short position is when you borrow stock, sell it, expect price to decrease, rebuy at lower price (hopefully) and give back to brokerClosed-end funds- neither consumer or portfolio can shortOpen-end funds- neither consumer or portfolio can shortExchange traded funds- consumer can short, fund cannotHedge funds- consumer can’t short (they already are), fund can short 9. How do mutual funds and banks differ? What are the similarities? (Use chapters 2 and5 frameworks) Banks - loaning money and accept deposits and payment services; invest in makingLoansMFs - accept “deposits”/investible funds; invest in securities cannot lend out loans;MF is an equity intermediary (risk is on the investors of the fund)Profits:mutual fund makes money on fees. So, if they don’t offer a good return, people will leave: everything based on reputation!10/7/20193
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bank’s guarantee return to investors regardless of the bank’s return so they must not cheat investors.how do you know hedge fund will not cheat investors? they have the owner’s equity or capital invested in so their skin is in the game. if you are managing a bank there are 2 things you must worry about: liquidity and solvency. liquidity:bank ensures liquidity with reserves. (also have secondary reserves)mutual funds are all secondary reserves. why do they not hold reserves of cash?would reduce yield!oopen end MF: must hold very liquid assets MARKETABLE assetsoclosed end MF: liquid assets as well, maybe not as liquid as open endsolvency:banks ensure solvency by having equity. they have debt obligation so the risk lies with bank owners. does MF have to worry about assets losing value MF have equity obligation so risk is passed on to investors. oMutual fund is type of investment company. It raises funds entirely by issuing equity claims or shares. It passes earnings on assets to the holders of these claims, and all risks are borne by holders of the claims. Ina bank, funds are raised by issuing debt claims. A debt intermediary like abank promises a SET return on claims it issues so the return does not depend on the return it earns on assets – therefore the debt intermediary bears the residual risk and takes the residual return. Mutual funds tend to invest in higher risk investments and as a result earn higher returns (money market mutual funds are a little safer). both face similar economies of scale. Both face diseconomies of scale eventually(for mutual fund it is bc the largest mutual funds find it harder to outperformthe market and their purchases and sales of securities tend to have greater impact on market – when they buy the price rises, when they sell the price falls). both have financial, operational and reputational economies of scale. financial econ of scale includelarger portfolios can be more easily diversified.
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