Question 1

Which of the following mutual funds is likely to have the highest dividend yield?

Accepted Answer

Equity income funds typically focus on investing in stocks with strong dividend-paying histories, and therefore are likely to have a higher dividend yield than other types of mutual funds that may prioritize growth or other investment objectives.

Question 2

Why did income trusts become less popular with investors in Canada after October 31, 2006?

Accepted Answer

After October 31, 2006, the Canadian government announced a new income trust tax which increased taxes on income trusts. This made income trusts less popular with investors in Canada as they were no longer seen as tax-efficient investments.

Question 3

To analyze a mutual fund, we pay the least attention to its

Accepted Answer

Trading volume is largely irrelevant when analyzing a mutual fund, as it has no meaningful impact on the fund's performance or potential for success. Factors such as degree of diversification, market timing, management expense ratio, and risk level are all more important to consider in evaluating a mutual fund's potential for success.

Question 4

Which of the following is not a reason to pay fees and expenses associated with mutual funds?

Accepted Answer

Mutual funds do not necessarily always have greater returns than the stock market as a whole, and this is not a reason to pay fees and expenses associated with mutual funds. It is important to consider the fund's track record and potential for returns, but this should not be the sole reason for paying fees and expenses. The other options are valid reasons for paying fees and expenses associated with mutual funds.

Question 5

Which of the following is a drawback of diversification?

Accepted Answer

Diversification can limit the potential for large returns because it spreads investments across various assets to reduce risk, which may dilute the impact of high-performing investments.

Question 6

All of the following expenses are reported in a mutual fund's prospectus except:

Accepted Answer

Trading costs are not typically reported in a mutual fund's prospectus. These costs are incurred from buying and selling securities within the fund's portfolio and are not directly charged to investors as explicit fees, making them less visible in the prospectus documentation.

Question 7

Which of the following mutual funds will be the best in providing current income, safety of principal and liquidity?

Accepted Answer

Money market funds are specifically designed to provide current income, safety of principal, and liquidity. These funds invest in high-quality, short-term debt securities, which provide a predictable stream of income and are considered a safe investment. Money market funds are also highly liquid, providing investors with easy access to their funds when needed. Income funds and balanced funds may provide current income, but they may not prioritize safety of principal, while exchange-traded funds may have higher volatility and may not prioritize current income or safety of principal.

Question 8

Which of the following mutual funds might try to time the market to achieve superior performance?

Accepted Answer

Asset allocation funds actively adjust their asset mix (e.g., stocks, bonds, cash) aiming to capitalize on market trends or economic conditions, which can be seen as a form of market timing to achieve superior performance.

Question 9

In order to be treated as a "flow-through entity" for tax purposes, a mutual fund must do which of the following?
I. It must hold almost all of its assets in stocks, bonds, and other securities.
II. It must follow investing rules set by the Canada Revenue Agency.
III. It must pass through all realized investment income to its shareholders.

Accepted Answer

To be treated as a "flow-through entity" for tax purposes, a mutual fund must hold almost all of its assets in stocks, bonds, and other securities, follow investing rules set by the Canada Revenue Agency, and pass through all realized investment income to its shareholders.

Question 10

A mutual fund is owned by:

Accepted Answer

Mutual funds are owned by shareholders who purchase shares in the fund. The shareholders collectively own the assets of the mutual fund. The fund management, fund family, board of directors, and fund investment advisor are all involved in managing the fund, but they do not own it.

Question 11

Which of the following types of mutual funds will likely have the most stable net asset value?

Accepted Answer

Money market funds invest in short-term, low-risk securities such as Treasury bills and commercial paper, and aim to maintain a stable net asset value of $1 per share. Therefore, they are the most likely type of mutual fund to have a stable net asset value.

Question 12

Which of the following fees and expenses are most important for long-term investors?
I. Management fees.
II. Front-end loads.
III. Deferred sales charges.
IV. Annual administrative fees.

Accepted Answer

For long-term investors, the most important fees and expenses are those that have a direct impact on their investment returns. Management fees (I) are important because they are an ongoing expense that will erode investment returns over time. Annual administrative fees (IV) are also important as they are charged every year and can add up over the long-term. Front-end loads (II) and deferred sales charges (III) are less important for long-term investors as they are one-time fees that are paid upfront or upon redemption. As such, the best choice is B, which includes both management fees and annual administrative fees.

Question 13

Money market mutual funds

Accepted Answer

Money market mutual funds may offer limited check-writing features, allowing investors to easily access their funds while still earning interest. None of the other options mentioned are entirely accurate. Money market mutual funds are not necessarily offered by all banks and mutual fund families, as some may choose not to invest in this type of fund. They are not identical to money market deposit accounts, as the two have different structures and insurance protections. Money market funds may invest in a range of securities, but generally focus on short-term options. Finally, they are not guaranteed by the CDIC, as they are not deposit accounts.

Question 14

You have purchased shares of the AGF Stock Fund for just a week. However, you decide you want to invest in a bond fund so you move your investment to the AGF Bond Fund. If the company charges you a fee of $30, this charge is considered as a(n):

Accepted Answer

This charge is considered a short-term trading fee, which is often imposed by mutual funds or investment companies to discourage investors from making rapid, potentially disruptive trades in and out of funds.

Question 15

Which of the following is false concerning the money market mutual funds?

Accepted Answer

Money market mutual funds are actually open-end funds, meaning that they issue and redeem shares on demand.

Question 16

Which of the following is an advantage of purchasing mutual funds?

Accepted Answer

A mutual fund allows for diversification by pooling the money of multiple investors and investing in a range of securities. Thus, it enables an investor to spread their investment across many securities without having to purchase numerous securities individually. This diversification reduces the risk of losses from any single security, and also provides access to a wide range of securities that an individual investor might not be able to afford or invest in.

Question 17

The net asset value of a money market mutual fund

Accepted Answer

The net asset value (NAV) of a money market mutual fund can fall below $10, although it is typically maintained at $1 per share in the U.S. However, it is not guaranteed and can fluctuate based on the underlying assets' performance.

Question 18

Which of the following fund types would likely have the lowest turnover?

Accepted Answer

Index funds are designed to track a specific market index, such as the S&P 500, and therefore have a low turnover rate as they only buy and sell securities within that index when the index itself changes. Capital appreciation funds, social conscience funds, corporate bond funds, and international stock funds may have higher turnover rates as they actively manage their portfolios to achieve their investment objectives.

Question 19

To avoid taxation, tax-managed fund manager must:

Accepted Answer

To avoid taxation, tax-managed fund managers employ various strategies including matching realized gains with realized losses, holding down turnover to minimize taxable capital gains, focusing on the tax liabilities of fund owners, and emphasizing earnings and cash flows. All these strategies are aimed at managing the fund in a way that minimizes the tax burden for the investors.

Question 20

Which of the following facts concerning open-end mutual funds is false?

Accepted Answer

The number of shares in an open-end mutual fund is not fixed. Instead, the number of shares can increase or decrease depending on investor demand. This is in contrast to closed-end funds, where the number of shares is fixed.

Quiz 5: Mutual Funds