Question 1

A sector fund invests in only one industry.

Accepted Answer

A sector fund specializes in investing in one particular industry, such as technology or healthcare. This allows investors to target a specific sector they believe will perform well, but also exposes them to higher risk if that industry performs poorly.

Question 2

Global and international funds invest in foreign securities.

Accepted Answer

Global and international funds are designed to invest in securities outside of the investor's home country, often diversifying across multiple regions or countries. Therefore, these types of funds typically allocate a significant portion of their portfolio to foreign securities.

Question 3

Money market mutual funds have the protection of FDIC insurance.

Accepted Answer

Money market mutual funds do not have the protection of FDIC insurance. They are regulated by the SEC and are not insured like traditional bank accounts.

Question 4

The following returns were earned last year: Fund A,10%,Fund B,18%,the overall market,11%.Fund A's beta was 0.8 while Fund B's was 2.0.Therefore,the best investment was Fund A.

Accepted Answer

Beta is a measure of the volatility of a stock or portfolio compared to the overall market. If a fund has a higher beta, it is more volatile and has a higher potential return or loss. As Fund B has a higher beta than Fund A, it had a higher potential return but also a higher potential loss. However, since Fund A earned a higher return than the overall market and had a lower risk compared to Fund B, it can be considered the best investment option.

Question 5

Shares of an open-end fund are typically purchased through stockbrokers,while closed-end fund shares are typically purchased directly from the fund.

Accepted Answer

Shares of an open-end fund are typically purchased directly from the fund or through a financial advisor, while shares of a closed-end fund are bought and sold on stock exchanges through brokers, similar to stocks.

Question 6

The following returns were earned last year: Fund A,10%,Fund B,18%,the overall market,14%.Fund A's beta was 0.8 while Fund B's was 2.0.Therefore,the best investment was Fund A.

Accepted Answer

The best investment cannot be determined solely by returns and beta without considering the investor's risk tolerance. Fund A had lower returns but also lower risk (beta), while Fund B had higher returns and higher risk. The best investment depends on the investor's risk preference.

Question 7

You cannot buy an open-end fund at a premium or discount.

Accepted Answer

Open-end funds are bought and sold at their net asset value (NAV) per share, which does not allow for purchasing at a premium or discount; the NAV is calculated at the end of each trading day based on the total value of the fund's assets.

Question 8

"Fund switching" allows investors to switch in and out of IRAs.

Accepted Answer

Fund switching refers to moving investments from one mutual fund to another within the same fund family or investment platform, not in and out of Individual Retirement Accounts (IRAs).

Question 9

One performance measure of a mutual fund is to determine the growth of a given amount of investment,assuming all fund distributions are used to buy more shares of the fund.

Accepted Answer

This performance measure is known as Total Return, which takes into account both the increase in the value of the investment and any distributions (such as dividends or capital gains) that are reinvested back into the fund.

Question 10

Many mutual funds operate without clearly-defined investment objectives.

Accepted Answer

All mutual funds must have clearly-defined investment objectives that are outlined in their prospectus. This is a requirement set by the Securities and Exchange Commission (SEC).

Question 11

A disadvantage of mutual funds is that they cannot be used in IRAs.

Accepted Answer

This statement is false. Mutual funds can be used in IRAs, and in fact, they are a popular investment option for retirement accounts.

Question 12

Fund switching allows you to transfer funds from one mutual fund family to another,as long as both families are approved by the SEC.

Accepted Answer

Fund switching typically refers to transferring investments within the same mutual fund company or family, not between different fund families. Transfers between different fund families would require selling shares in one family and purchasing shares in another, which is not the same as fund switching.

Question 13

You always sell shares of a no-load,open-end fund at their net asset values.

Accepted Answer

No-load, open-end funds do not charge any commission or sales load, and therefore the shares are sold at their net asset value (NAV), which represents the per-share market value of the fund's assets. The NAV is calculated by dividing the total value of the fund's assets by the number of shares outstanding. Investors can buy or sell shares of the fund at the current NAV, which is determined at the end of each trading day.

Question 14

A discount on a closed-end fund can increase its investment return.

Accepted Answer

When a closed-end fund trades at a discount, an investor can acquire the fund's assets for less than their actual value. As a result, the investor can potentially realize a higher investment return when the discount narrows or the fund's assets appreciate in value. However, it should be noted that closed-end funds are subject to market risk and there is no guarantee that their prices will rise or that the discount will narrow.

Question 15

Open-end funds sometimes sell at a discount.

Accepted Answer

Open-end funds sell and redeem their shares at the net asset value (NAV) per share, without discounts or premiums.

Question 16

The more narrowly-defined a mutual fund's objective,the greater its risk,all other things considered.

Accepted Answer

The more narrowly-defined a mutual fund's objective, the more limited its investments, which can increase its risk. For example, a mutual fund that only invests in small-cap technology companies may be riskier than a mutual fund that invests in a broader range of companies and sectors.

Question 17

If your investment goal is merely to match the overall market,you should invest in an index fund.

Accepted Answer

Investing in an index fund is a passive investment strategy that aims to replicate the performance of a particular market index. By investing in an index fund, investors can achieve broad market exposure and diversification in a cost-effective manner. As such, if your investment goal is to match the overall market, investing in an index fund would be a suitable choice.

Question 18

A risk-adjusted rate of return for a mutual fund uses the fund's beta weight.

Accepted Answer

A risk-adjusted rate of return for a mutual fund can take into account the fund's systematic risk, as measured by its beta weight, in order to determine the excess return the fund generates above its expected return given its level of risk. This can provide a more accurate measure of the fund's performance compared to other funds or benchmarks.

Question 19

A fund with a beta of 0.6 earned a return of 8%.During the same period of time the market return was 12%,which means the fund manager outperformed the market.

Accepted Answer

The answer of A fund with a beta of 0.6...

Question 20

A mutual fund's reinvestment plan allows you to buy additional shares in a fund from the fund's dividends.

Accepted Answer

A mutual fund's reinvestment plan, also known as a dividend reinvestment plan (DRIP), allows investors to automatically reinvest the cash dividends received from the fund back into the fund by purchasing additional shares. This can help to compound investment returns over time.

Quiz 12: Mutual Fundsother Pooling Arrangements: Simplifying, Maybe Improving Investment Performance