Finance 410, Mutual Fund Practice

A __________ is a private investment pool open only to wealthy or institutional investors that is exempt from SEC regulation and can therefore pursue more speculative policies than mutual funds hedge fund
Advantages of investment companies to investors include all but which one of the following? Guaranteed rates of return
Assume that you have just purchased some shares in an investment company reporting $500 million in assets, $50 million in liabilities, and 50 million shares outstanding. What is the net asset value (NAV) of these shares? NAV = ($500 − $50)/50 = $9
NAV formula The net asset value formula is used to calculate a mutual fund’s value per share. (Fund assets- Fund Liabilities)/ shares out standing
Consider a mutual fund with $300 million in assets at the start of the year and 12 million shares outstanding. If the gross return on assets is 18% and the total expense ratio is 2% of the year-end value, what is the rate of return on the fund? $300m *(1.18)= $354m.02* $354m = 7,080,000($354m- 7,080,000- 300m)/300m=15.64%
Higher portfolio turnover:I. Results in greater tax liability for investorsII. Results in greater trading costs for the fund, which investors have to pay forIII. Is a characteristic of asset allocation funds High Portfolio Turnover results in all 3
Mutual funds that hold both equities and fixed-income securities in relatively stable proportions are called ____________________. balanced funds
Net asset value is defined as MARKET value of assets minus liabilities divided by shares outstanding
Rank the following fund categories from most risky to least risky:I. Equity growth fundII. Balanced fundIII. Sector fundIV. Money market fund Most= Sector fund2nd most= Eq Growth fund3rd most = Balanced Fundleast risky= Money Mkt Fund
Specialized-sector funds concentrate their investments in _________________. securities issued by firms in a particular industry
The Wildwood Fund sells Class A shares with a front-end load of 5% and Class B shares with a 12b-1 fee of 1% annually. If you plan to sell the fund after 4 years, are Class A or Class B shares the better choice? Assume a 10% annual return net of expenses before the 12b-1 fee is applied. Assume $100 is invested.Class A: Investment after load = $100 – .05($100) = $95After four years = $95(1.104) = $95 × 1.4641 = $139.09Class B: Rate of return after 12b-1 fee = 10% – 1% = 9%After four years = $100(1.094) = $100 × 1.4116 = $141.16Class B is the better choice.
Investors who want to liquidate their holdings in a closed-end fund may ___________________. sell their shares on the open market
The ratio of trading activity of a portfolio to the assets of the portfolio is called the ____________. portfolio turnover
Under SEC rules, the managers of certain funds are allowed to deduct charges for advertising, brokerage commissions, and other sales expenses directly from the fund assets rather than billing investors. These fees are known as 12b-1 charges
You are considering investing in one of several mutual funds. All the funds under consideration have various combinations of front-end and back-end loads and/or 12b-1 fees. The longer you plan on remaining in the fund you choose, the more likely you will prefer a fund with a __________ rather than a __________, everything else equal. front-end load; 12b-1 fee
You invest in a mutual fund that charges a 3% front-end load, 1% total annual fees, and a 2% back-end load, which decreases .5% per year. How much will you pay in fees on a $10,000 investment that does not grow if you cash out after 3 years of no gain? Total fees = 10,000 – (10,000 × .97) × (.99) × (.99) × (.99) × (.995) = 635
You pay $21,600 to the Laramie Fund, which has a NAV of $18 per share at the beginning of the year. The fund deducted a front-end load of 4%. The securities in the fund increased in value by 10% during the year. The fund’s expense ratio is 1.3% and is deducted from year-end asset values. What is your rate of return on the fund if you sell your shares at the end of the year? [((21600.96 )1.10*(1-.013))/21600]-1=4.23%
_____ is an example of an exchange-traded fund An SPDR or spider
______ are mutual funds that vary the proportions of funds invested in particular market sectors according to the fund manager’s forecast of the performance of that market sector asset allocation funds
__________ funds stand ready to redeem or issue shares at their net asset value Open-end
______________________ are often called mutual funds Open-end investment companies

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