1. Which one of the following invests in a portfolio that is fixed for the life of the fund?
A. Mutual fund
B. Money market fund
C. Managed investment company
D. Unit investment trust
Answer: D. Unit investment trust
2. ______ are partnerships of investors with portfolios that are larger than most individual
investors but are still too small to warrant managing on a separate basis.
A. Commingled funds
B. Closed-end funds
C. REITs
D. Mutual funds
Answer: A. Commingled funds
3. A __________ is a private investment pool open only to wealthy or institutional investors
that is exempt from SEC regulation and can therefore pursue more speculative policies than
mutual funds.
A. commingled pool
B. unit trust
C. hedge fund
D. money market fund
Answer: C. hedge fund
4. Advantages of investment companies to investors include all but which one of the
following?
A. Record keeping and administration
B. Low-cost diversification
C. Professional management
D. Guaranteed rates of return
Answer: D. Guaranteed rates of return
5. Which of the following typically employ significant amounts of leverage?
I. Hedge funds
II. REITs
III. Money market funds
IV. Equity mutual funds
A. I and II only
B. II and III only
C. III and IV only
D. I, II, and III only
Answer: A. I and II only
6. The NAV of which funds is fixed at $1 per share?
A. Equity funds
B. Money market funds
C. Fixed-income funds
D. Commingled funds
Answer: B. Money market funds
7. The two principal types of REITs are equity trusts, which _______________, and mortgage
trusts, which _______________.
A. invest directly in real estate; invest in mortgage and construction loans
B. invest in mortgage and construction loans; invest directly in real estate
C. use extensive leverage; distribute less than 95% of income to shareholders
D. distribute less than 95% of income to shareholders; use extensive leverage
Answer: A. invest directly in real estate; invest in mortgage and construction loans
8. A contingent deferred sales charge is commonly called a ____.
A. front-end load
B. back-end load
C. 12b-1 charge
D. top-end sales commission
Answer: B. back-end load
9. In the United States in 2011, there were approximately _______ mutual funds offered by
fewer than _______ fund families.
A. 12,000; 600
B. 7,000; 100
C. 8,000; 700
D. 9,000; 300
Answer: C. 8,000; 700
10. Part B of a mutual fund prospectus contains information about:
I. Fund holdings by directors and officers
II. Front-end and back-end loads
III. Securities held by the fund at the end of the fiscal year
A. I only
B. I and II only
C. I and III only
D. I, II, and III
Answer: C. I and III only
11. Mutual funds provide the following for their shareholders:
A. Diversification
B. Professional management
C. Record keeping and administration
D. All of these options
Answer: D. All of these options
12. The average maturity of fund investments in a money market mutual fund is _______.
A. slightly more than 1 month
B. slightly more than 1 year
C. about 9 months
D. between 2 and 3 years
Answer: A. slightly more than 1 month
13. Rank the following fund categories from most risky to least risky:
I. Equity growth fund
II. Balanced fund
III. Sector fund
IV. Money market fund
A. IV, I, III, II
B. III, II, IV, I
C. I, II, III, IV
D. III, I, II, IV
Answer: D. III, I, II, IV
14. Which of the following result in a taxable event for investors?
I. Short-term capital gain distributions from the fund
II. Dividend distributions from the fund
III. Long-term capital gain distributions from the fund
A. I only
B. II only
C. I and II only
D. I, II, and III
Answer: D. I, II, and III
15. The type of mutual fund that primarily engages in market timing is called _______.
A. a sector fund
B. an index fund
C. an ETF
D. an asset allocation fund
Answer: D. an asset allocation fund
16. As of 2011, approximately _____ of mutual fund assets were invested in equity funds.
A. 5%
B. 54%
C. 30%
D. 12%
Answer: B. 54%
17. As of 2011, approximately _____ of mutual fund assets were invested in bond funds.
A. 14%
B. 19%
C. 37%
D. 47%
Answer: A. 14%
18. As of 2011, approximately _____ of mutual fund assets were invested in money market
funds.
A. 5%
B. 26%
C. 44%
D. 66%
Answer: B. 26%
19. Management fees for open-end and closed-end funds typically range between _____ and
_____.
A. .2%; 1.5%
B. .5%; 5%
C. 2%; 5%
D. 3%; 8%
Answer: A. .2%; 1.5%
20. The primary measurement unit used for assessing the value of one's stake in an investment
company is ___________________.
A. net asset value
B. average asset value
C. gross asset value
D. total asset value
Answer: A. net asset value
21. Net asset value is defined as ________________________.
A. book value of assets divided by shares outstanding
B. book value of assets minus liabilities divided by shares outstanding
C. market value of assets divided by shares outstanding
D. market value of assets minus liabilities divided by shares outstanding
Answer: D. market value of assets minus liabilities divided by shares outstanding
22. Assume that you have just purchased some shares in an investment company reporting
$500 million in assets, $50 million in liabilities, and 50 million shares outstanding. What is
the net asset value (NAV) of these shares?
A. $12
B. $9
C. $10
D. $1
Answer: B. $9
NAV = ($500 - $50)/50 = $9
23. Assume that you have recently purchased 100 shares in an investment company. Upon
examining the balance sheet, you note that the firm is reporting $225 million in assets, $30
million in liabilities, and 10 million shares outstanding. What is the net asset value (NAV) of
these shares?
A. $25.50
B. $22.50
C. $19.50
D. $1.95
Answer: C. $19.50
NAV = (225 - 30)/10 = 19.50
24. The Vanguard 500 Index Fund tracks the performance of the S&P 500. To do so, the fund
buys shares in each S&P 500 company __________.
A. in proportion to the market value weight of the firm's equity in the S&P 500
B. in proportion to the price weight of the stock in the S&P 500
C. by purchasing an equal number of shares of each stock in the S&P 500
D. by purchasing an equal dollar amount of shares of each stock in the S&P 500
Answer: A. in proportion to the market value weight of the firm's equity in the S&P 500
25. Which of the following is not a type of managed investment company?
A. Unit investment trusts
B. Closed-end funds
C. Open-end funds
D. Hedge funds
Answer: A. Unit investment trusts
26. Which of the following funds invest specifically in stocks of fast-growing companies?
A. Balanced funds
B. Growth equity funds
C. REITs
D. Equity income funds
Answer: B. Growth equity funds
27. A fund that invests in securities worldwide, including the United States, is called ______.
A. an international fund
B. an emerging market fund
C. a global fund
D. a regional fund
Answer: C. a global fund
28. The greatest percentage of mutual fund assets are invested in ________.
A. bond funds
B. equity funds
C. hybrid funds
D. money market funds
Answer: B. equity funds
29. Sponsors of unit investment trusts earn a profit by ___________________.
A. deducting management fees from fund assets
B. deducting a percentage of any gains in asset value
C. selling shares in the trust at a premium to the cost of acquiring the underlying assets
D. charging portfolio turnover fees
Answer: C. selling shares in the trust at a premium to the cost of acquiring the underlying
assets
30. Investors who want to liquidate their holdings in a unit investment trust may
___________________.
A. sell their shares back to the trustee at a discount
B. sell their shares back to the trustee at net asset value
C. sell their shares on the open market
D. sell their shares at a premium to net asset value
Answer: B. sell their shares back to the trustee at net asset value
31. Investors who want to liquidate their holdings in a closed-end fund may
___________________.
A. sell their shares back to the fund at a discount if they wish
B. sell their shares back to the fund at net asset value
C. sell their shares on the open market
D. sell their shares at a premium to net asset value if they wish
Answer: C. sell their shares on the open market
32. __________ fund is defined as one in which the fund charges a sales commission to either
buy into or exit from the fund.
A. A load
B. A no-load
C. An index
D. A specialized-sector
Answer: A. A load
33. Which of the following is a false statement regarding open-end mutual funds?
A. They offer investors a guaranteed rate of return.
B. They offer investors a well-diversified portfolio.
C. They redeem shares at their net asset value.
D. They offer low-cost diversification.
Answer: A. They offer investors a guaranteed rate of return.
34. __________ funds stand ready to redeem or issue shares at their net asset value.
A. Closed-end
B. Index
C. Open-end
D. Hedge
Answer: C. Open-end
35. Revenue sharing with respect to mutual funds refers to _________.
A. fund companies paying brokers if the broker recommends the fund to investors
B. allowing certain classes of investors to engage in market timing
C. charging loads to new investors in a mutual fund
D. directly marketing funds over the Internet
Answer: A. fund companies paying brokers if the broker recommends the fund to investors
36. Higher portfolio turnover:
I. Results in greater tax liability for investors
II. Results in greater trading costs for the fund, which investors have to pay for
III. Is a characteristic of asset allocation funds
A. I only
B. II only
C. I and II only
D. I, II, and III
Answer: D. I, II, and III
37. Low-load mutual funds have front-end loads of no more than _____.
A. 2%
B. 3%
C. 4%
D. 5%
Answer: B. 3%
38. Most real estate investment trusts (REITs) have a debt ratio of around _________.
A. 10%
B. 30%
C. 50%
D. 70%
Answer: D. 70%
39. Measured by assets, about _____ of funds are money market funds.
A. 15%
B. 25%
C. 40%
D. 60%
Answer: B. 25%
40. Which of the following is not a type of real estate investment trust?
I. Equity trust
II. Debt trust
III. Mortgage trust
IV. Unit trust
A. I and II only
B. II only
C. II and IV only
D. I, II, and III
Answer: C. II and IV only
41. ______________________ are often called mutual funds.
A. Unit investment trusts
B. Open-end investment companies
C. Closed-end investment companies
D. REITs
Answer: B. Open-end investment companies
42. Mutual funds account for roughly ______ of investment company assets.
A. 30%
B. 50%
C. 70%
D. 90%
Answer: D. 90%
43. An official description of a particular mutual fund's planned investment policy can be
found in the fund's _____________.
A. prospectus
B. indenture
C. investment statement
D. 12b-1 forms
Answer: A. prospectus
44. Mutual funds that hold both equities and fixed-income securities in relatively stable
proportions are called ____________________.
A. income funds
B. balanced funds
C. asset allocation funds
D. index funds
Answer: B. balanced funds
45. ______ are mutual funds that vary the proportions of funds invested in particular market
sectors according to the fund manager's forecast of the performance of that market sector.
A. asset allocation funds
B. balanced funds
C. index funds
D. income funds
Answer: A. asset allocation funds
46. Specialized-sector funds concentrate their investments in _________________.
A. bonds of a particular maturity
B. geographic segments of the real estate market
C. government securities
D. securities issued by firms in a particular industry
Answer: D. securities issued by firms in a particular industry
47. If a mutual fund has multiple-class shares, which class typically has a front-end load?
A. Class A
B. Class B
C. Class C
D. Class D
Answer: A. Class A
48. The commission, or front-end load, paid when you purchase shares in mutual funds may
not exceed __________.
A. 3.5%
B. 6%
C. 8.5%
D. 10%
Answer: C. 8.5%
49. You are considering investing in one of several mutual funds. All the funds under
consideration have various combinations of front-end and back-end loads and/or 12b-1 fees.
The longer you plan on remaining in the fund you choose, the more likely you will prefer a
fund with a __________ rather than a __________, everything else equal.
A. 12b-1 fee; front-end load
B. front-end load; 12b-1 fee
C. back-end load; front-end load
D. 12b-1 fee; back-end load
Answer: B. front-end load; 12b-1 fee
50. Under SEC rules, the managers of certain funds are allowed to deduct charges for
advertising, brokerage commissions, and other sales expenses directly from the fund assets
rather than billing investors. These fees are known as ____________.
A. direct operating expenses
B. back-end loads
C. 12b-1 charges
D. front-end loads
Answer: C. 12b-1 charges
51. The SEC requires funds to disclose:
I. After-tax returns for the past year
II. After-tax returns for the last 5-year period
III. The tax impact of portfolio turnover
A. I only
B. I and II only
C. I and III only
D. I, II, and III
Answer: D. I, II, and III
52. SEC Rule 12b-1 allows managers of certain funds to deduct __________ expenses from
fund assets; however, these expenses may not exceed __________ of the fund's average net
assets per year.
A. marketing; 1%
B. marketing; 5%
C. administrative; .5%
D. administrative; 2%
Answer: A. marketing; 1%
53. Consider a mutual fund with $300 million in assets at the start of the year and 12 million
shares outstanding. If the gross return on assets is 18% and the total expense ratio is 2% of the
year-end value, what is the rate of return on the fund?
A. 15.64%
B. 16%
C. 17.25%
D. 17.5%
Answer: A. 15.64%
54. Consider a no-load mutual fund with $200 million in assets and 10 million shares at the
start of the year and with $250 million in assets and 11 million shares at the end of the year.
During the year investors have received income distributions of $2 per share and capital gain
distributions of $.25 per share. Assuming that the fund carries no debt, and that the total
expense ratio is 1%, what is the rate of return on the fund?
A. 11.19%
B. 23.75%
C. 24.64%
D. The answer cannot be determined from the information given.
Answer: B. 23.75%
NAV0 = $200/10 = $20.00
NAV1 = [$250 - ($250 × .01)]/11 = $22.50
Gross return = ($22.50 - $20 + $2 + $.25)/$20 = 23.75%
55. Consider a no-load mutual fund with $400 million in assets, 50 million in debt, and 15
million shares at the start of the year and with $500 million in assets, 40 million in debt, and
18 million shares at the end of the year. During the year investors have received income
distributions of $.50 per share and capital gain distributions of $.30 per share. If the total
expense ratio is .75%, what is the rate of return on the fund?
A. 12.09%
B. 12.99%
C. 8.25%
D. The answer cannot be determined from the information given.
Answer: A. 12.09%
Since this is a no-load fund, all charges are already embedded in gross return. Thus, gross
return and net return are the same.
NAV0 = (400 - 50)/15 = 23.33
NAV1 = [500 - 500(.0075) - 40]/18 = 25.35
Gross return = (25.35 - 23.33 + .80)/23.33 = 12.09%
56. Mutual fund returns may be granted pass-through status if _________________.
A. virtually all income is distributed to shareholders
B. the fund qualifies for pass-through status according to the U.S. tax code
C. the fund is sufficiently diversified
D. All of these options (All of the answers must be true for pass-through status to be granted.)
Answer: D. All of these options (All of the answers must be true for pass-through status to be
granted.)
57. _____ is an example of an exchange-traded fund.
A. An SPDR or spider
B. A samurai
C. A Vanguard
D. An open-end fund
Answer: A. An SPDR or spider
58. If you place an order to buy or sell a share of a mutual fund during the trading day, the
order will be executed at _____.
A. the NAV calculated at the market close at 4 pm New York time
B. the real time NAV
C. the NAV delayed 15 minutes
D. the NAV calculated at the opening of the next day's trading
Answer: A. the NAV calculated at the market close at 4 pm New York time
59. According to the 2011 Mutual Fund Fact Book, _______ of total assets were in taxable
money market funds and _______ were tax-exempt money market funds.
A. 35%; 14%
B. 12.3%; 75%
C. 22%; 3.9%
D. 5%; 47%
Answer: C. 22%; 3.9%
60. In his 1970 study, Malkiel found that mutual funds that do well in one period have an
approximately ________ chance of doing well in the subsequent-year period.
A. 33%
B. 52%
C. 65%
D. 85%
Answer: C. 65%
61. In a recent study, Malkiel found that evidence of persistence in the performance of mutual
funds ________________ in the 1980s.
A. grew stronger
B. remained about the same
C. became slightly weaker
D. virtually disappeared
Answer: D. virtually disappeared
62. The ratio of trading activity of a portfolio to the assets of the portfolio is called the
____________.
A. reinvestment ratio
B. trading rate
C. portfolio turnover
D. tax yield
Answer: C. portfolio turnover
63. Which of the following ETFs tracks the S&P 500 Index?
A. Qubes
B. Diamonds
C. Vipers
D. Spiders
Answer: D. Spiders
64. The Stone Harbor Fund is a closed-end investment company with a portfolio currently
worth $300 million. It has liabilities of $5 million and 9 million shares outstanding. If the
fund sells for $30 a share, what is its premium or discount as a percent of NAV?
A. 9.26% premium
B. 8.47% premium
C. 9.26% discount
D. 8.47% discount
Answer: D. 8.47% discount
NAV = ($300,000,000 - $5,000,000)/9,000,000 = $32.78
Discount = $32.78 - $30 = $2.78
Discount as % of NAV = $2.78/$32.78 = .0847 = 8.47%
65. The difference between balanced funds and asset allocation funds is that _____.
A. balanced funds invest in bonds while asset allocation funds do not
B. asset allocation funds invest in bonds while balanced funds do not
C. balanced funds have relatively stable proportions of stocks and bonds while the proportions
may vary dramatically for asset allocation funds
D. balanced funds make no capital gain distributions and asset allocation funds make both
dividend and capital gain distributions
Answer: C. balanced funds have relatively stable proportions of stocks and bonds while the
proportions may vary dramatically for asset allocation funds
66. The Wildwood Fund sells Class A shares with a front-end load of 5% and Class B shares
with a 12b-1 fee of 1% annually. If you plan to sell the fund after 4 years, are Class A or Class
B shares the better choice? Assume a 10% annual return net of expenses before the 12b-1 fee
is applied.
A. Class A.
B. Class B.
C. There is no difference.
D. The answer cannot be determined from the information given.
Answer: B. Class B.
Assume $100 is invested.
Class A: Investment after load = $100 - .05($100) = $95
After four years = $95(1.104) = $95 × 1.4641 = $139.09
Class B: Rate of return after 12b-1 fee = 10% - 1% = 9%
After four years = $100(1.094) = $100 × 1.4116 = $141.16
Class B is the better choice.
67. A mutual fund has total assets outstanding of $69 million. During the year the fund bought
and sold assets equal to $17.25 million. This fund's turnover rate was _____.
A. 25%
B. 28.5%
C. 18.63%
D. 33.4%
Answer: A. 25%
$17.25/$69 = 25%
68. Which type of investment fund is commonly known to invest in options and futures in
large scale?
A. Commingled funds
B. Hedge funds
C. ETFs
D. REITs
Answer: B. Hedge funds
69. Advantages of ETFs over mutual funds include all but which one of the following?
A. ETFs trade continuously, so investors can trade throughout the day.
B. ETFs can be sold short or purchased on margin, unlike fund shares.
C. ETF providers do not have to sell holdings to fund redemptions.
D. ETF values can diverge from NAV.
Answer: D. ETF values can diverge from NAV.
70. Harold has just taken his company public and owns a large quantity of restricted stock.
For purposes of diversification, what fund might he help create in order to diversify his
holdings?
A. Commingled funds
B. Hedge funds
C. ETF
D. REITs
Answer: A. Commingled funds
71. Which of the following funds is most likely to have a debt ratio of 70% or higher?
A. Bond fund
B. Commingled fund
C. Mortgage-backed securities
D. REIT
Answer: D. REIT
72. _______ have become the main way for investors to speculate in precious metals.
A. Strategic income funds
B. Balanced funds
C. Specialized-sector funds
D. Exchange-traded funds
Answer: D. Exchange-traded funds
73. From 1971 to 2010 the average return on the Wilshire 5000 Index was _________ the
return of the average mutual fund.
A. identical to
B. .8% higher than
C. .8% lower than
D. 1.3% higher than
Answer: B. .8% higher than
74. An open-end fund has a NAV of $16.50 per share. The fund charges a 6% load. What is
the offering price?
A. $14.57
B. $15.95
C. $17.55
D. $16.49
Answer: C. $17.55
75. The offer price of an open-end fund is $18 and the fund is sold with a front-end load of
5%. What is the fund's NAV?
A. $18.74
B. $17.10
C. $15.40
D. $16.57
Answer: B. $17.10
($18)(1 - .05) = $17.10
76. A mutual fund has $50 million in assets at the beginning of the year and 1 million shares
outstanding throughout the year. Throughout the year assets grow at 12%. The fund imposes a
12b-1 fee on all shares equal to 1%. The fee is imposed on year-end asset values. If there are
no distributions, what is the end-of-year NAV for the fund?
A. $50
B. $55.44
C. $56.12
D. $54.55
Answer: B. $55.44
($50 million)(1.12)(1 - .01)/1 million = $55.44
77. The assets of a mutual fund are $25 million. The liabilities are $4 million. If the fund has
700,000 shares outstanding and pays a $3 dividend, what is the dividend yield?
A. 5%
B. 10%
C. 15%
D. 20%
Answer: B. 10%
Price per share = (25 million - 4 million)/700,000 = 30 per share
Dividend yield = 3/30 = 10%
78. Which of the following funds are usually most tax-efficient?
A. Equity funds
B. Bond Funds
C. ETFs
D. Specialized-sector funds
Answer: C. ETFs
79. You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a
2% back-end load, which decreases .5% per year. How much will you pay in fees on a
$10,000 investment that does not grow if you cash out after 3 years of no gain?
A. $103
B. $219
C. $553
D. $635
Answer: D. $635
Total fees = 10,000 - (10,000 × .97) × (.99) × (.99) × (.99) × (.995) = 635
80. You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a
0% back-end load on Class A shares. The same fund charges a 0% front-end load, 1% total
annual fees, and a 2% back-end load on Class B shares. What are the total fees in year 1 on a
Class A investment of $20,000 with no growth in value?
A. $658
B. $794
C. $885
D. $902
Answer: B. $794
First-year fees = 20,000 - (20,000 × .97 × .99) = 794
81. You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a
0% back-end load on Class A shares. The same fund charges a 0% front-end load, 1% total
annual fees, and a 2% back-end load on Class B shares. What are the total fees in year 1 on a
Class B investment of $20,000 if you redeem shares with no growth in value?
A. $596
B. $794
C. $885
D. $902
Answer: A. $596
Total fees after 1 year = 20,000 - (20,000 × .98 × .99) = 596
82. You pay $21,600 to the Laramie Fund, which has a NAV of $18 per share at the
beginning of the year. The fund deducted a front-end load of 4%. The securities in the fund
increased in value by 10% during the year. The fund's expense ratio is 1.3% and is deducted
from year-end asset values. What is your rate of return on the fund if you sell your shares at
the end of the year?
A. 4.35%
B. 4.23%
C. 6.45%
D. 5.63%
Answer: B. 4.23%
83. Which one of the following statements about returns reported by mutual funds is not
correct?
A. Reported returns are net of management expenses.
B. Reported returns are net of 12b-1 fees.
C. Reported returns are net of brokerage fees paid on the fund's trading activity.
D. None of these options. (All of the items are included in reported returns.)
Answer: D. None of these options. (All of the items are included in reported returns.)
84. The top Morningstar mutual fund performance rating is ________.
A. five stars
B. four stars
C. three stars
D. two stars
Answer: A. five stars
85. You are considering investing in a no-load mutual fund with an annual expense ratio of
.6% and an annual 12b-1 fee of .75%. You could also invest in a bank CD paying 6.5% per
year. What minimum annual rate of return must the fund earn to make you better off in the
fund than in the CD?
A. 7.1%
B. 7.45%
C. 7.25%
D. 7.85%
Answer: D. 7.85%
r > .065 + .006 + .0075 = .0785 = 7.85%
Test Bank for Essentials of Investments
Zvi Bodie, Alex Kane, Alan Marcus
9780078034695, 9789389957877, 9781264140251, 9781260316148, 9780073382401, 9780078034695, 9781260013924, 9780077835422
