Pooled Investments

Question 1

NAV

Answer 1

(Assets-Liabilities)/Shares outstanding

Question 2

Unit Investment Trust

Answer 2

Investment company that owns fixed set of securities for the life of the company (most hold fixed income securities) 6mos-20yrs, more popular in Europe

Question 3

How are UITs formed and managed?

Answer 3

Sponsor purchases securities and deposits with trustee/bank
Redeemable trust certificates are sold to the public
Pay out income and repayments of principal
(Passively managed)

Question 4

Mutual funds

Answer 4

Investment companies that take pooled assets and purchase securities based on objectives

Question 5

Advantages of MF

Answer 5

Diversification, professional management, min transaction costs, liquidity, flexibility (7,900+ MF), and service

Question 6

Disadvantages of MF

Answer 6

Underperformance, costs, risks, systematic risk, taxes, unrealized cap gain, style drift, transaction price, poor for estate planning

Question 7

Investment Company Act of 1940 provided what two classifications for investment companies?

Answer 7

Unit investment trusts and managed investment companies (open and closed-end funds)

Question 8

Closed-end fund quotations

Answer 8

Market prices are published daily if listed on an exchange or traded actively in the over-the-counter market, NAV published weekly and based on Friday’s closing price
Discount if market price share<NAV
Premium if > NAV

Question 9

How are closed end funds traded?

Answer 9

On an organized exchange or over-the-counter market. They do not purchase their own shares

Question 10

What can an investor earn if purchasing a closed end fund shares at a discount?

Answer 10

Change in NAV, higher dividend yield than similar no-load, open-end investment company; if discount is substantial, the return will be greater

Question 11

ETFs

Answer 11

type of closed-end investment company which offers the same trading flexibility of a stock and with lower expense ratios

Question 12

No-load funds

Answer 12

Charge lower transaction costs and provide fewer services

Question 13

Front load funds

Answer 13

Cost of advertising, education and promotion (can’t >8.5% of invested amount)

Question 14

12b-1 Fee

Answer 14

Annual distribution fee can’t be more than 1% of ave market value of total assets to pay for marketing expenses

Question 15

Contingent deferred sales charge (CDSC)

Answer 15

Load is paid when shareholder sells shares (starts at 507% and declines 1% for each year held until 0.

Question 16

Share Class Fees and Loads

Answer 16

Class A shares: front load which can be reduced through breakpoints for larger investments. Typically charge a lower 12b-1 fee.
Class B shares: shares with CDSC charge plus a 12b-1 fee. After the CDSC’s term is up, the Class B share may convert to Class A shares.
Class C shares: charge an annual 12b-1 fee.

Question 17

Open end fund quotations

Answer 17

Based on NAV at close of trading day. Fees and loads are also based on NAV

Question 18

How do ETFs compare with open-end funds?

Answer 18

Greater trading flexibility and lower expenses since indexing instead of active management

Question 19

Money Market Funds

Answer 19

Holds ST fixed income instruments like CDs, commercial paper and treasury bill. Manager extracts between .25-1% of ave value of total assets), usually carry no load charges. Dividends declared daily

Question 20

Bond funds

Answer 20

Fixed income securities vary from conservative/ST Treasury notes to aggressive LT high yield bonds

Question 21

Caveats for using Morningstar

Answer 21

Indices may not be appropriate benchmarks for comparing all types of funds
Performance measures fdon’t indicate which approach is used for abnormal returns
Peer group comparisons to evaluate performance has shortcomings
Survivorship bias skews comparisons

Question 22

Benefits of hedge funds

Answer 22

diversification benefits due to their low-correlation with long-only funds. Uses shorting, leverage, concentration, and derivatives to achieve superior returns and to reduce risk

Question 23

Five HF segments

Answer 23

1. Fundamental Long/Short Funds
   Strategy: Seek out mispriced securities based on the business prospects of firms, utilizing both long and short positions.
   Use of Leverage: Maintain leverage positions from slightly short to 100% long.
   Risk Control: Often accomplished through market-neutral strategies. The goal is to eliminate systematic risk.
2. Quantitative Long/Short Funds
   Investment Strategy: Seek out mispriced securities using statistical analysis, which is applied to historical data.
   Use of Leverage: A high degree of leverage is used to capitalize on small but statistically significant return opportunities.
   Risk Control: Using derivatives and net neutral positions, managers eliminate all risk except the risk that is viewed as profitable.
3. Arbitrage/Relative Value Funds
   Investment Strategy: Seek out basic mispriced securities.
   Use of Leverage: A high degree of leverage is used to capitalize on otherwise small pricing differences.
   Risk Control: Necessary to eliminate broad market risk in order to capitalize on relative mispricing.
4. Macro Funds
   Investment Strategy: Seek out mispriced securities in global stock, currency, and bond markets.
   Use of Leverage: Is kept to a minimum due to the lack of adequate risk control.
   Risk Control: Difficult to achieve because of the low correlation between currencies and indices within a market.
5. Funds of Funds
   Investment Strategy: Seek out diversification by investing in a variety of hedge funds.
   Use of Leverage: Although the underlying hedge fund investments use leverage, the use of leverage at the Funds of Funds level is not used.
   Risk Control: Is achieved through diversification of the underlying hedge funds.

Question 24

What are advantages of separately managed accounts (SMAs) over MFs?

Answer 24

Individual security selection
Social responsibility investing
Tax management

Question 25

REITs

Answer 25

Closed-end investment companies that invest in real estate. REITs generate return to investors from income and gains associated with the underlying properties. A REIT that owns apartment buildings will pass the rent to investors as income. A REIT that owns mortgages will pass mortgage payments to investors. A REIT that owns equity in properties will pass the profits of the property. A change in the property value would increase the price of the REIT that owns it. REITs invest in real estate and therefore would not own equipment.

Question 26

LPs

Answer 26

direct participation programs where the result of the investment is passed to the directors including losses, limited liability is dependent on their passivity in GPs’ management decisions

Question 27

Hedge funds

Answer 27

pooled investment vehicles that primarily invest in publicly traded securities and their derivatives. Hedge funds tend to have diversification benefits due to their low-correlation with long-only funds.

Question 28

Which hedge fund segment aims to take advantage basic mispriced securities using a high degree of leverage?

Answer 28

Arbitrage/Relative Value Funds

Question 29

If inflation is at 3% and your investment account returns 5%, what is your inflation-adjusted rate of return?

Answer 29

[(1.05 ÷ 1.03) – 1] x 100 = 1.9417 = 1.94%

Question 30

Typically, ________ shares of an open-end fund are shares with CDSC charge plus a 12b-1 fee.

Answer 30

Typically, Class B shares of a fund are shares with CDSC charge plus a 12b-1 fee. After the CDSC’s term is up, the Class B share may convert to Class A shares.

Question 31

Each of the following are potential disadvantages associated with investing in mutual funds EXCEPT:

Unrealized Capital Gain
Overall Costs
Estate Planning Utility
Service Quality

Answer 31

Service is an advantage of mutual fund investing.

Mutual funds can provide you with a number of services including book-keeping services, checking accounts and automatic systems which help you to add or withdraw from your account, as well as buy or sell over the phone or the Internet.

Question 32

A charge that is assessed to an investor that sells prior to the agreed-upon holding period is known as a

Answer 32

A contingent deferred sales charge (CDSC) may be assessed to an investor that sells the fund prior to an agreed-upon holding period

Question 33

A mutual fund that trades on secondary markets is known as a ________________.

Answer 33

closed-end funds do not stand ready to purchase their own shares. Instead, the shares of these funds are traded in either an organized exchange or an over-the-counter market.