FIN 407 Chapter 12C

Which of the following statements regarding investment companies is(are) CORRECT? 1. Closed-end investment companies are commonly referred to as mutual funds. 2. A closed-end investment company is an investment company with a fixed capitalization, whose shares trade on exchanges and over the counter. 3. An open-end investment company is an investment company whose capitalization constantly changes as new shares are sold and outstanding shares are redeemed. 4. A unit investment trust is an unmanaged investment company, typically holding fixed-income securities, offering investors diversification and low operating costs. A. 2, 3, and 4 B. 1 only C. 1, 2, and 3 D. 2 and 4

A. 2, 3, and 4

Which of the following statements regarding measures of portfolio performance is(are) CORRECT? I. Both the Sharpe and Treynor measures relate the excess return of a portfolio to a measure of its risk. II. The Sharpe ratio uses standard deviation, whereas the Treynor ratio uses beta. A. I only B. II only C. Both I and II D. Neither I nor II

A. I only

All of the following statements regarding indirect investing in closed-end funds or mutual funds are correct EXCEPT A. if the market price of a closed-end fund exceeds the net asset value, the fund is selling at a discount; if the net asset value (NAV) of a closed-end fund exceeds the market price, the fund is selling at a premium B. mutual funds can be subdivided into load funds and no-load funds C. the 12b-1 fee covers a mutual fund's cost of distribution, marketing, and advertising D. no-load mutual funds are bought at net asset value directly from the fund by investors who purchase and redeem shares through the mail, wire, or telephone

A. if the market price of a closed-end fund exceeds the net asset value, the fund is selling at a discount; if the net asset value (NAV) of a closed-end fund exceeds the market price, the fund is selling at a premium

All of the following statements regarding investment companies are correct EXCEPT A. an investment company is a financial service organization that sells shares to the public and uses these funds to invest in a portfolio of securities B. exchange-traded funds are always actively managed and attempt to track a specific index C. a unit investment trust is an unmanaged form of investment company, typically holding fixed-income securities, offering investors diversification and low operating costs D. a closed-end investment company is an investment company with a fixed capitalization, whose shares trade on exchanges and over the counter

B. exchange-traded funds are always actively managed and attempt to track a specific index

Which of the following statements regarding measures of portfolio performance is(are) CORRECT? I. Because the Sharpe ratio implicitly measures the lack of complete diversification in a portfolio and the Treynor ratio assumes complete diversification, portfolio rankings from the two measures can differ if portfolios are not well diversified. II. The information ratio is used to quantify the amount of incremental risk undertaken by a portfolio manager to achieve an excess return. A. I only B. II only C. Both I and II D. Neither I nor II

C. Both I and II

Which of the following statements regarding measures of portfolio performance is(are) CORRECT? I. Jensen's alpha measures the difference between what the portfolio was expected to return, given its systematic risk, and what it actually returned. II. By regressing the portfolio's excess return against that of the market index, alpha can be used to capture the superior or inferior performance of the portfolio manager. A. I only B. II only C. Both I and II D. Neither I nor II

C. Both I and II

Which of the following statements regarding measures of portfolio performance is(are) CORRECT? I. The most often used measure of portfolio performance are the composite measures of Sharpe, Treynor, and Jensen, which bring return and risk together into one calculation. II. The Sharpe and Treynor measures can be used to rank portfolio performance and indicate the relative positions of the portfolios being evaluated, whereas Jensen's measure is an absolute measure of performance. A. I only B. II only C. Both I and II D. Neither I nor II

C. Both I and II

Which of the following statements regarding mutual funds is(are) CORRECT? I. Owners of mutual fund shares purchase new shares and redeem existing shares at net asset value (NAV), which is the total market value of the securities in an investment company's portfolio divided by the number of investment company fund shares currently outstanding. II. Shares purchased through a broker or other financial services person will generally be charged a commission or a sales charge. A. I only B. II only C. Both I and II D. Neither I nor II

C. Both I and II

All of the following statements regarding mutual funds are correct EXCEPT A. mutual funds typically are purchased in either of two ways: directly from a fund company or indirectly from a sales agent B. mutual funds may be affiliated with an underwriter that usually has an exclusive right to distribute shares to investors through broker/dealer firms C. there are two major types of mutual funds: money market mutual funds, which are long-term funds, and equity and fixed-income funds, which are short-term funds D. money market mutual funds are mutual funds that invest in money market instruments and can be divided into taxable and tax-exempt funds

C. there are two major types of mutual funds: money market mutual funds, which are long-term funds, and equity and fixed-income funds, which are short-term funds

A unit investment trust (UIT) is a registered investment company that is actively managed and may invest in stocks, bonds, or other securities.

False

Due to professional management, investors need not be concerned with the risks inherent in the underlying securities in a particular mutual fund.

False

Due to the short-term maturities of the portfolio's assets, money market mutual funds are subject to interest rate risk and credit risk.

False

Equity mutual funds are generally less volatile than bond funds, but historically have earned higher returns over a long-term time horizon.

False

Investment companies are generally taxable entities.

False

The Sharpe ratio uses beta as the risk measure.

False

The expense ratio is disclosed by all mutual funds in the fund's prospectus and is an indication of the annual fund expenses that are stated as a percentage of total liabilities.

False

Under the Investment Company Act of 1940, 12b-1 fees are not permitted to pay for marketing and distribution expenses directly from a fund's asset base.

False

Although the classification system for mutual funds is not completely standardized or precise, there are specific types and objectives for mutual funds.

True

As with other fixed-income securities, purchasing power risk is a relevant factor to consider when investing in bond mutual funds.

True

Because the information ratio measures return and risk only relative to a benchmark, using the right benchmark is crucial to getting an accurate measure.

True

Closed-end funds invest in a wide array of securities, including municipal bonds, corporate bonds, U.S. government bonds, international bonds, mortgage-backed securities, convertible securities, domestic equities, and foreign equities.

True

Equity mutual funds invest primarily in equity (ownership interest) securities, such as common stocks, and have a variety of objectives.

True

Fixed-income or bond mutual funds invest primarily in fixed-income securities ranging in maturity from several months to 30 years or longer.

True

Front-end load is simply a term to describe a sales charge based on the initial investment in a mutual fund.

True

Generally, an appropriate mutual fund is one that best meets the client's goals, objectives, and risk tolerance.

True

Hybrid mutual funds are mutual funds that cannot be categorized into any of the three types of fund classifications (money market, bond, or equity).

True

International funds generally invest in securities throughout the world, while foreign funds strictly invest outside the United States.

True

Investment companies are financial service companies that sell shares of common stock to the public and use the proceeds to invest in a portfolio of securities.

True

Jensen's alpha is an absolute measure of performance, which indicates how the actual performance of the investment compares with the expected performance.

True

Money market mutual funds include securities such as Treasury bills, commercial paper, negotiable certificates of deposit, repurchase agreements, and short-term municipal debt.

True

Mutual funds are investment vehicles that provide investors with easy access to capital markets.

True

Mutual funds can be purchased either directly from the mutual fund family or through the use of a broker, bank, or other financial institution.

True

Mutual funds provide advantages to investors including low initial investment, diversification, ease of access, and professional management.

True

Mutual funds provide an easy way to diversify a portfolio at a low cost by providing the investor with broad diversification coupled with a minimum investment requirement.

True

Mutual funds provide many benefits to investors, including easy access to a diversified portfolio with professional management.

True

Mutual funds that charge either a front-end or a back-end load are considered load funds.

True

Open-end investment companies are referred to as open end because they are not limited in the number of shares that are offered.

True

The Treynor ratio is a similar relative performance measure to the Sharpe ratio, except for the risk measure.

True

The mutual fund classification system can assist investors in choosing funds that are consistent with their goals and objectives.

True

UITs are known as unmanaged or passively managed funds because professional managers initially select securities to be included in the portfolio, and those securities are generally held until maturity.

True

With such short maturities, these funds have minimal interest rate risk, and because of the quality and diversity of the investments, these funds have little or no credit risk.

True