Chapter 4 (Mutual Funds)

Question 1

Closed-End Fund

Answer 1

Shares may not be redeemed, but instead are traded at prices that can differ from net asset value.

Question 2

Exchange-Traded Funds (ETFs)

Answer 2

Offshoots of mutual funds that allow investors to trade index portfolios.

Question 3

Funds of funds

Answer 3

Mutual funds that primarily invest in shares of other mutual funds.

Question 4

Hedge Fund

Answer 4

A private investment pool, open to wealthy or institutional investors, that is exempt from SEC regulation and can therefore pursue more speculative policies than mutual funds.

Question 5

Investment Companies

Answer 5

Financial intermediaries that invest the funds of individual investors in securities or other assets.

Question 6

Load

Answer 6

A sales commission charged on a mutual fund.

Question 7

Net Asset Value (NAV)

Answer 7

Assets minus liabilities expressed on a per-share basis.

Question 8

Open-End Fund

Answer 8

A fund that issues or redeems its shares at net asset value.

Question 9

Soft Dollars

Answer 9

The value of research services that brokerage houses provide “free of charge” in exchange for the investment manager’s business.

Question 10

Turnover

Answer 10

The ratio of the trading activity of a portfolio to the assets of the portfolio.

Question 11

12b-1 Fees

Answer 11

Annual fees charged by a mutual fund to pay for marketing and distribution costs

Question 12

Unit Investment Trust

Answer 12

Money pooled from many investors that is invested in a portfolio fixed for the life of the fund.

Question 13

Characteristics of a Closed-End Fund. 5

Answer 13

• Sold on primary market
• Fixed Amount of Shares
• Traded on secondary market
• Usually sold through brokers
• Premium/Discount of NAV

Question 14

Characteristics of an Open-End Fund. 3

Answer 14

• Shares are bought directly from fund
• Redeem shares (@ NAV) from fund
• Pays redemption’s from cash

Question 15

What are some of the Open-End Costs

Answer 15

• Fees from sales are called loads
• 12b-1 fees- marketing and distribution costs
• Management fees
• Operating expenses - record keeping, etc.

Question 16

Real Estate Investment Trust (REITs)

Answer 16

Similar to a closed-end fund. Invests in real estate or loans secured by real estate.

• > 75% of income from real estate
• > 90% of income to fundholders
• High Dividend yields, but taxable

Question 17

What do life cycle funds do?

Answer 17

• shift assets toward safety as retirement nears
• asset allocation changes as you age
• life cycle funds- diversified

Question 18

Why invest in life cycle fund?

Answer 18

• time diversification
• diminishing human capital
• risk capacity reduces with age

Question 19

What is Active Management?

Answer 19

• a fund where experts pick investments and charge fees

Question 20

What is Passive Management?

Answer 20

• These funds are tied to an index (i.e. S&P 500), low fees

Question 21

What are some things that ruin returns? 5

Answer 21

• Cash holdings
• Size
• Heavy Trading and Brokerage expenses
• Large Turnover and Redemption’s
  - can be reduces through redemption fees
• Poor investor Timing in Funds

Question 22

What three Investment Styles are involved in the Morningstar Style Box?

Answer 22

• Value - as those with low ratios of market price per share to various measures of value.
• Blend-
• Growth- have high ratios, suggesting that investors in these firms must believe that the firm will experience rapid growth to justify the prices at which the stocks sell.

Question 23

What do the three sizes for a morning star style box indicate?

Answer 23

• Large- represents the top 70% of capitalization in the market
• Mid - represents the next 20%
• Low - represents the remaining balance

Question 24

What two dimensions are measured in the morningstar style box for a bond?

Answer 24

• Duration of the Bond

- Interest sensitivity

Question 25

What are the load structures for “A” shares

Answer 25

• commission deducted from investment up-front
• Front-end Loads
• Lower *****
• Charged a .25% 12-B1 fee

Question 26

What Type of Share Class has a back-end load?

Answer 26

“B” Class shares

Question 27

What are some characteristics of “B” Class shares

Answer 27

• Reduced after each year held, then can convert to “A” share with a lower 12b-1 fee
• Often charged a 1% 12b-1 fee

Question 28

Breakpoints

Answer 28

• For load mutual funds, the dollar amount for the purchase of the fund’s shares that qualifies the investor for a reduced sales charge (load). The purchase may either be made in a lump sum or by staggering payments within a prescribed period of time. The latter form of investment purchase in a fund must be documented by a letter of intent.
• For larger investments, “A” shares may be more beneficial

Question 29

Characteristics of class “C” Shares. 4

Answer 29

• lower contingent deferred sales charge than class “B”
• No Front end load
• No Breakpoints, does NOT convert to “A” over time
• More expensive if held for long time-periods

Question 30

What are “I” shares?

Answer 30

• Institutional Shares
• Carry no load for the most part
• little or no 12b-1 fees
• have a low expense ratio

Question 31

What are some general tax rules of a mutual fund?

Answer 31

• Funds are not taxed if diversified and income distributed

- Investor tax on capital gain and dividend distribution

Question 32

What is Portfolio Turnover?

Answer 32

The ratio of trading activity to assets of portfolio.

- This may effect investors tax liability

Question 33

What are some of the benefits for ETF’s?

Answer 33

• Generally have lower fees and taxes than managed funds
• Can be traded just like a stock
• Traded in Secondary Market near NAV
• Buy on margin, sold short

Question 34

What style of management do ETF’s use? (Passive or Active)

Answer 34

• ETF’s are Passively Managed