karoliukas

Open-end investment companies:

A) can continue to sell and repurchase shares after their initial public offerings.

B) must register a maximum number of shares with the Securities and Exchange Commission (SEC).

C) must redeem shares at the net asset value with no fees included.

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The primary difference between open-end and closed-end funds is that open-end funds continue to sell and repurchase shares after their initial public offerings. Open-end investment companies can be load or no-load.

karoliukas

Which statement about mutual funds is most accurate?

A) The liquidity of an open-end fund is provided by the open market.

B) The redemption fee for a closed-end fund is the commission charged on the sale and a portion of the bid/ask spread of the shares.

C) Some open-end funds charge no fees.

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Since closed-end funds are traded in the secondary market for a price determined by supply and demand for shares, the spread along with the sales commission represent the redemption fee. All funds charge fees, although the fees vary widely from fund to fund. In addition, some funds charge a load in addition to fees. The liquidity of an open-end fund is provided by the company that manages it, not the open market.

karoliukas

Which statement is the least accurate analysis of a mutual fund equity investment strategy?

A) Stable value funds invest in long-term fixed-income securities with regular cash flows and a steady interest rate.

B) Sector funds may set performance targets drastically different than the overall market’s expected returns.

C) Global funds managed by U.S. investment companies often contain U.S. stocks.

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Stable value funds seek both timely principal payments and steady interest rates, but tend to invest in short-term securities with regular principal payments. Global funds frequently contain stocks from the investment manager’s home country. Index funds are designed to track a certain index, and fees are typically lower than those of actively managed funds. Because different industry sectors have different growth characteristics, some sector funds’ targets will of necessity diverge from the broader market.

karoliukas

The Big Fund is a mutual fund that invests primarily in the equity of pharmaceutical companies. The investment style of the Big Fund can best be classified as a:

A) style strategy.

B) large-cap strategy.

C) sector strategy.

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A large-cap strategy focuses on the equities of companies with large capitalization. Both large cap and growth are examples of style strategies, which look for investments with common underlying characteristics. A sector strategy invests in one, defined industry.

karoliukas

Growth, value, large-cap, and small-cap investing are all examples of:

A) style investment strategies.

B) sector investment strategies.

C) index investment strategies.

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A sector strategy invests in the stocks of a particular industry. An index strategy models the portfolio to mimic the benchmark index. A style strategy looks for investments with common underlying characteristics.

karoliukas

A portfolio that pursues a stable-value investment strategy would most likely invest in:

A) low P/E stocks.

B) short-term Treasuries.

C) high P/E stocks.

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Investing in low P/E stocks is a value strategy. Buying high P/E stocks is a growth strategy. A stable-value fund would be most likely to invest in short-term, fixed-income securities.

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.

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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.

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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.

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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.

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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.