Chapter 6 Investment Companies: Mutual Funds
TRUE/FALSE
depends on the difference between the fund’s assets and
liabilities and the number of shares outstanding.
investor should receive the net asset value.
net asset value.
fund are the commissions to buy and sell the shares.
return from an investment in a mutual fund.
the stockholders’ income tax returns.
no–load fund.
the shares are sold.
net asset value.
from their net asset value.
avoid market risk.
one sector of the economy, unsystematic risk may not be
reduced.
an index such as the S&P 500.
million.
analytical techniques such as a price to earnings ratio.
mutual fund must register its securities and prepare a
prospectus detailing its objectives and costs to investors.
distributes capital gains.
market instruments such as commercial paper.
seller agrees to repurchase the asset at a lower price.
money market securities is safety of principal.
have no risk of default.
in the United States by a foreign bank.
suggest they consistently outperform the market.
basis.
an investor’s return as an equal load fee (e.g., 3
percent).
their existing shareholders for marketing expenses.
companies and used to compute risk–adjusted rates of
return.
desirable if the investor is seeking a conservative
investment.
systematic risk.
risk–adjusted required performance.
well diversified.
portfolio’s beta.
avoid 12b–1 fees.
the fund’s annual distribution, the investor becomes
responsible for taxes on the distribution.
return is comparable to its before–tax return.
efficiency.
consistently higher returns in subsequent years.
benchmark for a small–cap fund.
measure of the market or a segment of the market.
exceeded the return on the S&P 500 stock index, you may
conclude that the fund outperformed the market on a risk–
adjusted basis.
MULTIPLE CHOICE
include
1. professional management
2. avoidance of income taxes by the investor
3. portfolio diversification
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
a. have a fixed number of shares
b. issue new stock whenever investors buy shares
c. may sell for a discount from net asset value
d. redeem shares at the investor’s cost
income (e.g., dividends received)
a. retain
b. reinvest
c. distribute
d. distribute or reinvest
a. a money market mutual fund
b. an index fund
c. a commercial bank
d. a growth mutual fund
a. higher stock prices
b. lower stock prices
c. larger number of shares
d. increased liabilities
1. the loading charges
2. commissions when the fund buys and sells
securities
3. management fees
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
1. sales charges
2. commissions
3. 12b–1 plans
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. only 3
a. are reported after taxes
b. consider the impact of loading fees
c. are based on change in net asset value and
the fund’s distributions
d. are adjusted for the fund’s systematic risk
a. high quality securities
b. stocks that respond to changes in the consumer
prices (i.e., Consumer Price Index)
c. stocks included in an aggregate measure
of stock prices
d. stocks of firms in a particular industry
liquid asset?
a. negotiable certificate of deposit
b. U.S. Treasury bills
c. corporate stock
d. commercial paper
1. commercial paper
2. repurchase agreements
3. corporate bonds
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
a. a short–term unsecured debt of a corporation
b. a short–term secured debt of a corporation
c. a long–term unsecured debt of a corporation
d. a long–term secured debt of a corporation
a. money market mutual funds
b. commercial paper
c. negotiable certificates of deposit
d. treasury bills
companies indicate that
a. no funds outperform the market consistently
b. most funds are less risky than the market
c. most funds outperform the market consistently
d. few funds outperform the market consistently
a. a load fee of the same percentage
b. a 12b–1 fee with the same percentage
c. commissions paid by a mutual fund to buy
securities
d. management fees
financial markets, they
a. cannot outperform the market consistently
b. should not outperform the market consistently
c. will underperform the market when securities
prices decline
d. primarily bear unsystematic risk
a. have outperformed the market
b. have underperformed the market
c. have more systematic risk than the market
d. have less systematic risk than the market
a. investment skill and market timing
b. the specific style combined with a low beta
c. a high beta and investment timing
d. investment skill combined with the style
a. standardize funds’ returns by their beta
coefficients
b. compute their rates of return including both
income and capital gain distributions
c. standardize funds’ costs by an aggregate index of
mutual fund expenses
d. to divide each funds’ return by the return on the
market
a. the realized return was less than the return
earned by the market
b. the required return exceeded the realized return
c. the investor constructed a poorly diversified
portfolio
d. the investor’s portfolio had excessive
diversification
a. Mutual funds report returns before adjusting for
taxes.
b. 12b–1 fees exceed a fund’s NAV.
c. Small cap funds cannot have load fees.
d. Exchange–traded funds exchange their portfolios.
mutual fund?
a. its historic return
b. high tax efficiency
c. charging 12b–1 fees instead of load fees
d. often realizing portfolio gains
selecting a mutual fund?
1. portfolio turnover
2. 12b–1 fees
3. unrealized losses in the fund’s portfolio
a. 1 and 2
b. 1 and 3
c. 2 and 3
d. all of the above
a. the stock market as a whole
b. the bond market
c. a specific measure of the market
d. the return on other index funds
a. invests in an index of the stock market
b. invests only in debt instruments
c. has less systematic risk
d. has less unsystematic risk
PROBLEMS
For problems concerning mutual funds, see the problems
provided in Chapter 7.