Unit 3 : Pooled Investments
By investing in a REIT, you are provided all of the following except A) pass-through tax treatment of operating losses. B) ownership of real property without management responsibilities. C) pass-through tax treatment of income. D) diversification of real estate investment capital.
A) pass-through tax treatment of operating losses. REITs cannot pass through losses to investors. It is important to remember that they are not DPPs.
If general interest rates increase, the interest income of a bond unit investment trust will probably A) remain the same. B) increase. C) decrease. D) change as soon as the portfolio manager can take advantage of the higher rates now available in the marketplace.
A) remain the same. Because the portfolio of a UIT is fixed, the income generated by that portfolio will not change. Remember, a UIT does not have a portfolio manager.
Last year, the bond market was profitable and ABC Fund had 70% of its assets in bonds. Next year, the fund's managers expect the equity market to outperform and will adjust the fund's portfolio so that 60% of its assets will be invested in stock. ABC is most likely A) a specialized fund. B) an asset allocation fund. C) a growth fund. D) an income fund.
B)an asset allocation fund. A mutual fund whose portfolio managers have the flexibility to allocate between different investment classes is known as an asset allocation fund.
"An investment company with a low expense ratio and a portfolio that doesn't change" is a description of A) an index fund. B) a no-load fund. C) a UIT. D) an ETF.
C) a UIT. The key to this is that the portfolio does not change. Unit investment trusts (UITs) are characterized by a fixed portfolio; once put together, it remains until maturity of the bonds or liquidation of the equities. Index funds and ETFs do change their portfolios from time to time as the composition of the underlying index changes.
Why are country funds organized as closed-end funds? A) Because it is often difficult to liquidate the foreign securities to get their value into the United States B) So that additional capital may easily be raised C) Because the United Nations Investment Act of 1952 requires that they all be closed-end D) Because redemption at net asset value within seven days is ensured Explanation
A) Because it is often difficult to liquidate the foreign securities to get their value into the United States There are a number of funds that invest exclusively (or predominately) in the shares of companies domiciled (and traded) in a single country. Not all securities markets are as liquid as those in the United States, and many countries have currency restrictions limiting the amount of money that may be taken out of the country at any one time. Therefore, organizing as a mutual fund is not very practical. With no need to redeem shares, closed-end companies are the obvious solution. Please Note: In recent years, things have changed, and a majority of country funds today are now open-end companies (mutual funds). We are urging NASAA to remove or revise any questions that deal with "old" information and will update our questions (and LEM) when they do.
An investor is considering purchasing an equity exchange-traded fund (ETF) to further diversify his portfolio. All of the following are reasons for him to purchase this investment except A) they have lower taxable distributions than most mutual funds. B) ETFs offer tax benefits similar to a limited partnership. C) they have lower annual expenses than those of mutual funds. D) shares may be purchased and sold throughout the day.
B) ETFs offer tax benefits similar to a limited partnership. Equity ETFs are organized as regulated open-end investment companies or unit investment trusts, not as limited partnerships. That means the tax benefit of the flow-through of operating income or loss does not apply. As regulated investment companies, they must distribute at least 90% of their net investment income and capital gains. However, the way in which capital gains occur is different, resulting in fewer taxable distributions than is the case with a mutual fund. Expenses are generally lower as well, and ETFs trade during the day just like any stock.
Nurturing growth of the enterprise would be the objective of which of the following types of investments? A) 529 plan B) Private fund C) Investment adviser D) Growth fund
B) Private fund Private funds invest in companies where the objective is to use their money and business acumen to grow the company to the point where the fund's holding can be sold at a large profit. Growth funds are looking for growth but take no role in the operations of the companies in which they invest. An investment adviser would like to see portfolio values grow, but you don't invest in an investment adviser. A 529 plan, just like a growth fund, does not take an active role in management.
Which of the following investment vehicles provides for redemption by the issuer? A) Exchange-traded fund (ETF) B) Unit investment trust (UIT) C) Closed-end fund (CEF) D) Face-amount certificate (FAC)
B) Unit investment trust (UIT) A UIT typically issues redeemable securities (or units), like a mutual fund, which means that the UIT will buy back an investor's units, at the investor's request, at their approximate net asset value. ETFs and CEFs are traded in the secondary markets, and investors sell their shares in the marketplace rather than redeeming them through the issuer. Face-amount certificates are not redeemable—the investor's funds are returned when the debt is paid off.
A client wishing to invest $10,000 in a tax-exempt unit investment trust would be acquiring A) participation interests. B) units. C) shares. D) bonds.
B) units. Unlike mutual funds in which the purchaser acquires shares, in a unit investment trust, the acquisition is of trust units.
Asset-based sales charges will generally be lowest when holding A) Class C shares. B) Class R shares. C) Class A shares. D) Class B shares.
C) Class A shares. Class A shares have a front-end load but a low- or no asset-based sales charge. Class B and C shares don't have a front-end load but do have a higher asset-based sales charge. Class R shares invariably have a 12b-1 charge higher than that of Class A shares but lower than that of Class B and Class C shares.
In order to qualify as a REIT, A) at least 75% of the income must be paid out as dividends to investors. B) a mortgage REIT must have at least 75% of the assets in government-insured mortgages. C) at least 75% of the assets must be invested in real estate-related assets, cash, and U.S. government securities. D) at least 90% of the assets must be invested in real estate-related assets.
C) at least 75% of the assets must be invested in real estate-related assets, cash, and U.S. government securities. A REIT must be invested in real estate. By law, at least 75% of a REIT's assets must consist of real estate assets such as real property or loans secured by real property. That 75% can also include cash and U.S. government securities. If it is a mortgage REIT, there is no specific requirement regarding government-insured mortgages. A REIT must distribute at least 90% of its income to investors, not 75%.
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) investors would only need to be accredited rather than qualified. C) it would be able to have more than 100 investors. D) the compensation grid to the manager of a 3(c)(7) fund is higher than to a 3(c)(1) fund.
C) it would be able to have more than 100 investors. Private equity funds operate under two exemptions found in the Investment Company Act of 1940. The 3(c)(1) exemption limits the number of investors to 100 while no such limit applies to the 3(c)(7) exemption. Under the 3(c)(7) exemption, all investors must be qualified, a significantly higher standard than accredited. Investment advisers to private funds generally have to register and the selection of which exemption to use doesn't impact that. As private investments, liquidity is very limited. The compensation to the manager of a private equity fund is not based on the exemption used.
When advising an investor on the purchase of mutual funds, the agent should instruct the client to compare open-end mutual funds with the same objective for all of the following except A) portfolio turnover. B) services offered. C) liquidity. D) costs.
C) liquidity. Shares in an open-end investment company (mutual fund) are liquid. By federal law, all mutual funds are required to redeem shares at their net asset value within seven days; therefore, that should not be a consideration when comparing mutual funds with the same objective. Sales loads, management fees, and operating expenses reduce an investor's return. Most of these fees continue throughout the holding period and have a significant impact on performance. Portfolio turnover is significant, as gains in the portfolio will likely all be short-term gains, which are usually taxable to the investor at a higher rate than long-term capital gains. Services that mutual funds offer include retirement accounts, investment plans, check-writing privileges, telephone transfers, conversion privileges, withdrawal plans, and others.
One of the potential effects of a mutual fund's portfolio manager having poor investment results might be A) a restriction on the sale of new shares. B) the redemption price of the fund shares dropping below their net asset value per share. C) net redemptions. D) failure to renew the bi-annual management contract.
C) net redemptions. Poor results will frequently lead to investors liquidating their holdings in a greater amount than new investors coming in. This leads to net redemptions; more money going out than coming in. No mutual fund can ever sell below NAV and the management contract is renewed on an annual, not bi-annual basis. LO 3.i
When comparing mutual funds, one of the factors to consider is A) the amount of sales charge levied on reinvested capital gain distributions. B) the length of time it takes for the fund to redeem shares. C) the length of time the fund manager has been managing the fund. D) the fund's net asset value per share.
C)the length of time the fund manager has been managing the fund. Tenure in the job can be an important consideration when evaluating and comparing mutual funds. All funds must redeem in seven days, and no fund can levy a sale charge on reinvested capital gains.
When comparing mutual funds and ETFs, the disadvantages of investing in ETFs include which of the following? A) The ability to avoid tax consequences B) A price not set by supply and demand C) An expense ratio that is generally lower D) Commissions both when purchasing and liquidating shares
D) Commissions both when purchasing and liquidating shares Because the shares of ETFs are traded like any other stock, commissions are paid both to buy and to sell, and the price is determined by supply and demand, not NAV. ETFs are generally more tax efficient than mutual funds and their expense ratios tend to be lower as well. Recently, a number of brokerage firms have begun offering commission-free trading for ETFs. That has not yet become the norm, so stick with our explanation until told otherwise.
Which of the following statements about open-end investment companies are true? Open-end investment companies are also known as mutual funds. Open-end investment companies continually offer shares for sale to the public. The price at which an open-end investment company will sell shares to the public is based on the share's net asset value (NAV). A) I and III B) I and II C) II and III D) I, II, and III
D) I, II, and III An open-end investment company is also known as a mutual fund. One of the distinguishing characteristics of open-end companies is their continuous offering of new shares. The price at which open-end investment companies sell shares to the public is always based on the NAV per share. To that is added any sales charge or load indicated in the prospectus. LO 3.b
Which of the following is likely to be characterized by no management fees and a portfolio consisting of municipal or corporate bonds? A) Face-amount certificate company B) Open-end investment company C) Closed-end investment company D) Unit investment trust
D) Unit investment trust Only management companies, (open- and closed-end) have management fees.
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) an open-end investment company. B) a unit investment trust. C) a blended investment company. D) a closed-end investment company.
D) a closed-end investment company. The only investment company that can legally issue preferred stock is a closed-end investment company. Open-end companies can only issue one class of stock (common stock or its equivalent). UITs issue units, and the term blended investment company refers to portfolio composition, not the fund's capitalization.
When comparing exchange-traded funds (ETFs) to mutual funds, a feature available in ETFs that is not found in the mutual funds would include the ability to A) represent an entire portfolio or basket of securities. B) reinvest dividend distributions. C) correlate to a specific index. D) be bought and sold at a profit the same day.
D. be bought and sold at a profit the same day. Unlike mutual fund shares, ETF shares can be traded on an intra-day basis. Mutual funds are priced once per day, after the market closes, but, with an ETF, you can buy and then sell an hour or two later at a profit or a loss. They are similar in that they both represent an entire portfolio or basket of securities and both can have portfolios correlated to a specific index. Dividend reinvestment is available on ETFs and mutual funds, although the process tends to be more efficient with the funds.
Under the Investment Company Act of 1940, which of the following would be considered affiliated persons? Persons who control, are controlled by, or share common control with the company Any officer, director, or employee of the company Persons who own or control 5% or more of the voting shares of the company A) I, II, and III B) III only C) I and III D) II and III
A) I, II, and III Affiliated persons are any investment company directors, officers, employees, or owners of 5% or more of the voting shares of stock, and/or any persons controlling or controlled by such persons.
Which of the following statements regarding a mutual fund that offers Class A, B, and C shares are true? Class A shares have a front-end sales charge and a low 12b-1 fee. Class B shares have a declining contingent-deferred sales charge and a high 12b-1 fee. Class C shares have a high 12b-1 fee and a level contingent-deferred sales charge. Class B and C shares allow investors to put the shares back to the fund for their original purchase price for up to one year after purchase. A) I, II, and III B) I and II C) I, II, III, and IV D) I only
A) I, II, and III There is no put provision that guarantees the return of an investor's purchase price associated with mutual fund shares.
All of the following are characteristics of exchange-traded funds except A) they are redeemable securities. B) they are priced by supply and demand continuously during the trading day. C) they generally have a lower expense ratio than comparable mutual funds. D) they are typically designed to track an index.
A) they are redeemable securities. Exchange-traded funds have many similarities to closed-end investment companies. They are traded based on supply and demand rather than redeemed and are typically designed to track a particular index, such as the S&P 500. In most cases, ETFs have lower operating expense ratios than mutual funds with similar objectives.
Why do some mutual funds offer Class A and Class B share options? A) To differentiate between those shares sold directly from the fund's principal underwriter and those sold by broker-dealers B) To give investors the option of choosing how they wish to be charged for the purchase of their funds C) To give investors the option of purchasing shares prior to or after 4:00 pm ET 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 Class A shares have a front-end load while Class B shares have a back-end load. The operating and administrative expenses are always higher on the Class B shares, but management fees are generally the same.
An investment company that invests in common stock, preferred stock, and bonds would most likely be classified as A) an income fund. B) a balanced fund. C) a growth fund. D) a sector fund.
B) a balanced fund. Balanced funds spread the risk of their investments among different types of securities, such as common stock, preferred stock, and bonds. Growth funds concentrate more on growth than balance. As a result, they will have a higher concentration of common stock. Income funds will consist mostly of bonds and some preferred stock. Finally, sector funds will focus on specific industries or technologies.
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) they must distribute at least 90% of their net taxable income for favorable tax treatment. C) in most cases, their shares are publicly traded. D) they must take equity or debt positions, never both.
D) they must take equity or debt positions, never both. Hybrid REITs take both equity and debt (mortgage) positions. REITs engage in real estate activities and can qualify for favorable tax treatment if they pass through at least 90% of their taxable income to their shareholders. Although there has been an increase in non-traded REITS in recent years, unless the question specified them, assume they are publicly traded.
A client invests $2,200 in an open-end investment company and signs a letter of intent for a $10,000 breakpoint. If six months later he deposits $11,000, which of the following statements is true? A) He will receive a reduced load on $13,200 worth of the shares. B) He will not receive any reduction in the sales load. C) He will receive a reduced load on $10,000 worth of the shares. D) He will receive a reduced load on $8,800 worth of the shares.
A) He will receive a reduced load on $13,200 worth of the shares. An investor signing a letter of intent has 13 months to contribute funds to reach the reduced load. The sales charge in this case, then, will be based on the total investment of $13,200. If at the end of the 13 months the investor has not invested up to the breakpoint, the fund will liquidate enough shares to pay the difference in sales load.
If an investment company invests in a fixed portfolio of municipal or corporate bonds, it is classified as A) a unit investment trust. B) a closed-end company. C) a utilities fund. D) a growth fund.
A) a unit investment trust. A unit investment trust issues shares that represent units of a particular portfolio; management has no authority, or only limited authority, to change the portfolio. The portfolio is fixed; it is not traded. Historically, UITs have had fixed bond portfolios, but in recent times, fixed equity portfolios are more popular.
The Investment Company Act of 1940 requires certain types of investment companies to compute their net asset value on a regular basis. Excluded from this requirement are A) face-amount certificate companies. B) open-end management investment companies. C) closed-end management investment companies. D) unit investment trusts.
A) face-amount certificate companies. The two investment companies offering redeemable securities, open-end funds and UITs, must compute their NAV on a daily basis. Closed-end funds can do it daily; many compute every Friday. The concept of NAV makes no sense with a FACC.
If general interest rates increase, the interest income of an open-end bond fund whose sales exceed redemptions will likely A) increase. B) remain unchanged. C) not be determined from the information given. D) decreas
A) increase. The primary portfolio holding of a bond mutual fund is bonds. When sales exceed redemptions, the fund has a net cash inflow (just like when your income exceeds your expenses). When that continuous flow of "new" money in invested in these higher yielding bonds, the fund's interest income increases.
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) issue more than one class of stock. B) permit reinvestment of dividends. C) be listed on an exchange. D) continuously offer additional shares. Explanation
A) issue more than one class of stock. Unlike open-end companies, which can only issue one class of stock (don't confuse this with different sales charge classes), closed-end companies can issue preferred stock. It is only the open-end company that continuously offers new shares, and both permit reinvestment of dividends. The fact that closed-end companies can be listed on an exchange is not a method of capitalization.
Which of the following statements correctly expresses requirements under the Investment Company Act of 1940? A) No investment advisory contract may be entered into that does not provide for termination with no more than 60 days' notice in writing. B) Renewal of the advisory contract can only be done with majority vote of the fund's board of directors. C) A registered open-end investment company using a bank as custodian must choose one that has FDIC coverage. D) No registered investment company may acquire less than 3% of the shares of another investment company.
A)No investment advisory contract may be entered into that does not provide for termination with no more than 60 days' notice in writing. One of the provisions of the Investment Company Act of 1940 is that the maximum permitted termination notice is 60 days in writing. The custodial bank does not need FDIC coverage (this is not your local bank account) and the 3% limit is the maximum, not a minimum. In order to renew the advisory contract, it is either a majority vote of the fund's directors or by a vote of a majority of the outstanding voting securities of the fund.
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 should limit her purchase to a hedge fund that is registered with the SEC. B) adding the hedge fund increases the portfolio's diversification. C) hedge funds offer higher returns with less risk than similar investments. D) she is probably not eligible to purchase a hedge fund.
B) adding the hedge fund increases the portfolio's diversification. Diversification is increased by adding asset classes or, in this case, a sub-class. When we are told that she is a high-net-worth client, it means she meets the eligibility requirements for purchasing a hedge fund. Although many hedge fund advisers are registered with the SEC, the funds are not. Hedge funds carry a number of risks, so we can't refer to them as low-risk investments.
Although investing in managed investment companies can provide many benefits, investors should be aware that disadvantages could include all of these except A) poor management performance. B) limited liquidity. C) high expenses. D) unpredictability of tax consequences.
B) limited liquidity. Open-end and closed-end are the two categories of managed investment companies. Liquidity is never a problem with open-end companies with the federal law requiring redemption at NAV within seven days and, because almost all CEFs are traded on exchanges, they have a ready market as well. Management fees can be high and, because performance is due to the efforts of the portfolio managers, some just don't do very well. Finally, the investor has no say in when the fund elects to take gains or losses and that can have an impact on the investor's personal return.
ABC Investment Company shares are trading at $13.80 on a per-share basis. The net asset value (NAV) per share is $12.00. Which of the following conclusions correctly defines the relationship between trading price and NAV? A) The value of $13.80 is calculated as total assets minus total liabilities divided by total outstanding shares. B) The fund's shares are trading at a premium of 15% to the NAV. C) The fund's shares are trading at a discount of 15% to underlying NAV. D) NAV per share is calculated as per-market demand and supply for the fund's shares.
B)The fund's shares are trading at a premium of 15% to the NAV. This is a closed-end investment company whose shares are trading at a premium. The premium is 15% relative to the underlying NAV ($1.80 ÷ $12.00). The market price, not the NAV of the fund's shares, is determined by supply and demand in the market. How do we know this is not a mutual fund? There are two ways. Mutual funds do not trade; there is no secondary market for them. Secondly, the sales charge is 13.8% ($1.80 ÷ $13.80), which is far above the maximum 8.5% allowed.
A client of yours has been investigating a particular mutual fund. She mentions that she saw a blurb on the internet that the fund has had net redemptions over the past six months and asks you to explain how that might affect the fund's performance. You should explain which of these? This is a good thing because now, with less money to invest, the fund's adviser is able to be more selective. Performance will probably suffer because the fund's adviser will have to sell positions prematurely in order to meet redemption requests. This would be a good time to buy because the supply of shares exceeds the demand. Many of the fund's expenses are relatively fixed, so with less assets in the fund, the expense ratio will probably increase.
C) II and IV When a fund has net redemptions, it means that less money is coming in than is going out. In order to meet those redemptions, the fund's manager will either have to sell securities that they planned to hold onto or maintain more assets in cash (which generally will return less than other investments). Because the expense ratio is the annual expenses divided by the average annual assets, with less assets to cover the fixed expenses, the ratio will probably increase.
In a mutual fund portfolio, you might find all of the following except A) shares of common stock. B) junk bonds. C) short stock. D) 2% of the outstanding voting securities of another registered investment company.
C) short stock. A mutual fund is generally prohibited by the Investment Company Act of 1940 from taking short stock positions. There are exceptions to this rule, such as in the case of hedge funds. Shares of common stock are permissible if they are consistent with the fund's stated objectives. Junk bonds or high-yield bonds are permissible in those high income funds that authorize such an investment. A mutual fund is permitted to own up to 3% of the outstanding voting shares of another investment company.
Which of the following statements regarding investment companies is not true? A) 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. B) The Investment Company Act of 1940 classifies investment companies into three types: face-amount certificate companies, unit investment trusts, and management investment companies. 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, 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, open-end redeemable shares. A management investment company cannot offer investors two ways of participating in the fund under management. The fund must either be a closed-end fund with shares traded in the marketplace or an open-end fund with redeemable shares. The Investment Company Act of 1940 classifies investment companies into three types: FACs, UITs, and management investment companies. Redemption (or purchase) of open-end investment company shares is based on the forward pricing rule. Because the offering of open-end investment shares is continuous, it is impractical to specify the exact number that will be issued.
Which of the following is the least suitable mutual fund transaction? A) Encouraging an investor in his early 30s to invest in an emerging markets mutual fund B) Encouraging an investor in a high tax bracket with an income objective to invest in a municipal bond fund C) Encouraging a retired 65-year-old investor to invest a small percentage of his savings in a large-cap growth fund D) Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence
D) Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence Encouraging a mutual fund shareholder to switch from one fund family to another while a deferred load is in existence is not in the client's best interest, because the client might be subject to substantial additional sales charges.
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) He could select a fund whose portfolio had the proper mix of foreign and domestic stocks to maximize his diversification. B) Purchasing foreign stocks through a mutual fund saves on foreign taxation. 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. There are two primary benefits to purchasing any mutual fund: professional management and diversification. However, an international fund has no domestic securities in the portfolio (that would be a global fund), so there would be no mix for diversification as indicated in that choice. There are no special tax breaks for investing in foreign securities via a mutual fund, and the voting rights have nothing to do with the securities in the portfolio. LO 3.i
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 A shares with a 4% load and 0.25% 12b-1 fee. C) buy the XYZ Aggressive Growth Class B shares with a declining CDSC and 0.75% 12b-1 fee. D) buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in 1 year and 0.75% 12b-1 fee.
D) buy the XYZ Aggressive Growth Class C shares with a 1% CDSC expiring in 1 year and 0.75% 12b-1 fee. If the client insists on making this type of investment, then the Class C shares are most appropriate for this customer's objectives; the sales load would be lower than that of either Class A or Class B shares. But, you ask, we don't know what the CDSC is for the Class B shares because it isn't given. It doesn't have to be because the CDSC for redemptions in the first year would never be lower than the Class A front-end load (4% in this question and certainly higher than the 1% on the Class C shares). Although short-term trading of mutual funds is generally considered unsuitable, there is nothing illegal about it.
All of the following characteristics are advantages of a REIT except A) liquidity. B) diversification. C) professional management. D) tax deferral.
D) tax deferral. A REIT is a professionally managed company that invests in a diversified portfolio of real estate holdings. REITs are traded on exchanges and OTC, which provides liquidity. The IRS does not permit tax deferrals on REIT investments. Please note that over the past few years, there has been a growth in non-traded REITs (they don't trade; there is no liquidity). However, there has been no exam 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.
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 average period of time the investors remain in the fund. B) the length of time that asset allocations are maintained before changes are made. C) the length of time that the fund has been in operation. D) the number of years the portfolio manager has been managing the fund.
D) the number of years the portfolio manager has been managing the fund. Tenure always refers to management tenure, the length of time the portfolio manager has been at the helm of the fund.
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) both typically have low initial investment requirements. D) their portfolio managers are required to adhere to the fund's stated objective.
D) their portfolio managers are required to adhere to the fund's stated objective. 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.
A retiree contacts an agent to discuss investing his retirement savings of approximately $2.1 million; his investment objective is long-term growth. The representative and customer discuss the advantages and disadvantages of diversifying among five different mutual funds within two fund families, as opposed to purchasing just one fund. 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 the investments are not equal in amount. D) 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 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. LO 3.c
