Unit 14 Pooled Investments

When investing in mutual funds, each of the following is a sales charge EXCEPT A) a CDSC B) a front-end load C) 12b-1 fees D) a back-end load

C. 12b-1 fees are not defined as sales charges because they are not a function of buying or selling your shares. These fees are asset-based, generally charged quarterly, and come out of the NAV. Front-end loads and back-end loads (CDSCs) are charged either when you buy the fund (front end) or sell your shares (back-end). U14LO4

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

C. Both hedge funds and mutual funds have stated objectives. It is expected by owners that the management will 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. U14LO6

A customer is interested in an exchange-traded fund (ETF). With regard to the trading of ETFs, the customer should be aware that 1. ETFs can be purchased throughout the trading day 2. ETFs use forward pricing, as all mutual funds do 3. real-time quotes are available for ETFs 4. the NAV calculated at the end of the day, plus a sales charge, will equal the trading price

A. ETFs can be traded throughout the trading day. Changing price quotes are available in real time as investors buy and sell. Although ETFs have an NAV that is calculated on the basis of the portfolio holdings, the trading price is determined by supply and demand in the open market, with customers paying commissions. U14LO8

Which of the following are characteristics of a REIT? 1. It is traded on an exchange or over the counter. 2. It is professionally managed. 3. It passes through both gains and losses to investors. It is a type of limited partnership.

C. A REIT shares some features with a limited partnership, but it is a different type of business entity. REITs are traded on exchanges and OTC and are professionally managed. Both REITs and limited partnerships provide pass-through of gains to investors, but REITs do not provide pass-through of losses. Please note: We recognize that, over the past few years, there has been an enormous growth in non-traded REITs (exactly what that says - they don't trade; there is no liquidity). However, we have received 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. U14LO9

Which of the following would be common features of mutual funds and hedge funds? A) Redemption of ownership interests within 7 days B) Portfolio transparency C) Investors have pooled their money together D) Registration with the SEC

C. Both of these are in the category of pooled investment vehicles. Only the mutual fund is registered with the SEC, and that means full disclosure, including portfolio holdings. No such disclosure is required of hedge funds. The mutual fund offers the 7-day redemption—no such policy exists with hedge funds. In fact, most have a lock-up period where redemption cannot take place. U14LO6

To be in compliance with the Investment Company Act of 1940, it is permissible for the portfolio manager of an open-end investment company to buy all of the following securities EXCEPT A) call options B) shares of other mutual funds C) stock on margin D) high-yield bonds

C. The Investment Company Act of 1940 generally prohibits mutual funds from making purchases on margin. There are exceptions to this rule, such as in the case of hedge funds. A fund is not prohibited from buying options or low-quality bonds. A mutual fund may invest in other mutual funds so long as it does not acquire more than 3% of the outstanding shares of the other fund. U14LO1

Which of the following activities would have an effect on the NAV of a mutual fund? The sale of securities from the portfolio Automatic reinvestment of dividends by the shareholders Market appreciation of portfolio securities Market decline in the value of portfolio securities A) I, II, III, and IV B) I and II C) III and IV D) I, III, and IV

C. The formula to determine NAV is: assets minus liabilities divided by shares outstanding. The sale of securities from the portfolio will replace the asset (securities) with an equal value of the asset (cash) and will have no effect on the NAV. The reinvestment of dividends will also not affect the NAV, because the shares going out are offset equally by the cash coming in. Market appreciation or decline will, however, affect the NAV because asset value will either increase or decrease, but liabilities and shares outstanding will remain unchanged. U14LO3

Under the Investment Company Act of 1940, which of the following statements regarding the investment objective of a mutual fund are TRUE? 1. Only the board of directors needs to approve changes in the investment objective. 2. The majority of outstanding shares must vote to approve changes in the investment objective. 3. The SEC must approve all changes in the investment objective. 4.The investment adviser does not set, but tries to meet, the investment objective. A) III and IV B) I and III C) I and II D) II and IV

D. A majority of the outstanding shares must vote to approve any change in investment objective or policy. The investment adviser's job is to try to achieve the investment objective. U14LO1

If an investor wants to invest in the electronics industry but does not want to limit his investments to only one or two companies, which type of fund would be most suitable? A) Hedge B) Money market C) Bond D) Specialized

D. A specialized or sector fund invests 25% or more of its assets in a particular region or industry. U14LO10

The exchange privilege offered by open-end investment companies allows investors to A) delay the payment of taxes on shares B) purchase new fund shares from dividends C) exchange personally owned securities for shares of the investment company D) exchange shares of one open-end fund for another in the same fund family at a net asset value basis

D. Exchange privileges allow an investor to convert the value of shares held in one fund for those of an equal value in the same family. Remember that conversion is a taxable event; if the shares converted have increased in value, capital gains taxes will be due. U14LO10