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finc314 CH4

front 1

Which one of the following invests in a portfolio that is fixed for the life of the fund?

A.mutual fund

B.money market fund

C.managed investment company

D.unit investment trust

back 1

D

front 2

______ are partnerships of investors with portfolios that are larger than most individual investors but are still too small to warrant managing on a separate basis.

A.Commingled funds

B.Closed-end funds

C.REITs

D.Mutual funds

back 2

A

front 3

A __________ is a private investment pool open only to wealthy or institutional investors that is exempt from SEC regulation and can therefore pursue more speculative policies than mutual funds.

A.commingled pool

B.unit trust

C.hedge fund

D.money market fund

back 3

C

front 4

Advantages of investment companies to investors include all but which one of the following?

A. record keeping and administration
B. low-cost diversification
C. professional management
D. guaranteed rates of return

back 4

D

front 5

5. Which of the following typically employ significant amounts of leverage? I. Hedge funds II. REITs III. Money market funds IV. Equity mutual funds

A.I and II only

B.II and III only

C.III and IV only

D.I, II, and III only

back 5

A

front 6

The NAV of which funds is fixed at $1 per share?

A. equity funds
B. money market funds
C. fixed-income funds
D. commingled funds

back 6

B

front 7

The two principal types of REITs are equity trusts, which _______________, and mortgage trusts, which _______________.

A.invest directly in real estate; invest in mortgage and construction loans

B.invest in mortgage and construction loans; invest directly in real estate

C.use extensive leverage; distribute less than 95% of income to shareholders

D.distribute less than 95% of income to shareholders; use extensive leverage

back 7

A

front 8

A contingent deferred sales load is commonly called a ____.

A.front-end load

B.back-end load
C. 12b-1 charge
D. top-end sales commission

back 8

B

front 9

In the United States in 2014, there were approximately _______ mutual funds offered by fewer than _______ fund complexes.

12,000; 600

7,000; 100

8,000; 800

9,000; 300

back 9

C

front 10

10. Part B of a mutual fund prospectus contains information about:

I. Fund holdings by directors and officers

II. Front-end and back-end loads

Securities held by the fund at the end of the fiscal year

I only

I and II only

I and III only

I, II, and III

back 10

C

front 11

11. Mutual funds provide the following for their shareholders.

A. diversification
B. professional management
C. record keeping and administration
D. all of these options

back 11

D

front 12

12. The average maturity of fund investments in a money market mutual fund is _______.

slightly more than 1 month

slightly more than 1 year

about 9 months

between 2 and 3 years

back 12

A

front 13

13. Rank the following fund categories from most risky to least risky:

I. Equity growth fund

II. Balanced fund

III. Sector fund

IV. Money market fund

IV, I, III, II

III, II, IV, I

I, II, III, IV

III, I, II, IV

back 13

D

front 14

14. Which of the following result in a taxable event for investors?

I. Short-term capital gain distributions from the fund

II. Dividend distributions from the fund

Long-term capital gain distributions from the fund

I only

II only

I and II only

I, II, and III

back 14

D

front 15

15. The type of mutual fund that primarily engages in market timing is called _______.

a sector fund

an index fund

an ETF

an asset allocation fund

back 15

D

front 16

16. As of 2014, approximately _____ of mutual fund assets were invested in equity funds.

5%

52%

30%

12%

back 16

B

front 17

17. As of 2014, approximately _____ of mutual fund assets were invested in bond funds.

22%

32%

37%

47%

back 17

A

front 18

18. As of 2014, approximately _____ of mutual fund assets were invested in money market funds.

5%

18%

44%

back 18

B

front 19

19. Management fees for open-end and closed-end funds typically range between _____ and _____.

A. .2%; 1.5%

B. .5%; 5%

2%; 5%

3%; 8%

back 19

A

front 20

20. The primary measurement unit used for assessing the value of one's stake in an investment company is ___________________.

net asset value

average asset value

gross asset value

back 20

A

front 21

21. Net asset value is defined as ________________________.

book value of assets divided by shares outstanding

book value of assets minus liabilities divided by shares outstanding

market value of assets divided by shares outstanding

market value of assets minus liabilities divided by shares outstanding

back 21

D

front 22

Assume that you have just purchased some shares in an investment company reporting $500 million in assets, $50 million in liabilities, and 50 million shares outstanding. What is the net asset value (NAV) of these shares?

$12

$9

$10
$1

back 22

B

front 23

Assume that you have recently purchased 100 shares in an investment company. Upon examining the balance sheet, you note that the firm is reporting $225 million in assets, $30 million in liabilities, and 10 million shares outstanding. What is the net asset value (NAV) of these shares?

$25.50

$22.50

$19.50
D. $1.95

back 23

C

front 24

24. The Vanguard 500 Index Fund tracks the performance of the S&P 500. To do so, the fund buys shares in each S&P 500 company __________.

A. in proportion to the market value weight of the firm's equity in the S&P 500
B. in proportion to the price weight of the stock in the S&P 500
C. by purchasing an equal number of shares of each stock in the S&P 500
D. by purchasing an equal dollar amount of shares of each stock in the S&P 500

back 24

A

front 25

25. Which of the following is not a type of managed investment company?

A. unit investment trusts
B. closed-end funds
C. open-end funds
D. hedge funds

back 25

A

front 26

26. Which of the following funds invest specifically in stocks of fast-growing companies?

A. balanced funds
B. growth equity funds
C. REITs
D. equity income funds

back 26

B

front 27

27. A fund that invests in securities worldwide, including the United States, is called ______.

an international fund

an emerging market fund

a global fund

a regional fund

back 27

C

front 28

28. The greatest percentage of mutual fund assets are invested in ________.

bond funds

equity funds

hybrid funds

money market funds

back 28

B

front 29

29. Sponsors of unit investment trusts earn a profit by ___________________.

deducting management fees from fund assets

deducting a percentage of any gains in asset value

selling shares in the trust at a premium to the cost of acquiring the underlying assets

charging portfolio turnover fees

back 29

C

front 30

30. Investors who want to liquidate their holdings in a unit investment trust may ___________________.

sell their shares back to the trustee at a discount

sell their shares back to the trustee at net asset value

sell their shares on the open market

sell their shares at a premium to net asset value

back 30

B

front 31

31. Investors who want to liquidate their holdings in a closed-end fund may ___________________.

sell their shares back to the fund at a discount if they wish

sell their shares back to the fund at net asset value

sell their shares on the open market

sell their shares at a premium to net asset value if they wish

back 31

C

front 32

32. __________ fund is defined as one in which the fund charges a sales commission to either buy into or exit from the fund.

A load

A no-load

An index

A specialized-sector

back 32

A

front 33

33. Which of the following is a false statement regarding open-end mutual funds?

They offer investors a guaranteed rate of return.

They offer investors a well-diversified portfolio.

They redeem shares at their net asset value.

They offer low-cost diversification.

back 33

A

front 34

34. __________ funds stand ready to redeem or issue shares at their net asset value.

Closed-end

Index

Open-end

Hedge

back 34

C

front 35

35. Revenue sharing with respect to mutual funds refers to _________.

fund companies paying brokers if the broker recommends the fund to investors

allowing certain classes of investors to engage in market timing

charging loads to new investors in a mutual fund

directly marketing funds over the Internet

back 35

A

front 36

36. Higher portfolio turnover:

I. Results in greater tax liability for investors

II. Results in greater trading costs for the fund, which investors have to pay for

Is a characteristic of asset allocation funds

I only

II only

I and II only

I, II, and III

back 36

D

front 37

37. Low-load mutual funds have front-end loads of no more than _____.

2%

3%

4%

5%

back 37

B

front 38

38. Most real estate investment trusts (REITs) have a debt ratio of around _________.

10%

30%

50%

70%

back 38

D

front 39

39. Measured by assets, about _____ of funds are money market funds.

15%

25%

40%

back 39

B

front 40

40. Which of the following is not a type of real estate investment trust?

I. Equity trust

II. Debt trust

III. Mortgage trust

IV. Unit trust

I and II only

II only

II and IV only

I, II, and III

back 40

C

front 41

41. ______________________ are often called mutual funds.

Unit investment trusts

Open-end investment companies

Closed-end investment companies

REITs

back 41

B

front 42

42. Mutual funds account for roughly ______ of investment company assets.

30%

50%

70%

90%

back 42

D

front 43

43. An official description of a particular mutual fund's planned investment policy can be found in the fund's _____________.

prospectus

indenture

investment statement
D. 12b-1 forms

back 43

A

front 44

44. Mutual funds that hold both equities and fixed-income securities in relatively stable proportions are called ____________________.

income funds

balanced funds

asset allocation funds

index funds

back 44

B

front 45

______ are mutual funds that vary the proportions of funds invested in particular market sectors according to the fund manager's forecast of the performance of that market sector.

A. Asset allocation funds
B. Balanced funds
C. Index funds
D. Income funds

back 45

A

front 46

46. Specialized-sector funds concentrate their investments in _________________.

bonds of a particular maturity

geographic segments of the real estate market

government securities

securities issued by firms in a particular industry

back 46

D

front 47

47. If a mutual fund has multiple-class shares, which class typically has a front-end load?

Class A

Class B

Class C

Class I

back 47

A

front 48

48. The commission, or front-end load, paid when you purchase shares in mutual funds may not exceed __________.

3.5%

6%

8.5%

10%

back 48

C

front 49

You are considering investing in one of several mutual funds. All the funds under consideration have various combinations of front-end and back-end loads and/or 12b-1 fees. The longer you plan on remaining in the fund you choose, the more likely you will prefer a fund with a

__________ rather than a __________, everything else equal.

A. 12b-1 fee; front-end load
B. front-end load; 12b-1 fee
C. back-end load; front-end load
D. 12b-1 fee; back-end load

back 49

B

front 50

Under SEC rules, the managers of certain funds are allowed to deduct charges for advertising, brokerage commissions, and other sales expenses directly from the fund assets rather than billing investors. These fees are known as ____________.

direct operating expenses

back-end loads
C. 12b-1 charges
D. front-end loads

back 50

C

front 51

51. The SEC requires funds to disclose:

I. After-tax returns for the past year

II. After-tax returns for the last 5-year period

The tax impact of portfolio turnover

I only

I and II only

I and III only

I, II, and III

back 51

D

front 52

SEC Rule 12b-1 allows managers of certain funds to deduct __________ expenses from fund assets; however, these expenses may not exceed

__________ of the fund's average net assets per year.

marketing; 1%

marketing; 5%

administrative; .5%

administrative; 2%

back 52

A

front 53

Consider a mutual fund with $300 million in assets at the start of the year and 12 million shares outstanding. If the gross return on assets is 18% and the total expense ratio is 2% of the year-end value, what is the rate of return on the fund?

15.64%

16%

17.25%
D. 17.5%

back 53

A

front 54

Consider a no-load mutual fund with $200 million in assets and 10 million shares at the start of the year and with $250 million in assets and 11 million shares at the end of the year. During the year investors have received income distributions of $2 per share and capital gain distributions of $.25 per share. Assuming that the fund carries no debt, and that the total expense ratio is 1%, what is the rate of return on the fund?

11.19%

23.75%

24.64%
D. The answer cannot be determined from the information given.

back 54

B

front 55

Consider a no-load mutual fund with $400 million in assets, 50 million in debt, and 15 million shares at the start of the year and with $500 million in assets, 40 million in debt, and 18 million shares at the end of the year. During the year investors have received income distributions of $.50 per share and capital gain distributions of $.30 per share. If the total expense ratio is .75%, what is the rate of return on the fund?

12.09%

12.99%

8.25%
D. The answer cannot be determined from the information given.

back 55

A

front 56

56. Mutual fund returns may be granted pass-through status if _________________.

virtually all income is distributed to shareholders

the fund qualifies for pass-through status according to the U.S. tax code

the fund is sufficiently diversified

All of these options (All of the answers must be true for pass-through status to be granted.)

back 56

D

front 57

57. _____ is an example of an exchange-traded fund.

An SPDR or spider

A samurai

A Vanguard

An open-end fund

back 57

A

front 58

58. If you place an order to buy or sell a share of a mutual fund during the trading day, the order will be executed at _____.

the NAV calculated at the market close at 4 pm New York time

the real time NAV

the NAV delayed 15 minutes

the NAV calculated at the opening of the next day's trading

back 58

A

front 59

According to the 2014 Mutual Fund Fact Book, _______ of total assets were in taxable money market funds and _______ were tax-exempt money market funds.

35%; 14%

12.3%; 75%

16.3%; 1.8%

5%; 47%

back 59

C

front 60

In his 1970 study, Malkiel found that mutual funds that do well in one period have an approximately ________ chance of doing well in the subsequent-year period.

33%

52%

65%

85%

back 60

C

front 61

61. In a recent study, Malkiel found that evidence of persistence in the performance of mutual funds ________________ in the 1980s.

grew stronger

remained about the same

became slightly weaker

virtually disappeared

back 61

D

front 62

62. The ratio of trading activity of a portfolio to the assets of the portfolio is called the ____________.

reinvestment ratio

trading rate

portfolio turnover

tax yield

back 62

C

front 63

63. Which of the following ETFs tracks the S&P 500 Index?

Qubes

Diamonds

Vipers

Spiders

back 63

D

front 64

The Stone Harbor Fund is a closed-end investment company with a portfolio currently worth $300 million. It has liabilities of $5 million and 9 million shares outstanding. If the fund sells for $30 a share, what is its premium or discount as a percent of NAV?

9.26% premium

8.47% premium

9.26% discount
D. 8.47% discount

back 64

D

front 65

65. The difference between balanced funds and asset allocation funds is that _____.

balanced funds invest in bonds while asset allocation funds do not

asset allocation funds invest in bonds while balanced funds do not

balanced funds have relatively stable proportions of stocks and bonds while the proportions may vary dramatically for asset allocation funds

balanced funds make no capital gain distributions and asset allocation funds make both dividend and capital gain distributions

back 65

C

front 66

The Wildwood Fund sells Class A shares with a front-end load of 5% and Class B shares with a 12b-1 fee of 1% annually. If you plan to sell the fund after 4 years, are Class A or Class B shares the better choice? Assume a 10% annual return net of expenses before the 12b-1 fee is applied.

Class A.

Class B.

There is no difference.
D. The answer cannot be determined from the information given.

back 66

B

front 67

A mutual fund has total assets outstanding of $69 million. During the year the fund bought and sold assets equal to $17.25 million. This fund's turnover rate was _____.

25%

28.5%

18.63%
D. 33.4%

back 67

A

front 68

68. Which type of investment fund is commonly known to invest in options and futures in large scale?

A. commingled funds
B. hedge funds
ETFs

REITs

back 68

B

front 69

69. Advantages of ETFs over mutual funds include all but which one of the following?

ETFs trade continuously, so investors can trade throughout the day.

ETFs can be sold short or purchased on margin, unlike fund shares.

ETF providers do not have to sell holdings to fund redemptions.

ETF values can diverge from NAV.

back 69

D

front 70

Harold has just taken his company public and owns a large quantity of restricted stock. For purposes of diversification, what fund might he help create in order to diversify his holdings?

A. commingled funds
B. hedge funds
ETF

REITs

back 70

A

front 71

71. Which of the following funds is most likely to have a debt ratio of 70% or higher?

A. bond fund
B. commingled fund
C. mortgage-backed securities
D. REIT

back 71

D

front 72

72. _______ have become the main way for investors to speculate in precious metals.

Strategic income funds

Balanced funds

Specialized-sector funds

Exchange-traded funds

back 72

D

front 73

73. From 1971 to 2013 the average return on the Wilshire 5000 Index was _________ the return of the average mutual fund.

A. identical to

B. .9% higher than

C. .9% lower than

D. 1.3% higher than

back 73

B

front 74

74. An open-end fund has a NAV of $16.50 per share. The fund charges a 6% load. What is the offering price?

$14.57

$15.95

$17.55
D. $16.49

back 74

C

front 75

75. The offer price of an open-end fund is $18 and the fund is sold with a front-end load of 5%. What is the fund's NAV?

$18.74

$17.10

$15.40
D. $16.57

back 75

B

front 76

A mutual fund has $50 million in assets at the beginning of the year and 1 million shares outstanding throughout the year. Throughout the year assets grow at 12%. The fund imposes a 12b-1 fee on all shares equal to 1%. The fee is imposed on year-end asset values. If there are no distributions, what is the end-of-year NAV for the fund?

$50

$55.44

$56.12
D. $54.55

back 76

B

front 77

The assets of a mutual fund are $25 million. The liabilities are $4 million. If the fund has 700,000 shares outstanding and pays a $3 dividend, what is the dividend yield?

5%

10%

15%
D. 20%

back 77

B

front 78

78. Which of the following funds are usually most tax-efficient?

A. equity funds
B. bond Funds
C. ETFs
D. specialized-sector funds

back 78

C

front 79

You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 2% back-end load, which decreases .5% per year. How much will you pay in fees on a $10,000 investment that does not grow if you cash out after 3 years of no gain?

$103

$219

$553
D. $635

back 79

D

front 80

You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 0% back-end load on Class A shares. The same fund charges a 0% front-end load, 1% total annual fees, and a 2% back-end load on Class B shares. What are the total fees in year 1 on a Class A investment of $20,000 with no growth in value?

$658

$794

$885
D. $902

back 80

B

front 81

You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 0% back-end load on Class A shares. The same fund charges a 0% front-end load, 1% total annual fees, and a 2% back-end load on Class B shares. What are the total fees in year 1 on a Class B investment of $20,000 if you redeem shares with no growth in value?

$596

$794

$885
D. $902

back 81

A

front 82

You pay $21,600 to the Laramie Fund, which has a NAV of $18 per share at the beginning of the year. The fund deducted a front-end load of 4%. The securities in the fund increased in value by 10% during the year. The fund's expense ratio is 1.3% and is deducted from year-end asset values. What is your rate of return on the fund if you sell your shares at the end of the year?

4.35%

4.23%

6.45%
D. 5.63%

back 82

B

front 83

83. Which one of the following statements about returns reported by mutual funds is not correct?

A. Reported returns are net of management expenses.
B. Reported returns are net of 12b-1 fees.
Reported returns are net of brokerage fees paid on the fund's trading activity.

None of these options. (All of the items are included in reported returns.)

back 83

D

front 84

84. The top Morningstar mutual fund performance rating is ________.

five stars

four stars

three stars

two stars

back 84

A

front 85

You are considering investing in a no-load mutual fund with an annual expense ratio of .6% and an annual 12b-1 fee of .75%. You could also invest in a bank CD paying 6.5% per year. What minimum annual rate of return must the fund earn to make you better off in the fund than in the CD?

7.1%

7.45%

7.25%
D. 7.85%

back 85

D

front 86

86. The five-star Morningstar rating implies

A. superior returns compared to risk.
B. superior risk compared to return.
C. lowest turnover compared to peers.
D. lowest fees compared to peers.

back 86

A

front 87

87. Which type of fund is often priced at a significant discount to net asset value?

A. open-end fund
B. closed-end fund
C. hedge fund
D. ETF

back 87

B

front 88

88. Which type of fund generally has the lowest average expense ratio?

A. actively managed bond funds
B. hedge funds
C. indexed funds
D. actively managed international funds

back 88

C

front 89

89. Approximately what percentage of assets held in equity funds in 2014 was in index funds?

20%

33%

50%
D. 60%

back 89

A

front 90

90. Disadvantages of ETFs include all of the following except

A. investors incur a bid-ask spread when purchasing.
B. investors must pay a broker fee when purchasing.
C. prices are only quoted once each day.
D. prices can depart from NAV at times.

back 90

C