Series 65 Unit 3: Pooled Investments

In order to qualify as a REIT, A) at least 75% of the income must be paid out as dividends to investors. B) at least 75% of the assets must be invested in real estate-related assets, cash, and U.S. government securities. C) at least 90% of the assets must be invested in real estate-related assets. D) a mortgage REIT must have at least 75% of the assets in government-insured mortgages.

B) at least 75% of the assets must be invested in real estate-related assets, cash, and U.S. government securities.

A mutual fund's computed NAV on April 24 was $100 per share. On April 25, the portfolio realized gains of $2 per share and enjoyed $1 per share in unrealized appreciation. What would the NAV be on April 26 assuming an unchanged market? A) $101 per share B) $103 per share C) $102 per share D) $100 per share

A) $101 per share A mutual fund's net asset value (NAV) per share is the fund's total assets minus total liabilities (net asset) divided by the number of shares outstanding. The major asset is the fund's portfolio. Portfolio securities are carried at their value as of the close of the markets (4:00 pm ET). As a result, unrealized appreciation (and depreciation) are part of the NAV. Therefore, when that gain (or loss) is realized, paper profit (or loss) is now real and there is no change to total assets. In the subject question, the realization of the $2-per-share gain has no effect, but the new $1 in unrealized appreciation increases the NAV by that amount. LO 3.b

Investors with a short time horizon most likely will invest in which class of mutual fund shares? A) Class A shares, then convert to Class B shares B) Class C shares C) Class B shares D) Class A shares

B) Class C shares Class C shares may be less expensive than Class A or B shares for investors with a short time horizon. The front-end load on Class A shares and the back-end load on Class B shares make them unattractive for short-term investors. Class A shares do not convert to Class B shares; it goes the other way.Class C shares may be less expensive than Class A or B shares for investors with a short time horizon. The front-end load on Class A shares and the back-end load on Class B shares make them unattractive for short-term investors. Class A shares do not convert to Class B shares; it goes the other way.

Net asset value per share for a mutual fund can be expected to decrease if A) the securities in the portfolio have appreciated in value. B) the fund has made dividend distributions to shareholders. C) the issuers of securities in the portfolio have made dividend distributions. D) the fund has experienced net redemptions of shares.

B: If dividends are distributed to shareholders, the fund's assets will decrease and value per share will fall accordingly. Appreciation of the portfolio and dividends paid to the portfolio will increase the value. If issuers have made distributions to the portfolio, the net asset value will increase. Net redemptions have no effect on the net asset value, because the money paid out is offset by a reduced number of shares outstanding.

A retiree contacts an agent to discuss investing his retirement savings of approximately $2.1 million. His investment objective is long-term growth. The agent and customer discuss the advantages and disadvantages of diversifying among five different mutual funds within two fund families, as opposed to purchasing within just one fund family. Consequently, the agent made the following purchase recommendations: XYZ Emerging Growth Class B $495,000 XYZ Research Class B $310,000 XYZ Investors Growth Stock Class B $495,000 ABC Capital Enterprise Class B $495,000 ABC Capital Opportunity Class B $310,000 Total $2,105,000 These recommendations are A) suitable because the customer fully understands all of the ramifications and is satisfied. B) suitable because they achieve the diversification the customer seeks. C) unsuitable because Class A shares in either (or both) fund family could be purchased for a sales charge breakpoint discount at or near zero percent. D) unsuitable because the investments are not equal in amount.

C) unsuitable because Class A shares in either (or both) fund family could be purchased for a sales charge breakpoint discount at or near zero percent Class A shares, in most mutual funds, provide breakpoint sales charge discounts, so there is no sales charge when purchasing $1 million worth of shares (or less in some cases). Class A shares also have lower operating expenses than Class B shares. This retired investor would be subject to back-end loads with Class B shares if the funds were needed unexpectedly within a few years. In the real world, it is impossible to buy Class B shares in this dollar quantity. Most funds have a limit of $50 to $100 thousand.

A management investment company owns portfolio securities with a current market value of $100 million. The company owes $10 million for securities purchased but not yet paid for and accrued management fees of $5 million. If there are 2,611,437 shares outstanding and the current asking price of the shares is $36.38 per share, it would be correct to state that this investment company is A) selling at NAV. B) an open-end investment company. C) selling at a discount. D) selling at a premium.

D.) selling at a premium When a closed-end investment company is selling at a price in excess of its net asset value, it is said to be selling at a premium. The net asset value per share of a management investment company (either open-end or closed-end) is computed by dividing the net assets (assets minus liabilities) by the number of outstanding shares. In this example, the assets are the $100 million portfolio value and the liabilities are $10 million for the unpaid securities plus the $5 million in accrued management fees. Subtracting the $15 million in liabilities from the $100 million in assets leaves $85 million. Divide that by the 2,611,437 shares outstanding, and the quotient is approximately $32.55. Once we know the NAV, it is clear that the price of $36.38 is a premium over the NAV. And, we know that this can't be an open-end investment company because if it was, the $3.83 sales charge represents 10.5% of the asking price ($3.83 ÷ $36.38), which is well in excess of the maximum 8.5%

A private equity fund would most likely be structured as A) a limited partnership. B) an open-end investment company. C) a unit investment trust. D) an ETF.

Private equity investments, including hedge funds, are typically structured as limited partnerships.