karoliukas

A primary advantage of the in-kind redemption process of exchange traded funds (ETFs) is that it:

A) provides greater liquidity for shares of the ETF.

B) reduces transaction costs for the investor.

C) reduces tax liability.

---

ETFs are typically cost-effective for the investor because they are passively managed and therefore have lower management fees than actively managed portfolios. The in-kind process has no effect on the liquidity of the ETF shares. The in-kind process does reduce asset turnover, because shares do not have to be sold in order to satisfy the redemption of shares.

karoliukas

Which of the following risks are specific to exchange traded funds (ETFs) that are allowed to purchase derivatives?

A) Tracking error risk.

B) Credit risk.

C) Market risk.

---

All ETFs are subject to market risk just like any other diversified portfolio. Tracking error risk is always present in an index fund. Only those ETFs that utilize a derivatives strategy will be subject to credit risk.

karoliukas

Which of the following is least likely an advantage of exchange traded funds (ETFs) over traditional mutual funds?

A) ETF shares have smaller bid-ask spreads than open-end mutual funds.

B) The structure of ETFs prevents share prices from trading at a significant premium/discount to net asset value (NAV).

C) ETF shares trade throughout the day at continuously updated prices, while open-end funds trade only once a day at close-of-market prices.

---

ETF shares do trade continuously throughout the day, unlike shares of open-end funds. Investors in ETFs do have lower capital gains liabilities than investors in open-end funds because of ETF’s in-kind redemption feature. Because of the in-kind creation/redemption process of ETFs, new shares will be issued or redeemed in accordance with investor demand, thus eliminating any significant discount or premium. Because ETF shares trade on the open market, the shares are subject to a bid-ask spread, while open-end funds trade at NAV and are not subject to a bid-ask spread.

karoliukas

Which statement about the advantages and disadvantages of exchange-traded funds (ETFs) is least accurate?

A) ETFs represent an attractive diversification tool, but investors cannot check their composition daily.

B) Most ETFs have low fees, but some may cost more to trade because of high bid/ask spreads.

C) ETFs offer less capital-gains tax liability than open-end funds.

---

ETFs are a useful diversification tool, and investors can check their composition at any time. ETFs generally charge low fees, but some with low trading volume may be costly to trade. ETFs incur less tax liability than open-end funds.

karoliukas

Demand for real estate is a function of all of the following factors EXCEPT?

A) Population characteristics of the community.

B) Competitive properties.

C) The terms and conditions of mortgage financing.

---

This is a determinant of the supply of real estate property. Both remaining choices are determinants of demand.

karoliukas

Which of the following is least likely to be a form of real estate investment?

A) Aggregation vehicles.

B) Property insurance.

C) Leveraged equity position.

---

Property insurance is not considered a category of real estate investment because the underlying real estate does not revert to the insurer if the property holder allows the policy to lapse. A leveraged equity position and aggregation vehicles such as real estate investment trusts are each forms of real estate investment.

karoliukas

Mortgages are considered to be a form of real estate investment because:

A) the investor receives a constant stream of cash flows.

B) if the borrower defaults on the loan, the lender may end up owning the property.

C) the borrower will own the property at the end of the loan term.

---

It is true that the borrower will own the property if all loan terms are met, but the question is stated in terms of the mortgage lender, not the borrower. The investor anticipates a constant stream of cash flows, similar to other fixed income investments, but is also subject to defaults as well as prepayments. If the borrower defaults on the terms of the loan, the property will revert back to the lender, and this exposure is the reason why mortgages are considered a real estate investment.

karoliukas

Investors can diversify their direct real estate holdings through all of the following vehicles EXCEPT:

A) commingled funds.

B) co-operative shares.

C) limited partnerships.

---

Real estate co-operatives are generally a tool with which multiple owners can purchase shares in a single building or complex. This strategy spreads out risk among many investors but doesn’t offer much in the way of diversification for a single investor. Commingled funds and limited partnerships typically allow investors to spread their bets either geographically or through different property types.

karoliukas

Which of the following least likely affects a property’s investment potential?

A) Structure of the financing mechanisms used to buy the property.

B) The legal rights associated with the property.

C) The activity around the property, both commercial and non-commercial.

---

The financing and investing decisions are made separately. Market value analysis does not consider how the asset will be financed.

karoliukas

Define the sales comparison method and the cost approach.

Sales comparison

Cost approach

A) uses the price of a similar property or properties from recent transactions to value real estate the value of real estate is determined by the replacement cost of improvements, plus an estimate for the value of the land

B) uses the price of a similar property or properties from recent transactions to value real estate links the value of a property to an investor's specific marginal tax rate

C) uses a discounted cash flow model to estimate the present value of the future income produced by the property links the value of a property to an investor's specific marginal tax rate

---

The sales comparison method values property relative to similar properties that have been recently sold. The cost approach values a property at the cost it would be to rebuild it.