Chapter 4 In Class Notes

Question 1

Mostly a portfolio of bonds. They start the bonds and just leave it alone. Money pooled from many investors is invested in portfolio fixed for life of fund (unmanaged)
�Low fees because it’s unmanaged.

Answer 1

Unit Investment Trusts

Question 2

two types of actively managed funds

Answer 2

Open ended and closed ended funds.

Question 3

Has a fixed number of shares. Don’t buy straight through. You buy through exchange.
Investment Companies. ETF (Exchange traded funds) actively managed

Answer 3

Closed end

Question 4

: Issues or redeems shares at NAV

�Mutual funds. Actively managed.

Answer 4

Open ended fund

Question 5

Partnership of investors pooling funds; designed for trusts/larger retirement accounts to get professional management for fee
�

Answer 5

Commingled Funds

Question 6

Trades on exchange. Some buy physical properties and some buy paper. Similar to closed-end funds, invests in real estate/real estate loans
�Allows you to invest in real estate even if you only have like 2,000

Answer 6

Real Estate Investment Trusts (REITs)

Question 7

The average small investor never invests in this. Requires a great deal of money and very risky.

Answer 7

Hedge Funds

Question 8

Mutual Funds. List 4 types

Answer 8

Investment Policies, Equity funds, specialized sector funds, bond funds.

Question 9

Global funds invest in securities worldwide, including U.S.
International funds invest outside U.S.
Regional funds focus on particular part of world
Emerging market funds invest in developing nations

Answer 9

Investment Policies

Question 10

Hold both equities and fixed-income securities in stable proportion
Life-cycle funds: Asset mix ranges from aggressive to conservative
Static allocation funds maintain stable mix across stocks and bonds
Targeted maturity funds become more conservative as investor ages
Funds of funds: Mutual funds that primarily invest in other mutual funds

Answer 10

Balanced Funds

Question 11

You invest in a mutual fund and instead of picking stocks and bonds, they go to other mutual funds.

Answer 11

Funds to Funds

Question 12

and flexible funds

Stocks and bonds—proportion varies according to market forecast

Answer 12

Asset allocation

Question 13

Try to match performance of broad market index
Buy shares in securities included in particular index in proportion to security’s representation in index. Instead of trying to beat the market, you’re trying to buy the market. A lot cheaper because they don’t pick the best companies. They buy all of them.

Answer 13

Index Funds.

Question 14

Next few questions are on types of expenses when investing.

Answer 14

.

Question 15

Costs incurred by mutual

fund in operating portfolio

Answer 15

Operating Expenses

Question 16

Commission or sales charge paid when purchasing shares . When you get an advisor to help you.

Answer 16

Front-end load

Question 17

Sometimes they hit you with this fee when you leave the mutual fund. It’s an incentive to keep your money there.

Answer 17

Back-end load

Question 18

Annual fees to pay for marketing costs

Answer 18

12b-1 charges

Question 19

Has very low fees and covers all of the market. Kind of like an index fund.

Answer 19

ETF

Question 20

How to calculate Rate of Return on Mutual Fund returns

Answer 20

(NAV1 - NAV0 + Income + Capital gains distribution)/ NAV0

Question 21

Taxation of Mutual Fund Income

Answer 21

The mutual fund does not pay the taxes. They pass everything onto the investor/client. Fund not taxed if diversified and income distributed
Investor taxed on capital gain and dividend distributions
Turnover: Ratio of trading activity to assets of portfolio
Portfolio turnover may affect investor’s tax liability

Question 22

Trade like a stock. Trade like an index so they have low costs. Trade continuously throughout day
Can be sold or purchased on margin
Potentially lower tax rates
Lower costs (no marketing, lower fund expenses)

Answer 22

ETF (exchange-traded fund)

Question 23

Disadvantages of an ETF

Answer 23

Small deviations from NAV possible. Not that bad though. Pay commission every time you buy or sale. If you trade a lot, not good.

Question 24

On average, mutual fund performs

Answer 24

Less than broad market performance

Question 25

NAV Formula

Answer 25

(Market value of the funds - Liabilities)/# of shares outstanding