CHAPTER 17—PROFESSIONAL MONEY MANAGEMENT, ALTERNATIVE
ASSETS, AND INDUSTRY ETHICS
TRUE/FALSE
1. Management and advisory firms can advise clients on how to structure their own portfolios.
2. In an investment company, the invested funds belong to many individuals.
3. 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.
4. A portfolio is generally managed by the board of directors of an investment company.
5. A closed-end investment company is normally referred to as a mutual fund.
6. The market price of shares of a closed-end fund is typically determined by supply and demand.
7. An open-end investment company differs from a closed-end investment company by the way they
operate after the initial public offering.
8. Open-end investment companies continue to sell and repurchase shares after their initial public
offering.
9. A no-load fund imposes a substantial sales charge and sells shares at their NAV.
10. All investment firms charge annual management fees to compensate the professional manager of the
fund.
11. Hedge funds are far less liquid than mutual fund shares.
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12. 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.
13. Hedge funds have no limitations on when and how often capital can be contributed or removed from
the partnership.
14. 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.
15. An investor should be cautious when selecting a fund based solely on the manager’s past performance,
since past performance may not be repeated in the future.
16. Diversifying a portfolio to eliminate unsystematic risk is one of the major benefits of investing in
mutual funds.
17. High Portfolio turnover lowers mutual fund costs.
18. 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.
19. Income distributions and capital gains distributions are the only source of returns for mutual funds.
20. The market price of shares of a closed-end fund is typically determined by supply and demand.
21. Closed-end investment companies never sell at discounts to their NAV.
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22. Market index funds attempt to match the composition and performance of a specified market indicator
series.
23. Open-end and closed-end investment companies are similar in that both companies will repurchase
shares on demand.
24. When securities are held in an investment company the appropriate way to value a client’s investment
is by net asset value (NAV).
25. An open-end investment company functions like any other public firm.
26. The offering price for a share of a load fund equals the net asset value of the share.
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MULTIPLE CHOICE
1. Which of the following is an approach to asset management?
a.
Management and advisory firms
b.
Investment companies
c.
Strategic management
d.
Choices a and b only
e.
All of the above
2. 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.
3. 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.
4. 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.
5. The market price of a closed-end investment company has generally been
a.
5 to 20% below the NAV.
b.
25 to 35% below the NAV.
c.
Equal to the NAV (within a 2% range).
d.
5 to 20% above the NAV.
e.
25 to 35% above the NAV.
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6. 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.
7. Open-end mutual funds that charge a sales fee when the fund is initially offered to the investor are
known as
a.
Balance funds.
b.
Deferred sales loads.
c.
Unit investment trusts.
d.
Load funds.
e.
Contingency funds.
8. A low-load fund allows to
a.
Charge a redemption fee.
b.
Deduct 7 to 8% commission at the initial offering.
c.
Deduct 3% of the average net assets per year.
d.
Charge a contingent deferred sales load.
e.
Switch from closed-end to open-end.
9. 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.
10. All investment companies charge an annual
a.
Redemption fee.
b.
Marketing and distribution.
c.
Management fee.
d.
Maintenance fee.
e.
Market adjustment.
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11. 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.
12. Funds that normally contain a combination of common stock and fixed income securities are known as
a.
Unit investment trust.
b.
Balanced funds.
c.
Contractual plans.
d.
Income funds.
e.
Flexible funds.
13. 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.
14. 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.
Canadian Treasury bills.
d.
Bank certificates of deposit.
e.
Canadian Treasury notes.
15. A mutual fund typically performs all of the following functions, except
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.
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16. 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.
17. The text offers a number of suggestions for investing in mutual funds. Which of the following is not
such a suggestion?
a.
Choose only those mutual funds which are consistent with your objectives and constraints.
b.
Invest in no-load funds whenever possible.
c.
Avoid investing in index funds.
d.
Use a dollar cost average strategy.
e.
None of the above (that is, all are valid suggestions for investing in mutual funds)
18. The gross return of closed-end investments companies has typically been
a.
10−20% less than their NAV.
b.
10−15% less than their NAV.
c.
Less than the net return.
d.
About the same as the net return.
e.
None of the above.
19. A major question in modern finance regarding closed-end investment companies is
a.
Why do these funds sell at discounts?
b.
Why do the discounts differ between funds?
c.
What are the returns available to investors from funds that sell at a large discount?
d.
Choices a and b.
e.
All of the above.
20. A portfolio manager should be able to perform all of the following functions, except
a.
Determine risk-return preferences.
b.
Eliminate systematic risk.
c.
Maintain diversification ensuring a stabilized risk class.
d.
Attempt to derive a risk-adjusted performance that is superior to the market.
e.
Administer the account, keep records and provide timely information.
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21. 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.
Choices a and b.
e.
Choices a and c.
22. 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.
Choices a and b.
e.
Choices a and c.
23. 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 have separate accounts tailored to their specific
needs.
e.
None of the above.
24. 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 have separate accounts tailored to their specific
needs.
e.
None of the above.
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25. 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 supply and demand.
d.
Choices a and c.
e.
Choices b and c.
26. In the case of closed-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 supply and demand.
d.
Choices a and c.
e.
Choices b and c.
27. The following are examples of mutual fund companies
a.
Common stock funds.
b.
Bond funds.
c.
Hedge funds.
d.
Choices a and b.
e.
Choices a, b and c.
28. An example of an international fund would be one that consisted of investments in securities from
a.
Canada., Germany, and Japan.
b.
Germany, Italy, and the U.K.
c.
Canada, Korea, and Argentina.
d.
All of the above.
e.
None of the above.
29. Soft dollars are generated when
a.
A manager commits to paying a higher than normal brokerage fee in exchange for
additional bundled services.
b.
A manager commits to paying a higher than normal brokerage fee in exchange for
secretarial services.
c.
A manager commits to paying a higher than normal brokerage fee in exchange for office
equipment.
d.
All of the above.
e.
None of the above.
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30. Which of the following is a characteristic of hedge funds?
a.
They are generally less restricted in how and where they can make investments.
b.
They are more liquid than mutual fund shares.
c.
They have no limitations on when and how often investment capital can be contributed or
removed.
d.
All of the above.
e.
None of the above.
31. In a long short-short hedge fund strategy
a.
Managers take long positions in undervalued stocks and short positions in overvalued
stocks.
b.
Managers take short positions in undervalued stocks and long positions in overvalued
stocks.
c.
Managers take offsetting risk positions on the long and short side.
d.
All of the above.
e.
None of the above.
32. In a convertible arbitrage strategy hedge fund managers attempt to
a.
Generate profits by taking advantage of convertible bond pricing disparities caused by
changing market events.
b.
Generate profits by taking advantage of disparities in the relationship between prices for
convertible bonds and the underlying common stock.
c.
Generate profits by taking advantage of disparities in the relationship between prices for
convertible bonds and the underlying common stock option.
d.
All of the above.
e.
None of the above.
33. Ethical conflicts may arise as a result of
a.
Incentive compensation schemes.
b.
Soft dollar arrangements.
c.
Marketing investment management services.
d.
All of the above.
e.
None of the above.
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34. Which of the following are guiding principles for ethical behavior in the asset management industry as
put forward by the CFA Center for Financial Market Integrity?
a.
The interests of investment professional come first.
b.
The preferred method for promoting fair and efficient markets is to set up a central
oversight board.
c.
Financial markets in various countries should develop high-quality standards for reporting
financial information that reflect local customs.
d.
Financial statements should be reported from the perspective of firm shareholders.
e.
All of the above.
35. Which of the following are functions that a portfolio manager should perform for clients?
a.
Determine investment objectives and constraints, diversify the portfolio, eliminate tax
payments.
b.
Determine investment objectives, diversify the portfolio, maintain ethical standards and
eliminate tax payments.
c.
Determine investment objectives and constraints, diversify the portfolio, and maintain
ethical standards.
d.
Determine constraints, diversify the portfolio, and eliminate tax payments.
e.
Determine investment objectives and constraints, diversify the portfolio, eliminate tax
payments, and achieve risk adjusted return superior to the relevant benchmark.
36. The low-load fund permits funds to deduct as much as ____ percent of average net asset per year to
cover distribution costs, brokers’ commissions, and general marketing expenses.
a.
0.25
b.
0.50
c.
3.00
d.
1.00
e.
1.50
37. What type of funds are typically no-load funds that impose no penalty for early withdrawal and
generally allow holders to write checks against their account?
a.
Mutual funds
b.
Open-end funds
c.
Closed-end funds
d.
Money market funds
e.
Balanced funds
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38. Which of the following is not an example of an alternative asset class?
a.
Hedge funds
b.
Private equity
c.
Real estate
d.
Commodities
e.
All of the above are examples of alternative asset classes.
39. When alternative assets of investors are pooled together into a single pool of assets
a.
The collection of assets is formed as a limited partnership.
b.
One or more general partners are responsible for running the organization.
c.
The limited partners are only liable to the extent of their investments.
d.
Both a and c.
e.
All of the above.
40. Investing in emerging markets can be viewed as a global application of
a.
Fixed-income arbitrage.
b.
Convertible arbitrage.
c.
Merger arbitrage.
d.
Distressed opportunistic strategies.
e.
Equity market neutral.
41. An investment vehicle that acts like a mutual fund of hedge funds, and allows investors access to
managers that might otherwise be unavailable is known as
a.
Managed futures funds
b.
Long-short equity funds
c.
Fund of funds
d.
Private equity funds
e.
Leveraged Buyouts (LBOs)