Unit 3 Checkpoint Exam

When comparing mutual funds and exchange-traded funds (ETFs), the disadvantages of investing in ETFs include which of the following? A) Commissions when both purchasing and liquidating shares B) A price not set by supply and demand C) An expense ratio that is generally lower D) The ability to avoid tax consequences

a. commissions when both purchasing and liquidating shares

Examples of private funds include A) hedge funds and private equity funds. B) open-end and closed-end investment companies. C) exchange-traded notes (ETNs) and private equity funds. D) hedge funds and private placements.

a. hedge funds and private equity funds

By investing in a REIT, you are provided all of the following except A) pass-through tax treatment of operating losses. B) diversification of real estate investment capital. C) pass-through tax treatment of income. D) ownership of real property without management responsibilities.

a. pass-through treatment of operating losses

In a mutual fund portfolio, you might find all of the following except A) short stock. B) junk bonds. C) 2% of the outstanding voting securities of another registered investment company. D) shares of common stock.

a. short stock

Asset-based sales charges will generally be lowest when holding A) Class B shares. B) Class A shares. C) Class R shares. D) Class C shares.

b. Class A shares

"An investment company with a low expense ratio and a portfolio that doesn't change" is a description of A) a no load fund. B) an ETF. C) a UIT. D) an index fund.

c. a UIT

If an investment company invests in a fixed portfolio of municipal or corporate bonds, it is classified as A) a utilities fund. B) a growth fund. C) a unit investment trust. D) a closed-end company.

c. a unit investment trust

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 blended investment company. B) an open-end investment company. C) a closed-end investment company. D) a unit investment trust.

c. closed-end investment company

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 length of time that asset allocations are maintained before changes are made. B) the length of time that the fund has been in operation. C) the number of years the portfolio manager has been managing the fund. D) the average period of time the investors remain in the fund.

c. the number of years the portfolio manager has been managing the fund

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) in most cases, their shares are publicly traded. C) they must take equity or debt positions, never both. D) they must distribute at least 90% of their net taxable income for favorable tax treatment.

c. they must take equity or debt positions, never both.

A client wishing to invest $10,000 in a tax-exempt unit investment trust would be acquiring A) bonds. B) shares. C) units. D) participation interests.

c. units

A mutual fund must redeem its tendered shares within how many days after receiving a request for their redemption? A) 10 days B) 3 days C) 5 days D) 7 days

d. 7 days

All of the following are characteristics of exchange-traded funds except A) they generally have a lower expense ratio than comparable mutual funds. B) they are priced by supply and demand continuously during the trading day. C) they are typically designed to track an index. D) they are redeemable securities.

d. they are redeemable securities.

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) To give investors the option of choosing how they wish to be charged for the purchase of their funds C) To differentiate between those shares sold directly from the fund's principal underwriter and those sold by broker-dealers D) Class A shares have lower management fees, while Class B shares have lower administrative costs

b. To give investors the option of choosing how they wish to be charged for the purchase of their funds

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) Purchasing foreign stocks through a mutual fund saves on foreign taxation. B) He could select a fund whose portfolio had the proper mix of foreign and domestic stocks to maximize his diversification. C) The voting rights granted to a mutual fund shareholder are much stronger than those to the holder of an ADR. 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.

All of the following characteristics are advantages of a REIT except A) tax deferral. B) professional management. C) liquidity. D) diversification.

a. tax deferral

A hedge fund and a traditional mutual fund are similar in that A) their portfolio managers are required to adhere to the fund's stated objective. B) both typically have low initial investment requirements. C) both use long and short positions, swaps, and arbitrage. D) both offer performance incentives to the fund manager.

a. their portfolio managers are required to adhere to the fund's stated objective

Hedge funds are issued by A) portfolio advisers. B) limited partnerships. C) administrators. D) investment companies.

b. limited partnerships

Although investing in managed investment companies can provide many benefits, investors should be aware that disadvantages could include all of the following except A) poor management performance. B) unpredictability of tax consequences. C) high expenses. D) limited liquidity.

d. limited liability

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) greater liquidity would be assured. B) it would be able to have more than 100 investors. C) the compensation grid to the manager of a 3(c)(7) fund is higher than to a 3(c)(1) fund. D) investors would only need to be accredited rather than qualified.

b. It would be able to have more than 100 investors.

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) she is probably not eligible to purchase a hedge fund. B) she should limit her purchase to a hedge fund that is registered with the SEC. C) hedge funds offer higher returns with less risk than similar investments. D) adding the hedge fund increases the portfolio's diversification.

d. adding the hedge fund increases the portfolio's diversification

The term private fund would apply to all of the following except A) a liquidity fund. B) a unit investment trust. C) a hedge fund. D) a venture capital fund.

b. a unit investment trust

When comparing exchange-traded funds (ETFs) to mutual funds, a feature available in ETFs that is not found in mutual funds is the ability to A) correlate to a specific index. B) be bought and sold at a profit the same day. C) reinvest dividend distributions. D) represent an entire portfolio or basket of securities.

b. be bought and sold at a profit the same day

As defined in the Investment Company Act of 1940, investment companies include A) open-end companies, closed-end companies, and unit investment trusts. B) face-amount certificate companies, management companies, and unit investment trusts. C) mutual funds, closed-end companies, and unit investment trusts. D) diversified companies, nondiversified companies, and face-amount certificate companies.

b. face-amount certificate companies, management companies, and unit investment trusts

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) issue more than one class of stock. C) be listed on an exchange. D) permit reinvestment of dividends.

b. issue more than one class of stock

Which of the following statements regarding investment companies is not true? A) The Investment Company Act of 1940 classifies investment companies into three 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, through 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, through open-end redeemable shares.

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 B shares with a declining CDSC and 0.75% 12b-1 fee. C) buy the XYZ Aggressive Growth Class A shares with a 4% load and 0.25% 12b-1 fee. D) buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in one year and 0.75% 12b-1 fee.

d. buy the XYZ Aggressive Growth class C shares with a 1% CDSC expiring in one year and 0.75% 12-b 1 fee