Mutual Funds and Exchange-Traded Funds

Question 1

actively managed fund

Answer 1

A fund that attempts to “beat the market” by selecting stocks or other securities that will earn abnormally high returns. (Chapter 12)

Question 2

aggressive-growth fund

Answer 2

A highly speculative mutual fund that attempts to achieve the highest capital gains. (Chapter 12)

Question 3

asset allocation fund

Answer 3

A mutual fund that spreads investors’ money across stocks, bonds, money market securities, and possibly other asset classes. (Chapter 12)

Question 4

automatic investment plan

Answer 4

A mutual fund service that allows shareholders to automatically send fixed amounts of money from their paychecks or bank accounts into the fund. (Chapter 12)

Question 5

automatic reinvestment plan

Answer 5

A mutual fund service that enables shareholders to automatically buy additional shares in the fund through the reinvestment of dividends and capital gains income. (Chapter 12)

Question 6

back-end load

Answer 6

A commission charged on the sale of shares in a mutual fund. (Chapter 12)

Question 7

balanced fund

Answer 7

A mutual fund whose objective is to generate a balanced return of both current income and long-term capital appreciation. (Chapter 12)

Question 8

bond fund

Answer 8

A mutual fund that invests in various kinds and grades of bonds, with interest income as the primary objective. (Chapter 12)

Question 9

capital gains distributions

Answer 9

Payments made to mutual fund shareholders that come from the profits that a fund makes from the sale of its securities. (Chapter 12)

Question 10

closed-end fund

Answer 10

A mutual fund with a fixed number of shares outstanding. The fund is closed to new contributions from investors, so investors must buy shares in the fund in the open market. (Chapter 12)

Question 11

conversion (exchange) privilege

Answer 11

Feature of a mutual fund that allows shareholders to move money from one fund to another within the same family of funds. (Chapter 12)

Question 12

dividend income

Answer 12

Income derived from the dividends and interest earned on the security holdings of a mutual fund. (Chapter 12)

Question 13

equity-income fund

Answer 13

A mutual fund that emphasizes current income and capital preservation and invests primarily in high-yielding common stocks. (Chapter 12)

Question 14

expense ratio

Answer 14

A charge, expressed as a percentage of fund assets, that mutual funds charge investors to cover expenses of running the fund. (Chapter 12)

Question 15

fire sale

Answer 15

A sale that occurs when a mutual fund experiences withdrawals by investors and must quickly sell illiquid securities to raise cash to meet withdrawal requests. (Chapter 12)

Question 16

fund families

Answer 16

Different kinds of mutual funds offered by a single investment management company. (Chapter 12)

Question 17

growth fund

Answer 17

A mutual fund whose primary goal is capital appreciation. (Chapter 12)

Question 18

growth-and-income fund

Answer 18

A mutual fund that seeks both long-term growth and current income, with primary emphasis on capital gains. (Chapter 12)

Question 19

hedge funds

Answer 19

Lightly regulated investment funds that pool resources from wealthy investors. (Chapters 1 and 12)

Question 20

index fund

Answer 20

A mutual fund that buys and holds a portfolio of stocks (or bonds) equivalent to those in a specific market index. (Chapter 12)

Question 21

international fund

Answer 21

A mutual fund that does all or most of its investing in foreign securities. (Chapter 12)

Question 22

load fund

Answer 22

A mutual fund that charges a commission when shares are bought; also known as a front-end load fund. (Chapter 12)

Question 23

low-load fund

Answer 23

A mutual fund that charges a small commission when shares are bought. (Chapter 12)

Question 24

management fee

Answer 24

Compensation paid to the professional managers who administer the fund’s portfolio.

Question 25

money market mutual funds (money funds)

Answer 25

Mutual funds that invest solely in short-term investment vehicles. (Chapters 1 and 12)

Question 26

mutual fund

Answer 26

A company that raises money from sale of its shares and invests in and professionally manages a diversified portfolio of securities. (Chapters 1 and 12)

Question 27

net asset value (NAV)

Answer 27

The underlying value of a share of stock in a particular mutual fund. (Chapter 12)

Question 28

no-load fund

Answer 28

A mutual fund that does not charge a commission when shares are bought. (Chapter 12)

Question 29

open-end fund

Answer 29

A mutual fund that issues new shares to investors each time that they send money to the fund. There is no limit to the number of new shares that can be issued and, hence, no limit to the amount of money that people can invest in the fund. (Chapter 12)

Question 30

passively managed fund

Answer 30

A fund designed to mimic the performance of a particular benchmark or index. (Chapter 12)

Question 31

pooled diversification

Answer 31

A process whereby investors buy into a portfolio of securities for the collective benefit of the individual investors. (Chapter 12)

Question 32

real estate investment trust (REIT)

Answer 32

A type of closed-end investment company that sells shares to investors and invests the proceeds in various types of real estate and real estate mortgages; they come in three types: equity REITs, mortgage REITs, and hybrid REITs. (Chapters 12 and 18)

Question 33

redemption fee

Answer 33

A charge that investors pay if they sell shares in the fund only a short time after buying them. (Chapter 12)

Question 34

sector fund

Answer 34

A mutual fund that restricts its investments to a particular segment of the market. (Chapter 12)

Question 35

socially responsible fund

Answer 35

A mutual fund that actively and directly incorporates ethics and morality into the investment decision. (Chapter 12)

Question 36

systematic withdrawal plan

Answer 36

A mutual fund service that enables shareholders to automatically receive a predetermined amount of money every month or quarter. (Chapter 12)

Question 37

target date fund

Answer 37

A mutual fund that follows an asset allocation plan tied to a specific target date, usually decreasing the asset allocation to equities and increasing the allocation to bonds as the target date approaches. (Chapter 12)

Question 38

12(b)-1 fee

Answer 38

A fee levied annually by many mutual funds to cover management and other operating costs. (Chapter 12)

Question 39

unrealized capital gains (paper profits)

Answer 39

A capital gain made only “on paper”—that is, not realized until the fund’s holdings are sold. (Chapter 12)

Question 40

value fund

Answer 40

A mutual fund that invests in stocks that are deemed to be undervalued in the market; value stocks often exhibit low P/E multiples, high dividend yields, and promising futures. (Chapter 12)