QBank 3
Which of the following are characteristics of closed-end funds? A closed-end fund stands ready to redeem shares from investors. Closed-end funds trade like common stocks. Closed-end fund shares can be bought on margin or sold short. Closed-end funds will always trade at net asset value. A) II and III B) I and III C) II, III, and IV D) I and II
A) Similar to common stocks, closed-end funds trade on the exchanges. Also, closed-end funds can be bought on margin and sold short.
A review of the prospectus of an open-end investment company reveals that its portfolio consists entirely of CDs, Treasury bills, and repurchase agreements. This is probably a(n) A) money market fund. B) exchange-traded fund (ETF). C) index fund. D) balanced fund.
A) The answer is money market fund. Money market funds hold money market instruments like negotiable CDs, Treasury bills, banker's acceptances, commercial paper, and repurchase agreements.
Select the CORRECT statement regarding hedge funds. A) Purchasers of hedge funds are required to be accredited investors. B) Hedge fund managers are paid on a commission basis. C) Short sales by the fund are not allowed. D) The fund is required to register with FINRA prior to soliciting potential clients.
A) The answer is purchasers of hedge funds are required to be accredited investors. A hedge fund is an unregistered, privately offered, managed pool of capital for wealthy investors. In addition to short selling, a hedge fund will implement a wide array of risky trading strategies in order to exploit market inefficiencies. Hedge fund managers are paid based on fund performance.
To be on a corporation's books as holder-of-record (and thus have a right to the next dividend payment), the investor must purchase stock A) two business days before the record date. B) three days before the payment date. C) before the declaration date. D) between the ex-dividend date and the record date.
A) The answer is two business days before the record date. Under the T+2 rules in effect, ex-dividend date is one day business prior to the record date. A trade made on the ex-dividend date will clear in two business days, one day after the record date. The investor will not be on the corporation's record book as a shareholder unless the purchase is made at least two days before the record date.
An investor who is looking for the opportunity to buy an investment that generates consistent income with no portfolio turnover, no management fee, and low operating expenses would choose which of these? A) Unit investment trust B) Open-end fund C) Guaranteed investment contract (GIC) D) Closed-end fund
A) The answer is unit investment trust. Unit investment trusts are fixed portfolios of securities, most frequently in fixed income that an investor pays a load upfront to own, but have no turnover because it is a fixed portfolio of self-liquidating securities that have no management fee.
Which of the following is a potential pitfall of mutual fund investing? A) Buying a fund with a good long-term record with the same manager during the entire period B) Buying a fund ranked number one if the fund is misclassified C) Investing in a fund with low annual operating expenses D) Purchasing a fund immediately after a distribution of income and capital gains
B) A number-one ranking can be obtained if a fund is misclassified with lower-risk funds.
A client has $40,000 in cash in a money market that she would like to invest in the stock market, but she is concerned that the market might not have hit bottom. You have convinced her of the merits of investing for the long term and she has decided to use a systematic approach to investing in mutual funds. She has decided that after her initial investment of $5,000, she will invest $4,000 at the end of each quarter provided that the NAV of the fund is less than her cumulative average cost basis. This is an example of which of the following strategies? A) Share averaging B) Averaging down C) Dollar cost averaging D) Averaging up
B) Averaging down involves buying when the price is below the price previously paid. Dollar cost averaging utilizes a fixed dollar amount at regular intervals regardless of price. Share averaging purchases the same number of shares and requires different dollar amounts. Averaging up is not a viable strategy; the idea is to buy low and sell high.
Which one of the following options is true? Closed-End Funds Open-End Funds A Bought and sold in secondary market Often sell at discount to NAV B Often sell at premium to NAV NAV computed daily C Sector funds not permitted Also known as unit trusts D Fixed number of shares sold Shares purchased directly from fund company A) Option A B) Option D C) Option B D) Option C
B) Closed-end funds issue a fixed number of shares. Investors purchase shares of open-end funds directly from investment companies.
Grace's portfolio is comprised of 40% U.S. corporate bond fund, 50% U.S. growth and income equity fund, and 10% municipal bond fund. Grace would like to reduce her portfolio's level of risk and maintain or improve return. Which of these could be recommended to Grace to achieve her goal? Global equity fund Biotechnology sector equity fund Louisiana municipal bond fund Emerging market fund A) III only B) I and IV C) II, III, and IV D) I only
B) The answer is I and IV. Adding foreign investments could reduce her portfolio's level of risk and possibly improve return. Foreign investments have a low correlation with U.S. securities and thus provide diversification benefits. Additional investment in U.S. equities or bonds will not provide as much diversification as international investing.
Dave and Pam Larson, ages 65 and 63, respectively, recently retired. They successfully saved for their retirement throughout their careers using a low-risk approach. They would like to restructure their investments to have current income now to travel in their leisure time. Which of the following investment alternatives would be appropriate for the Larsons' goal? Equity income mutual fund shares Aggressive growth mutual fund shares Newly issued U.S. government bonds GNMA fund shares A) I, II, and III B) I, III, and IV C) II, III, and IV D) I, II, and IV
B) The answer is I, III, and IV. Aggressive growth mutual funds have a primary objective of capital appreciation and pay out little to no dividends. This investment would not provide the Larsons with their desired current income. The remaining investment alternatives all fit within the Larsons' risk tolerance.
What kind of investment company has no provision for redemption of outstanding shares? A) Open-end company B) Closed-end company C) Unit investment trust D) Mutual fund
B) The answer is closed-end company. The closed-end company does not redeem the shares that it issues. The closed-end company has a fixed capitalization and, like regular corporations, outstanding shares trade on the open market.
Which of the following best represents a characteristic of balanced mutual funds? A) They combine high- and low-risk stock. B) They combine domestic and international securities. C) They combine debt and equity securities. D) They combine income and growth stock.
C) Balanced funds can be securities that produce both income (dividends and interest) and capital gains. Income securities can be high-dividend paying stocks or bonds. Capital gains securities generally are stocks. Most balanced funds contain some combination of both stocks and bonds (often 60% stocks and 40% bonds).
Under which of these circumstances will dollar cost averaging result in an average cost per share lower than the average price per share? The price of the stock fluctuates over time. A fixed number of shares is purchased regularly. A fixed dollar amount is invested regularly. A constant dollar plan is maintained. A) II and III B) I and II C) I and III D) I, III, and IV
C) The answer is I and III. Dollar cost averaging benefits the investor if the same amount is invested on a regular basis over a substantial period, during which the price of the stock fluctuates. A constant dollar plan is one in which the investor maintains a constant dollar value of securities in the investment portfolio.
Which of these are correctly defined bond classifications? Short-term - maturities up to five years Intermediate-term - maturities of five to seven years Long-term - maturities longer than seven years A) III only B) I, II, and III C) I only D) None of these
C) The answer is I only. Intermediate-term bonds have maturities five to 10 years. Long-term bonds have maturities of longer than 10 years.
All of the following are risks associated with hedge funds except A) higher risk investments. B) leverage. C) long selling. D) lack of transparency.
C) The answer is long selling. Short selling is a risk associated with hedge funds because losses can be incurred in unlimited amounts.
An investor using a dollar cost averaging approach to buying a mutual fund will buy A) fewer shares when the NAV of the fund falls since the last purchase. B) more shares when the NAV of the fund rises since the last purchase. C) more shares when the NAV of the fund falls since the last purchase. D) the same number of shares regardless of which direction the NAV takes.
C) The investor will purchase more shares when the NAV falls because the dollar amount invested remains the same.
Which of the following statements is CORRECT regarding hedge funds? A) The fund manager's fee is usually 10% of the hedge fund's profits. B) A fund of hedge funds will have a higher minimum investment requirement than a hedge fund. C) They are available for any investor with $500,000 of net worth. D) They often make extensive use of derivatives.
D) Hedge funds may employ a variety of investment strategies in an attempt to achieve a superior return for investors and, as such, can be conservative investments or very aggressive investments.
All of these statements correctly identifies a separately managed account except A) in a separately managed account, the investor owns 100% of the securities in the account. B) a separately managed account holds a diversified portfolio of securities managed by a professional money manager. C) one advantage of a separately managed account is the ability to maintain an individual cost basis in the securities held in the account. D) a separately managed account is a privately offered pool of capital for wealthy, sophisticated investors.
D) The answer is a separately managed account is a privately offered pool of capital for wealthy, sophisticated investors. In a separately managed account, the money manager purchases securities on behalf of the individual investor, not as a pool of capital for numerous investors.
A financial reporter notices that the quoted price of one investment company's shares is at a 22% discount from the NAV. From this information, it can be deduced that the company is likely which of the following? A) Open-end investment company B) Contractual plan of a mutual fund C) Unit investment trust D) Closed-end investment company
D) The answer is closed-end investment company. If the selling price of an investment company is less than the NAV, the fund is likely a closed-end investment company.
If ABC Fund pays regular dividends, offers a high degree of safety of principal, and appeals especially to investors in the higher tax brackets, ABC is a(n) A) money market fund. B) corporate bond fund. C) aggressive growth fund. D) municipal bond fund.
D) The answer is municipal bond fund. Municipal bonds are considered second only to U.S. government securities in terms of safety. Furthermore, whenever you see a question about an investor in a high tax bracket, always look for the answer choice with municipal bonds; the tax-free income is the key.
