3.4 Other Investments Flashcards

1
Q

exchange-traded funds (ETFs)

A

Most ETFs permit tax-free, in-kind redemptions.
ETFs can be either passively or actively managed.
Hedge funds typically use margin and short-selling strategies

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2
Q

Exchange-traded funds (ETFs) are

A

ETFs are usually passively managed, although some are actively managed, and they attempt to track a specific index (e.g., S&P 500 Index) or sector within the index.

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3
Q

An investor should choose index funds if he or she believes in

A

The answer is a passive investment strategy. Index funds are used in a passive investment strategy. The purpose of an indexed portfolio is not to beat the targeted index (e.g., S&P 500 Index) but merely to match its long-term performance, less any management fees and administrative costs.

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4
Q

Characteristics of exchange-traded funds (ETFs)

A

They are generally tax-efficient.
Large investors known as authorized participants buy or sell shares on an “in-kind” basis.
They usually trade at or near their net asset value.
The shares are priced continuously throughout the trading day and can be purchased on margin.
They are permitted to sample an index.

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5
Q

hedge funds

A

Purchasers of hedge funds are required to be accredited investors
Charge both a management fee and a carried interest fee
A hedge fund employs leverage, which is the process of borrowing money to enlarge a position in a security.
A hedge fund manager is paid on the basis of fund performance and commonly owns a significant percentage of the fund’s shares.

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6
Q

Risks that pertain to hedge funds

A
Overuse of leverage
Excessive short selling
Lack of transparency
Lack of regulation
Short selling is a risk associated with hedge funds because losses can be incurred in unlimited amounts
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7
Q

entity that issues guaranteed investment contracts (GICs).

A

The answer is insurance companies. GICs are issued by insurance companies. They are called guaranteed investment contracts because their rate of return is guaranteed by the insurance company for a fixed period. They are not guaranteed by the FDIC.

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