Unit 14
When comparing mutual funds and ETFs, the disadvantages of investing in ETFs include which of the following? A)A price not set by supply and demand B)An expense ratio that is generally lower C)The ability to avoid tax consequences D)Commissions both when purchasing and liquidating shares
D)Commissions both when purchasing and liquidating shares Because the shares of ETFs are traded like any other stock, commissions are paid both to buy and to sell, and the price is determined by supply and demand, not NAV. ETFs are generally more tax efficient than mutual funds and their expense ratios tend to be lower as well.
If an investment company invests in a fixed portfolio of municipal or corporate bonds, it is classified as A)a closed-end company B)a utilities fund C)a growth fund D)a unit investment trust
D)a unit investment trust A unit investment trust issues shares that represent units of a particular portfolio; management has no authority, or only limited authority, to change the portfolio. The portfolio is fixed, it is not traded.
A mutual fund must redeem its tendered shares within how many days after receiving a request for their redemption? A)7 days B)10 days. C)3 days D)5 days
A)7 days The 7-day redemption rule is required by the Investment Company Act of 1940.
"An investment company with a low expense ratio and a portfolio that doesn't change," is a description of A)a UIT B)an index fund C)an ETF D)a no-load fund
A)a UIT The key to this is that the portfolio does not change. Unit investment trusts (UITs) are characterized by a fixed portfolio; once put together, it remains until maturity of the bonds or liquidation of the equities. Index funds and ETFs do change their portfolios from time to time as the composition of the underlying index changes.
A client wishing to invest $10,000 in a tax-exempt unit investment trust would be acquiring A)participation interests B)shares C)units D)bonds
C)units Unlike mutual funds in which the purchaser acquires shares, in a unit investment trust, the acquisition is of trust units.
All of the following statements regarding a closed-end investment company are true EXCEPT A)it sells at the market price based on supply and demand B)it may redeem its own shares C)it differs from a mutual fund D)it is a type of management company
B)it may redeem its own shares A closed-end investment company does not redeem its own shares. The term mutual fund refers to an open-end management investment company that issues redeemable shares.
Hedge funds are issued by A)portfolio advisers B)limited partnerships C)Administrators D)investment companies
B)limited partnerships Almost all hedge funds are issued as limited partnerships with the investment adviser (portfolio manager) having an investment in the fund.
All of the following characteristics are advantages of a REIT EXCEPT A)professional management B)tax deferral C)liquidity D)diversification
B)tax deferral A REIT is a professionally managed company that invests in a diversified portfolio of real estate holdings. REITs are traded on exchanges and OTC, which provides liquidity. The IRS does not permit tax deferrals on REIT investments. Please note: Over the past few years, there has been an enormous growth in non-traded REITs (they don't trade; there is no liquidity). However, there has been no feedback about that issue and, unless something in the question refers to a non-traded REIT, assume that all REITs are publicly traded either on the stock exchanges or OTC.
All of the following are characteristics of exchange-traded funds EXCEPT A)they are redeemable securities B)they generally have a lower expense ratio than comparable mutual funds C)they are priced by supply and demand continuously during the trading day D)they are typically designed to track an index
B)they generally have a lower expense ratio than comparable mutual funds Exchange-traded funds have many similarities to closed-end investment companies. They are traded based on supply and demand rather than redeemed and are typically designed to track a particular index, such as the S&P 500. In most cases, ETFs have lower operating expense ratios than mutual funds with similar objectives.
A high net worth client expresses an interest in adding a hedge fund to her portfolio and asks for your advice. Among the points you could make is that A)hedge funds offer higher returns with less risk than similar investments B)she should limit her purchase to a hedge fund that is registered with the SEC C)adding the hedge fund increases the portfolio's diversification D)she is probably not eligible to purchase a hedge fund
C)adding the hedge fund increases the portfolio's diversification Diversification is increased by adding asset classes or, in this case, a sub-class. When we are told that she is a high net worth client, it means she meets the eligibility requirements for purchasing a hedge fund. Although many hedge fund advisers are registered with the SEC, the funds are not. Hedge funds carry a number of risks, so we can't refer to them as low-risk investments.
When reading a research report about an investment company, you read that, in addition to common stock, the company also has a preferred stock issue outstanding. From this, you could conclude that this is A)a unit investment trust B)a blended investment company C)an open-end investment company D)a closed-end investment company
D)a closed-end investment company The only investment company that can legally issue preferred stock is a closed-end investment company. Open-end companies can only issue 1 class of stock (common stock or its equivalent). UITs issue units and term blended investment company makes no sense here.
As defined in the Investment Company Act, investment companies include A)face-amount certificate companies, management companies, and unit investment trusts B)open-end companies, closed-end companies, and unit investment trusts C)diversified companies, nondiversified companies, and face-amount certificate companies D)mutual funds, closed-end companies, and unit investment trusts
A)face-amount certificate companies, management companies, and unit investment trusts The act defines investment companies as being management companies, face-amount certificate companies, or unit investment trusts. Management companies are further categorized as being open-end or closed-end, diversified or nondiversified.
An investor is studying the prospectus received from the Abundant Returns Asset Allocation Fund. In a section titled Tenure, the discussion would be dealing with A)the average period of time the investors remain in the fund B)the length of time that asset allocations are maintained before changes are made C)the length of time that the fund has been in operation D)the number of years the portfolio manager has been managing the fund
D)the number of years the portfolio manager has been managing the fund Tenure always refers to management tenure, the length of time the portfolio manager has been at the helm of the fund.
A customer has been following several investment company quotes in the newspaper. She notices that the GEM Fund has an net asset value (NAV) of $12 and an ask price of $12.50, and that the ABC Fund has an NAV of $11.50 and an ask price of $10.98. The customer should conclude that A)ABC is an open-end fund and GEM is a closed-end fund B)GEM may be an open- or closed-end fund and ABC is a closed-end fund C)both are open-end funds D)ABC and GEM are both unit investment trusts
B)GEM may be an open- or closed-end fund and ABC is a closed-end fund The price for open-end funds is determined by adding the sales charge to the NAV. An open-end fund can never have an ask (or offering) price less than its NAV, therefore ABC cannot be an open-end fund.
Which of the following would be the most important reason for an investor interested in adding foreign stocks to his portfolio to do so by purchasing an international mutual fund? A)The voting rights granted to a mutual fund shareholder are much stronger than those to the holder of an ADR. B)He could select a fund whose portfolio had the proper mix of foreign and domestic stocks to maximize his diversification. C)Purchasing foreign stocks through a mutual fund saves on foreign taxation. D)He would have the benefit of the portfolio managers picking the stocks instead of having to rely on his own efforts.
D)He would have the benefit of the portfolio managers picking the stocks instead of having to rely on his own efforts. There are two primary benefits to purchasing any mutual fund: professional management and diversification. However, an international fund has no domestic securities in the portfolio (that would be a global fund) so there would be no mix for diversification as indicated in that choice. There are no special tax breaks for investing in foreign securities via a mutual fund and the voting rights have nothing to do with the securities in the portfolio.
Starflier Mutual Fund, regulated under the Investment Company Act of 1940, wishes to change its investment policy. It may do so with approval of A)a majority of the outstanding shares B)none of these; no need for approval C)the fund's investment adviser D)a majority of the board of directors
A)a majority of the outstanding shares Changes in investment policy require a vote of the majority of outstanding shares for approval.
By investing in a REIT, you are provided all of the following EXCEPT A)ownership of real property without management responsibilities B)diversification of real estate investment capital C)pass-through tax treatment of income D)pass-through tax treatment of operating losses
D)pass-through tax treatment of operating losses REITs cannot pass through losses to investors. It is important to remember that they are not DPPs.
One reason that a private equity fund may operate under the Section 3(c)(7) exemption of the Investment Company Act of 1940 is that A)it would be able to have more than 100 investors B)investors would only need to be accredited rather than qualified C)greater liquidity would be assured D)registration would not be required of the investment adviser
A)it would be able to have more than 100 investors Private equity funds operate under two exemptions found in the Investment Company Act of 1940. The 3(c)(1) exemption limits the number of investors to 100 while no such limit applies to the 3(c)(7) exemption. Under the 3(c)(7) exemption, all investors must be qualified, a significantly higher standard than accredited. Investment advisers to private funds generally have to register and the selection of which exemption to use doesn't impact that. As private investments, liquidity is very limited.
Examples of private funds include A)open-end and closed-end investment companies B)hedge funds and private placements C)hedge funds and private equity funds D)ETNs and private equity funds
C)hedge funds and private equity funds Private funds, such as hedge funds and private equity funds, are excluded from the definition of investment company under the Investment Company Act of 1940. As a result, they do not register with the SEC as do open-end and closed-end companies. Although these are generally sold as private placements under Regulation D of the Securities Act of 1933, there are many private placements that are not private funds.
One way in which the method of capitalization of closed-end companies differs from that of open-end companies is that the closed-end company can A)continuously offer additional shares B)be listed on an exchange C)issue more than 1 class of stock D)permit reinvestment of dividends
C)issue more than 1 class of stock Unlike open-end companies, which can only issue 1 class of stock (don't confuse this with different sales charge classes), closed-end companies can issue preferred stock. It is only the open-end company that continuously offers new shares, and both permit reinvestment of dividends. The fact that closed-end companies can be listed on an exchange is not a method of capitalization.
A hedge fund and a traditional mutual fund are similar in that A)both typically have low initial investment requirements B)both use long and short positions, swaps, and arbitrage C)their portfolio managers are required to adhere to the fund's stated objective D)both offer performance incentives to the fund manager
C)their portfolio managers are required to adhere to the fund's stated objective Both hedge funds and mutual funds have stated objectives. It is expected by owners that the management with follow those objectives. Only the hedge fund always has performance incentives and only the mutual fund has a low initial investment requirement. Mutual funds are prohibited from selling short.
Asset-based sales charges will generally be lowest when holding A)Class B shares B)Class R shares C)Class C shares D)Class A shares
D)Class A shares Class A shares have a front-end load, but a low- or no asset-based sales charge. Class B and C shares don't have a front-end load, but do have a higher asset-based sales charge. Class R shares invariably have a 12b-1 charge.
All of the following are true of REITs EXCEPT A)they must invest at least 75% of their assets in real estate-related activities B)they must distribute at least 90% of their net investment income for favorable tax treatment C)they must take equity or debt positions, never both D)in most cases, their shares are publicly traded
C)they must take equity or debt positions, never both Hybrid REITs take both equity and debt (mortgage) positions. REITs engage in real estate activities and can qualify for favorable tax treatment if they pass through at least 90% of their net investment income to their shareholders. Although there has been an increase in non-traded REITS in recent years, unless the question specified them, assume they are publicly traded.
The term private fund would apply to all of the following EXCEPT A)a liquidity fund B)a hedge fund C)a venture capital fund D)a unit investment trust
D)a unit investment trust Unit investment trusts are one of the types of investment companies defined in the Investment Company Act of 1940. They register with the SEC prior to offering their units to the public. The other choices are all types of private funds.
Although investing in managed investment companies can provide many benefits, investors should be aware that disadvantages could include all of these EXCEPT A)limited liquidity B)high expenses C)poor management performance D)unpredictability of tax consequences
A)limited liquidity Open-end and closed-end are the 2 categories of managed investment companies. Liquidity is never a problem with open-end companies with the federal law requiring redemption at NAV within 7 days and, because almost all CEFs are traded on exchanges, they have a ready market as well. Management fees can be high and, because performance is due to the efforts of the portfolio managers, some just don't do very well. Finally, the investor has no say in when the fund elects to take gains or losses and that can have an impact on the investor's personal return.
Why do some mutual funds offer Class A and Class B share options? A)To give investors the option of purchasing shares prior to or after 4:00 pm ET B)Class A shares have lower management fees, while Class B shares have lower administrative costs C)To differentiate between those shares sold directly from the fund's principal underwriter and those sold by broker-dealers D)To give investors the option of choosing how they wish to be charged for the purchase of their funds
D)To give investors the option of choosing how they wish to be charged for the purchase of their funds Class A shares have a front-end load while Class B shares have a back-end load. The operating and administrative expenses are always higher on the Class B shares, but management fees are generally the same.
When comparing exchange-traded funds (ETFs) to mutual funds, a feature available in ETFs that is NOT found in the mutual funds would include the ability to A)represent an entire portfolio, or basket of securities. B)correlate to a specific index. C)reinvest dividend distributions D)be bought and sold at a profit the same day
D)be bought and sold at a profit the same day Unlike mutual fund shares, ETF shares can be traded on an intra-day basis. Mutual funds are generally only priced once per day, after the market closes, but, with an ETF, you can buy and then sell an hour or two later at a profit. They are similar in that they both represent an entire portfolio or basket of securities and both can have portfolios correlated to a specific index. Dividend reinvestment is available on ETFs and mutual funds, although the process tends to be more efficient with the funds.
Which of the following statements regarding investment companies is not true? A)The Investment Company Act of 1940 classifies investment companies into 3 types: face-amount certificate companies, unit investment trusts, and management investment companies. B)When investors redeem their open-end fund shares, they receive the net asset value (NAV) per share next computed after the redemption order was received. C)When an open-end investment company, or mutual fund, registers its offering with the SEC, it does not specify the exact number of shares it intends to issue. D)A management investment company can offer investors two ways of participating in the fund under management through the purchase of closed-end shares or, if the investor prefers, open-end redeemable shares.
D)A management investment company can offer investors two ways of participating in the fund under management through the purchase of closed-end shares or, if the investor prefers, open-end redeemable shares. A management investment company cannot offer investors two ways of participating in the fund under management. The fund must either be a closed-end fund with shares traded in the marketplace or an open-end fund with redeemable shares. The Investment Company Act of 1940 classifies investment companies into 3 types: FACs, UITs, and management investment companies. Redemption (or purchase) of open-end investment company shares is based on the forward pricing rule. Because the offering of open-end investment shares is continuous, it is impractical to specify the exact number that will be issued.
A customer with an aggressive growth investment objective and short-term (6- to 12-month) time horizon wants to invest $50,000 in a mutual fund. He has a substantial net worth, but none of it is invested in mutual funds. You inform him that mutual fund investments are intended to be long-term investments, but he expresses his intention to make the short-term investment anyway. If the XYZ fund family (one you have dealt with in the past) offers an aggressive growth fund that has a respectable track record, your recommendation should be to A)decline the transaction because short-term trading of funds is not allowed B)buy the XYZ Aggressive Growth Class A shares with a 4% load and 0.25% 12b-1 fee C)buy the XYZ Aggressive Growth Class B shares with a declining CDSC and 0.75% 12b-1 fee D)buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in 1 year and 0.75% 12b-1 fee
D)buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in 1 year and 0.75% 12b-1 fee If the client insists on making this type of investment, then the Class C shares are most appropriate for this customer's objectives; the sales load would be lower than that of either Class A or Class B shares. But, you ask, we don't know what the CDSC is for the Class B shares - it isn't given. It doesn't have to be because the CDSC for redemptions in the first year would never be lower than the Class A front-end load (4% in this question and certainly higher than the 1% on the Class C shares).
In a mutual fund portfolio, you might find all of the following EXCEPT A)index options B)covered calls C)junk bonds D)short stock
D)short stock A mutual fund is generally prohibited by the Investment Company Act of 1940 from taking short stock positions. There are exceptions to this rule, such as in the case of hedge funds. Index options are permissible if they are consistent with the fund's stated objectives. Junk bonds or high-yield bonds are permissible in those high income funds that authorize such an investment. Some funds may use covered calls to generate income.
Open- and closed-end investment companies have all of the following in common EXCEPT A)they have stated investment objectives B)they actively manage their portfolios C)they compute their net asset values D)they trade their shares in the secondary market
D)they trade their shares in the secondary market Open-end companies do not trade shares in the secondary market. However, both open-end and closed-end companies compute their net asset values, actively manage their portfolios, and have stated investment objectives.
