Chapter 04

Mutual Funds and Other Investment Companies

Multiple Choice Questions

1. Which 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. The funds offer investors professional management and a guaranteed rate of return.

E. The funds redeem shares at net asset value and offer investors professional management.

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. The funds always trade at a discount from NAV and redeem shares at their net asset value.

E. None of the options

3. Which of the following functions do investment 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 options

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

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

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.

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. REITs invest in real estate or loans secured by real estate and raise capital by borrowing from

banks and issuing mortgages.

E. All of the options 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. REITs may be equity trusts or mortgage trusts and are usually highly leveraged.

E. All of the options 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. They invest in commercial paper, CDs, and repurchase agreements, and they usually offer check-

writing privileges.

E. All of the options are true.

16. In 2012 the proportion of mutual funds (based on total assets) specializing in common stocks was

A. 21.7%.

B. 28.0%.

C. 44.8%.

D. 73.4%.

E. 63.5%.

17. In 2012 the proportion of mutual funds (based on total assets) specializing in bonds was

A. 24.8%.

B. 28.0%.

C. 54.1%.

D. 73.4%.

E. 63.5%.
18. In 2012 the proportion of mutual funds (based on total assets) specializing in money market securities

was

A. 21.7%.

B. 28.0%.

C. 54.1%.

D. 73.4%.

E. 23.2%.

19. In 2012 the proportion of hybrid (bond and stock) mutual funds (based on total assets) was

A. 21.7%.

B. 28.0%.

C. 54.1%.

D. 7.2%.

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. front-end and back-end loads.

E. front-end loads, back-end loads, and 12b-1 charges.

21. The Profitability Fund had NAV per share of $17.50 on January 1, 2012. 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, 2012. 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, 2012. 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. All of the options are advantages of mutual funds.

E. None of the options is an advantage 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

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 2012 which class of mutual funds had the largest amount of assets invested?

A. Equity 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 months 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. $18.56

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 options

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

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, 2012. 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, 2012. 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, 2012. 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, 2012. 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, 2012. 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, 2012. 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. $37.30

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 fund managers can pursue strategies not available to mutual funds, such as short selling,

heavy use of derivatives, and leverage.

D. hedge funds are commonly structured as private partnerships.

E. All of the options

52. Of the following types of mutual funds, an investor who 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.

53. Of the following types of mutual funds, an investor who 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.

54. Of the following types of ETFs, an investor who wishes to invest in a diversified portfolio that tracks

the S&P 500 should choose

A. SPY.

B. DIA.

C. QQQQ.

D. IWM.

E. VTI.

55. Of the following types of ETFs, an investor who wishes to invest in a diversified portfolio that tracks

the Dow Jones Industrials should choose

A. SPY.

B. DIA.

C. QQQQ.

D. IWM.

E. VTI.

56. Of the following types of ETFs, an investor who wishes to invest in a diversified portfolio that tracks

the Nasdaq 100 should choose

A. SPY.

B. DIA.

C. QQQQ.

D. IWM.

E. VTI.
57. Of the following types of ETFs, an investor who wishes to invest in a diversified portfolio that tracks

the Russell 2000 should choose

A. SPY.

B. DIA.

C. QQQQ.

D. IWM.

E. VTI.

58. Of the following types of ETFs, an investor who wishes to invest in a diversified portfolio that tracks

the Wilshire 5000 should choose

A. SPY.

B. DIA.

C. QQQQ.

D. IWM.

E. VTI.

59. Of the following types of ETFs, an investor who wishes to invest in a diversified portfolio that tracks

the MSCI Japan Index should choose

A. SPY.

B. EWJ.

C. QQQQ.

D. IWM.

E. VTI.
60. Of the following types of ETFs, an investor who 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 fund had average daily assets of $3.0 billion in 2012. The fund sold $600 million worth of

stock and purchased $700 million worth of stock during the year. The fund's turnover ratio is

A. 27.5%.

B. 12%.

C. 15%.

D. 25%.

E. 20%.

62. A mutual fund had average daily assets of $2.0 billion in 2012. The fund sold $500 million worth of

stock and purchased $600 million worth of stock during the year. The fund's turnover ratio is

A. 27.5%.

B. 12%.

C. 15%.

D. 25%.

E. 20%.
63. A mutual fund had average daily assets of $4.0 billion in 2012. The fund sold $1.5 billion worth of

stock and purchased $1.6 billion worth of stock during the year. The fund's turnover ratio is

A. 37.5%.

B. 22%.

C. 15%.

D. 45%.

E. 20%.

64. A mutual fund had average daily assets of $4.7 billion in 2012. The fund sold $2.2 billion worth of

stock and purchased $3.6 billion worth of stock during the year. The fund's 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 fund invested increased in value by 11%

during the year, and the fund's 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%.
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 fund's 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%.

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 fund invested increased in value by 12%

during the year, and the fund's 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%.
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 fund invested increased in value by 10%

during the year, and the fund's 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 options

Short Answer Questions

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).