1. Which of the following is not a characteristic of investments companies?

A) pooled investing
B) diversification
C) managed portfolios
D) reduced expenses
Ans: D

2. In order to avoid paying income taxes, an investment company must:

A) be classified as a non-profit organization
B) invest only in municipal bonds.
C) pass on interest, dividends, and capital gains to the stockholders.
D) be registered as a closed-end investment company.
Ans: C

3. Investment companies must register with the SEC under the provisions of the:
A) Securities Act of 1933
B) Securities Exchange Act of 1934
C) Maloney Act of 1938
D) Investment Company Act of 1940
Ans: C

4. The most popular type of investment company is a:

A) unit investment trust.
B) mutual fund.
C) closed-end investment company
D) real estate investment trust.
Ans: B

5. An unmanaged fixed income security portfolio handled by an independent trustee

is known as a:
A) junk bond fund
B) closed-end investment company.
C) unit investment trust.
D) hedge fund.
Ans: C

6. Which of the following is a major objective of unit investment trusts?

A) capital preservation
B) capital gains
C) current income
D) tax deferment

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Ans: A

7. A major difference between a closed-end investment company and an open-end

investment company is that:
A) closed-end investment companies are generally much riskier.
B) their security portfolios are substantially different.
C) closed-end investment companies are passive investments and open-ends are not.
D) closed-end companies have a more fixed capitalization.
Ans: D

8. . Which of the following generally trade on stock exchanges?

A) unit investment trusts
B) closed-end investment companies
C) open-end investment companies
D) All trade on stock exchanges.
Ans: B

9. Which of the following statements concerning the trend in investment company

growth is true?
A) The recent trend shows more growth in closed-end investment companies.
B) The recent trend shows more growth in unit investment trusts.
C) The recent trend shows more growth in open-end investment companies.
D) All investment companies have been growing at an equal rate.
Ans: C

10. Which of the following is not one of the characteristics of exchange traded funds
(ETFs)?
A) They are passive portfolios.
B) They are managed investments.
C) They often track a particular sector of the market.
D) All of the above are characteristics of ETFs.
Ans: B

11. It is not important to have a secondary market for mutual funds because:
A) investors hold the securities till maturity.
B) investors trade between themselves.
C) investors sell their shares back to the company.
D) banks will cash their shares as long as they have accounts at the bank.
Ans: C

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 12. Which of the following is not an ETF (exchange traded fund)?
A) Spider
B) Clubs
C) Cubes
D) Diamonds
Ans: B

13. Which of the following is true regarding ETFs?

A) They trade on exchanges like individual stocks.
B) They can be bought on margin or sold short.
C) They have management fees higher than other mutual funds.
D) All of the above are true regarding ETFs.
Ans: C

14. A group of mutual funds with a common management are known as:
A) fund syndicates.
B) fund conglomerates.
C) fund families.
D) fund complexes.
Ans: D

15. Which of the following is not true regarding money market funds?
A) They charge no sales charge, redemption fee or management fee.
B) Their maximum average maturity is 90 days.
C) Normally, there are no capital gains or losses on their shares.
D) All of the above are true.
Ans: A

16. If a mutual fund holds a substantial amount of Treasury bills, this is probably
a(an):
A) tax-exempt fund.
B) conservative bond fund.
C) income fund
D) money market mutual fund.
Ans: D

17. Which of the following is true regarding value funds and growth funds?
A) Value funds seek stocks that are cheap by fundamental standards while growth
funds seek stocks with high current earnings.
B) Growth funds typically outperform value funds.
C) Value funds and growth funds tend to perform well at different times.

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D) All of the above are true.
Ans: C

18. In general, index funds:

A) are higher risk than other funds.
B) are traded on the exchanges.
C) have lower expenses than other funds.
D) all of the above.
Ans: B

19. Net asset value takes into account:

A) both realized and unrealized capital gains.
B) only realized capital gains.
C) only unrealized capital gains.
D) neither realized or unrealized capital gains.
Ans: A

20. If NAV > market price of a fund, then the fund:

A) is selling at a discount.
B) is selling at a premium.
C) is an index fund.
D) is an ETF.
Ans: A

21. Mutual funds may be affiliated with an underwriter. This means:

A) the underwriter has an exclusive right to distribute shares.
B) the underwriter selects the securities in the portfolio.
C) there is no risk to the issuer of the mutual fund.
D) there is no risk to the investor of the mutual fund.
Ans: A

22. A loading fee is a:

A) type of income tax.
B) management fee.
C) origination fee.
D) sales charge.
Ans: D

23. A 12b-1 fee is a:

A) redemption fee.

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B) sales charge
C) distribution fee.
D) loading fee.
Ans: C

24. No-load funds sell:

A) at net asset value.
B) below net asset value.
C) above net asset value.
D) at a discount.
Ans: A

25. No-loads charge no sales fee because:

A) they are legally prohibited from doing so.
B) they charge a redemption fee instead.
C) they have no sales force.
D) they charge a 12b-1 fee instead.
Ans: C

26. Which of the following types of mutual fund shares typically does not charge a
front-end sales charge but does impose a redemption fee that declines over time?
A) Class A shares
B) Class B shares
C) Class C shares
D) Class D shares
Ans: B

27. Which brokerage firm was charged in 2004 with allowing late trading of mutual
funds for some of its clients?
A) Merrill Lynch
B) E. F. Hutton
C) Charles Schwab
D) Edward D. Jones
Ans: D

28. Which of the following statements regarding fund expenses and performance is
true?
A) The higher-performing funds generally have the highest expenses.
B) The stock funds generally have higher expenses than bond funds.
C) The index funds generally have higher expenses than non-index funds.
D) The lower performing funds generally have the highest expenses.

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Ans: D

29. In the mutual fund industry, the most common performance measure is a
hypothetical rate of return which assumes performance is constant over the entire
period and is known as the:
A) cumulative total return.
B) average annual total return.
C) total indexed return.
D) compounded geometric return.
Ans: B

30. On average, which type of mutual fund is expected to have the highest
performance?
A) money market funds
B) bond funds
C) equity funds
D) municipal bond funds
Ans: C

31. Global funds tend to keep ___________ percent of their assets in ___________.
A) 50; foreign securities.
B) 50; single-country securities.
C) 25; foreign securities.
D) 25; United States.
Ans: D

32. Single-country funds have traditionally:

A) outperformed international funds.
B) underperformed international funds.
C) been open-end.
D) been; closed-end.
Ans: D

33. The 2 largest fund supermarkets are:

A) Merrill Lynch and Charles Schwab
B) Edward D. Jones and Vanguard
C) Vanguard and Fidelity
D) Charles Schwab and Fidelity
Ans: D

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 34. A portfolio of directly-owned individual securities guided by an investment
manager is known as a:
A) IRA.
B) IMA.
C) SMA.
D) DCA.
Ans: C

35. Unregulated companies that seek to exploit various market opportunities and
require a substantial investment from investors are known as:
A) derivatives.
B) options.
C) hedge funds.
D) SMAs.
Ans: C

36. Each investment company investor shares in the returns of the fund's portfolio
and also shares in the cost of running the fund.
A) True
B) False
Ans: A

37. Buying shares of a mutual fund is an example of indirect investing.

A) True
B) False
Ans: A

38. To qualify as a regulated investment company, a fund must distribute at least 50

percent of its taxable income to the shareholders.
A) True
B) False
Ans: B

39. Under the Securities Act of 1933, investment companies are required to register
with the SEC.
A) True
B) False
Ans: B

40. Most unit investment trusts are considered active investments.

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A) True
B) False
Ans: B

41. ETFs are managed investment portfolios that offer investors targeted
diversification.
A) True
B) False
Ans: B

42. Many ETFs report little or no capital gains over the years giving them greater tax
efficiency than many mutual funds.
A) True
B) False
Ans: A

43. Closed-end investment companies typically sell additional shares of its own stock
every few years.
A) True
B) False
Ans: B

44. Almost 70 percent of all U.S. households owned mutual funds as of 2005.
A) True
B) False
Ans: B

45. Investment company managers seek to increase the size of the funds being
managed as the cost of oversee additional amounts of money rises less than the
revenue rate.
A) True
B) False
Ans: A

46. Approximately 85 percent of money market assets are in non-taxable funds.

A) True
B) False
Ans: B

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 47. You would expect a value fund to buy stock based on a sound earnings record
while growth funds might invest in companies with no earnings record at all.
A) True
B) False
Ans: A

48. Loaded funds generally outperform the no-load funds.

A) True
B) False
Ans: B

49. Both open-end and closed-end investment company shares may sell at a discount
from NAV.
A) True
B) False
Ans: B

50. A 12b-1 fee is used to cover a fund's cost of distribution.

A) True
B) False
Ans: A

51. Investors desiring no-load funds must generally seek them out since there is no
sales force.
A) True
B) False
Ans: A

52. No-load funds charge a one-time expense fee to cover all operating expenses.
A) True
B) False
Ans: B

53. The net asset value of a mutual fund does not consider unrealized capital gains.
A) True
B) False
Ans: B

54. Index funds tend to have lower expenses than other funds because they are larger

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 in size.
A) True
B) False
Ans: B

55. Total return for a mutual fund includes capital gains less any reinvested
dividends.
A) True
B) False
Ans: B

56. Under its new system, Morningstar ranks funds against comparable funds in
approximately 50 categories.
A) True
B) False
Ans: A

57. It is possible under the new Morningstar ratings that one class of shares of a
mutual fund can have a different rating that another class of shares of the same
mutual fund.
A) True
B) False
Ans: A

58. Survivorship bias occurs when mutual funds are merged or liquidated and only
surviving funds' performance is reported.
A) True
B) False
Ans: A

59. Global funds tend to hold a higher percentage of their portfolio in U.S. securities
than do international funds.
A) True
B) False
Ans: A

60. The major advantage of Separately Managed Accounts (SMA) is control and the
direct owner may be able to specify investment restrictions.
A) True
B) False

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Ans: A

61. Hedge funds typically require a large initial investment and may have restrictions
on how quickly investors can withdraw their funds.
A) True
B) False
Ans: A

62. Briefly explain the fees charged by funds.

Ans: Load fees are sales charges, management fees include advisory fees and operating
expenses, and 12b-1 fees are marketing expenses.

63. What are the main differences between a closed-end and an open-end investment
company?
Ans: A closed-end investment company has a fixed number of shares, and the price
depends on supply and demand. An open-end fund's shares increase as long as
new investors contribute money, and the price is the net asset value of the
securities owned.

64. What is the difference between the insurance offered by the Securities Investor
Protection Corporation (SIPC) and that offered by the Federal Deposit Insurance
Corporation (FDIC)?
Ans: The FDIC insures accounts at banks from bank failures..
The SIPC provides insurance against the brokerage company going bankrupt.

65. Would one expect to find higher P/E ratios in an aggressive growth fund or in a
growth and income fund?
Ans: One would expect higher P/Es in an aggressive growth fund because investors are
willing to pay a high current price for expected future growth.

66. Would you recommend a 65-year old retiree to invest all of his/her retirement
assets in an income fund?
Ans: Probably not. The retiree will probably have a long time to live and should
consider investing part of the portfolio in growth funds to provide protection
against inflation.

67. You have decided to invest in an aggressive growth fund for long-run future
needs. You have a publication listing a number of such funds with their most
recent 12-month total returns. Is this a good predictor of future performance?

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Ans: Not necessarily. The best fund last year may or may not be in the rankings next
year. The literature is divided on the usefulness of past performance in predicting
fund performance in the future. Some investors prefer longer-run performance
measures such as five-year or ten-year compounded returns, but none are sure-fire
guides to future performance.

68. How is the individual investor's income tax position affected by owning
investment companies compared to owning securities directly?
Ans: The investor's tax position should be the same whether he/she invests indirectly
through an investment company or directly in the securities themselves. The
investment companies are intermediaries that pass on income and losses to the
shareholder.

69. Does one mutual fund provide all the diversification that an investor needs?
Ans: One fund typically has many (perhaps several hundred) securities, which should
provide adequate diversification for risks that are unique to any particular
company. Nonetheless, some investors prefer to invest in several funds in order to
participate in more than one market and to gain some protection from market risk
in a particular market.

70. Is an investor able to achieve significant diversification by purchasing a single-

country fund?
Ans: The fund itself might be well diversified within that country if the fund owns a
wide variety of securities. However, an investor is seeking international
diversification would not be well diversified in terms of country risk and
exchange-rate risk.

71. What are some of the advantages individual investors seek by buying mutual
funds or closed-end investment company shares rather than through purchasing
securities directly?
Ans: Substantial diversification even for a small amount of funds, professional
management (questioned by some), international securities, capability to
participate in the money market with a small investment.

72. An environmentally-friendly balanced mutual fund began the year with a net
asset value (NAV) of $12.25 per share. During the year it received $1.00
dividend and interest income, $0.25 in realized capital gains, and $0.50 in
unrealized capital gains. Ninety percent of the income and all of the realized
capital gain were distributed to shareholders. Calculate the year-end NAV.
Ans:
Beginning NAV $12.25

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 Income from investment operations
net investment income $1.00
net realized and unrealized gain ($.25 + .50) 0.75
Total income from investment operations $1.75

Less distributions to shareholders

from net investment income (90% x $1) ($0.90)
from net realized capital gain (0.25)
Total distribution ($1.15)

Ending NAV $12.85

73. An aggressive equity mutual fund began the year with a net asset value (NAV) of
$6.50 per share. During the year it received $0.15 dividend income, $1.25 in
realized capital losses, and $0.50 in unrealized capital gains. Ninety percent of
the income was distributed to shareholders. Calculate the year-end NAV.
Ans:
Beginning NAV $6.50
Income from investment operations
net investment income $0.15
net realized and unrealized gain (-$1.25 + .50) (0.75)
Total income from investment operations ($0.60)

Less distributions to shareholders

from net investment income (90% x $.15) ($0.135)
from net realized capital gain -
Total distribution ($0.135)

74. You invested $10,000 10 years ago into Fly-By-Night Fund which has reported
performance (average annual total return) of 11.12% over this 10-year period.
What would your ending wealth position be?
Ans: on a financial calculator: 10000 PV, 11.12 interest rate, 10 N, 0 pmt, solve for FV
= $28,702.67. Subtract your initial investment of $10,000, which results in
$18,702.67 cumulative total dollar return.

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