Chapter 04 - Mutual Funds and other Investment Companies

Chapter 04
Mutual Funds and other Investment Companies

Multiple Choice Questions
1. Which one of the following statements regarding open-end mutual funds is false?
A. he funds redeem shares at net asset value.
!. he funds offer investors professional management.
C. he funds offer investors a guaranteed rate of return.
". ! and C.
#. A and !.
$o investment offers a guaranteed rate of return.

Difficulty: Moderate

%. Which one of the following statements regarding closed-end mutual funds is false?
A. he funds alwa&s trade at a discount from $A'.
!. he funds redeem shares at their net asset value.
C. he funds offer investors professional management.
D. A and !.
#. $one of the a(ove.
Closed-end funds are sold at the prevailing mar)et price.
Difficulty: Moderate
4. Multiple Mutual Funds had &ear-end assets of *4+,-000-000 and lia(ilities of *1,-000-000.
here were %4-.00-000 shares in the fund at &ear-end. What was Multiple Mutual/s $et Asset
'alue0
A. *11.11
!. *11.11
C. *23.32
". *,.00
#. *111.0,
44+,-000-000 - 1,-000-0005 6 %4-.00-000 7 *11.11

Difficulty: Moderate

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Chapter 04 - Mutual Funds and other Investment Companies
2. "iversified 8ortfolios had &ear-end assets of *%,3-000-000 and lia(ilities of *4.-000-000. If
"iversified/s $A' was *4%.1.- how man& shares must have (een held in the fund0
A. 4.-000-000
!. 2-411-.,%
C. +-201-,03
". 1-11%-%0.
#. $one of the a(ove.
4*%,3-000-000 - 4.-000-0005 6 *4%.1. 7 +-201-,01.332.

Difficulty: Moderate

1. Most activel& managed mutual funds- when compared to a mar)et inde9 such as the
Wilshire +000-
A. (eat the mar)et return in all &ears.
!. (eat the mar)et return in most &ears.
C. e9ceed the return on inde9 funds.
D. do not outperform the mar)et
#. $one of the a(ove is a correct statement.
Most activel& managed mutual funds fail to e:ual the return earned (& inde9 funds- possi(l&
due to higher transactions costs.

Difficulty: Easy

3. 8ools of mone& invested in a portfolio that is fi9ed for the life of the fund are called
A. closed-end funds.
!. open-end funds.
C. unit investment trusts.
". ;#I<.
#. redeema(le trust certificates.
=nit investment trusts are funds that invest in a portfolio- often fi9ed-income securities- and
hold it to maturit&.

Difficulty: Easy

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Chapter 04 - Mutual Funds and other Investment Companies
10. Investors in closed-end funds who wish to li:uidate their positions must
A. sell their shares through a (ro)er.
!. sell their shares to the issuer at a discount to $et Asset 'alue.
C. sell their shares to the issuer at a premium to $et Asset 'alue.
". sell their shares to the issuer for $et Asset 'alue.
#. hold their shares to maturit&.
Closed-end fund shares are sold on organi>ed e9changes through a (ro)er.

Difficulty: Moderate

1%. At issue- offering prices of open-end funds will often (e
A. less than $A' due to loads and commissions.
B. greater than $A' due to loads and commissions.
C. less than $A' due to limited demand.
". greater than $A' due to e9cess demand.
#. less than or greater than $A' with no apparent pattern.
?pen-end funds are redeema(le on demand at $A' so the& should never sell for less than
$A'. @owever- loads and commissions can increase the price a(ove $A'.

Difficulty: Difficult

1.. Which of the following statements a(out ;eal #state Investment rusts is true0
A. ;#Is invest in real estate or loans secured (& real estate.
!. ;#Is raise capital (& (orrowing from (an)s and issuing mortgages.
C. ;#Is are similar to open-end funds- with shares redeema(le at $A'.
". All of the a(ove are true.
E. !oth A and ! are true.
;eal #state Investment rusts invest in real estate or real-estate-secured loans. he& ma& raise
capital from (an)s and (& issuing mortgages. he& are similar to closed-end funds and shares
are t&picall& e9change traded.

Difficulty: Moderate
1+. Which of the following statements a(out Mone& Mar)et Mutual Funds is true0
A. he& invest in commercial paper- C"s- and repurchase agreements.
!. he& usuall& offer chec)-writing privileges.
C. he& are highl& leveraged and ris)&.
". All of the a(ove are true.
E. !oth A and ! are true.
4-.
Chapter 04 - Mutual Funds and other Investment Companies
Mone& Mar)et Mutual Funds invest in commercial paper- C"s- repurchase agreements- and
other mone& mar)et securities. he& usuall& offer chec)-writing privileges. heir $A' is is
fi9ed at *1 per share.

Difficulty: Moderate

%0. Management fees and other e9penses of mutual funds ma& include
A. front-end loads.
!. (ac)-end loads.
C. 1%(-1 charges.
". A and ! onl&.
E. A- ! and C.
All of the listed e9penses ma& (e included in the cost of owning a mutual fund.

Difficulty: Easy

%1. he 8rofita(ilit& Fund had $A' per share of *1,.+0 on Aanuar& 1- %00,. ?n "ecem(er .1
of the same &ear the fund/s $A' was *13.4,. Income distri(utions were *0.,+ and the fund
had capital gain distri(utions of *1.00. Without considering ta9es and transactions costs- what
rate of return did an investor receive on the 8rofita(ilit& fund last &ear0
A. 11.%2B
!. 1+.+4B
C. 12.3,B
D. %1.%2B
#. 3.1.B
; 7 4*13.4, - 1,.+0 C .,+ C 1.005 6 *1,.+0 7 %1.%2B

Difficulty: Moderate

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Chapter 04 - Mutual Funds and other Investment Companies
%4. Which of the following is not an advantage of mutual funds0
A. he& offer a variet& of investment st&les.
!. he& offer small investors the (enefits of diversification.
C. he& treat income as Dpassed throughD to the investor for ta9 purposes.
". A- ! and C are all advantages of mutual funds.
#. $either A nor ! nor C are advantages of mutual funds.
A disadvantage of mutual funds is that investment income is passed through for ta9 purposes
and investors ma& therefore lose the a(ilit& to engage in ta9 management.

Difficulty: Easy

%+. Which of the following would increase the net asset value of a mutual fund share-
assuming all other things remain unchanged0
A. an increase in the num(er of fund shares outstanding
!. an increase in the fund/s accounts pa&a(le
C. a change in the fund/s management
D. an increase in the value of one of the fund/s stoc)s
#. none of the a(ove
A and ! would decrease $A' and C would have an uncertain effect 4and then onl& in the
future5. @owever- an increase in the value of one of the fund/s stoc)s would increase $A'.
Difficulty: Easy

%2. Which of the following characteristics appl& to unit investment trusts0
I5 Most are invested in fi9ed-income portfolios.
II5 he& are activel& managed portfolios.
III5 he sponsor pools securities- then sells pu(lic shares in the trust.
I'5 he portfolio is fi9ed for the life of the fund.
A. I and I'
!. I and II
C. I- III- and I'
". I- II- and III
#. I- II- III- and I'
hree chief characteristics of =Is are that 415 the sponsor pools securities- and then sells
pu(lic shares in the trust- 4%5 the portfolio is fi9ed for the life of the fund- and 4.5 most are
invested in fi9ed-income portfolios.

Difficulty: Moderate

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Chapter 04 - Mutual Funds and other Investment Companies
%,. Aargon ;apid Erowth is a mutual fund that has traditionall& accepted funds from new
investors and issued new shares at net asset value. Aerem& Aargon manages the fund himself
and has (ecome concerned that its level of assets has (ecome too high for his management
a(ilities. @e issues a statement that Aargon will no longer accept funds from new investors- (ut
will continue to accept additional investments from current shareholders. Which of the
following is true a(out Aargon ;apid Erowth fund0
A. Aargon used to (e an open-end fund (ut has now (ecome a closed-end fund.
B. Aargon has alwa&s (een an open-end fund and will remain an open-end fund.
C. Aargon has alwa&s (een a closed-end fund and will remain a closed-end fund.
". Aargon is an open-end fund (ut would change to a closed-end fund if it wouldn/t accept
additional funds from current investors.
#. Aargon is violating <#C polic& (& refusing to accept new investors.
!ecause Aargon accepts funds from investors- it is an open-end fund. ?nce closed-end start
trading- the& are onl& traded in the secondar& mar)et. @owever- when the decision was made
to stop accepting investments from new investors- it (ecame a closed-fund.

Difficulty: Moderate

.1. he fee that mutual funds use to help pa& for advertising and promotional literature is
called a
A. front-end load fee.
!. (ac)-end load fee.
C. operating e9pense fee.
D. 1%(-1 fee.
#. structured fee.
A and ! are used to compensate the sales force and C is used to cover operating e9penses.
;ule 1%(-1 allows a small fee to cover advertising and promotion.

Difficulty: Easy

+1. "ifferences (etween hedge funds and mutual funds are that
A. hedge funds are onl& su(Fect to minimal <#C regulation.
!. hedge funds are t&picall& open onl& to wealth& or institutional investors.
C. hedge funds managers can pursue strategies not availa(le to mutual funds such as short
selling- heav& use of derivatives- and leverage.
". are commonl& structured as private partnerships.
E. all of the a(ove
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Chapter 04 - Mutual Funds and other Investment Companies
@edge funds are t&picall& open onl& to wealth& or institutional investors- are commonl&
structured as private partnerships- are onl& su(Fect to minimal <#C regulation- and can pursue
strategies not availa(le to mutual funds such as short selling- heav& use of derivatives- and
leverage.

Difficulty: Moderate

+4. ?f the following t&pes of #Fs- an investor that wishes to invest in a diversified portfolio
that trac)s the <G8 +00 should choose
A. <8H.
!. "IA.
C. III.
". IWM.
#. 'I.
<8H trac)s the <G8 +00.

Difficulty: Moderate

++. ?f the following t&pes of #Fs- an investor that wishes to invest in a diversified portfolio
that trac)s the "ow Aones Industrials should choose
A. <8H.
B. "IA.
C. III.
". IWM.
#. 'I.
"IA trac)s the "AIA.

Difficulty: Moderate

+2. ?f the following t&pes of #Fs- an investor that wishes to invest in a diversified portfolio
that trac)s the $asda: 100 should choose
A. <8H.
!. "IA.
C. III.
". IWM.
#. 'I.
4-,
Chapter 04 - Mutual Funds and other Investment Companies
III trac)s the $asda: 100.

Difficulty: Moderate

21. A mutual funds had average dail& assets of *..0 (illion in %00,. he fund sold *200
million worth of stoc) and purchased *,00 million worth of stoc) during the &ear. he funds
turnover ratio is JJJ.
A. %,.+B
!. 1%B
C. 1+B
". %+B
E. %0B
200-000-000 6 .-000-000-000 7 %0B

Difficulty: Moderate

2+. Hou purchased shares of a mutual fund at a price of *%0 per share at the (eginning of the
&ear and paid a front-end load of +.,+B. If the securities in which the find invested increased
in value (& 11B during the &ear- and the funds e9pense ratio was 1.%+B- &our return if &ou
sold the fund at the end of the &ear would (e JJJJJJJJJJJJ.
A. 4...
B. ..44
C. %.4+
". 2.1,
#. $one of the a(ove
KL*%0 M .34%+ M 41.11 - .01%+5N - *%0O 6 *%0 7 ..44B

Difficulty: Difficult


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Chapter 04 - Mutual Funds and other Investment Companies
2,. Hou purchased shares of a mutual fund at a price of *1, per share at the (eginning of the
&ear and paid a front-end load of +.0B. If the securities in which the find invested increased in
value (& 1%B during the &ear- and the funds e9pense ratio was 1.0B- &our return if &ou sold
the fund at the end of the &ear would (e JJJJJJJJJJJJ.
A. 4.,+
B. +.4+
C. +.2+
". 4..3
#. $one of the a(ove
KL*1, M .3+ M 41.1% - .015N - *1,O 6 *1, 7 +.4+B

Difficulty: Difficult


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