___________________________________________________________________________
1.
Which ch4
Student: one of the following statements regarding open-end mutual funds is false?
A. The funds redeem shares at net asset value.
B. The funds offer investors professional management.
C. The funds offer investors a guaranteed rate of return.
D. B and C.
E. A and B.
2.
Which one of the following statements regarding closed-end mutual funds is false?
A. The funds always trade at a discount from NAV.
B. The funds redeem shares at their net asset value.
C. The funds offer investors professional management.
D. A and B.
E. None of the above.
3.
Which of the following functions do mutual fund companies perform for their investors?
A. Record keeping and administration
B. Diversification and divisibility
C. Professional management
D. Lower transaction costs
E. All of the above.
4.
Multiple Mutual Funds had year-end assets of $457,000,000 and liabilities of $17,000,000. There were
24,300,000 shares in the fund at year-end. What was Multiple Mutual's Net Asset Value?
A. $18.11
B. $18.81
C. $69.96
D. $7.00
E. $181.07
5.
Growth Fund had year-end assets of $862,000,000 and liabilities of $12,000,000. There were 32,675,254
shares in the fund at year-end. What was Growth Fund's Net Asset Value?
A. $28.17
B. $25.24
C. $19.62
D. $26.01
E. $21.56
6.
Diversified Portfolios had year-end assets of $279,000,000 and liabilities of $43,000,000. If Diversified's
NAV was $42.13, how many shares must have been held in the fund?
A. 43,000,000
B. 6,488,372
C. 5,601,709
D. 1,182,203
E. None of the above.
7.
Pinnacle Fund had year-end assets of $825,000,000 and liabilities of $25,000,000. If Pinnacle's NAV was
$32.18, how many shares must have been held in the fund?
A. 21,619,346,92
B. 22,930,546.28
C. 24,860,161.59
D. 25,693,645.25
E. None of the above.
8.
Most actively managed mutual funds, when compared to a market index such as the Wilshire 5000,
A. beat the market return in all years.
B. beat the market return in most years.
C. exceed the return on index funds.
D. do not outperform the market
E. None of the above is a correct statement.
9.
Pools of money invested in a portfolio that is fixed for the life of the fund are called
A. closed-end funds.
B. open-end funds.
C. unit investment trusts.
D. REITS.
E. redeemable trust certificates.
10. Investors in closed-end funds who wish to liquidate their positions must
A. sell their shares through a broker.
B. sell their shares to the issuer at a discount to Net Asset Value.
C. sell their shares to the issuer at a premium to Net Asset Value.
D. sell their shares to the issuer for Net Asset Value.
E. hold their shares to maturity.
11. Closed end funds are frequently issued at a ______ to NAV and subsequently trade at a __________ to
NAV.
A. discount, discount
B. discount, premium
C. premium, premium
D. premium, discount
E. No consistent relationship has been observed.
12. At issue, offering prices of open-end funds will often be
A. less than NAV due to loads and commissions.
B. greater than NAV due to loads and commissions.
C. less than NAV due to limited demand.
D. greater than NAV due to excess demand.
E. less than or greater than NAV with no apparent pattern.
13. Which of the following statements about Real Estate Investment Trusts is true?
A. REITs invest in real estate or loans secured by real estate.
B. REITs raise capital by borrowing from banks and issuing mortgages.
C. REITs are similar to open-end funds, with shares redeemable at NAV.
D. All of the above are true.
E. Both A and B are true.
14. Which of the following statements about Real Estate Investment Trusts is true?
A. REITs may be equity trusts or mortgage trusts.
B. REITs are usually highly-leveraged.
C. REITs are similar to closed-end funds.
D. All of the above are true.
E. Both A and C are true.
15. Which of the following statements about Money Market Mutual Funds is true?
A. They invest in commercial paper, CDs, and repurchase agreements.
B. They usually offer check-writing privileges.
C. They are highly leveraged and risky.
D. All of the above are true.
E. Both A and B are true.
16. In 2007 the proportion of mutual funds specializing in common stocks was
A. 21.7%
B. 28.0%
C. 56.8%
D. 73.4%
E. 63.5%
17. In 2007 the proportion of mutual funds specializing in bonds was
A. 14.4%
B. 28.0%
C. 54.1%
D. 73.4%
E. 63.5%
18. In 2007 the proportion of mutual funds specializing in money market securities was
A. 21.7%
B. 28.0%
C. 54.1%
D. 73.4%
E. 22.6%
19. In 2007 the proportion of hybrid (bond and stock) mutual funds was
A. 21.7%
B. 28.0%
C. 54.1%
D. 6.3%
E. 22.6%
20. Management fees and other expenses of mutual funds may include
A. front-end loads.
B. back-end loads.
C. 12b-1 charges.
D. A and B only.
E. A, B and C.
21. The Profitability Fund had NAV per share of $17.50 on January 1, 2007. On December 31 of the same year
the fund's NAV was $19.47. Income distributions were $0.75 and the fund had capital gain distributions of
$1.00. Without considering taxes and transactions costs, what rate of return did an investor receive on the
Profitability fund last year?
A. 11.26%
B. 15.54%
C. 16.97%
D. 21.26%
E. 9.83%
22. The Yachtsman Fund had NAV per share of $36.12 on January 1, 2007. On December 31 of the same year
the fund's NAV was $39.71. Income distributions were $0.64 and the fund had capital gain distributions of
$1.13. Without considering taxes and transactions costs, what rate of return did an investor receive on the
Yachtsman Fund last year?
A. 22.92%
B. 17.68%
C. 14.39%
D. 18.52%
E. 14.84%
23. Investors' Choice Fund had NAV per share of $37.25 on January 1, 2007. On December 31 of the same
year the fund's rate of return for the year was 17.3%. Income distributions were $1.14 and the fund had
capital gain distributions of $1.35. Without considering taxes and transactions costs, what ending NAV
would you calculate for Investors' Choice?
A. $41.20
B. $33.88
C. $43.69
D. $42.03
E. $46.62
24. Which of the following is not an advantage of mutual funds?
A. They offer a variety of investment styles.
B. They offer small investors the benefits of diversification.
C. They treat income as "passed through" to the investor for tax purposes.
D. A, B and C are all advantages of mutual funds.
E. Neither A nor B nor C are advantages of mutual funds.
25. Which of the following would increase the net asset value of a mutual fund share, assuming all other things
remain unchanged?
A. an increase in the number of fund shares outstanding
B. an increase in the fund's accounts payable
C. a change in the fund's management
D. an increase in the value of one of the fund's stocks
E. none of the above
26. Which of the following characteristics apply to unit investment trusts?
I) Most are invested in fixed-income portfolios.
II) They are actively managed portfolios.
III) The sponsor pools securities, then sells public shares in the trust.
IV) The portfolio is fixed for the life of the fund.
A. I and IV
B. I and II
C. I, III, and IV
D. I, II, and III
E. I, II, III, and IV
27. Jargon Rapid Growth is a mutual fund that has traditionally accepted funds from new investors and issued
new shares at net asset value. Jeremy Jargon manages the fund himself and has become concerned that its
level of assets has become too high for his management abilities. He issues a statement that Jargon will no
longer accept funds from new investors, but will continue to accept additional investments from current
shareholders. Which of the following is true about Jargon Rapid Growth fund?
A. Jargon used to be an open-end fund but has now become a closed-end fund.
B. Jargon has always been an open-end fund and will remain an open-end fund.
C. Jargon has always been a closed-end fund and will remain a closed-end fund.
D. Jargon is an open-end fund but would change to a closed-end fund if it wouldn't accept additional funds
from current investors.
E. Jargon is violating SEC policy by refusing to accept new investors.
28. As of 2007, which class of mutual funds had the largest amount of assets invested?
A. stock funds
B. bond funds
C. mixed asset classes such as asset allocation funds
D. money market funds
E. global funds
29. Commingled funds are
A. amounts invested in equity and fixed-income mutual funds.
B. funds that may be purchased at intervals of 3, 6, or 12 month intervals at the discretion of management.
C. amounts invested in domestic and global equities.
D. closed-end funds that may be repurchased only once every two years at the discretion of mutual fund
management.
E. partnerships of investors that pool their funds, which are then managed for a fee.
30. Which of the following is true regarding equity mutual funds:
I) They invest primarily in stock.
II) They may hold fixed-income securities as well as stock.
III) Most hold money market securities as well as stock.
IV) Two types of equity funds are income funds and growth funds.
A. I and IV
B. I, III, and IV
C. I, II, and IV
D. I, II, and III
E. I, II, III, and IV
31. The fee that mutual funds use to help pay for advertising and promotional literature is called a
A. front-end load fee.
B. back-end load fee.
C. operating expense fee.
D. 12b-1 fee.
E. structured fee.
32. Patty O'Furniture purchased 100 shares of Green Isle mutual fund at a net asset value of $42 per share.
During the year Patty received dividend income distributions of $2.00 per share and capital gains
distributions of $4.30 per share. At the end of the year the shares had a net asset value of $40 per share.
What was Patty's rate of return on this investment?
A. 5.43%
B. 10.24%
C. 7.19%
D. 12.44%
E. 9.18%
33. Assume that you purchased 200 shares of Super Performing mutual fund at a net asset value of $21 per
share. During the year you received dividend income distributions of $1.50 per share and capital gains
distributions of $2.85 per share. At the end of the year the shares had a net asset value of $23 per share.
What was your rate of return on this investment?
A. 30.24%
B. 25.37%
C. 27.19%
D. 22.44%
E. 29.18%
34. Assume that you purchased shares of High Flying mutual fund at a net asset value of $12.50 per
share. During the year you received dividend income distributions of $0.78 per share and capital gains
distributions of $1.67 per share. At the end of the year the shares had a net asset value of $13.87 per share.
What was your rate of return on this investment?
A. 29.43%
B. 30.56%
C. 31.19%
D. 32.44%
E. 29.18%
35. Assume that you purchased shares of a mutual fund at a net asset value of $14.50 per share. During the year
you received dividend income distributions of $0.27 per share and capital gains distributions of $0.65 per
share. At the end of the year the shares had a net asset value of $13.74 per share. What was your rate of
return on this investment?
A. 2.91%
B. 3.07%
C. 1.10%
D. 1.78%
E. -1.18%
36. Assume that you purchased shares of a mutual fund at a net asset value of $10.00 per share. During the
year you received dividend income distributions of $0.05 per share and capital gains distributions of $0.06
per share. At the end of the year the shares had a net asset value of $8.16 per share. What was your rate of
return on this investment?
A. -18.24%
B. -16.1%
C. 16.10%
D. -17.3%
E. 17.3%
37. A mutual fund had year-end assets of $560,000,000 and liabilities of $26,000,000. There were 23,850,000
shares in the fund at year end. What was the mutual fund's Net Asset Value?
A. $22.87
B. $22.39
C. $22.24
D. $17.61
E. $19.25
38. A mutual fund had year-end assets of $250,000,000 and liabilities of $4,000,000. There were 3,750,000
shares in the fund at year-end. What was the mutual fund's Net Asset Value?
A. $92.53
B. $67.39
C. $63.24
D. $65.60
E. $17.46
39. A mutual fund had year-end assets of $700,000,000 and liabilities of $7,000,000. There were 40,150,000
shares in the fund at year-end. What was the mutual fund's Net Asset Value?
A. $9.63
B. $57.71
C. $16.42
D. $17.87
E. $17.26
40. A mutual fund had year-end assets of $750,000,000 and liabilities of $7,500,000. There were 40,000,000
shares in the fund at year-end. What was the mutual fund's Net Asset Value?
A. $9.63
B. $18.58
C. $16.42
D. $17.87
E. $17.26
41. A mutual fund had year-end assets of $465,000,000 and liabilities of $37,000,000. If the fund NAV was
$56.12, how many shares must have been held in the fund?
A. 4,300,000
B. 6,488,372
C. 8,601,709
D. 7,626,515
E. None of the above.
42. A mutual fund had year-end assets of $521,000,000 and liabilities of $63,000,000. If the fund NAV was
$26.12, how many shares must have been held in the fund?
A. 17,534,456
B. 16,488,372
C. 18,601,742
D. 17,542,515
E. None of the above.
43. A mutual fund had year-end assets of $327,000,000 and liabilities of $46,000,000. If the fund NAV was
$30.48, how many shares must have been held in the fund?
A. 11,354,751
B. 8,412,642
C. 10,165,476
D. 9,165,414
E. 9,219,160
44. A mutual fund had year-end assets of $437,000,000 and liabilities of $37,000,000. If the fund NAV was
$60.12, how many shares must have been held in the fund?
A. 6,653,360
B. 8,412,642
C. 10,165,476
D. 9,165,414
E. 9,219,160
45. A mutual fund had NAV per share of $19.00 on January 1, 2007. On December 31 of the same year the
fund's NAV was $19.14. Income distributions were $0.57 and the fund had capital gain distributions of
$1.12. Without considering taxes and transactions costs, what rate of return did an investor receive on the
fund last year?
A. 11.26%
B. 10.54%
C. 7.97%
D. 8.26%
E. 9.63%
46. A mutual fund had NAV per share of $23.00 on January 1, 2007. On December 31 of the same year the
fund's NAV was $23.15. Income distributions were $0.63 and the fund had capital gain distributions of
$1.26. Without considering taxes and transactions costs, what rate of return did an investor receive on the
fund last year?
A. 11.26%
B. 10.54%
C. 8.87%
D. 8.26%
E. 9.63%
47. A mutual fund had NAV per share of $26.25 on January 1, 2007. On December 31 of the same year the
fund's rate of return for the year was 16.4%. Income distributions were $1.27 and the fund had capital gain
distributions of $1.85. Without considering taxes and transactions costs, what ending NAV would you
calculate?
A. $27.44
B. $33.88
C. $24.69
D. $42.03
E. $16.62
48. A mutual fund had NAV per share of $16.75 on January 1, 2007. On December 31 of the same year the
fund's rate of return for the year was 26.6%. Income distributions were $1.79 and the fund had capital gain
distributions of $2.80. Without considering taxes and transactions costs, what ending NAV would you
calculate?
A. $17.44
B. $13.28
C. $14.96
D. $17.25
E. $16.62
49. A mutual fund had NAV per share of $36.15 on January 1, 2007. On December 31 of the same year the
fund's rate of return for the year was 14.0%. Income distributions were $1.16 and the fund had capital gain
distributions of $2.12. Without considering taxes and transactions costs, what ending NAV would you
calculate?
A. $37.93
B. $34.52
C. $44.69
D. $47.25
E. $36.28
50. A mutual fund had NAV per share of $37.12 on January 1, 2007. On December 31 of the same year the
fund's rate of return for the year was 11.0%. Income distributions were $2.26 and the fund had capital gain
distributions of $1.64. Without considering taxes and transactions costs, what ending NAV would you
calculate?
A. $37.93
B. $34.52
C. $45.10
D. $47.25
E. $36.28
51. Differences between hedge funds and mutual funds are that
A. hedge funds are only subject to minimal SEC regulation.
B. hedge funds are typically open only to wealthy or institutional investors.
C.hedge funds managers can pursue strategies not available to mutual funds such as short selling, heavy use
of derivatives, and leverage.
D. are commonly structured as private partnerships.
E. all of the above
52. Of the following types of mutual funds, an investor that wishes to invest in a diversified portfolio of stocks
worldwide (including the U.S.) should choose
A. international funds.
B. global funds.
C. regional funds.
D. emerging market funds.
E. none of the above.
53. Of the following types of mutual funds, an investor that wishes to invest in a diversified portfolio of foreign
stocks (excluding the U.S.) should choose
A. International funds
B. Global funds
C. Regional funds
D. Emerging market funds
E. None of the above
54. Of the following types of EFTs, an investor that wishes to invest in a diversified portfolio that tracks the
S&P 500 should choose
A. SPY.
B. DIA.
C. QQQ.
D. IWM.
E. VTI.
55. Of the following types of EFTs, an investor that wishes to invest in a diversified portfolio that tracks the
Dow Jones Industrials should choose
A. SPY.
B. DIA.
C. QQQ.
D. IWM.
E. VTI.
56. Of the following types of EFTs, an investor that wishes to invest in a diversified portfolio that tracks the
Nasdaq 100 should choose
A. SPY.
B. DIA.
C. QQQ.
D. IWM.
E. VTI.
57. Of the following types of EFTs, an investor that wishes to invest in a diversified portfolio that tracks the
Russell 2000 should choose
A. SPY.
B. DIA.
C. QQQ.
D. IWM.
E. VTI.
58. Of the following types of EFTs, an investor that wishes to invest in a diversified portfolio that tracks the
Wilshire 5000 should choose
A. SPY.
B. DIA.
C. QQQ.
D. IWM.
E. VTI.
59. Of the following types of EFTs, an investor that wishes to invest in a diversified portfolio that tracks the
MSCI Japan Index should choose
A. SPY.
B. EWJ.
C. QQQ.
D. IWM.
E. VTI.
60. Of the following types of EFTs, an investor that wishes to invest in a diversified portfolio that tracks the
MSCI France Index should choose
A. SPY.
B. EWJ.
C. EWQ.
D. IWM.
E. VTI.
61. A mutual funds had average daily assets of $3.0 billion in 2007. The fund sold $600 million worth of stock
and purchased $700 million worth of stock during the year. The funds turnover ratio is ___.
A. 27.5%
B. 12%
C. 15%
D. 25%
E. 20%
62. A mutual funds had average daily assets of $2.0 billion on 2007. The fund sold $500 million worth of stock
and purchased $600 million worth of stock during the year. The funds turnover ratio is ___.
A. 27.5%
B. 12%
C. 15%
D. 25%
E. 20%
63. A mutual funds had average daily assets of $4.0 billion on 2007. The fund sold $1.5 billion worth of stock
and purchased $1.6 billion worth of stock during the year. The funds turnover ratio is ____________.
A. 37.5%
B. 22%
C. 15%
D. 45%
E. 20%
64. A mutual funds had average daily assets of $4.7 billion on 2007. The fund sold $2.2 billion worth of stock
and purchased $3.6 billion worth of stock during the year. The funds turnover ratio is ____________.
A. 37.5%
B. 22.6%
C. 15.3%
D. 46.8%
E. 20.7%
65. You purchased shares of a mutual fund at a price of $20 per share at the beginning of the year and paid a
front-end load of 5.75%. If the securities in which the find invested increased in value by 11% during the
year, and the funds expense ratio was 1.25%, your return if you sold the fund at the end of the year would
be ____________.
A. 4.33
B. 3.44
C. 2.45
D. 6.87
E. None of the above
66. You purchased shares of a mutual fund at a price of $12 per share at the beginning of the year and paid a
front-end load of 4.75%. If the securities in which the fund invested increased in value by 9% during the
year, and the funds expense ratio was 1.5%, your return if you sold the fund at the end of the year would be
____________.
A. 4.75
B. 3.54
C. 2.65
D. 2.39
E. None of the above
67. You purchased shares of a mutual fund at a price of $17 per share at the beginning of the year and paid a
front-end load of 5.0%. If the securities in which the find invested increased in value by 12% during the
year, and the funds expense ratio was 1.0%, your return if you sold the fund at the end of the year would be
____________.
A. 4.75
B. 5.45
C. 5.65
D. 4.39
E. None of the above
68. You purchased shares of a mutual fund at a price of $20 per share at the beginning of the year and paid a
front-end load of 6.0%. If the securities in which the find invested increased in value by 10% during the
year, and the funds expense ratio was 1.5%, your return if you sold the fund at the end of the year would be
____________.
A. 1.99
B. 2.32
C. 1.65
D. 2.06
E. None of the above
69. List and describe the more important types of mutual funds according to their investment policy and use.
70. Discuss the taxation of mutual fund income.
71. What is an Exchange-traded fund? Give two examples of specific ETFs. What are some advantages they
have over ordinary open-end mutual funds? What are some disadvantages?
72. Discuss the consistency of mutual fund performance results, as studied by Goetzmann and Ibbotson (1994)
and Malkiel (1995).
ch4 Key
1.
Which one of the following statements regarding open-end mutual funds is false?
A.
B.
C.
D.
E.
The funds redeem shares at net asset value.
The funds offer investors professional management.
The funds offer investors a guaranteed rate of return.
B and C.
A and B.
No investment offers a guaranteed rate of return.
Bodie - Chapter 04 #1
Difficulty: Moderate
2.
Which one of the following statements regarding closed-end mutual funds is false?
A.
B.
C.
D.
E.
The funds always trade at a discount from NAV.
The funds redeem shares at their net asset value.
The funds offer investors professional management.
A and B.
None of the above.
Closed-end funds are sold at the prevailing market price.
Bodie - Chapter 04 #2
Difficulty: Moderate
3.
Which of the following functions do mutual fund companies perform for their investors?
A.
B.
C.
D.
E.
Record keeping and administration
Diversification and divisibility
Professional management
Lower transaction costs
All of the above.
Mutual funds are attractive to investors because they offer all of the listed services.
Bodie - Chapter 04 #3
Difficulty: Easy
4.
Multiple Mutual Funds had year-end assets of $457,000,000 and liabilities of $17,000,000. There were
24,300,000 shares in the fund at year-end. What was Multiple Mutual's Net Asset Value?
A.
B.
C.
D.
E.
$18.11
$18.81
$69.96
$7.00
$181.07
(457,000,000 - 17,000,000) / 24,300,000 = $18.11
Bodie - Chapter 04 #4
Difficulty: Moderate
5.
Growth Fund had year-end assets of $862,000,000 and liabilities of $12,000,000. There were
32,675,254 shares in the fund at year-end. What was Growth Fund's Net Asset Value?
A.
B.
C.
D.
E.
$28.17
$25.24
$19.62
$26.01
$21.56
(862,000,000 - 12,000,000) / 32,675,254 = $26.01
Bodie - Chapter 04 #5
Difficulty: Moderate
6.
Diversified Portfolios had year-end assets of $279,000,000 and liabilities of $43,000,000. If
Diversified's NAV was $42.13, how many shares must have been held in the fund?
A.
B.
C.
D.
E.
43,000,000
6,488,372
5,601,709
1,182,203
None of the above.
($279,000,000 - 43,000,000) / $42.13 = 5,601,708.996.
Bodie - Chapter 04 #6
Difficulty: Moderate
7.
Pinnacle Fund had year-end assets of $825,000,000 and liabilities of $25,000,000. If Pinnacle's NAV
was $32.18, how many shares must have been held in the fund?
A.
B.
C.
D.
E.
21,619,346,92
22,930,546.28
24,860,161.59
25,693,645.25
None of the above.
($825,000,000 - 25,000,000) / $32.18 = 24,860,161.59.
Bodie - Chapter 04 #7
Difficulty: Moderate
8.
Most actively managed mutual funds, when compared to a market index such as the Wilshire 5000,
A.
B.
C.
D.
E.
beat the market return in all years.
beat the market return in most years.
exceed the return on index funds.
do not outperform the market
None of the above is a correct statement.
Most actively managed mutual funds fail to equal the return earned by index funds, possibly due to
higher transactions costs.
Bodie - Chapter 04 #8
Difficulty: Easy
9.
Pools of money invested in a portfolio that is fixed for the life of the fund are called
A.
B.
C.
D.
E.
closed-end funds.
open-end funds.
unit investment trusts.
REITS.
redeemable trust certificates.
Unit investment trusts are funds that invest in a portfolio, often fixed-income securities, and hold it to
maturity.
Bodie - Chapter 04 #9
Difficulty: Easy
10.
Investors in closed-end funds who wish to liquidate their positions must
A.
B.
C.
D.
E.
sell their shares through a broker.
sell their shares to the issuer at a discount to Net Asset Value.
sell their shares to the issuer at a premium to Net Asset Value.
sell their shares to the issuer for Net Asset Value.
hold their shares to maturity.
Closed-end fund shares are sold on organized exchanges through a broker.
Bodie - Chapter 04 #10
Difficulty: Moderate
11.
Closed end funds are frequently issued at a ______ to NAV and subsequently trade at a __________ to
NAV.
A.
B.
C.
D.
E.
discount, discount
discount, premium
premium, premium
premium, discount
No consistent relationship has been observed.
Closed-end funds are typically issued at a premium to Net Asset Value and subsequently trade at a
discount.
Bodie - Chapter 04 #11
Difficulty: Moderate
12.
At issue, offering prices of open-end funds will often be
A.
B.
C.
D.
E.
less than NAV due to loads and commissions.
greater than NAV due to loads and commissions.
less than NAV due to limited demand.
greater than NAV due to excess demand.
less than or greater than NAV with no apparent pattern.
Open-end funds are redeemable on demand at NAV so they should never sell for less than NAV.
However, loads and commissions can increase the price above NAV.
Bodie - Chapter 04 #12
Difficulty: Difficult
13.
Which of the following statements about Real Estate Investment Trusts is true?
A.
B.
C.
D.
E.
REITs invest in real estate or loans secured by real estate.
REITs raise capital by borrowing from banks and issuing mortgages.
REITs are similar to open-end funds, with shares redeemable at NAV.
All of the above are true.
Both A and B are true.
Real Estate Investment Trusts invest in real estate or real-estate-secured loans. They may raise capital
from banks and by issuing mortgages. They are similar to closed-end funds and shares are typically
exchange traded.
Bodie - Chapter 04 #13
Difficulty: Moderate
14.
Which of the following statements about Real Estate Investment Trusts is true?
A.
B.
C.
D.
E.
REITs may be equity trusts or mortgage trusts.
REITs are usually highly-leveraged.
REITs are similar to closed-end funds.
All of the above are true.
Both A and C are true.
Real Estate Investment Trusts invest in real estate or real-estate-secured loans. They may raise capital
from banks and by issuing mortgages. They are similar to closed-end funds and shares are typically
exchange traded.
Bodie - Chapter 04 #14
Difficulty: Moderate
15.
Which of the following statements about Money Market Mutual Funds is true?
A.
B.
C.
D.
E.
They invest in commercial paper, CDs, and repurchase agreements.
They usually offer check-writing privileges.
They are highly leveraged and risky.
All of the above are true.
Both A and B are true.
Money Market Mutual Funds invest in commercial paper, CDs, repurchase agreements, and other
money market securities. They usually offer check-writing privileges. Their NAV is is fixed at $1 per
share.
Bodie - Chapter 04 #15
Difficulty: Moderate
16.
In 2007 the proportion of mutual funds specializing in common stocks was
A.
B.
C.
D.
E.
21.7%
28.0%
56.8%
73.4%
63.5%
See Table 4.1.
Bodie - Chapter 04 #16
Difficulty: Moderate
17.
In 2007 the proportion of mutual funds specializing in bonds was
A.
B.
C.
D.
E.
14.4%
28.0%
54.1%
73.4%
63.5%
See Table 4.1.
Bodie - Chapter 04 #17
Difficulty: Moderate
18.
In 2007 the proportion of mutual funds specializing in money market securities was
A.
B.
C.
D.
E.
21.7%
28.0%
54.1%
73.4%
22.6%
See Table 4.1.
Bodie - Chapter 04 #18
Difficulty: Moderate
19.
In 2007 the proportion of hybrid (bond and stock) mutual funds was
A.
B.
C.
D.
E.
21.7%
28.0%
54.1%
6.3%
22.6%
See Table 4.1.
Bodie - Chapter 04 #19
Difficulty: fees Moderate
20.
Management and other expenses of mutual funds may include
A.
B.
C.
D.
E.
front-end loads.
back-end loads.
12b-1 charges.
A and B only.
A, B and C.
All of the listed expenses may be included in the cost of owning a mutual fund.
Bodie - Chapter 04 #20
Difficulty: Easy
21.
The Profitability Fund had NAV per share of $17.50 on January 1, 2007. On December 31 of the
same year the fund's NAV was $19.47. Income distributions were $0.75 and the fund had capital gain
distributions of $1.00. Without considering taxes and transactions costs, what rate of return did an
investor receive on the Profitability fund last year?
A.
B.
C.
D.
E.
11.26%
15.54%
16.97%
21.26%
9.83%
R = ($19.47 - 17.50 + .75 + 1.00) / $17.50 = 21.26%
Bodie - Chapter 04 #21
Difficulty: Moderate
22.
The Yachtsman Fund had NAV per share of $36.12 on January 1, 2007. On December 31 of the
same year the fund's NAV was $39.71. Income distributions were $0.64 and the fund had capital gain
distributions of $1.13. Without considering taxes and transactions costs, what rate of return did an
investor receive on the Yachtsman Fund last year?
A.
B.
C.
D.
E.
22.92%
17.68%
14.39%
18.52%
14.84%
R = ($39.71 - 36.12 + .64 + 1.13) / $36.12 = 14.84%
Bodie - Chapter 04 #22
Difficulty: Moderate
23.
Investors' Choice Fund had NAV per share of $37.25 on January 1, 2007. On December 31 of the same
year the fund's rate of return for the year was 17.3%. Income distributions were $1.14 and the fund had
capital gain distributions of $1.35. Without considering taxes and transactions costs, what ending NAV
would you calculate for Investors' Choice?
A.
B.
C.
D.
E.
$41.20
$33.88
$43.69
$42.03
$46.62
.173 = (P - $37.25 + 1.14 + 1.35) / $37.25; P = $41.20
Bodie - Chapter 04 #23
Difficulty: Moderate
24.
Which of the following is not an advantage of mutual funds?
A.
B.
C.
D.
E.
They offer a variety of investment styles.
They offer small investors the benefits of diversification.
They treat income as "passed through" to the investor for tax purposes.
A, B and C are all advantages of mutual funds.
Neither A nor B nor C are advantages of mutual funds.
A disadvantage of mutual funds is that investment income is passed through for tax purposes and
investors may therefore lose the ability to engage in tax management.
Bodie - Chapter 04 #24
Difficulty: Easy
25.
Which of the following would increase the net asset value of a mutual fund share, assuming all other
things remain unchanged?
A.
B.
C.
D.
E.
an increase in the number of fund shares outstanding
an increase in the fund's accounts payable
a change in the fund's management
an increase in the value of one of the fund's stocks
none of the above
A and B would decrease NAV and C would have an uncertain effect (and then only in the future).
However, an increase in the value of one of the fund's stocks would increase NAV.
Bodie - Chapter 04 #25
Difficulty: Easy
26.
Which of the following characteristics apply to unit investment trusts?
I) Most are invested in fixed-income portfolios.
II) They are actively managed portfolios.
III) The sponsor pools securities, then sells public shares in the trust.
IV) The portfolio is fixed for the life of the fund.
A.
B.
C.
D.
E.
I and IV
I and II
I, III, and IV
I, II, and III
I, II, III, and IV
Three chief characteristics of UITs are that (1) the sponsor pools securities, and then sells public shares
in the trust, (2) the portfolio is fixed for the life of the fund, and (3) most are invested in fixed-income
portfolios.
Bodie - Chapter 04 #26
Difficulty: Moderate
27.
Jargon Rapid Growth is a mutual fund that has traditionally accepted funds from new investors
and issued new shares at net asset value. Jeremy Jargon manages the fund himself and has become
concerned that its level of assets has become too high for his management abilities. He issues a
statement that Jargon will no longer accept funds from new investors, but will continue to accept
additional investments from current shareholders. Which of the following is true about Jargon Rapid
Growth fund?
A. Jargon used to be an open-end fund but has now become a closed-end fund.
B. Jargon has always been an open-end fund and will remain an open-end fund.
C. Jargon has always been a closed-end fund and will remain a closed-end fund.
D. Jargon is an open-end fund but would change to a closed-end fund if it wouldn't accept additional
funds from current investors.
E. Jargon is violating SEC policy by refusing to accept new investors.
Because Jargon accepts funds from investors, it is an open-end fund. Once closed-end start trading,
they are only traded in the secondary market. However, when the decision was made to stop accepting
investments from new investors, it became a closed-fund.
Bodie - Chapter 04 #27
Difficulty: Moderate
28.
As of 2007, which class of mutual funds had the largest amount of assets invested?
A.
B.
C.
D.
E.
stock funds
bond funds
mixed asset classes such as asset allocation funds
money market funds
global funds
See Table 4.1.
Bodie - Chapter 04 #28
Difficulty: Easy
29.
Commingled funds are
A. amounts invested in equity and fixed-income mutual funds.
B. funds that may be purchased at intervals of 3, 6, or 12 month intervals at the discretion of
management.
C. amounts invested in domestic and global equities.
D. closed-end funds that may be repurchased only once every two years at the discretion of mutual fund
management.
E. partnerships of investors that pool their funds, which are then managed for a fee.
Commingled funds are partnerships of investors that pool their funds, which are then managed for a fee.
Bodie - Chapter 04 #29
Difficulty: Easy
30.
Which of the following is true regarding equity mutual funds:
I) They invest primarily in stock.
II) They may hold fixed-income securities as well as stock.
III) Most hold money market securities as well as stock.
IV) Two types of equity funds are income funds and growth funds.
A.
B.
C.
D.
E.
I and IV
I, III, and IV
I, II, and IV
I, II, and III
I, II, III, and IV
Equity mutual funds can be classified as income funds or growth funds. Equity mutual funds invest
primarily in stock but may hold fixed-income securities as well. Most hold money market securities to
reduce the need to redeem securities to meet uncertain redemptions on a daily basis.
Bodie - Chapter 04 #30
Difficulty: Moderate
31.
The fee that mutual funds use to help pay for advertising and promotional literature is called a
A.
B.
C.
D.
E.
front-end load fee.
back-end load fee.
operating expense fee.
12b-1 fee.
structured fee.
A and B are used to compensate the sales force and C is used to cover operating expenses. Rule 12b-1
allows a small fee to cover advertising and promotion.
Bodie - Chapter 04 #31
Difficulty: Easy
32.
Patty O'Furniture purchased 100 shares of Green Isle mutual fund at a net asset value of $42 per share.
During the year Patty received dividend income distributions of $2.00 per share and capital gains
distributions of $4.30 per share. At the end of the year the shares had a net asset value of $40 per share.
What was Patty's rate of return on this investment?
A.
B.
C.
D.
E.
5.43%
10.24%
7.19%
12.44%
9.18%
R = ($40 - 42 + 2 + 4.3)/$42 = 10.238%
Bodie - Chapter 04 #32
Difficulty: Moderate
33.
Assume that you purchased 200 shares of Super Performing mutual fund at a net asset value of $21 per
share. During the year you received dividend income distributions of $1.50 per share and capital gains
distributions of $2.85 per share. At the end of the year the shares had a net asset value of $23 per share.
What was your rate of return on this investment?
A.
B.
C.
D.
E.
30.24%
25.37%
27.19%
22.44%
29.18%
R = ($23 - 21 + 1.5 + 2.85)/$21 = 30.238%
Bodie - Chapter 04 #33
Difficulty: Moderate
34.
Assume that you purchased shares of High Flying mutual fund at a net asset value of $12.50 per
share. During the year you received dividend income distributions of $0.78 per share and capital gains
distributions of $1.67 per share. At the end of the year the shares had a net asset value of $13.87 per
share. What was your rate of return on this investment?
A.
B.
C.
D.
E.
29.43%
30.56%
31.19%
32.44%
29.18%
R = ($13.87 - 12.50 + 0.78 + 1.67)/$12.50 = 30.56%
Bodie - Chapter 04 #34
Difficulty: Moderate
35.
Assume that you purchased shares of a mutual fund at a net asset value of $14.50 per share. During the
year you received dividend income distributions of $0.27 per share and capital gains distributions of
$0.65 per share. At the end of the year the shares had a net asset value of $13.74 per share. What was
your rate of return on this investment?
A.
B.
C.
D.
E.
2.91%
3.07%
1.10%
1.78%
-1.18%
R = ($13.74 - 14.50 + 0.27 + 0.65)/$14.50 = 1.103%
Bodie - Chapter 04 #35
Difficulty: Moderate
36.
Assume that you purchased shares of a mutual fund at a net asset value of $10.00 per share. During the
year you received dividend income distributions of $0.05 per share and capital gains distributions of
$0.06 per share. At the end of the year the shares had a net asset value of $8.16 per share. What was
your rate of return on this investment?
A.
B.
C.
D.
E.
-18.24%
-16.1%
16.10%
-17.3%
17.3%
R = ($8.16 - 10.00 + 0.05 + 0.06)/$10.00 = -17.3%
Bodie - Chapter 04 #36
Difficulty: Moderate
37.
A mutual fund had year-end assets of $560,000,000 and liabilities of $26,000,000. There were
23,850,000 shares in the fund at year end. What was the mutual fund's Net Asset Value?
A.
B.
C.
D.
E.
$22.87
$22.39
$22.24
$17.61
$19.25
(560,000,000 - 26,000,000) / 23,850,000 = $22.389
Bodie - Chapter 04 #37
Difficulty: Moderate
38.
A mutual fund had year-end assets of $250,000,000 and liabilities of $4,000,000. There were 3,750,000
shares in the fund at year-end. What was the mutual fund's Net Asset Value?
A.
B.
C.
D.
E.
$92.53
$67.39
$63.24
$65.60
$17.46
(250,000,000 - 4,000,000) / 3,750,000 = $65.60
Bodie - Chapter 04 #38
Difficulty: Moderate
39.
A mutual fund had year-end assets of $700,000,000 and liabilities of $7,000,000. There were
40,150,000 shares in the fund at year-end. What was the mutual fund's Net Asset Value?
A.
B.
C.
D.
E.
$9.63
$57.71
$16.42
$17.87
$17.26
(700,000,000 - 7,000,000) / 40,150,000 = $17.26
Bodie - Chapter 04 #39
Difficulty: Moderate
40.
A mutual fund had year-end assets of $750,000,000 and liabilities of $7,500,000. There were
40,000,000 shares in the fund at year-end. What was the mutual fund's Net Asset Value?
A.
B.
C.
D.
E.
$9.63
$18.58
$16.42
$17.87
$17.26
(750,000,000 - 7,000,000) / 40,000,000 = $18.575
Bodie - Chapter 04 #40
Difficulty: Moderate
41.
A mutual fund had year-end assets of $465,000,000 and liabilities of $37,000,000. If the fund NAV was
$56.12, how many shares must have been held in the fund?
A.
B.
C.
D.
E.
4,300,000
6,488,372
8,601,709
7,626,515
None of the above.
($465,000,000 - 37,000,000) / $56.12 = 7,626,515.
Bodie - Chapter 04 #41
Difficulty: Moderate
42.
A mutual fund had year-end assets of $521,000,000 and liabilities of $63,000,000. If the fund NAV was
$26.12, how many shares must have been held in the fund?
A.
B.
C.
D.
E.
17,534,456
16,488,372
18,601,742
17,542,515
None of the above.
($521,000,000 - 63,000,000) / $26.12 = 17,534,456.
Bodie - Chapter 04 #42
Difficulty: Moderate
43.
A mutual fund had year-end assets of $327,000,000 and liabilities of $46,000,000. If the fund NAV was
$30.48, how many shares must have been held in the fund?
A.
B.
C.
D.
E.
11,354,751
8,412,642
10,165,476
9,165,414
9,219,160
($327,000,000 - 46,000,000) / $30.48 = 9,219,160.
Bodie - Chapter 04 #43
Difficulty: Moderate
44.
A mutual fund had year-end assets of $437,000,000 and liabilities of $37,000,000. If the fund NAV was
$60.12, how many shares must have been held in the fund?
A.
B.
C.
D.
E.
6,653,360
8,412,642
10,165,476
9,165,414
9,219,160
($437,000,000 - 37,000,000) / $60.12 = 6,653,359.947.
Bodie - Chapter 04 #44
Difficulty: Moderate
45.
A mutual fund had NAV per share of $19.00 on January 1, 2007. On December 31 of the same year the
fund's NAV was $19.14. Income distributions were $0.57 and the fund had capital gain distributions of
$1.12. Without considering taxes and transactions costs, what rate of return did an investor receive on
the fund last year?
A.
B.
C.
D.
E.
11.26%
10.54%
7.97%
8.26%
9.63%
R = ($19.14 - 19.00 + .57 + 1.12) / $19.00 = 9.63%
Bodie - Chapter 04 #45
Difficulty: Moderate
46.
A mutual fund had NAV per share of $23.00 on January 1, 2007. On December 31 of the same year the
fund's NAV was $23.15. Income distributions were $0.63 and the fund had capital gain distributions of
$1.26. Without considering taxes and transactions costs, what rate of return did an investor receive on
the fund last year?
A.
B.
C.
D.
E.
11.26%
10.54%
8.87%
8.26%
9.63%
R = ($23.15 - 23.00 + .63 + 1.26) / $23.00 = 8.869%
Bodie - Chapter 04 #46
Difficulty: Moderate
47.
A mutual fund had NAV per share of $26.25 on January 1, 2007. On December 31 of the same year the
fund's rate of return for the year was 16.4%. Income distributions were $1.27 and the fund had capital
gain distributions of $1.85. Without considering taxes and transactions costs, what ending NAV would
you calculate?
A.
B.
C.
D.
E.
$27.44
$33.88
$24.69
$42.03
$16.62
.164 = (P - $26.25 + 1.27 + 1.85) / $26.25; P = $27.435
Bodie - Chapter 04 #47
Difficulty: Moderate
48.
A mutual fund had NAV per share of $16.75 on January 1, 2007. On December 31 of the same year the
fund's rate of return for the year was 26.6%. Income distributions were $1.79 and the fund had capital
gain distributions of $2.80. Without considering taxes and transactions costs, what ending NAV would
you calculate?
A.
B.
C.
D.
E.
$17.44
$13.28
$14.96
$17.25
$16.62
.266 = (P - $16.75 + 1.79 + 2.80) / $16.75; P = $16.615
Bodie - Chapter 04 #48
Difficulty: Moderate
49.
A mutual fund had NAV per share of $36.15 on January 1, 2007. On December 31 of the same year the
fund's rate of return for the year was 14.0%. Income distributions were $1.16 and the fund had capital
gain distributions of $2.12. Without considering taxes and transactions costs, what ending NAV would
you calculate?
A.
B.
C.
D.
E.
$37.93
$34.52
$44.69
$47.25
$36.28
.14 = (P - $36.15 + 1.16 + 2.12) / $36.15; P = $37.931
Bodie - Chapter 04 #49
Difficulty: Moderate
50.
A mutual fund had NAV per share of $37.12 on January 1, 2007. On December 31 of the same year the
fund's rate of return for the year was 11.0%. Income distributions were $2.26 and the fund had capital
gain distributions of $1.64. Without considering taxes and transactions costs, what ending NAV would
you calculate?
A.
B.
C.
D.
E.
$37.93
$34.52
$45.10
$47.25
$36.28
.11 = (P - $37.12 + 2.26 + 1.64) / $37.12; P = $45.1032
Bodie - Chapter 04 #50
Difficulty: Moderate
51.
Differences between hedge funds and mutual funds are that
A. hedge funds are only subject to minimal SEC regulation.
B. hedge funds are typically open only to wealthy or institutional investors.
C. hedge funds managers can pursue strategies not available to mutual funds such as short selling, heavy
use of derivatives, and leverage.
D. are commonly structured as private partnerships.
E. all of the above
Hedge funds are typically open only to wealthy or institutional investors, are commonly structured as
private partnerships, are only subject to minimal SEC regulation, and can pursue strategies not available
to mutual funds such as short selling, heavy use of derivatives, and leverage.
Bodie - Chapter 04 #51
Difficulty: Moderate
52.
Of the following types of mutual funds, an investor that wishes to invest in a diversified portfolio of
stocks worldwide (including the U.S.) should choose
A.
B.
C.
D.
E.
international funds.
global funds.
regional funds.
emerging market funds.
none of the above.
International funds exclude the U.S. but global funds include the U.S.
Bodie - Chapter 04 #52
Difficulty: Moderate
53.
Of the following types of mutual funds, an investor that wishes to invest in a diversified portfolio of
foreign stocks (excluding the U.S.) should choose
A.
B.
C.
D.
E.
International funds
Global funds
Regional funds
Emerging market funds
None of the above
International funds exclude the U.S. but global funds include the U.S.
Bodie - Chapter 04 #53
Difficulty: Moderate
54.
Of the following types of EFTs, an investor that wishes to invest in a diversified portfolio that tracks the
S&P 500 should choose
A.
B.
C.
D.
E.
SPY.
DIA.
QQQ.
IWM.
VTI.
SPY tracks the S&P 500.
Bodie - Chapter 04 #54
Difficulty: Moderate
55.
Of the following types of EFTs, an investor that wishes to invest in a diversified portfolio that tracks the
Dow Jones Industrials should choose
A.
B.
C.
D.
E.
SPY.
DIA.
QQQ.
IWM.
VTI.
DIA tracks the DJIA.
Bodie - Chapter 04 #55
Difficulty: Moderate
56.
Of the following types of EFTs, an investor that wishes to invest in a diversified portfolio that tracks the
Nasdaq 100 should choose
A.
B.
C.
D.
E.
SPY.
DIA.
QQQ.
IWM.
VTI.
QQQ tracks the Nasdaq 100.
Bodie - Chapter 04 #56
Difficulty: Moderate
57.
Of the following types of EFTs, an investor that wishes to invest in a diversified portfolio that tracks the
Russell 2000 should choose
A.
B.
C.
D.
E.
SPY.
DIA.
QQQ.
IWM.
VTI.
IWM tracks the Russell 2000.
Bodie - Chapter 04 #57
Difficulty: Moderate
58.
Of the following types of EFTs, an investor that wishes to invest in a diversified portfolio that tracks the
Wilshire 5000 should choose
A.
B.
C.
D.
E.
SPY.
DIA.
QQQ.
IWM.
VTI.
VTI tracks the Wilshire 5000.
Bodie - Chapter 04 #58
Difficulty: Moderate
59.
Of the following types of EFTs, an investor that wishes to invest in a diversified portfolio that tracks the
MSCI Japan Index should choose
A.
B.
C.
D.
E.
SPY.
EWJ.
QQQ.
IWM.
VTI.
EWJ tracks the MSCI Japan Index.
Bodie - Chapter 04 #59
Difficulty: Moderate
60.
Of the following types of EFTs, an investor that wishes to invest in a diversified portfolio that tracks the
MSCI France Index should choose
A.
B.
C.
D.
E.
SPY.
EWJ.
EWQ.
IWM.
VTI.
EWQ tracks the MSCI France Index.
Bodie - Chapter 04 #60
Difficulty: Moderate
61.
A mutual funds had average daily assets of $3.0 billion in 2007. The fund sold $600 million worth of
stock and purchased $700 million worth of stock during the year. The funds turnover ratio is ___.
A.
B.
C.
D.
E.
27.5%
12%
15%
25%
20%
600,000,000 / 3,000,000,000 = 20%
Bodie - Chapter 04 #61
Difficulty: Moderate
62.
A mutual funds had average daily assets of $2.0 billion on 2007. The fund sold $500 million worth of
stock and purchased $600 million worth of stock during the year. The funds turnover ratio is ___.
A.
B.
C.
D.
E.
27.5%
12%
15%
25%
20%
500,000,000 / 2,000,000,000 = 25%
Bodie - Chapter 04 #62
Difficulty: Moderate
63.
A mutual funds had average daily assets of $4.0 billion on 2007. The fund sold $1.5 billion worth
of stock and purchased $1.6 billion worth of stock during the year. The funds turnover ratio is
____________.
A.
B.
C.
D.
E.
37.5%
22%
15%
45%
20%
1,500,000,000 / 4,000,000,000 = 37.5%
Bodie - Chapter 04 #63
Difficulty: Moderate
64.
A mutual funds had average daily assets of $4.7 billion on 2007. The fund sold $2.2 billion worth
of stock and purchased $3.6 billion worth of stock during the year. The funds turnover ratio is
____________.
A.
B.
C.
D.
E.
37.5%
22.6%
15.3%
46.8%
20.7%
2,200,000,000 / 4,700,000,000 = 46.8%
Bodie - Chapter 04 #64
Difficulty: Moderate
65.
You purchased shares of a mutual fund at a price of $20 per share at the beginning of the year and paid
a front-end load of 5.75%. If the securities in which the find invested increased in value by 11% during
the year, and the funds expense ratio was 1.25%, your return if you sold the fund at the end of the year
would be ____________.
A.
B.
C.
D.
E.
4.33
3.44
2.45
6.87
None of the above
{[$20 * .9425 * (1.11 - .0125)] - $20} / $20 = 3.44%
Bodie - Chapter 04 #65
Difficulty: Difficult
66.
You purchased shares of a mutual fund at a price of $12 per share at the beginning of the year and paid
a front-end load of 4.75%. If the securities in which the fund invested increased in value by 9% during
the year, and the funds expense ratio was 1.5%, your return if you sold the fund at the end of the year
would be ____________.
A.
B.
C.
D.
E.
4.75
3.54
2.65
2.39
None of the above
{[$12 * .9525 * (1.09 - .015)] - $12} / $12 = 2.39%
Bodie - Chapter 04 #66
Difficulty: Difficult
67.
You purchased shares of a mutual fund at a price of $17 per share at the beginning of the year and paid
a front-end load of 5.0%. If the securities in which the find invested increased in value by 12% during
the year, and the funds expense ratio was 1.0%, your return if you sold the fund at the end of the year
would be ____________.
A.
B.
C.
D.
E.
4.75
5.45
5.65
4.39
None of the above
{[$17 * .95 * (1.12 - .01)] - $17} / $17 = 5.45%
Bodie - Chapter 04 #67
Difficulty: Difficult
68.
You purchased shares of a mutual fund at a price of $20 per share at the beginning of the year and paid
a front-end load of 6.0%. If the securities in which the find invested increased in value by 10% during
the year, and the funds expense ratio was 1.5%, your return if you sold the fund at the end of the year
would be ____________.
A.
B.
C.
D.
E.
1.99
2.32
1.65
2.06
None of the above
{[$20 * .94 * (1.10 - .015)] - $20} / $20 = 1.99%
Bodie - Chapter 04 #68
Difficulty: Difficult
69.
List and describe the more important types of mutual funds according to their investment policy and
use.
Some of the more important fund types, classified by investment policy, are:
Money Market Funds - These funds invest in money market securities. They usually offer checkwriting features and NAV is fixed at $1 per share, so that there are no tax implications associated with
redemption of shares. They provide low risk, relatively low return and high liquidity.
Equity Funds - These funds invest primarily in stock, although they may hold other types of securities
at the manager's discretion. They may also hold some money market securities to provide liquidity for
share redemption. Typical objectives are capital gain, growth, growth and income, income, and income
and security.
Bond Funds - These funds specialize in fixed-income securities such as corporate bonds, Treasury
bonds, mortgage-backed securities or municipal bonds. These funds may specialize by maturity or
credit risk as well.
Balanced Funds - These funds may substitute for an investor's entire portfolio. They hold a mix of
fixed-income and equity securities. Income funds try to maintain safety of principal but achieve liberal
current income, while balanced funds seek to minimize risk.
Asset Allocation Funds - These funds also hold both stocks and bonds, but vary the proportions in
accord with the portfolio manager's forecast of the relative performance of each sector. These funds are
engaged in market timing and are therefore higher risk.
Index Funds - These funds try to match the performance of a broad market index. They buy shares in
securities included in a particular index in proportion to the security's representation in that index. Index
funds are a low-cost way for small investors to pursue a passive investment strategy.
Specialized Sector Funds - These funds concentrate on a particular industry or industries. Held alone,
they are not well diversified and may be higher risk.
Feedback: The question is designed to test the student's knowledge of the various types of funds
available and their suitability for different needs.
Bodie - Chapter 04 #69
Difficulty: Moderate
70.
Discuss the taxation of mutual fund income.
Investment returns of mutual funds are granted "pass-through status" under the U.S. tax code, meaning
that taxes are paid only by the investor in the mutual fund, not by the fund itself. The income is treated
as passed through to the investor as long as all income is distributed to shareholders.
Investors will pay taxes at the appropriate rate depending on the type of income. One drawback is that
investors cannot time the sale of securities for maximum tax advantage, unless the funds are held in taxdeferred retirement accounts.
Feedback: The purpose of the question is to determine whether students understand the tax differences
of owning mutual funds as compared to individual investments.
Bodie - Chapter 04 #70
Difficulty: Difficult
71.
What is an Exchange-traded fund? Give two examples of specific ETFs. What are some advantages they
have over ordinary open-end mutual funds? What are some disadvantages?
ETFs allow investors to trade index portfolios. Some examples are spiders (SPDR), which track the
S&P500 index, diamonds (DIA), which track the Dow Jones Industrial Average, and qubes (QQQ),
which track the NASDAQ 100 index. Other examples are listed in Table 4-3. (It is anticipated that there
may soon be ETFs that track actively managed funds as well ad the current ones that track indexes.)
Advantages 1. ETFs may be bought and sold during the trading day at prices that reflect the current value of the
underlying index. This is different from ordinary open-end mutual funds, which are bought or sold only
at the end of the day NAV.
2. ETFs can be sold short.
3. ETFs can be purchased on margin.
4. ETFs may have tax advantages. Managers are not forced to sell securities from a portfolio to meet
redemption demands, as they would be with open-end funds. Small investors simply sell their ETF
shares to other traders without affecting the composition of the underlying portfolio. Institutional
investors who want to sell their shares receive shares of stock in the underlying portfolio.
5. ETFs may be cheaper to buy than mutual funds because they are purchased from brokers. The fund
doesn't have to incur the costs of marketing itself, so the investor incurs lower management fees.
Disadvantages 1. ETF prices can differ from NAV by small amounts because of the way they trade. This can lead to
arbitrage opportunities for large traders.
2. ETFs must be purchased from brokers for a fee. This makes them more expensive than mutual funds
that can be purchased at NAV.
Feedback: This question tests the student's understanding of ETFs.
Bodie - Chapter 04 #71
Difficulty: Difficult
72.
Discuss the consistency of mutual fund performance results, as studied by Goetzmann and Ibbotson
(1994) and Malkiel (1995).
Goetzmann and Ibbotson found that, of mutual funds that performed in the top half of their categories
during an initial period, 62% remained "winners" during the subsequent two-year period. The other 38%
became "losers". Of the funds that performed in the bottom half of their categories during the initial
period, 63.4% remained "losers" in the subsequent two-year period, while 36.6% became "winners". If
performance were purely random, the percentages would be 50%. If performance were due entirely to
the skill of the managers, all winners should remain winners and all losers should remain losers. The
results of the study indicate that there seems to be some skill involved in fund performance trends.
Malkiel broke his study into two time periods. For the 1970s he found results similar to Goetzmann and
Ibbotson. For the 1980s his percentages were much closer to 50%, which indicates that performance
seemed to be more random during this period. Malkiel used one-year returns rather than two-year
returns.
Feedback: This question tests the student's understanding of research on mutual fund performance.
Bodie - Chapter 04 #72
Difficulty: Moderate
ch4 Summary
Category
Bodie - Chapter 04
Difficulty: Difficult
Difficulty: Easy
Difficulty: Moderate
# of
Questions
72
7
9
56