Chapter 17 – Professional Money Management, Alternative Assets, and Industry Ethics
1. Management and advisory firms can advise clients on how to structure their own portfolios.
a.
True
b.
False
2. In an investment company, the invested funds belong to many individuals.
a.
True
b.
False
3. A portfolio is generally managed by the board of directors of an investment company.
a.
True
b.
False
4. The total market value of all assets of a mutual fund divided by the number of shares of the fund is known as the net
asset value.
a.
True
b.
False
5. When securities are held in an investment company the appropriate way to value a client’s investment is by net asset
value (NAV).
a.
True
b.
False
6. A closed-end investment company is normally referred to as a mutual fund.
a.
True
b.
False
7. The market price of shares of a closed-end fund is typically determined by supply and demand.
Chapter 17 – Professional Money Management, Alternative Assets, and Industry Ethics
a.
True
b.
False
8. An open-end investment company differs from a closed-end investment company by the way they operate after the
initial public offering.
a.
True
b.
False
9. Open-end investment companies continue to sell and repurchase shares after their initial public offering.
a.
True
b.
False
10. Open-end and closed-end investment companies are similar in that both companies will repurchase shares on demand.
a.
True
b.
False
Chapter 17 – Professional Money Management, Alternative Assets, and Industry Ethics
11. An open-end investment company functions like any other public firm.
a.
True
b.
False
12. The market price of shares of a closed-end fund is typically determined by supply and demand.
a.
True
b.
False
13. Closed-end investment companies never sell at discounts to their NAV.
a.
True
b.
False
14. A no-load fund imposes a substantial sales charge and sells shares at their NAV.
a.
True
b.
False
15. The offering price for a share of a load fund equals the net asset value of the share.
a.
True
b.
False
16. All investment firms charge annual management fees to compensate the professional manager of the fund.
a.
True
b.
False
17. Diversifying a portfolio to eliminate unsystematic risk is one of the major benefits of investing in mutual funds.
a.
True
b.
False
18. High portfolio turnover lowers mutual fund costs.
a.
True
b.
False
19. The total market value of all assets of a mutual fund divided by the number of shares of the fund is known as the net
asset value.
a.
True
b.
False
20. Income distributions and capital gains distributions are the only source of returns for mutual funds.
a.
True
b.
False
21. The returns received by the average individual investor on funds managed by investment companies will probably be
superior to the average results for a specific U.S. or international market.
a.
True
b.
False
22. Hedge funds are far less liquid than mutual fund shares.
a.
True
b.
False
23. Hedge funds have no limitations on when and how often capital can be contributed or removed from the partnership.
Chapter 17 – Professional Money Management, Alternative Assets, and Industry Ethics
a.
True
b.
False
24. Fund of funds gives investors access to hedge fund managers who may otherwise be unavailable to them.
a.
True
b.
False
25. A common hedge fund strategy known as long-short equity is a type of arbitrage strategy.
a.
True
b.
False
26. Convertible arbitrage hedge funds profit from disparities in the relationship between prices for convertible bonds and
fixed-income bonds.
a.
True
b.
False
27. The primary purpose of government regulations and voluntary standards in the professional asset management
industry is to ensure that managers deal with all investors fairly and equitably and that information about investment
performance is accurately reported.
a.
True
b.
False
28. Agency conflicts always exist in the investment management business because the entire industry is based on handling
someone else’s money.
a.
True
b.
False
29. An investor should be cautious when selecting a fund based solely on the manager’s past performance because past
performance may not be repeated in the future.
a.
True
b.
False
30. It is quite common for investors to form a “portfolio” of managers with different capabilities.
a.
True
b.
False
31. A function your portfolio manager may perform for you is to maintain the diversification of your portfolio within your
desired risk class.
a.
True
b.
False
32. Which of the following is an approach to asset management?
a.
management and advisory firms
b.
investment banks
c.
strategic management
d.
stock brokerage firms
e.
chartered banks
33. In the case of investment companies,
a.
investors deal with a fund company and do not have separate accounts tailored to their specific needs.
b.
investors deal with a fund company and have separate accounts tailored to their specific needs.
c.
investors deal with an asset manager and do not have separate accounts tailored to their specific needs.
d.
investors deal with an asset manager and have separate accounts tailored to their specific needs.
e.
None of these are correct.
34. An investment company is
a.
a corporation that handles the administrative functions for a fund.
b.
a corporation that has its major assets in a portfolio of securities.
c.
a corporation that invests in financial services firms.
d.
a corporation that arranges IPOs.
e.
a corporation that handles the trust functions for a fund.
35. An investment management company is
a.
a corporation that handles the administrative functions for a fund.
b.
a corporation that has its major assets in a portfolio of securities.
c.
a corporation that invests in financial services firms.
d.
a corporation that arranges IPOs.
e.
a corporation that handles the trust functions for a fund.
36. In the case of private management firms,
a.
investors deal with a fund company and do not have separate accounts tailored to their specific needs.
b.
investors deal with a fund company and have separate accounts tailored to their specific needs.
c.
investors deal with an asset manager and do not have separate accounts tailored to their specific needs.
d.
investors deal with an asset manager and have separate accounts tailored to their specific needs.
e.
None of these are correct.
37. An open-end investment company is commonly referred to as a(n)
a.
balanced fund.
b.
mutual fund.
c.
money market fund.
d.
accessible fund.
e.
unit trust.
38. The main difference between a closed-end fund and an open-end fund is
a.
the way each is traded after the initial public offering.
b.
there is no significant difference.
c.
the minimum initial investment.
d.
the type of allowable investments.
e.
the way in which each is regulated by the SEC.
39. The closed-end fund index is
a.
value weighted and based on market values.
b.
value weighted and based on NAVs.
c.
price weighted and based on market values.
d.
price weighted and based on NAVs.
e.
equally weighted and based on market values.
40. Open-end mutual funds that charge a sales fee when the fund is initially offered to the investor are known as
a.
12b–1.
Chapter 17 – Professional Money Management, Alternative Assets, and Industry Ethics
b.
americus trusts.
c.
unit investment trusts.
d.
load funds.
e.
contingency funds.
41. Which of the following statements regarding the closed-end investment company’s net asset value (NAV) is FALSE?
a.
NAV is computed throughout the day based on prevailing market prices for the portfolio of securities.
b.
The market price of the shares is determined by how they trade on the exchange.
c.
NAV and market price of a closed-end fund are almost never the same.
d.
No new investment dollars are available for the investment company unless it makes another public sale of
securities.
e.
All of these are correct.
42. Investment companies or mutual funds that continue to sell and repurchase shares after their initial public offerings are
referred to as
a.
closed-end.
b.
open-end.
c.
no-load.
d.
load.
e.
public.
43. Net asset value (NAV) is determined by
a.
the total market value of all its assets multiplied by the number of fund shares outstanding.
b.
the total market value of all its assets divided by the number of fund shares outstanding.
c.
the total market value of all its assets divided by the number of shareholders.
d.
supply and demand for the investment company stock in the secondary market.
e.
supply and demand for the investment company stock in the primary market.
44. The market price of a closed-end investment company has generally been
a.
5 to 20 percent below the NAV.
b.
25 to 35 percent below the NAV.
c.
equal to the NAV (within a 2 percent range).
d.
5 to 20 percent above the NAV.
e.
25 to 35 percent above the NAV.
45. A 12b-1 plan allows funds to
a.
charge a redemption fee.
b.
deduct 7 to 8 percent commission at the initial offering.
c.
deduct .75 percent of the average net assets per year.
Chapter 17 – Professional Money Management, Alternative Assets, and Industry Ethics
d.
charge a contingent deferred sales load.
e.
switch from closed-end to open-end.
46. All investment companies charge an annual
a.
12b-1 fee.
b.
marketing and distribution.
c.
management fee.
d.
maintenance fee.
e.
market adjustment.
47. When the offer price and the NAV of a mutual fund are equal, it is an indication that
a.
the fund’s assets are in equilibrium.
b.
the fund is trading at par.
c.
it is strictly a coincidence.
d.
the fund has no initial fee.
e.
the fund is backloaded.
48. The offering price of a load fund equals the NAV of the fund
a.
less an initial requirement.
b.
plus a sales charge.
c.
plus a sales charge and an administrative fee.
d.
less a negotiated discount.
e.
at its stated value.
49. Funds that normally contain a combination of common stock and fixed income securities are known as
a.
section 401(k) plans.
b.
balanced funds.
c.
contractual plans.
d.
income funds.
e.
flexible funds.
50. Funds that attempt to provide current income, safety of principal and liquidity are known as
a.
balanced funds.
b.
flexible funds.
c.
income funds.
d.
money market funds.
e.
index funds.
51. A money market fund would be likely to invest in a portfolio containing all of the following EXCEPT
a.
commercial paper.
b.
banker’s acceptances.
c.
U.S. Treasury bills.
d.
bank certificates of deposit.
e.
U.S. Treasury notes.
52. A mutual fund typically performs all of the following functions, EXCEPT that it
a.
provides alternative risk-return options.
b.
eliminates unsystematic risk.
c.
provides diversification.
d.
derives a risk-adjusted performance that is consistently superior to risk-adjusted net return of the aggregate
market.
e.
administers the account, keeps records, and provides timely information.
53. Mutual fund performance studies have shown that most funds
a.
have risks and returns that are inconsistent with their stated objectives.
b.
have risks and returns that are consistent with their stated objectives.
c.
do not have stated objectives.
d.
have experienced risk-adjusted returns above the market.
e.
have changed their objectives over time.
54. Funds that adjust the asset allocation weights in the portfolio to match the needs of an investor who is nearing
retirement are known as
a.
balanced funds.
b.
flexible portfolio funds.
c.
lifetime funds.
d.
money market funds.
e.
target date funds.
55. The gross return of closed-end investments companies has typically been
a.
10–20 percent less than their NAV.
b.
10–15 percent less than their NAV.
c.
5–20 percent less than their NAV.
d.
about the same as the net return.
e.
less than the net return.
56. A major question in modern finance regarding closed-end investment companies is
a.
why do these funds sell at a premium?
b.
why do the premiums differ between funds?
c.
what are the returns available to investors from funds that sell at a large discount?
d.
what are the returns available to investors from funds that sell at a large premium?
e.
what is the average premium?
57. In the case of open-end investment companies, shares of the company
a.
trade on the secondary market.
b.
can be bought from or sold to the investment company at the NAV.
c.
are determined by the investment company.
d.
are bought without a sales fee.
e.
show that no new investment dollars are available after the IPO.
58. In the case of closed-end investment companies, shares of the company
a.
are determined by the investment company.
b.
can be bought from or sold to the investment company at the NAV.