Question 1

An equity trust is

Accepted Answer

An equity trust is a type of real estate investment trust (REIT) that invests in real estate properties. It allows investors to own a share in the trust, which holds a portfolio of real estate properties and generates income through rent, appreciation in property value, and/or the sale of properties.

Question 2

A REIT's equity per share is

Accepted Answer

A REIT's equity per share is a value measurement similar to the NAV (Net Asset Value) of a mutual fund. It is calculated as the total assets minus liabilities divided by the number of outstanding shares. This represents the net value that would be distributed to shareholders if the REIT were to liquidate its assets and pay off its debts.

Question 3

A unit investment trust differs from a mutual fund in that

Accepted Answer

A unit investment trust typically has a fixed portfolio of securities that is not actively managed, whereas a mutual fund can have a changing portfolio and is actively managed. Additionally, the originator of a unit investment trust guarantees a redemption price, making it different from a mutual fund. While a unit investment trust does include a combination of debt and equity securities, this is not the main difference between it and a mutual fund. Lastly, neither a mutual fund nor a unit investment trust requires considerably greater portfolio management compared to the other.

Question 4

A real estate investment trust (REIT)invests

Accepted Answer

REITs can invest in many kinds of properties and mortgages, including commercial buildings, residential properties, shopping centers, hospitals, and more. They can also invest in mortgages to properties, providing financing for real estate projects. Therefore, option D is the best choice.

Question 5

Evaluating the performance of a mutual fund involves which of the following activities?
I.Determining its rate of return
II.Calculating its net asset value
III.Examining its turnover ratio
IV.Examining its administrative expenses

Accepted Answer

Determining the rate of return is important as it helps to evaluate the fund's performance over time. Calculating the net asset value is significant as it indicates the fund's worth based on the market value of the assets it holds. Examining the turnover ratio is essential as it measures the frequency of the fund's buying and selling of securities, which can impact its performance. Examining the administrative expenses is also important as it shows how much of the fund's assets are spent on managing the investments, and high administrative expenses can negatively impact the fund's returns. Therefore, only options I, III, and IV include all these significant measures for evaluating mutual fund performance.

Question 6

Which item below is not a characteristic of an exchange-traded fund?

Accepted Answer

ETF portfolios are typically passively managed and do not change frequently in response to market conditions. This is a characteristic of actively managed funds.

Question 7

Which item below is usually not a characteristic of a limited partnership?

Accepted Answer

Limited partnerships are typically subject to loss-limitation rules under the tax code. Therefore, option B is not a characteristic of a limited partnership. Options A, C, and D are characteristics commonly associated with limited partnerships.

Question 8

Which of the below publications does not provide periodic evaluations of mutual funds?

Accepted Answer

Time magazine primarily focuses on news and current events rather than providing evaluations of mutual funds. The other publications listed regularly provide such evaluations.

Question 9

When funds calculate their returns,they assume that all distributions

Accepted Answer

When funds calculate their returns, they assume that all distributions are reinvested in shares of the fund. This is known as reinvesting dividends or capital gains. This method helps to compound the returns over time and to achieve better returns in the long run. Therefore, the best choice is B where all distributions are assumed to be reinvested in shares of the fund.

Question 10

The significant difference between HOLDRs and ETFs is that

Accepted Answer

The significant difference between HOLDRs and ETFs is that HOLDRs give the owner rights to the underlying stock, whereas ETFs do not. Therefore, choice A is the correct answer. Choices B and C are incorrect because both HOLDRs and ETFs are traded in financial markets. Choice D is incorrect because owners of HOLDRs may still have to pay commissions on trades.

Question 11

Allen Fund had NAV values of $9,$10,and $12 at the beginning,middle,and end of last year,respectively.It made a $1.00 per share distribution at mid-year.The average annual total return of the fund for the year is

Accepted Answer

To calculate the average annual total return, we need to use the formula:

AATR = [(Ending NAV + Distributions - Beginning NAV) / Beginning NAV] * 100

Plugging in the values, we get:

AATR = [(12 + 1 - 9) / 9] * 100 
AATR = 44.44%

Therefore, the answer is (C), 46.67%.

Question 12

The Mark IV Fund had a rate of return of 21% last year.If its beta weight was +1.5 and if the return on the overall market was 12%,its risk adjusted rate of return,RAROR,is

Accepted Answer

The risk-adjusted rate of return (RAROR) is calculated by subtracting the expected return based on the market return and beta from the actual return. Expected return = 12% (market return) * 1.5 (beta) = 18%. RAROR = 21% (actual return) - 18% (expected return) = 3%. However, the question seems to have a typo, as the closest option is +2.0%.

Question 13

For a given return it is preferable to have

Accepted Answer

A low turnover rate and a low beta are preferable for a given return because a low turnover rate implies lower transaction costs, and a low beta indicates lower market risk, making the investment more stable and cost-effective.

Question 14

The Lei Fund had a risk-adjusted rate of return (RAROR)last year of -3.0%.This means

Accepted Answer

A negative RAROR indicates that the fund underperformed the overall market, as the market typically has a positive return.

Question 15

The Gale Market Index Fund advertises that it earned a 392% return.This is probably its

Accepted Answer

A return of 392% is an unusually high rate of return, and it is unlikely to represent a single year of investment performance. Instead, it is more likely that the 392% return represents the cumulative total return over some number of years, possibly a decade or more.

Question 16

Which item below is not a broad market exchange-traded fund?

Accepted Answer

"HOLDR" is not a broad market exchange-traded fund, while "diamond" tracks the Dow Jones Industrial Average, "spider" tracks the S&P 500, and "the Qs" tracks the Nasdaq 100.

Question 17

A real estate investment trust (REIT)is

Accepted Answer

A real estate investment trust (REIT) is a type of closed-end investment company involved in real estate investment. It invests in income-producing real estate and is required by law to distribute at least 90% of its taxable income to shareholders as dividends. REITs offer investors a way to invest in real estate without having to own, operate or finance property directly. Option A is incorrect because it describes a contingency clause in a real estate sale, Option B is incorrect because it describes a loan document, and Option C describes a limited partnership investing in real estate, which is different from a REIT.

Question 18

The Mark Fund had a rate of return of 18% last year.If its beta weight was +1.5 and if the return on the overall market was 15%,its risk adjusted rate of return,RAROR,is

Accepted Answer

The risk-adjusted rate of return (RAROR) is calculated by subtracting the expected return based on the fund's beta from the actual return. The expected return is the market return (15%) multiplied by the beta (1.5), which equals 22.5%. The actual return was 18%, so the RAROR is 18% - 22.5% = -3.0%.

Question 19

The Mark IV Fund had a rate of return of 21% last year.If its beta weight was +0.6 and if the return on the overall market was 12%,its risk adjusted rate of return,RAROR,is

Accepted Answer

RAROR = Risk-free rate + Beta * (Market return - Risk-free rate)
Assuming the risk-free rate is 0, RAROR = 0.6 * (12% - 0%) + 21% = 23.2%
Therefore, the closest answer choice is C, which is +23.0%.

Question 20

In which of these funds does the portfolio of assets generally remain unchanged?

Accepted Answer

Closed-end funds and unit investment trusts typically have a fixed portfolio of assets that generally remains unchanged over time. Closed-end funds issue a fixed number of shares that are traded on stock exchanges, and their portfolio is managed but not frequently changed. Unit investment trusts (UITs) offer a fixed portfolio of securities in a one-time public offering, and these securities are held until the trust is terminated, without active management or trading.

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