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Indicate whether the statement is true or false.
1. Mutual funds must register with the U.S. Treasury and provide interested investors with a prospectus that discloses
details about the components of the funds and the risks involved.
a. True
b. False
2. Diversification among types of mutual funds usually does little to reduce the volatility of returns on the overall
investment.
a. True
b. False
3. Most studies that assess mutual fund performance find that mutual funds almost always outperform a benchmark
market index.
a. True
b. False
4. A front-end load is a withdrawal fee assessed when you withdraw money from the mutual fund.
a. True
b. False
5. Shares of open-end mutual funds are purchased and sold on exchanges.
a. True
b. False
6. A mutual fund’s performance is usually unrelated to market conditions.
a. True
b. False
7. Venture capital funds typically invest in stocks of publicly traded companies.
a. True
b. False
8. Capital appreciation funds are suited to investors who are more willing to risk a possible loss in value.
a. True
b. False
9. The term “mutual funds” is normally used to refer to closed-end funds and does not include open-end funds.
a. True
b. False
10. Index mutual funds are not traded throughout the day, while exchange-traded funds are.
a. True
b. False
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11. Investors can sell exchange-traded funds short.
a. True
b. False
12. The net asset value of a mutual fund is estimated once every week.
a. True
b. False
13. Compared to open-end mutual funds, exchange-traded funds generate much more capital gain income that must
be distributed to their shareholders, who must pay tax on the gains.
a. True
b. False
14. 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
15. Private equity funds use most of their money to invest in stocks of publicly traded companies.
a. True
b. False
16. Hedge funds try to obtain an information advantage by using expert networks, whereby they hire consultants with
expertise in specific industries.
a. True
b. False
17. Equity REITs essentially represent fixed-income portfolios, so their market values are heavily influenced by interest
rate movements.
a. True
b. False
18. 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
19. 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
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20. Closed-end funds are closed to new investment but allow redemptions by shareholders.
a. True
b. False
21. Hedge funds commonly engage in short selling.
a. True
b. False
22. The number of exchange-traded funds has declined in recent years because the cost of managing them was excessive.
a. True
b. False
23. Exchange-traded funds can be purchased on margin.
a. True
b. False
24. Hedge funds are more heavily regulated than mutual funds.
a. True
b. False
25. Closed-end fund managers must hold more cash than open-end mutual fund managers.
a. True
b. False
26. The expenses incurred by a mutual fund are billed separately to investors and are not included in the calculation of the
fund’s net asset value (NAV).
a. True
b. False
27. Investors who feel capable of making their own investment decisions normally prefer to invest in load funds instead of
no-load funds.
a. True
b. False
28. 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
29. Investors who invest in a multifund mutual fund essentially pay two layers of management fees.
a. True
b. False
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30. Mutual fund managers seek securities that are very liquid so that they can easily sell them in the secondary market at
any time.
a. True
b. False
31. Large mutual funds can exert some control over the management of firms because they commonly are the largest
shareholders.
a. True
b. False
32. Equity REITs are sometimes purchased to hedge against inflation, as rents and property values tend to rise with
inflation.
a. True
b. False
33. Exchange-traded funds differ from open-end funds in that their share price is adjusted only at the end of each day.
a. True
b. False
34. The Securities and Exchange Commission has established rules that allow public firms to disclose their earnings
exclusively to hedge funds a few days before announcing the earnings to the public.
a. True
b. False
35. Index funds are becoming increasingly unpopular because most mutual fund managers consistently outperform
indexes.
a. True
b. False
36. 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
37. Many businesses that go public are partially backed by venture capital before the IPO.
a. True
b. False
Indicate the answer choice that best completes the statement or answers the question.
38. Which of the following statements is NOT correct?
a. A mutual fund is usually run by an investment company.
b. Mutual funds with lower expense ratios tend to outperform other funds with a similar investment objective.
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.
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39. ____ 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 these are correct.
40. Which of the following is NOT disclosed in a mutual fund prospectus?
a. the minimum amount of investment required
b. the investment objective of the mutual fund
c. the fees incurred by the mutual fund
d. All of the above are disclosed.
41. _____ funds contain both stocks and bonds, with the proportions changing automatically as the investor ages.
a. Alternative strategy
b. Automatic allocation
c. Target date
d. Age-in-place
42. If investors sell their mutual fund shares after the net asset value of the fund increases, the investors benefit from
a. share price appreciation.
b. capital gains distribution.
c. dividends.
d. split net asset value.
43. The composition of an asset allocation fund
a. includes nontraditional assets such as derivative securities and global real estate.
b. is fixed and does not change with market conditions.
c. is designed to automatically change as the investor ages.
d. is adjusted by the fund’s managers in response to expectations and economic conditions.
44. If money market fund managers 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)
45. ____ 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
46. Hedge funds that exceed a specified size must register with the
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a. Securities and Exchange Commission (SEC).
b. Federal Reserve.
c. Office of Thrift Supervision.
d. Federal Mutual Fund Board.
47. Mutual funds composed of _____ bonds with high credit ratings allow investors in high tax brackets to avoid taxes
while maintaining a low degree of ______.
a. Treasury; liquidity risk
b. municipal; credit risk
c. high-yield; credit risk
d. international; exchange rate risk
48. Which of the following is NOT true with correct to venture capital (VC) funds?
a. They typically invest in young, growing firms that need equity funding but are not ready to go public.
b. More than half of all VC investing is in businesses that are being created.
c. They 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 these are correct with respect to venture capital funds.
49. To cover managerial and other expenses, mutual funds typically charge
a. management fees of less than 2 percent of total assets per year.
b. commissions of 8 to 10 percent on purchases or sales of securities.
c. management fees of more than 10 percent of total assets per year.
d. a one-time load of 5 percent upon the initial investment in the mutual fund.
50. Exchange-traded funds can be
a. traded throughout the day.
b. purchased on margin.
c. sold short.
d. All of these are correct.
51. 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
52. Money market funds invest mostly in
a. stocks.
b. long-term bonds.
c. real estate.
d. short-term securities.
53. Which of the following statements is NOT correct?
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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.
54. Most closed-end funds invest in
a. bonds and other debt securities.
b. money market securities.
c. gold.
d. derivatives.
55. Mutual funds with ____ expense ratios tend to ____ other funds that have a similar investment objective.
a. lower; underperform
b. higher; outperform
c. lower; outperform
d. lower; underperform AND higher; outperform
56. 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
57. Money market funds are normally perceived to have ____ interest rate risk and ____ credit risk.
a. low; high
b. high; high
c. high; low
d. low; low
58. 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
59. 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.
60. Mutual funds that include both non-U.S. stocks and U.S. stocks are called ____ funds.
a. global
b. international
c. combined
d. mixed
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61. 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.
62. ____ 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
63. Mutual funds composed of bonds that offer periodic coupon payments are
a. income funds.
b. specialty funds.
c. dividend funds
d. growth funds.
64. Hedge funds
a. are typically organized as limited partnerships.
b. were accused of making market conditions worse during the credit crisis because they commonly took short
positions in the stock of financial institutions that held subprime mortgages.
c. commonly rely heavily on financial leverage.
d. generally charge both a management fee and an incentive fee.
e. All of these are correct.
65. When at least two-thirds of a bond mutual fund’s portfolio consists of bonds rated below Baa by Moody’s or BBB by
Standard and Poor’s, the fund is called a ____ fund.
a. growth
b. capital appreciation
c. high-yield bond
d. leveraged bond
e. None of these are correct.
66. The ____ of a mutual fund represents the price at which shares can be purchased from the mutual fund.
a. gross asset value
b. net asset value
c. net stock value
d. net bond value
67. Which of the following statements is NOT correct?
a. ETFs are like index mutual funds in that the share price adjusts over time in response to changes in the index
level.
b. ETFs normally do not have capital gains and losses that must be distributed to shareholders.
c. The portfolio management of both ETFs and index mutual funds is very complex.
d. ETFs can be traded throughout the day.
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68. 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.
69. Money market fund assets include all of the following, EXCEPT
a. stocks.
b. repurchase agreements.
c. Treasury bills.
d. CDs.
70. 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 these are correct.
71. The average annual fee on actively managed exchange-traded funds 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
72. ____ trade at one-tenth of the S&P 500 value.
a. Spiders
b. Cubes
c. Diamonds
d. World Equity Benchmark Shares
73. A mutual fund’s expense ratio represents the ____ 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
74. Money market funds commonly invest in
a. stocks.
b. real estate.
c. commercial paper.
d. U.S. Treasury bonds.
e. None of these are correct.
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a. income funds.
b. capital appreciation funds.
c. specialty funds.
d. dividend funds.
76. 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. longer; less AND shorter; more
77. 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 these are ways in which a mutual fund generates returns to its shareholders.
78. An investment in a(n) ____ fund incurs a sales charge.
a. load
b. no-load
c. closed-end
d. open-end
e. None of these are correct.
79. Which of the following statements is NOT correct?
a. Exchange-traded funds (ETFs) are designed to mimic particular stock indexes and are traded on a stock exchange.
b. ETFs have very high expense ratios.
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.
80. 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.
81. Based on the market value of total assets, which is the dominant type of mutual fund?
a. high-yield (junk) bond funds
b. hybrid funds
c. stock funds
d. taxable bond funds
e. municipal bond funds
82. _______ are promoted strictly by the mutual fund of concern and do not involve a sales charge.
a. Closed-end funds
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b. Load mutual funds
c. No-load mutual funds
d. Open-end mutual funds
83. 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
84. Which of the following is NOT correct about money market funds (MMFs)?
a. The credit risk of MMFs is normally perceived to be lower than that of corporate bond funds.
b. MMFs have higher interest rate risk than long-term bond funds.
c. MMFs are normally characterized as having relatively low risk and low expected returns.
d. All of these are correct.
85. The majority of mutual fund assets are
a. common stocks.
b. corporate bonds.
c. U.S. government bonds.
d. municipal bonds.
86. Exchange-traded funds (ETFs)
a. are traded on an exchange, and their share price changes throughout the day.
b. invest only in bonds.
c. are actively managed.
d. None of these are correct.
87. Which of the following are most likely to invest in mortgages?
a. stock mutual funds
b. real estate investment trusts
c. Treasury bond funds
d. money market funds
88. A mutual fund prospectus is not required to disclose the
a. minimum amount of investment required.
b. return on the fund since its inception in comparison to the returns of other funds in its category.
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 and passed on to investors.
89. The majority of closed-end funds invest in
a. derivatives.
b. bonds and other debt securities.
c. stocks representing a particular sector or country.
d. international equity securities.
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90. Which of the following statements is NOT correct?
a. Commercial paper is commonly purchased by money market funds.
b. Money market funds usually have a low level of credit risk.
c. Money market funds tend to have lower interest rate risk than bond funds.
d. If money market fund managers expect interest rates to decrease, they should use funds generated from maturing
securities to purchase new securities with shorter maturities.
91. When interest rates decline, investors who want to earn a high return may ____ their investments in stock mutual
funds and ____ their deposits in depository institutions.
a. reduce; reduce
b. reduce; increase
c. increase; reduce
d. increase; increase
92. 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.
93. 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.
94. 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 these are correct.
95. 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.
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Answer Key
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