.
investment objective of the mutual fund.
c.
exposure of the mutual fund to various types of risk.
d.
return on the fund since its inception.
e.
fees incurred by the mutual fund.
85. The ____ of a mutual fund represents the price at which shares can be purchased from a mutual fund.
a.
gross asset value
b.
net asset value
c.
net stock value
d.
net bond value
86. Which of the following is incorrect about money market funds (MMFs)?
a.
The credit risk of MMFs is normally perceived to be lower than that of corporate bonds.
b.
MMFs have higher interest rate risk than bond funds.
c.
MMFs normally generate positive returns over time
d.
All of the above are correct.
87. ____ are most likely to invest in mortgages.
a.
Stock mutual funds
b.
Real estate investment trusts (REITs)
c.
Load funds
d.
Closed-end funds
e.
None of the above
88. Mutual funds are not required to disclose which of the following in the prospectus?
a.
the names of the portfolio managers
b.
the length of time that the portfolio managers have been employed by the fund in that
position
c.
the performance record in recent years
d.
the number of investors currently investing in the mutual fund
e.
Mutual funds are required to disclose all of the above in a prospectus
89. Which of the following is not a way in which mutual funds generate returns for their shareholders?
a.
They can pass on any earned income as dividend payments to shareholders.
b.
They distribute the capital gains resulting from the sale of securities within the fund.
c.
The mutual fund price appreciates.
d.
All of the above are ways in which a mutual fund generates returns to its shareholders.
90. A(n) ____ fund contains a sales charge.
a.
load
b.
no-load
c.
closed-end
d.
open-end
e.
none of the above
91. ____ funds are open to investment from investors at any time.
a.
Load
b.
No-load
c.
Open-end
d.
Closed-end
e.
None of the above
92. Which of the following statements is incorrect?
a.
Investors can purchase shares directly from an open-end fund at any time.
b.
The number of shares of an open-end fund is always changing.
c.
Open-end funds typically maintain some cash on hand in case investments exceed
redemptions.
d.
There are many different categories of open-end mutual funds.
93. ____ funds focus on a group of companies sharing a particular characteristic.
a.
Specialty
b.
Growth and income
c.
Closed-end
d.
Capital appreciation
e.
None of the above
94. Bond portfolios with some bonds rated below Baa by Moody’s or BBB by Standard and Poor’s,
available for investors desiring high return and willing to incur high risk, are called ____ funds.
a.
growth
b.
capital appreciation
c.
junk bond
d.
bond
e.
none of the above
95. Which of the following statements is incorrect?
a.
A mutual fund is usually run by an investment company.
b.
Although many mutual funds have grown substantially over time, their expense ratios
have generally increased over time.
c.
For each mutual fund, all expenses charged and reflected in the expense ratio are always
valid.
d.
The SEC requires that a majority of the directors of a mutual fund board be independent.
96. Money market funds commonly invest in
a.
stocks.
b.
real estate.
c.
commercial paper.
d.
U.S. Treasury bonds.
e.
none of the above
97. Which of the following is not true with respect to venture capital funds?
a.
They typically invest in young, growing firms that need equity funding but are not ready
or willing to go public.
b.
More than half of all VC investing is in businesses that are being created.
c.
Venture capital funds tend to focus on technology firms, which have the potential for high
returns but also exhibit a high level of risk.
d.
Because VC funds invest in fairly safe ventures, a low percentage of their ventures fail.
e.
All of the above are correct with respect to venture capital funds.
98. ____ funds sell shares to wealthy individuals and financial institutions and use the proceeds to invest
in securities.
a.
Growth
b.
Open-end
c.
Capital appreciation
d.
Hedge
e.
Specialty
99. Exchange-traded funds distribute their capital gains to their shareholders, who must pay tax
on the gains.
a. True
b. False
100. Shares of exchange-traded funds can be sold _________, and shares of open-end mutual funds
can be sold _________.
a.
at any time during trading hours; at any time via private trading networks
b.
only at the end of the day; at any time during trading hours
c.
at any time via private trading networks; at any time during trading hours
d.
at any time during trading hours; only at the end of the day
101. The average annual fee on actively managed exchange-traded funds is ________, which is
_________.
a.
zero.
b.
lower than the typical annual fee on open-end mutual funds.
c.
higher than the typical annual fee on open-end mutual funds.
d.
the same as the typical annual fee on open-end mutual funds.
102. An investor who believes that technology stocks will perform well but does not want to select
individual technology stocks might invest in:
a.
Spiders.
b.
WEBs.
c.
Cubes.
d.
Diamonds.
103. If interest rates are expected to ________, mortgage real investment trusts (REITs)
___________.
a.
decline; become less attractive
b.
rise; become less attractive
c.
rise; are not affected
d.
decline; are not affected
104. Investors who invest in a hedge fund of funds essentially pay two layers of management fees.
a. True
b. False
105. Hedge funds commonly use financial leverage, which can:
a.
magnify their returns and magnify their losses.
b.
magnify their returns and limit their losses.
c.
reduce their risk and limit their losses.
d.
magnify their returns and not affect their risk.