Chapter 5
Identify the primary regulator (s) of mutual funds.
SEC
Which act appointed the National Association of Securities Dealers (NASD) to supervise mutual fund share distributions?
Securities Exchange Act of 1934.
Which of the following observations is true of open-end mutual funds?
The demand for shares determines the number outstanding.
Which of the following observations is true of a no-load fund?
The market shares of the fund directly to investors.
What does a hurdle rate specified by a hedge fund indicate?
The minimum annualized performance benchmark that must be realized before a performance fee can be assessed.
Which of the following observations concerning hedge funds is NOT true?
They have to disclose their activities to third parties.
Which of the following hedge fund objectives would be classified under the "risk avoidance" category?
Value funds
Which of the following is true about the values of most money market mutual fund shares?
Values are fixed at $1.
To be deemed "accredited" and able to invest in a hedge fund, an investor must have
an annual income of at least $200,000.
Hedge fund data such as assets held and trading activity
are primarily self-reported.
The net asset value of a mutual fund is found by
computing the daily market value of the fund's total asset portfolio and then dividing this amount by the number of mutual fund shares outstanding.
The largest asset category of mutual funds as of 2012 was
corporate equities.
The largest proportion of assets of money market mutual funds in 2012 was
credit market instruments.
The type of abusive activity that involves arrangements between mutual fund companies and brokerage houses is
directed brokerage.
The type of abusive activity that involves cases where investors were able to buy or sell mutual fund shares long after the price had been set each day is
late trading.
A mutual fund that charges investors a fee similar to a commission charge is called a
load fund.
Regarding the relative asset size and asset growth rate of mutual fund sectors,
long-term funds had more assets at the end of 2012, and long-term funds had grown at a faster rate since 1980.
Fees investors are charged to cover administration and shareholder services are called
management fees.
Mutual funds that purchase Treasury bills, bank negotiable certificates of deposit, commercial paper, and other short-term securities would be classified as
money market funds.
The short-term mutual fund sector includes
money market mutual funds.
The returns obtained by investors of mutual funds include the following except
refunds of load charges and management fees.
Duties of a mutual fund chief compliance officer include
reporting any wrongdoing directly to fund directors.
Open-end mutual funds guarantee
to redeem investors' shares upon demand at the daily Net Asset Value (NAV).
The hedge fund industry is built on the theory that
wealthy individuals should be expected to make more informed investment decisions and can take on higher levels of risk.
Eveningstar open-end fund has 1,000 shares outstanding and has the following assets in its portfolio: 100 shares of Procter & Gamble (P&G) priced at $30.00, 300 shares of Intel priced at $50.00 and 200 shares of Microsoft priced at $60.00. The Morningstar closed-end fund has the following stocks in its portfolio: 300 shares of P&G and 300 shares of Microsoft. It has a total of 500 shares outstanding. If the price of P&G shares rises to $35 and the price of Microsoft fails to $40.00, what is the new NAV of both funds?
$26.50 and $45.00
An open-ended fund has stocks of three companies: 200 shares of IBM currently valued at $50.00, 100 shares of GE currently values at $20 and 100 shares of Digital currently valued at $30. The fund has 500 shares outstanding. What is the net asset value (NAV) of the fund?
$30.00
Eveningstar open-end fund has 1,000 shares outstanding and has the following assets in its portfolio: 100 shares of Procter & Gamble (P&G) priced at $30.00, 300 shares of Intel priced at $50.00 and 200 shares of Microsoft priced at $60.00. The Morningstar closed-end fund has the following stocks in its portfolio: 300 shares of P&G and 300 shares of Microsoft. It has a total of 500 shares outstanding. Suppose Morningstar issues another 250 shares and purchases shares of Intel with the funds. What is its new NAV of Morningstar? (Assume the NAV found before the price change in P&G and Microsoft in the previous question).
$30.00
Eveningstar open-end fund has 1,000 shares outstanding and has the following assets in its portfolio: 100 shares of Procter & Gamble (P&G) priced at $30.00, 300 shares of Intel priced at $50.00 and 200 shares of Microsoft priced at $60.00. The Morningstar closed-end fund has the following stocks in its portfolio: 300 shares of P&G and 300 shares of Microsoft. It has a total of 500 shares outstanding. What is the NAV of both funds?
$30.00 and $54.00
An investor invests $100,000 in a mutual fund that has a 5 percent front-end load, charges a management fee of 0.5 percent, and a 12b-1 fee of 0.25 percent. The investor plans to leave the investment for one year. What is the dollar amount of the total shareholder cost?
$5,750 Dollar cost = Principle invested × (front-end load + management fee + 12b-1 fee) $5,750 = $100,000 × (0.05 + 0.005 + 0.0025)
Eveningstar open-end fund has 1,000 shares outstanding and has the following assets in its portfolio: 100 shares of Procter & Gamble (P&G) priced at $30.00, 300 shares of Intel priced at $50.00 and 200 shares of Microsoft priced at $60.00. The Morningstar closed-end fund has the following stocks in its portfolio: 300 shares of P&G and 300 shares of Microsoft. It has a total of 500 shares outstanding. To what level should the price of Microsoft shares decline in order for the NAV of Morningstar fund to remain constant if the price of P&G rises to $40?
$55
An investor purchases fund shares with a 3 percent front-end load and expects to hold the shares for 10 years. The annualized sales load incurred by the investor is _______ per year.
0.3 percent
An investor purchases fund shares with a 3 percent front-end load and expects to hold the shares for 10 years. The fund has a total fund expense ratio (including 12b-1 fees) of 1 percent per year. The annual total shareholder cost for this fund is _______ per year.
1.3 percent
In total, about what percentage of all retirement plan investments are in institutional funds.
80 percent
Which of the following is one of the characteristics of household mutual fund owners as of 2012?
A. The typical fund-owning household has $120,000 invested. B. 52 percent of the families are headed by someone without a college degree. C. The median age of mutual fund holders is 51. D. 21 percent of investors that conducted equity fund transactions used the internet.
12b-1 fees
A. are determined as a small percentage of the fund's investable assets. B. are annual fees to cover distribution and marketing costs of the fund. C. have been approved by the SEC. D. are capped at a maximum 0.25 percent for no-load funds.
As a result of illegal and abusive activities in recent years, new rules and regulations were imposed on mutual fund companies in 2004. These rules were intended to
A. close legal loopholes that some fund managers had abused. B. improve fund governance. C. give investors more information about conflicts of interest. D. ensure the accuracy of information given to regulators.
As compared to purchasing an individual stock, a no-load mutual fund investor will usually get
A. commission less reinvestment opportunities. B. better diversification. C. no-cost switching between funds within the same fund family. D. lower commission costs.
Closed-end investment companies
A. have a fixed number of shares. B. can trade at a price that is greater than, equal to, or less than the NAV.
The number of funds and assets size of the mutual fund industry have grown dramatically since 1970 because of the introduction of
A. money market mutual funds in 1972. B. tax-exempt money market mutual funds in 1979. C. special-purpose equity, bond, and derivative funds. D. 401-k retirement plans sponsored by employers.
The debate and research regarding the advantages of load funds versus no-load funds has revealed that
A. the proportion of total assets invested in load funds has decreased over the last 20 years and became less than the assets in no-load funds in 2002. B. the cost of the load may not be worth the attention and advice given to investors. C. most mutual fund companies offer the majority of their funds as no-load funds. D. a load fee should be annualized over the holding period of the fund shares.
Open-end mutual funds
B. calculate the NAV based on the total value of assets held divided by the number of fund shares outstanding. C. may experience fluctuations in the number of shares outstanding on a daily basis.
The long-term mutual fund sector includes
B. equity funds. C. bond funds.
The NAV of a closed-end investment company shares is determined at any point in time by
B. the value of the underlying shares owned by the company. C. the demand for the investment company's shares.
The first mutual fund was founded in this city in 1924.
Boston, Massachusetts
It is estimated that 75 percent of all hedge funds are located in
Cayman Islands
The front-end load on these type of shares is charged on new sales and is not generally incurred when these shares are exchanged for another mutual fund within the same fund family.
Class A shares.
Mutual fund shares that are offered for sale at the NAV without a front-end load, but which charge a combination of 12b-1 fees and a back-end load, and whose back-end load typically remains in effect for 6 to 8 years, are
Class B shares.
A mutual fund has the following share characteristics: Shares are offered at the NAV with no front-end load, a 12b-1 fee of 1 percent is charged, a back-end load of 1 percent is charged only if the shares are sold by the investor within one year of purchase, and the shares do not convert to any other class of shares. These shares would be classified as
Class C shares.
Which of the following hedge fund objectives would be classified under the "moderate risk" category?
Distressed securities funds.
New SEC rules call for shareholder reports to include: A. clear information to investors on brokerage commissions and discounts. B. information on how the fund compares with industry averages on fees and loads. C. information on eligibility for breakpoint discounts. D. All of the above. E. Only two of the above.
E. Only two of the above.
Which of the following hedge fund objectives would be classified under the "more risky" category?
Emerging markets funds.
For mutual funds outside the United States, total amounts invested in this fund category topped the list in 2012.
Equity funds
These types of funds mix hedge funds and other pooled investment vehicles.
Funds of funds
Which of the following are used to link the hedge fund manager's incentives more closely to those of the fund investors and to reduce the manager's incentive to increase the risk of trades?
High-water marks.
These "more risky" hedge funds aim to profit from changes in global economies, typically brought about by shifts in government policy that impact interest rates.
Macro funds.
Which of the following is common to both hedge funds and mutual funds?
Management fees
Which of the following is the regulation that allowed the SEC to restrict program trading when it deems necessary?
Market Reform Act.
Which of the following is the practice that involves short-term trading of mutual funds seeking to take advantage of short-term discrepancies between the price of a mutual fund's shares and out-of-date values on the securities in the fund's portfolio?
Market timing
Which practice is especially common in international funds as traders can exploit differences in time zones?
Market timing
Which of the following refers to the process used to determine the value of mutual fund shares each per day?
Market-to-market.
What agency acts as the distributor or "clearinghouse" for mutual fund transactions?
NASD
Retirement funds under management of mutual funds manage approximately what percentage of the mutual fund assets?
One-quarter
