Chapter 13: Investing in Mutual Funds, ETFs, and Real Estate Flashcards
financial service organization that receives money from its shareholders and invests those funds on their behalf in a diversified portfolio of securities.
mutual fund
who manages security selection and the portfolio under a mutual fund?
professional money managers
investment company whose shares trade on stock exchanges.
exchange traded fund (ETF)
when individuals pool resources for collective benefits of all contributors, this is referred to as…
pooled diversification.
- diversification
- professional management
- financial returns
- convenience
These are objectives of what type of investment?
mutual funds
- management company
- investment advisor
- distributor
- custodian
- transfer agent
These are the 5 different roles needed for m…
utual funds.
is an open-end or closed-end investment company:
- sell unlimited number of shares
- investors buy and sell shares from same mutual fund
- price fund at current value of all securities in portfolio
open-end investment company
(total market value of all securities in fund - liabilities) / shares outstanding =
net asset value (NAV)
is an open-end or closed-end investment company:
- operate w/ fixed number of shares outstanding and rarely issues new shares.
- trading is done in an open market
- no stock redemptions
- trades occur at a discount or premium to their NAV
- more pressure on managers
closed-end investment company
fund set up to match performance of a certain market segment.
index fund
ETFs are traded on listed exchanges, provide shares on an investor demand basis, sales occur at the end of the day, low costs/ portfolio turnover/taxes, and it’s best for narrow, targeted investing.
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commission when shares of open-end mutual funds are purchased.
load funds
low-load mutual funds have 2-3% commission.
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load fund that charges as much as 7 1/4% of value of shares sold.
back-end load mutual funds
no charge to buy funds.
no-load funds
help no-load funds cover distribution/marketing expenses
12b-1 fees (hidden loads)
cost incurred to hire professional money managers to run the fund’s portfolio of investments.
management fees
redemption fees and back-end loads are indicated by…
“r”
12b-1 fees are indicated by…
“p”
redemption and 12b-1 fees are indicated by..
“t”
- shareholder transaction costs
- annual operating expenses
- total cost over time
These are included in the what for mutual funds?
fee tables
invests in common stock w/ above-average growth potential
growth funds
higly speculative investments that seeks large profits from capital gains.
aggressive growth funds
invest in stocks that are undervalued by the market.
value funds
emphasize current income and invest in high-yielding common stock; low risk.
equity-income funds
balanced portfolio of stocks and bonds to generate well-balanced income and capital gains; 30-40% bonds.
balanced funds
balanced funds that automatically change asset allocation from more to less equity exposure as investor ages.
life-cycle (target-date) funds
seeks balanced return made of current income and long-0term gains, but more emphasis on capital gains.
growth-and-income funds
invest in various kinds of fixed-income securities; income = main focus.
bond funds
portfolio of short-term money market instruments.
money market mutual funds
portfolio of stocks/bonds equivalent to those in a market index.
index funds
restricts investments to a particular sector of the market; capital gains = goal.
sector funds
includes only socially responsible companies in portfolio.
socially responsible funds (SRFs)
invests exclusively in foreign securities.
international funds
spreads investors’ money across different types of markets.
asset allocation funds
allows fund shareholders to funnel fixed amounts from paycheck or bank account into mutual funds.
automatic investment plans
deals w/ dividends and other distributions that funds pay to shareholders.
automatic reinvestment plans
automatically receive fixed amount monthly or quarterly.
systematic withdrawal plan
change from one fund to another.
conversion privileges
funds offered by same company.
fund families
funds set up plans and handle all administrative details so shareholders can take full advantage of available tax savings.
retirement planning
you must determine your investment objectives for using funds.
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- attractive returns
- tolerable risk exposure
- acccumulate capital
- speculate with your money
- conserve capital
These are objectives of…
funds
ideal funds offer max capital growth when price rises, complete protection against capital loss when price falls, and high levels of current income always. Does a fund like this exist?
no
each fund has its own objective, style of operation, and range of services.
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contains information on objectives, portfolio composition, management, and past performance.
profile (prospectus)
what process helps to dwindle down fund options to 2-3 types of investments based on their objectives, risk tolerance, storehouse of value, management fees, and other fees/costs?
elimination process
to further the elimination process, your should assess the fund’s performance over the last 5-7 yrs, type of return, dividends, capital gains, and level of stability.
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if you stick to no-load or low-load mutual funds, you will yield….
greater returns.
what are the 3 types of returns from mutual funds (and investments in general)?
- dividend income
- capital gains
- change in share price
show variability in EFTs total returns based on the underlying index.
R^2 statistical measure
to estimate future performance of a ETF or mutual fund, look at past performance and consider the future direction of the whole market.
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what is the formula for when you buy a funds?
investment policy + management team
homes, raw land, and any type of income-producing property.
real estate
what is formula for the cash flows from real estate?
rent + depreciation + taxes + future sales price
what is the key determinant of returns on estate investments?
financial leverage (borrowing)
speculating in raw land is risky, but if you do it you should invest in areas of potential population growth or real estate demand.
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gross rental income - all operating expenses =
annual net operating income (NOI)
expected annual rate of return on property.
cap rate
office buildings, industrial space, warehouses, retail space, and hotels constitute…
commercial properties
homes, apartments, and multifamily buildings constitute…
residential properties
the percentage of available space rented over the year is referred to as the…
occupancy rates.
closed-end investment company that invests in real estate and RE mortgages.
real estate investment turst (REIT)
what are the 3 types of REITs?
- equity
- mortgage
- hybird
special-purpose syndicates organized to invest in RE.
real estate limited partnerships (LPs) OR LLCs
mike has decided to purchase a real estate property that is expected to generate a new operating income of $63,000/yr. with a 9% cap rate, what is the property’s estimate value?
$700,000
the most attrative REITs to income-oriented investors are…
mortgage REITs.
a fund that’s structured to match the performance of a certain market segment is known as an index fund.
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do all mutual funds always charge a management fee?
yes
the current market value of all securities offered by a mutual fund, less any liabilities, on a per-share basis is known as the fund’s…
net asset value
what funds invest in tax-exempt securities?
municipal bond funds
service offered by mutual funds that help an investor earn compound interest on their investments. this is called?
automatic reinvestment plan
having money taken at regular intervales form your paycheck and put into a mutual fund is an example of an automatic investment plan.
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what fund combines some of the operating characteristics of an open-end fund with some of the trading characteristics of a closed-end fund?
ETFs
carlos holds a portfolio of stocks and bonds. he is planning to buy a real estate property worth $150,000. he can use financial leverage to make this purchase by taking a personal loan worth $100,000 and selling bonds worth $50,000 form his portfolio.
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adding real estate to your investment portfolio increases…
investment diversity.
deprecaition gives the property owner an allowance for the decline the physical condition of the real estate over time.
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