Chapter 04 - Mutual Funds and other Investment Companies

1. Which one of the following statements regarding open-end mutual funds is false? C. The funds offer investors a guaranteed rate of return. No investment offers a guaranteed rate of return. 2. Which one of the following statements regarding closed-end mutual funds is false? A. The funds always trade at a discount from NAV. B. The funds redeem shares at their net asset value. D. A and B. Closed-end funds are sold at the prevailing market price. 4. Multiple Mutual Funds had year-end assets of $457,000,000 and liabilities of $17,000,000. There were 24,300,000 shares in the fund at year-end. What was Multiple Mutual's Net Asset Value? A. $18.11 (457,000,000 - 17,000,000) / 24,300,000 = $18.11 6. Diversified Portfolios had year-end assets of $279,000,000 and liabilities of $43,000,000. If Diversified's NAV was $42.13, how many shares must have been held in the fund? C. 5,601,709 ($279,000,000 - 43,000,000) / $42.13 = 5,601,708.996. 8. Most actively managed mutual funds, when compared to a market index such as the Wilshire 5000, D. do not outperform the market Most actively managed mutual funds fail to equal the return earned by index funds, possibly due to higher transactions costs. 9. Pools of money invested in a portfolio that is fixed for the life of the fund are called C. unit investment trusts. Unit investment trusts are funds that invest in a portfolio, often fixed-income securities, and hold it to maturity. 10. Investors in closed-end funds who wish to liquidate their positions must A. sell their shares through a broker. Closed-end fund shares are sold on organized exchanges through a broker. 12. At issue, offering prices of open-end funds will often be B. greater than NAV due to loads and commissions. Open-end funds are redeemable on demand at NAV so they should never sell for less than NAV. However, loads and commissions can increase the price above NAV. 13. Which of the following statements about Real Estate Investment Trusts is true? A. REITs invest in real estate or loans secured by real estate. B. REITs raise capital by borrowing from banks and issuing mortgages. E. Both A and B are true.

Real Estate Investment Trusts invest in real estate or real-estate-secured loans. They may raise capital from banks and by issuing mortgages. They are similar to closed-end funds and shares are typically exchange traded. 15. Which of the following statements about Money Market Mutual Funds is true? A. They invest in commercial paper, CDs, and repurchase agreements. B. They usually offer check-writing privileges. E. Both A and B are true. Money Market Mutual Funds invest in commercial paper, CDs, repurchase agreements, and other money market securities. They usually offer check-writing privileges. Their NAV is is fixed at $1 per share. 20. Management fees and other expenses of mutual funds may include A. front-end loads. B. back-end loads. C. 12b-1 charges. E. A, B and C. All of the listed expenses may be included in the cost of owning a mutual fund. 21. The Profitability Fund had NAV per share of $17.50 on January 1, 2007. On December 31 of the same year the fund's NAV was $19.47. Income distributions were $0.75 and the fund had capital gain distributions of $1.00. Without considering taxes and transactions costs, what rate of return did an investor receive on the Profitability fund last year? D. 21.26% R = ($19.47 - 17.50 + .75 + 1.00) / $17.50 = 21.26% 24. Which of the following is not an advantage of mutual funds? C. They treat income as "passed through" to the investor for tax purposes. A disadvantage of mutual funds is that investment income is passed through for tax purposes and investors may therefore lose the ability to engage in tax management. 25. Which of the following would increase the net asset value of a mutual fund share, assuming all other things remain unchanged? D. an increase in the value of one of the fund's stocks A and B would decrease NAV and C would have an uncertain effect (and then only in the future). However, an increase in the value of one of the fund's stocks would increase NAV. 26. Which of the following characteristics apply to unit investment trusts? I) Most are invested in fixed-income portfolios. III) The sponsor pools securities, then sells public shares in the trust. IV) The portfolio is fixed for the life of the fund. C. I, III, and IV Three chief characteristics of UITs are that (1) the sponsor pools securities, and then sells public shares in the trust, (2) the portfolio is fixed for the life of the fund, and (3) most are invested in fixed-income portfolios.

27. Jargon Rapid Growth is a mutual fund that has traditionally accepted funds from new investors and issued new shares at net asset value. Jeremy Jargon manages the fund himself and has become concerned that its level of assets has become too high for his management abilities. He issues a statement that Jargon will no longer accept funds from new investors, but will continue to accept additional investments from current shareholders. Which of the following is true about Jargon Rapid Growth fund? B. Jargon has always been an open-end fund and will remain an open-end fund. Because Jargon accepts funds from investors, it is an open-end fund. Once closed-end start trading, they are only traded in the secondary market. However, when the decision was made to stop accepting investments from new investors, it became a closed-fund. 31. The fee that mutual funds use to help pay for advertising and promotional literature is called a D. 12b-1 fee. A and B are used to compensate the sales force and C is used to cover operating expenses. Rule 12b-1 allows a small fee to cover advertising and promotion. 51. Differences between hedge funds and mutual funds are that A. hedge funds are only subject to minimal SEC regulation. B. hedge funds are typically open only to wealthy or institutional investors. C. hedge funds managers can pursue strategies not available to mutual funds such as short selling, heavy use of derivatives, and leverage. D. are commonly structured as private partnerships. E. all of the above Hedge funds are typically open only to wealthy or institutional investors, are commonly structured as private partnerships, are only subject to minimal SEC regulation, and can pursue strategies not available to mutual funds such as short selling, heavy use of derivatives, and leverage. 54. Of the following types of EFTs (Exchange Traded Funds), an investor that wishes to invest in a diversified portfolio that tracks the S&P 500 should choose A. SPY. SPY tracks the S&P 500. 55. Of the following types of EFTs, an investor that wishes to invest in a diversified portfolio that tracks the Dow Jones Industrials should choose B. DIA. DIA tracks the DJIA. 56. Of the following types of EFTs, an investor that wishes to invest in a diversified portfolio that tracks the Nasdaq 100 should choose C. QQQ. QQQ tracks the Nasdaq 100.

61. A mutual funds had average daily assets of $3.0 billion in 2007. The fund sold $600 million worth of stock and purchased $700 million worth of stock during the year. The funds turnover ratio is ___. E. 20% 600,000,000 / 3,000,000,000 = 20% 65. You purchased shares of a mutual fund at a price of $20 per share at the beginning of the year and paid a front-end load of 5.75%. If the securities in which the find invested increased in value by 11% during the year, and the funds expense ratio was 1.25%, your return if you sold the fund at the end of the year would be ____________. B. 3.44 {[$20 * .9425 * (1.11 - .0125)] - $20} / $20 = 3.44% 67. You purchased shares of a mutual fund at a price of $17 per share at the beginning of the year and paid a front-end load of 5.0%. If the securities in which the find invested increased in value by 12% during the year, and the funds expense ratio was 1.0%, your return if you sold the fund at the end of the year would be ____________. B. 5.45 {[$17 * .95 * (1.12 - .01)] - $17} / $17 = 5.45%