Chapter 7: Investment Companies

Question 1

A(n) ______ is an issuer in the business of investing, owning, holding, or trading in securities.

Answer 1

Investment Company

Question 2

Investment companies fall into the following classifications:

1. ______
2. ______
3. ______

Answer 2

1. Management Companies
2. Unit Investment Trusts
3. Face-Amount Certificates

Question 3

Investment companies are structured as either ______ or ______ which investors are able to pool their funds for increased ______ and ______.

Answer 3

1. Corporations
2. Trusts
3. Diversification
4. Professional Management

Question 4

Each investor owns a(n) ______ in a portfolio of securities. In other words, no single shareholder has any right or claim that exceeds the rights or claims of other shareholders.

Answer 4

Undivided Interest

Question 5

The investment company concept offers an investor access to ______ and a level of ______ that average investors could not afford or achieve on their own.

Answer 5

1. Professional Portfolio Management

2. Diversification

Question 6

The ______ established guidelines for the operation of investment companies and divided them into three types:

1. ______
2. ______
3. ______
   a. Open-End (Mutual Funds)
   b. Closed-End

Answer 6

0. Investment Company Act of 1940
1. Unit Investment Trusts (UITs)
2. Face Amount Certificate Companies (FACs)
3. Management Companies

Question 7

The ______ requires that investment companies be registered with the ______.

Answer 7

1. Securities Act of 1933

2. SEC

Question 8

A(n) ______ is established as a trust and operates as a holding company for the portfolio. A designated ______ supervises the company’s operation.

Answer 8

1. Unit Investment Trust (UIT)

2. Trustee

Question 9

A UIT’s units, like open-end investment companies, are ______, which means there is no secondary trading and the units must be ______ by the issuer (non-negotiable and nonmarketable).

Answer 9

1. Redeemable

2. Redeemed

Question 10

UITs usually feature a(n) ______, which is held for the life of the trust. As such, the portfolio is said to be ______ rather than actively managed. Therefore, there is no ______.

Answer 10

1. Fixed Portfolio
2. Supervised
3. Management Fee

Question 11

If the UIT features a fixed portfolio, no substitution of securities may be made without written notice to the ______. All unit holders must be notified of a substitution within ______.

Answer 11

1. SEC

2. 5 Days

Question 12

The SEC can order the liquidation of a UIT if it determines that the trust is ______ or that such liquidation would be in the ______ of the unit holders.

Answer 12

1. Ineffective

2. Best Interest

Question 13

At maturity, UIT proceeds are distributed to the investors on a(n) ______.

Answer 13

Per Unit Basis

Question 14

Unit holders of a UIT can ______ their units prior to maturity at the ______, which could be more or less than the original investment.

Answer 14

1. Redeem

2. Current Market Value (CMV)

Question 15

______ issue debt certificates that offer predetermined interest rates. The certificates can be purchased with either ______ or a(n) ______.

Answer 15

1. Face Amount Certificates
2. Periodic Installments
3. Lump-Sum Payment

Question 16

Face amount certificates have a maturity of at least ______.

Answer 16

24 Months

Question 17

Holders of face amount certificates are entitled to redeem them for a(n) ______ on a(n) ______. These certificates can be redeemed prior to maturity for their stated ______.

Answer 17

1. Fixed Amount
2. Specified Date
3. Surrender Value

Question 18

______ are rarely issued today due to changes in tax laws that make them less attractive.

Answer 18

Face Amount Certificates

Question 19

The management company employs a(n) ______ (a.k.a. “______”) to manage a portfolio of securities in such a way as to achieve a specified ______ over time. To reach this, each fund has its own ______ or guideline. This outlines the types of securities and investment strategies, which the fund employs in pursuing its stated objective.

Answer 19

1. Investment Adviser
2. Fund Manager
3. Specified Investment Objective
4. Specified Investment Objective

Question 20

Management companies are organized as either ______ or ______.

Answer 20

1. Open-End

2. Closed-End

Question 21

The most widely known and utilized type of management company is the ______, or “______”.

Answer 21

1. Open-End

2. Mutual Fund

Question 22

The main difference between open-end and closed-end management companies is in the shares they issue, or how they are ______.

Answer 22

Capitalized

Question 23

Shares of ______ management companies are issued and traded just like shares of any other corporation.

Answer 23

Closed-End

Question 24

How the Management Company Issues Shares

1. ______: Single IPO of a fixed number of shares.
2. ______: Full or fractional shares.
3. ______: Continuous primary offering of unlimited number of shares.
4. ______: Full shares only.

Answer 24

1. Closed-End
2. Open-End
3. Open-End
4. Closed-End

Question 25

How Investors Buy/Sell Shares of Management Companies

1. ______: Purchased from the company.
2. ______: After the IPO, secondary market exchange or OTC.
3. ______: No secondary market.
4. ______: Redeemed by the company.

Answer 25

1. Open-End
2. Closed-End
3. Open-End
4. Open-End

Question 26

Types of Management Company Shares (Capitalization)

1. ______: Debt Securities (maximum 33.3%)
2. ______: Common
3. ______: Preferred (maximum 50%)

Answer 26

1. Closed-End
2. Open- & Closed-End
3. Closed-End

Question 27

Management Company Share Pricing

1. ______: Market supply & demand
2. ______: Priced by formula NAV + SC = POP

Answer 27

1. Closed-End

2. Open-End

Question 28

Management Company Shareholder Rights

1. ______: Dividends
2. ______: Voting
3. ______: Preemptive Rights

Answer 28

1. Open- & Closed-End
2. Open- & Closed-End
3. Closed-End

Question 29

Closed-end funds also maintain a calculated ______ per share. However, due to market supply and demand, shares may be trading at a premium or a discount. Investors buy the shares at the ______ plus a(n) ______.

Answer 29

1. Net Asset Value (NAV)
2. Market Price
3. Sales Commission

Question 30

A management company, whether open-end or closed-end, can be either ______ or ______.

Answer 30

1. Diversified

2. Nondiversified

Question 31

In order for a company to market itself as diversified, its portfolio must be invested in a manner specified in the ______ and often referred to as the “______”.

Answer 31

1. Investment Company Act of 1940

2. 75-5-10 Rule

Question 32

For a portion totaling at least ______ of the total assets, the diversified portfolio must be structured so that no more than ______ of total assets are invested in any one company. Additionally, with this portion of assets, the investment company cannot own more than ______ of the voting stock of any target company. There are no investment restrictions on the remaining ______ of the assets of the management company.

Answer 32

1. 75%
2. 5%
3. 10%

This is 75-5-10 Rule from the Investment Company Act of 1940.

Question 33

Closed-end management companies have the following characteristics:

1. Usually capitalized through a(n) ______ of a fixed number of shares.
2. After the initial public offering, the shares trade in the ______.
3. The share price in the secondary market is determined by ______.
4. Trading in shares may take place on a(n) ______ or in the ______.
5. Do not ______ held by investors.

Answer 33

1. One-Time Public Offering
2. Secondary Market
3. Investor Demand
4. Exchange or OTC Market
5. Redeem Shares

Question 34

______ are the most common type of investment company security today.

Answer 34

Mutual Funds

Question 35

Open-end mutual funds provide a continual ______ and ______ of shares.

Answer 35

1. Offering

2. Redemption

Question 36

Investors purchase mutual fund shares at the ______, which is composed of the ______ plus any applicable ______. If the dollar amount of the purchase does not compute into an even number of shares, the mutual fund issues ______, computed to ______ of a share.

Answer 36

1. Public Offering Price (POP)
2. Net Asset Value (NAV)
3. Sales Charge
4. Fractional Shares
5. 1 / 1,000

Question 37

Mutual funds sell ______ on the date determined by the board of directors (usually the next business day after the ______).

Answer 37

1. Ex-Dividend

2. Record Date

Question 38

Mutual fund shareholders have ______ in direct proportion to the number of shares they own and are handled almost exclusively through ______.

Answer 38

1. Voting Rights

2. Proxies

Question 39

______ is considered by most investment professionals to be fundamental to successful long-term investing.

Answer 39

Diversification

Question 40

An investment portfolio may be diversified in many different ways:

1. ______
2. Types of Investment ______
3. A Variety of Securities ______
4. ______ Areas

Answer 40

1. Industries
2. Instruments
3. Issuers
4. Geographic

Question 41

Specialized funds may concentrate a large percentage of their portfolio in a specific ______ such as chemicals, pharmaceuticals, or business machinery. Funds with holdings in a wide range of ______ tend to reduce the effect of periodic downturns in a particular area of industry on their portfolios.

Answer 41

1. Industry

2. Industries

Question 42

A portfolio containing different types of ______ can offer some stability in volatile markets. This is called ______. For example, a well-diversified income-oriented fund might hold common stocks with a history of high dividends as well as preferred stock, corporate and treasury bonds, and money market instruments.

Answer 42

1. Securities

2. Asset Allocation

Question 43

A growth-oriented equity fund may find that positions in a large number of companies, including large-, medium-, and small-cap ______, would prove to be a successful long-term strategy.

Answer 43

Issuers

Question 44

Specialized funds may also be diversified by ______, concentrating their assets in a particular region, state, or foreign country. If a fund’s strategy includes international holdings, diversification may be achieved by including investments in Europe, Latin American, and Far Eastern countries in addition to domestic securities.

Answer 44

Geographic Region

Question 45

In addition to diversification and asset allocation, ______ must be taken into consideration. High ______, which occurs when securities are bought and sold with frequency, would generate ______ for the investor in a taxable account.

Answer 45

1. Tax Ramifications
2. Portfolio Turnover
3. Taxable Gains

Question 46

______ funds are those that invest in common and/or preferred stock as opposed to debt securities. Though ______ are generally considered to be a growth-oriented investment, funds that hold ______ may pursue a variety of objectives.

Answer 46

1. Equity
2. Common Stocks
3. Equities

Question 47

“______” companies are large, mature companies with high consumer recognition and brand loyalty.

Answer 47

Blue Chip

Question 48

______ companies have established products and distribution channels, proven earnings, and consistent dividend payment histories.

Answer 48

Blue Chip

Question 49

______ stock values tend to be stable, and are more durable if declining markets. A(n) ______ fund would suit an investor who wants stock market exposure, but prefers less volatility than other equity alternatives.

Answer 49

Blue Chip

Question 50

Blue chips carry ______ risk, but less ______ and ______ than other equity funds.

Answer 50

1. Systematic
2. Credit
3. Volatility

Question 51

______ funds have an objective of current income. For that reason, these funds will hold securities with dividend yield potential.

Answer 51

Income

Question 52

Depending upon its investment policies, a(n) ______ fund may seek to achieve its objective by holding a combination of preferred stock and common stock with a history of high dividends in relation to its market value. These common stocks include ______ with solid earnings histories. They also include ______, which pay regular dividends to their investors.

Answer 52

1. Income
2. Blue-Chip Companies
3. Utility Companies

Question 53

Income funds typically have below-average ______ and are exposed to ______ risk and ______ risk.

Answer 53

1. Growth Potential
2. Credit
3. Interest Rate

Question 54

______ funds typically include common stocks of blue-chip companies with solid earnings histories; however, they may include younger, smaller companies that the funder manager judges to have significant growth potential for long-term appreication.

Answer 54

Growth

Question 55

______ is a lower priority in most growth funds, because these companies will often retain their earnings to fund further expansion.

Answer 55

Dividend Income

Question 56

______ risk is the most prevalent risk factor for growth funds.

Answer 56

Market

Question 57

______ funds tend to hold well-established companies that pay some dividends, but still retain earnings for expansion. These funds tend to be less volatile than pure ______ funds, but usually under-perform ______ funds during market advances.

Answer 57

1. Growth & Income
2. Growth
3. Growth

Question 58

Growth and income funds are subject to ______ risks and possibly to ______ risks if dividend payments and capital appreciation fail to keep up with the cost-of-living increases.

Answer 58

1. Market

2. Purchasing Power

Question 59

______ funds are potentially volatile funds because these portfolios may be heavily invested in companies of cutting-edge industries or start-up companies whose earnings are unproven.

Answer 59

Aggressive Growth

Question 60

Companies in ______ funds have strong research and development divisions and retain their earnings for expansion.

Answer 60

Aggressive Growth

Question 61

Aggressive growth funds often exhibit high ______ as the fund manager is more likely to take profits and seek new opportunities.

Answer 61

Portfolio Turnover

Question 62

Aggressive growth funds are strongly susceptible to ______ risk and ______ risk if investors are not able to hold them through declining periods.

Answer 62

1. Market

2. Timing

Question 63

______ funds primarily hold stocks that are deemed to be undervalued in price for any number of reasons and thus have significant upside potential.

Answer 63

Value

Question 64

The mutual fund manager of value funds generally utilizes a(n) “______” strategy for the underlying securities in an attempt to give the securities enough time for any market inefficiencies in the true value of the security to be corrected.

Answer 64

Buy and Hold

Question 65

Value funds tend to ______ during a general market advance and ______in a decline.

Answer 65

1. Underperform

2. Outperform

Question 66

______ stocks usually have high rate of earnings growth, high P/E, and high price to book ratios.

Answer 66

Growth

Question 67

______ stocks are usually fully priced or high-priced stocks that investors are willing to buy because they believe the company will continue to grow in the future.

Answer 67

Growth

Question 68

______ stocks typically have low P/E and price to book ratios. They are often stocks that have fallen out of favor in the market.

Answer 68

Value

Question 69

The idea behind ______ investing is that a stock is mispriced or undervalued by investors, and eventually it will appreciate when investors recognize its true value.

Answer 69

Value

Question 70

______ funds hold no fixed income securities, but contain a mix of growth and value stocks. These funds are designed to appreciate in value by means of capital gains.

Answer 70

Blended

Question 71

______ funds provide a combination of fixed income instruments and equities, and their goal is to achieve growth in value and income, as well as preservation of capital.

Answer 71

Balanced

Question 72

______ securities are those with a consistent yield like debt securities and preferred stocks. They provide a return of fixed periodic payments known in advance (e.g. fixed-rate government bonds). While the income is ______, the return on investment is usually ______ than in other forms of securities.

Answer 72

1. Fixed Income
2. Guaranteed
3. Lower

Question 73

In addition to supplementing income, ______ securities help investors reduce volatility in their overall portfolio.

Answer 73

Fixed Income

Question 74

______ funds typically hold treasury and government agency debt and offer safety and generally less volatile. In return for limited ______ risk, these funds offer low yields.

Answer 74

1. Government Fixed Income

2. Credit

Question 75

______ funds hold only municipal bonds and offer advantages for those in high tax brackets.

Answer 75

Tax-Exempt

Question 76

______ or ______ government fixed income investments generate federally tax-exempt interest income and may be exempt from state tax if the holder is a resident of the issuing state.

Answer 76

1. State

2. Municipal

Question 77

______ funds are only suitable for investors in high tax brackets because other investors are better served by the higher (taxable) yields of corporate bond funds.

Answer 77

Tax-Exempt

Question 78

______ funds generally hold corporate debt with low credit ratings, referred to as speculative or sometimes “junk” bonds.

Answer 78

High-Yield Fixed Income

Question 79

High-yield fixed income funds carry high ______ risk and are generally more ______.

Answer 79

1. Default

2. Volatile

Question 80

______ funds could supplement a well-diversified portfolio, but are mostly suitable for aggressive long-term investors who are primarily interested in yield rather than safety.

Answer 80

High-Yield Fixed Income

Question 81

High-yield fixed income securities include above average share price ______ in return or the potentially higher ______.

Answer 81

1. Fluctuation

2. Yield

Question 82

______ funds invest in safe, liquid, short-term debt instruments. They have the distinctive feature of attempting to maintain a stable ______ per share value (NAV) although it is not guaranteed.

Answer 82

1. Money Market

2. $1

Question 83

A(n) ______ fund invests in short-term (______ maximum maturity) high quality debt such as corporate commercial paper, banker’s acceptances, negotiable (jumbo or brokered) CDs, and repurchase and reverse repurchase agreements. They also invest in any T-bills, and those T-notes and T-bonds with ______ or less remaining to maturity.

Answer 83

1. Money Market
2. 1 Year
3. 1 Year

Question 84

Money market funds have a high degree of _______. One of the risks is hat over the long term, they may not produce returns sufficient to keep up with ______.

Answer 84

1. Capital Preservation

2. Inflation

Question 85

______ money market funds are suitable for most investors (in lower tax brackets).

Answer 85

Taxable

Question 86

______ money market funds invest in federally tax-exempt money market instruments which offer lower yields than other money market instruments. These are suitable only for investors in higher tax brackets who can benefit from the tax-free income which these funds provide.

Answer 86

Tax-Exempt

Question 87

______ funds, also known as ______ or ______ funds, concentrate a major portion of their assets in a specific industry, market sector, or geographic region.

Answer 87

1. Specialized
2. Sector
3. Industry

Question 88

______ funds are usually not suitable for the average investor with a lower risk tolerance, or who needs wider diversification.

Answer 88

Specialized

Question 89

Specialized funds have the potential for substantial gains in advancing markets but are vulnerable to changes in ______ specific or ______ specific economic trends.

Answer 89

1. Industry

2. Sector

Question 90

Funds specializing in international sectors are vulnerable to ______ risk and ______ risk.

Answer 90

1. Currency Exchange

2. Foreign Legislative

Question 91

A fund with a(n) _______ purchases securities of companies from a common geographic region, such as the Midwest, the Southwest, or the Northeast.

Answer 91

Geographic Concetration

Question 92

When a fund is dependent on only one geographic region, it carries more ______. It would be most suitable for ______ who are already diversified and wish to concentrate a small portion of their portfolios.

Answer 92

1. Risk

2. Sophisticated Investors

Question 93

______ is the investment style of allocating assets over the various asset classes, such as stocks, bonds, and cash equivalents.

Answer 93

Asset Allocation

Question 94

By allocating assets across the spectrum of investment, a fund can reduce its ______ risk since assets are diversified across several investment classes.

Answer 94

Overall Market

Question 95

Over time, due to different performance among the different asset classes, the portfolio’s allocation will change. To remedy this, an asset allocation fund regularly ______.

Answer 95

Rebalances

Question 96

______ is the process of buying more securities from a class in which the portfolio has become deficient, and selling securities from a class that has grown too large so that the portfolio is returned to its specified allocation model.

Answer 96

Rebalancing

Question 97

A mutual fund that invests a concentration of its assets in overseas companies and markets (i.e. Asia, Australia, South American, etc.) is a(n) ______.

Answer 97

International Fund

Question 98

______ funds are considered to have a higher degree of risk because of different regulatory, political, and economic factors. They carry more ______ risk and also carry ______ risk.

Answer 98

1. International
2. Legislative
3. Currency Exchange

Question 99

______ funds invest primarily in securities issued by agencies such as Ginnie Mae, Freddie Mac, Fannie Mae, or possibly private corporations.

Answer 99

Mortgage-Backed Security

Question 100

Because the mortgage bonds provide monthly principal and interest, ______ funds pay a monthly dividend to shareholders. Therefore, this fund is most suitable for the investor who seeks ______.

Answer 100

1. Mortgage-Backed Security

2. Regular Income

Question 101

Mortgage-backed security funds generally carry a higher degree of ______ risk than government bond funds but also a higher ______.

Answer 101

1. Default

2. Yield

Question 102

A(n) ______ is a type of mutual fund whose goal is to achieve the same return as a particular market index, such as the Dow 30, an index of 30 large-cap stocks, or S&P 500, a broader index made up of 500 large-cap stocks. The ______ invests only in the securities that are included in that index.

Answer 102

Index Fund

Question 103

The ______ index fund provides exposure to 2000 small-cap stocks.

Answer 103

Russell 2000

Question 104

An index fund is ______, meaning there is no active research, buying, and selling. Because of this, their expenses are typically much lower than an ______ fund’s expenses.

Answer 104

1. Passively Managed

2. Actively Managed

Question 105

______ funds invest in gold, silver, and platinum, and are usually chosen in the time of economic decline as a hedge against ______.

Answer 105

1. Precious Metals

2. Inflation

Question 106

A(n) ______ is a mutual fund that holds shares in several other funds in the pursuit of its stated objective. By investing in a(n) ______, the investor gains exposure to several different investment objectives within one fund.

Answer 106

Fund of Funds (FOF)

Question 107

Expense fees on some ______ can be higher than on regular funds. Because the ______ (with its own expense ratio) invests in other mutual funds which each have their own expenses, the ______ has a “double layer” of expenses.

Answer 107

Fund of Funds (FOF)

Question 108

______ funds invest in illiquid assets, such as commercial property and private equity, and do not offer shareholders the ability to redeem shares on a daily basis. Instead, they periodically offer to repurchase shares from their shareholders at a price based on net asset value.

Answer 108

Interval

Question 109

______ fund investors benefit from the opportunity to invest in large properties and other investments that would not ordinarily be available to individuals.

Answer 109

Interval

Question 110

______ funds, also known as ______ funds, are automatically adjusted during the life of the fund to match the investor’s risk tolerance as it changes over her lifetime. An investor typically chooses a fund based on an estimated retirement date.

Answer 110

1. Life Cycle

2. Target Date

Question 111

The ______ is responsible for the establishment and implementation of a mutual fund’s investment policies.

Answer 111

Board of Directors

Question 112

The board members are elected by the fund’s ______.

Answer 112

Shareholders

Question 113

In accordance with the Investment Company Act of 1940, a minimum of ______ of the board members must be unaffiliated with the fund (______). The remaining ______ can include the fund’s employees, underwriters, or its investment adviser.

Answer 113

1. 40%
2. Outside Directors
3. 60%

Question 114

If the mutual fund has a 12b-1 fee or if any conflicts of interest exist, at least ______ of the board of directors must be ______.

Answer 114

1. 51%

2. Outside Directors

Question 115

The board selects ______ to carry out the operations of the investment company, and oversees their performance. The selection of investment company ______ does not require a shareholder vote.

Answer 115

Officers

Question 116

Other functions of the ______ are as follows:

1. Appoint and oversee investment advisers, transfer agents, custodians.
2. Establish investment policy.
3. Establish dividend and capital gains policy for the fund.

Answer 116

Board of Directors

Question 117

The rights of ______ include the following:

1. Voting rights/proxies.
2. Approving changes in investment objectives and policies.
3. Approving investment advisory agreements.
4. Approving changes in fees.
5. Electing directors.
6. Ratifying selection of independent auditors.

Answer 117

Shareholders

Question 118

The ______ is employed to manage the fund’s portfolio.

Answer 118

Investment Adviser

Question 119

The ______ is paid a fee for advisory services that is typically based on a percentage of the net asset value under management (also called assets under management, or AUM) over a specified period of time. This fee is classified as a(n) ______ of the fund.

Answer 119

1. Investment Adviser

2. Operating Expense

Question 120

The majority of shareholders, members of the board, or both, must approve ______ contracts.

Answer 120

Investment Advisory

Question 121

The ______ duties include the following:

1. Supervising the fund’s portfolio by obtaining the appropriate diversification of securities held by the fund and making decisions regarding the appropriate timing of investments.
2. Providing investment advice in conformity with federal securities regulations and tax laws.
3. Researching and analyzing financial and economic trends.
4. Conforming to investment objectives and policy decisions established by the board of directors.

Answer 121

Investment Adviser’s

Question 122

A(n) ______ is a financial institution that holds customers’ securities for safekeeping, providing administrative and operational support.

Answer 122

Custodian

Question 123

The ______ must safeguard the physical assets of the mutual fund, perform payable and receivable functions of securities transactions, and register the receipt of interest and dividends for the fund.

Answer 123

Custodian

Question 124

A(n) mutual fund is required to have a national bank, trust company, or other qualified institution to perform as its ______.

Answer 124

Custodian

Question 125

The ______ does not perform any management, supervisory, or investment functions; nor does it have any involvement in the sale of shares. The ______ may, however, perform as the fund’s transfer agent.

Answer 125

Custodian

Question 126

The ______ is contracted by the fund to perform the following basic clerical functions:

1. Issuance of physical shares or book entry.
2. Cancellation of redeemed shares.
3. Disbursement of dividend and capital gains distributions to shareholders.

Answer 126

Transfer Agent

Question 127

______ means that shares are owned, recorded, and transferred electronically without issuing a physical stock or bond certificate.

Answer 127

Book Entry

Question 128

The ______ facilitates the transfer of securities electronically.

Answer 128

Direct Registration System (DRS)

Question 129

The shareholders and board of directors must approve all of the ______ for the operation of the mutual fund. Detailed information concerning fund ______ is covered in the prospectus.

Answer 129

Expenses

Question 130

Fund expenses also include the ______ paid to the investment adviser. ______ are usually the largest expense of operating a fund, and are expressed as a percentage of the fund’s ______.

Answer 130

1. Management Fee
2. Management Fees
3. Net Asset Value (NAV)

Question 131

______ funds sell direct to the investor at NAV. Since they do not outsource their sales effort, their sales-related costs are charged against the fund as a(n) ______.

Answer 131

1. No-Loads

2. Expense

Question 132

The expenses of a mutual fund are expressed as the fund’s ______, which is determined by dividing the total expenses by average net assets (assets minus expenses) of the portfolio.

Answer 132

Expense Ratio

Question 133

Total Expenses / Average Net Assets = ______

Answer 133

Expense Ratio

Total expenses includes investment adviser’s management fee and the fees to the custodian, transfer agent, and board of directors.

Question 134

The ______ or ______ is not included in the expense ratio. This is not a direct operating expense of a mutual fund.

Answer 134

1. Sales Charge

2. Load

Question 135

A mutual fund’s ______, or ______, is known as the fund’s principal underwriter.

Answer 135

1. Sponsor

2. Distributor

Question 136

Sometimes the underwriter is called the ______, since it “______” the shares to dealers.

Answer 136

1. Wholesaler

2. Wholesales

Question 137

The underwriter has an exclusive agreement with the fund that allows it to purchase fund shares at the current ______. The shares are then sold to the public, through either outside dealers or the underwriter’s sales force, at the full ______.

Answer 137

1. Net Asset Value (NAV)

2. Public Offering Price (POP)

Question 138

The fund’s ______ markets the fund’s shares to ______ that sell the shares to the public.

Answer 138

1. Underwriter

2. Dealers

Question 139

Only dealers that have a(n) ______ with the fund may sell shares.

Answer 139

Selling Agreement

Question 140

The underwriters “______” or ______ to these dealers to help them make sales. They create and pay for retail communication material to better market the shares to dealers, and compensate the dealers for shares that are sold.

Answer 140

1. Wholesale

2. Market

Question 141

In some cases, the ______ make direct sales to the public by purchasing shares from the ______ at a discount from the ______ and then reselling them to investors.

Answer 141

1. Dealers
2. Underwriter
3. Public Offering Price (POP)

Question 142

______ can never buy mutual fund shares for their inventory; shares must be purchased to fill customer orders only.

Answer 142

Dealers

Question 143

The current market, or bid price, for a mutual fund is listed at its ______. This is the price that an investor receives when she redeems her shares. However, investors purchase mutual funds at the ______, or ask price, which represents the ______ plus the ______.

Answer 143

1. Net Asset Value (NAV)
2. Public Offering Price (POP)
3. Net Asset Value (NAV)
4. Sales Charge

Question 144

Mutual fund investors buy at the ______ and redeem at ______.

Answer 144

1. POP

2. NAV

Question 145

The ______ of a mutual fund is expressed as a percentage of the public offering price.

Answer 145

Sales Charge

Question 146

FINRA’s Conduct Rules limit the sales charge to a maximum of ______ of the POP.

Answer 146

8.5%

Question 147

If the fund does not offer three privileges, then the sales charge is limited to a maximum of ______.

Answer 147

6.25%

Question 148

The three privileges mutual funds need to provide in order to charge an 8.5% sales charge are:

1. ______
2. ______
3. ______

Answer 148

1. Dividend Reinvestment at NAV
2. Breakpoints
3. Rights of Accumulation

Question 149

All sales charges on mutual fund share repurchased or redeemed within ______ of the transaction must be refunded.

Answer 149

7 Business Days

Question 150

______ are not included in the expense ratio calculation because they are added to the net asset value per share to form the sales price.

Answer 150

Sales Charges

NAV + SC = POP

Question 151

______ funds do not charge front- or back-end sales loads, but may include a small ______. Note that if a fund has a sales charge or a(n) ______ in excess of ______, it may not describe itself as a(n) ______ fund.

Answer 151

1. No-Load
2. 12b-1 Fee
3. 12b-1 Fee
4. 0.25%
5. No-Load

Question 152

No-load funds cannot charge a 12b-1 fee greater than ______ basis points so they may have lower expense ratios than those with a load.

Answer 152

25

Question 153

The Investment Company Act of 1940 requires that redeemable mutual fund shares be sold to retail customers at the ______. However, the Act allows for exemptions from the rule for scheduled sales load variations (such as ______) or the ______ of the sales load altogether.

Answer 153

1. Public Offering Price (POP)
2. Breakpoints
3. Elimination

Question 154

The investment company, its dealers, and underwriters may offer discounts from the POP only when:

1. Discounts are applied ______ to all investors in a particular class.
2. Existing shareholders and new investors are provided with adequate ______ about the sales price variations.
3. The investment company ______ is revised to show new sales load variations before making them available to new investors.
4. The investment company informs existing shareholders of the new sales price variations within ______ of the date when they are available to new investors.

Answer 154

1. Uniformly
2. Information
3. Prospectus
4. 1 Year

Question 155

If “______” is indicated or if the offering price is the same as the ______ then the fund is a no-load fund.

Answer 155

1. NL

2. NAV

Question 156

Mutual funds are quoted by their ______ (bid price) and the ______ (asked price). The sales charge is computed by subtracting the ______ from the ______.

Answer 156

1. Net Asset Value (NAV)
2. Public Offering Price (POP)
3. Bid Price
4. Asked Price

Question 157

For open end shares, the ______ (___) will be the bigger number and the ______ (___) is the smaller number (unless the fund is a no load).

Answer 157

1. Asked (POP)

2. Bid (NAV)

Question 158

The NAV must be calculated at least ______ and is usually computed as of the close of the NYSE. Buy and sell orders are based on the next price to be computed, referred to as ______.

Answer 158

1. Once a Day

2. Forward Pricing

Question 159

The redemption value of an open-end investment company, or mutual fund, is based on ______ after the order is received.

Answer 159

NAV

Question 160

Mutual fund companies are prohibited from allowing certain investors to engage in ______, which means buying or selling after the close of the exchange.

Answer 160

Late Trading

Question 161

The ______ of a mutual fund is determined by dividing the total net assets of the fund by the number of shares outstanding.

Answer 161

Net Asset Value Per Share

The mutual fund’s total net assets consist of the current market value of the fund’s securities excluding fixed assets, plus cash, minus total liabilities.

Question 162

Total Net Assets / Total of Outstanding Shares = ______

Answer 162

Net Asset Value Per Share

The mutual fund’s total net assets consist of the current market value of the fund’s securities excluding fixed assets, plus cash, minus total liabilities.

Question 163

The mutual fund’s ______ consist of the current market value of the fund’s securities excluding fixed assets, plus cash, minus total liabilities.

Answer 163

Total Net Assets

Question 164

1. Held stock pays dividends: ______ NAV/Share
2. Issuing new shares: ______ NAV/Share
3. Fund sells asset for a gain: ______ NAV/Share
4. Fund distributes dividends: ______ NAV/Share
5. Fund sells asset at a loss: ______ NAV/Share
6. Redeeming shares: ______ NAV/Share
7. Held bond pays interest: ______ NAV/Share
8. Increase in MV of securities: ______ NAV/Share
9. Fund distributes capital gains: ______ NAV/Share
10. Fund distributes interest: ______ NAV/Share
11. Decrease in MV of securities: ______ NAV/Share

Answer 164

1. Held stock pays dividends: INCREASE NAV/Share
2. Issuing new shares: NO CHANGE NAV/Share
3. Fund sells asset for a gain: NO CHANGE NAV/Share
4. Fund distributes dividends: DECREASE NAV/Share
5. Fund sells asset at a loss: NO CHANGE NAV/Share
6. Redeeming shares: NO CHANGE NAV/Share
7. Held bond pays interest: INCREASE NAV/Share
8. Increase in MV of securities: INCREASE NAV/Share
9. Fund distributes capital gains: DECREASE NAV/Share
10. Fund distributes interest: DECREASE NAV/Share
11. Decrease in MV of securities: DECREASE NAV/Share

Question 165

MaxCap AgGr fund has a NAV of 77.89 and an offer price of 81.99. What is the sales charge?

Answer 165

5%

$81.99 - $77.89 = $4.10
$4.10 / $81.99 = 0.050 = 5%

Question 166

NAV: $10.50
Sales Charge: 5%
What is the POP and sales charge?

Answer 166

$11.05 = POP
$0.55 SC

$10.50 / (100% - 5%) = 11.05 POP
$11.05 - $10.50 = $0.55 SC

Question 167

______ shares purchased at the POP have no deferred sales charge. They are front-end loaded.

Answer 167

Class A

Question 168

______ shares purchased at NAV have a potential back-end load called a(n) ______, which is based on the lower of the share’s cost basis or current NAV at the time of redemption.

Answer 168

1. Class B

2. Contingent Deferred Sales Charge (CDSC)

Question 169

The contingent deferred sales charge declines each year the investment is held, eventually reaching 0%. At that time, ______ shares convert into ______ shares.

Answer 169

1. Class B

2. Class A

Question 170

______, or ______, shares are also purchased at NAV, but have a back-end sales charge that runs for only 1 year.

Answer 170

1. Class C

2. Level Load

Question 171

Unlike ______, ______ shares do not become ______ shares. Even though ______ shares have a lower expense ratio than ______ shares, they may be costly over a longer term since they can never be converted to ______ shares.

Answer 171

1. Class B
2. Class C
3. Class A
4. Class C
5. Class B
6. Class A

Question 172

Shares in Classes B or C status have ______ expenses than A shares. Because of this, they represent an alternate method of recovering the marketing costs that would have been paid up front had A shares been purchased.

Answer 172

Higher

Question 173

Determining which sales charge is appropriate for an investor’s purchase varies with such factors as the investment ______, the amount of the ______ investment, the ______ of investments, and the ______ of withdrawal of funds before intended.

Answer 173

1. Horizon
2. Initial
3. Frequency
4. Probability

Question 174

______ shares are most appropriate for large investments with a long-term time horizon.

Answer 174

Class A

Question 175

______ shares are appropriate for small investments with a long-term time horizon.

Answer 175

Class B

Question 176

______ shares are investment neutral and short-term time horizons.

Answer 176

Class C

Question 177

In order to encourage increased investment, most mutual funds have ______, which are dollar levels at which the sales charge is discounted or reduced.

Answer 177

Sales Breakpoints

Question 178

Breakpoints must be clearly stated in the fund’s ______.

Answer 178

Prospectus

Question 179

Breakpoints are made available to any “______”, which is defined as individuals, married couples, parents, and their minor children, and certain other entities, such as trusts and pension plans.

Answer 179

Person

Question 180

Specifically excluded from receiving ______ are informal entities, such as investment clubs and joint accounts with parents and adult children.

Answer 180

Breakpoints

Question 181

Breakpoints are allowable if the following conditions are met:

1. Breakpoints ______ apply to all recipients.
2. ______ concerning scheduled breakpoints is given to shareholders and prospective investors.
3. The ______ is revised if the breakpoint schedule changes.
4. The investment company advises existing shareholders of any breakpoint schedule changes within ______.

Answer 181

1. Uniformly
2. Information
3. Prospectus
4. 1 Year

Question 182

Selling just shy of a breakpoint is considered ______, and it is a violation.

Answer 182

Breakpoint Selling

Question 183

A(n) ______ allows an investor to qualify for the sales discounts without initially investing the entire amount required; it states the investor’s intent to invest the required amount over the next ______.

Answer 183

1. Letter of Intent (LOI)

2. 13 Months

Question 184

Letters of Intent can be backdated ______. If the LOI is backdated, note that there will be less than ______ remaining to complete the investment, since the window begins at the date of original purchase.

Answer 184

1. 90 Days

2. 13 Months

Question 185

Letters of intent are not ______ on the investor. If the investor fails to deposit the required amount by the time the letter expires, the fund will charge the investor an amount that equals the higher sales charge that applied to the amount invested so far.

The fund ensures that will be able to recover these charges by holding a sufficient number of ______ in ______ to cover the expenses.

Answer 185

1. Binding
2. Shares
3. Escrow

Question 186

Only investor ______ are considered part of additional deposits when it comes to breakpoints. ______ of shares owned is not credited toward completion of the letter.

Answer 186

1. Contributions

2. Appreciation

Question 187

Mutual fund companies typically permit ______ for members of the immediate family and children younger than 21 living at the same residence. Immediate family could also be considered relatives if they are financially dependent on the family.

Answer 187

Rights of Accumulation

Question 188

______ allows investors to combine prior mutual fund purchases with current purchases in the same mutual fund or related mutual fund family to qualify for a breakpoint.

Answer 188

Rights of Accumulation

Question 189

Fund companies also typically permit ______ for large groups such as schools, hospitals, corporations, etc. These groups usually invest through some type of retirement program.

Answer 189

Rights of Accumulation

Question 190

The ______ permits investors to count all of their mutual fund accounts and pre-existing investments in the same fund or fund family for the purpose of qualifying for breakpoint sales discounts.

Answer 190

Right of Accumulation

Question 191

The ______ of an investor’s pre-existing fund holdings is used to determine whether he or she qualifies for a breakpoint discount.

Answer 191

Current Value

Question 192

Certain funds may also charge a(n) ______ when an investor liquidates his or her shares. Normally, this occurs when shares are held for less than ______ or perhaps up to ______. Most often this is to discourage ______ of shares by the investor.

Answer 192

1. Redemption Fee
2. 90 Days
3. 1 Year
4. Short-Term Trading

Question 193

Mutual Funds may be redeemed through a(n) ______ if the fund has this privilege.

Answer 193

Written Request

Question 194

Mutual Funds may be redeemed through ______ if the fund has this privilege and the investor chooses it when the account is opened.

Answer 194

Telephone Redemption

Question 195

Mutual Funds may be redeemed through ______ if the fund has this privilege. This is usually limited to money market funds and some bond funds.

Answer 195

Check Writing

Question 196

An investor wishing to redeem mutual fund shares can do so through the ______ who sold the funds or directly with the ______. No-load funds are redeemed by direct contact with the issuing ______ or ______ bank, because there is no ______ involved.

Answer 196

1. Dealer
2. Transfer Agent
3. Transfer Agent
4. Custodian
5. Dealer

Question 197

Under certain conditions, funds may require a(n) ______ before redeeming shares to ensure that the request is valid. A(n) ______ is usually required for wire transfers, redemptions to addresses different than the address of record on the account, or for dollar amounts above certain limits.

Answer 197

Signature Guarantee

Question 198

Once a fund company receives a redemption request in ______, meaning all required items have been provided, the fund company will utilize ______ to determine the price per share that the shareholder will receive.

Answer 198

1. Good Order

2. Forward Pricing

Question 199

The Investment Company Act of 1940 requires that mutual funds pay redemption proceeds to customers within ______.

Answer 199

7 Calendar Days

Question 200

Open-end management companies (mutual funds) are constantly offering ______. Each share sold is a(n) ______ for that investor. This is called a(n) ______ and a(n) ______ must accompany each sale.

Answer 200

1. New Shares
2. New Share
3. Continuous Primary Offering
4. Prospectus

Question 201

A mutual fund ______ must cover in detail all material information required for an investor to make an informed investment decision. This required information includes:

1. Investment objectives, policies, and restrictions
2. Sales loads and fees, including front end, CDSC, 12b-1
3. Redemption fee
4. Management fee
5. Other expenses
6. Expense table
7. Breakpoint, ROA, combination of accounts, and LOI
8. Exchange privileges within a family of funds
9. Per-share income and capital changes
10. Methods of sale (including determining pricing)
11. Methods of redemption
12. Investment and withdrawal plans
13. Financial statements

Answer 201

Prospectus

Question 202

A prospectus must be updated at least once every ______ to keep the information relatively current. Financial information within a prospectus cannot be older than ______.

Answer 202

1. 12 Months or Annually

2. 16 Months

Question 203

Some mutual funds may furnish investors with a(n) ______ that contains key information about the fund.

Answer 203

Summary Prospectus

Question 204

If an investor would like additional disclosure, a(n) ______ can be requested. This statement must be made available to all current and potential investors within ______ of the request.

Answer 204

1. Statement of Additional Information

2. 3 Days

Question 205

Mutual funds typically offer ______ of capital gains and dividends at ______ (meaning without a sales charge).

Answer 205

1. Reinvestment

2. Net Asset Value (NAV)

Question 206

Although capital gains are generated when a mutual fund’s manager sells an asset at a profit and are based upon the fund’s holding period, they are distributed ______. Dividends are distributed ______.

Answer 206

1. Once a Year

2. Quarterly

Question 207

Most funds allow investors to redeem shares in one fund and reinvest the proceeds in another fund within their fund family at ______. These exchanges do not incur additional sales charges, but some funds charge a small ______.

Answer 207

1. Net Asset Value (NAV)

2. Exchange Fee

Question 208

Because redemption of shares normally results in a realized ______ or ______, the IRS defines these exchanges as a(n) ______ for capital gain and taxation purposes. ______ must be informed of the tax consequence before they execute the switch.

Answer 208

1. Capital Gain or Loss
2. Sale
3. Investors

Question 209

Although mutual funds that charge the maximum sales charge of 8 1/2% are required to offer dividend reinvestment, breakpoints, and rights of accumulation, ______ are a convenience privilege and are not required by the Investment Company Act of 1940.

Answer 209

Exchange Rights

Question 210

______ is a voluntary investment plan whereby the investor systematically invests a fixed dollar amount at regular intervals, usually monthly or quarterly.

Answer 210

Dollar Cost Averaging

Question 211

DCA plans are considered a way to reduce ______ risk in mutual fund investing because share prices are combined and averaged out over time.

Answer 211

Timing

Question 212

By investing a fixed amount at fixed intervals, regardless of price fluctuations in the share price, over time the investor will realize a(n) ______ per share that is less than the ______ per share during that time.

Answer 212

1. Average Personal Cost

2. Average Public Price

Question 213

When discussing ______ plans, the agent must alert investors of the following:

1. They still can sustain a loss if the current market value of the shares is below the average share cost.
2. The plan does not protect them from a loss in a steadily declining market.

Answer 213

Dollar Cost Averaging (DCA)

Question 214

Many investment companies provide investors with an option for systematic ______, ______, or ______ withdrawals. Payments can be received at specified intervals in either ______ or ______ amounts.

Answer 214

1. Monthly, Quarterly, or Annual

2. Fixed or Flexible

Question 215

There is usually a requirement for a minimum ______ for the account from which the distribution is being made. Payments are made first from ______ and then from ______. If these are not sufficient, fund shares are ______.

Answer 215

1. Net Asset Value (NAV)
2. Dividends
3. Capital Gains
4. Liquidated

Question 216

______ Periodic Payments: an investor requests that a specified dollar amount be received in each payment.

Answer 216

Fixed-Dollar

Question 217

______ Periodic Payments: an investor requests that a fixed percentage of shares be liquidated at fixed intervals.

Answer 217

Fixed-Percentage

Question 218

______ Periodic Payments: an investor requests that a fixed number of shares be liquidated at specified intervals.

Answer 218

Fixed-Shares

Question 219

Investors need to be aware that systematic withdrawal plans have a potential to exhaust their ______. These are not guaranteed to last for a certain length of time, like an annuity.

Answer 219

Principal

Question 220

All securities issued by the Treasury Department are issued in ______, meaning they exist only as electronic records in computers without physical certificates of ownership.

Answer 220

Book-Entry Form

Question 221

Members must use a(n) ______ for book-entry settlement, an electronic system of custody, transfer, delivery, and settlement.

Answer 221

Securities Depository

Question 222

Book-entry settlement allows shares to move electronically through the ______ system, transferring securities with simultaneous cash settlement.

Answer 222

Depository Trust Corporation

Question 223

Investment companies provide shareholders with ______ and explanations of the type of distributions made. This form documents to the IRS and to the investor all potentially taxable events, such as dividends, realized short-term and long-term capital gains, and capital losses.

Answer 223

1099 Forms

Question 224

______ = Portfolio Interest + Dividends - Fund Expenses

Answer 224

Net Investment Income

Question 225

The mutual fund must pay out at least ______ of its net investment income to the shares to avoid taxation on the distributed portion. If the fund does so, it is only taxed on the small portion of net investment income which it retains, known as the _______.

Answer 225

1. 90%

2. Conduit or Pipeline Theory

Question 226

A fund’s ______ provides the most comprehensive information for evaluation and comparison.

Answer 226

Prospectus

Question 227

When comparing funds, it is vital to restrict the comparisons to funds of ______.

Answer 227

Similar Nature

Question 228

______: For example, it would not be appropriate to compare the performance results of a fund with a growth objective with a fund having an income objective.

Answer 228

Investment Objective

Question 229

______: Even funds with the same overall objective can utilize very different ______ to pursue those objectives. For example, one growth fund may invest exclusively in domestic stocks, while another may invest primarily in stocks of far eastern countries.

Answer 229

Investment Policies

Question 230

______: ______ can be compared by duration of current management and consistency of performance relative to like funds.

Answer 230

Quality of Management

Question 231

______: ______ can be compared by the fund’s calculated risk coefficient, beta, Sharpe ratio, and risk/return factors.

Answer 231

Risk Factors

Question 232

______: The frequency with which a fund buys and sells securities in its portfolio can affect its cost to the investor.

Answer 232

Portfolio Turnover

Question 233

One could expect a fund with a high turnover rate to have ______ expenses (trading costs) and probably ______ short-term capital gains distributions.

Answer 233

1. Higher

2. Higher

Question 234

______ investing is most appropriate for long-term investment objectives. Comparisons between ______ should focus on long-term results and consistency of performance over time, not on the current short-term trends of certain funds or industry sectors.

Answer 234

Mutual Fund(s)

Question 235

______ for a given holding period (______, ______, and ______, or ______) includes the effect of reinvested distributions and share price appreciation, net of sales charges and expenses for the period.

Answer 235

1. Total Return
2. 1 Year
3. 5 years
4. 10 Years
5. Life of Fund

Question 236

______ or ______ is calculated by dividing the annual dividend by the current POP. This is a snapshot of the benefit of owning the fund at this moment.

Answer 236

1. SEC Yield

2. Current Yield

Question 237

Higher ______ have the effect of reducing current yields and total returns.

Answer 237

Expense Ratios

Question 238

Newer funds, especially those with fewer total assets under management than their peers, usually experience ______ expense ratios in their earlier years.

Answer 238

Higher

Question 239

Investors purchasing or selling shares in ETF typically pay a(n) ______ on each transaction. However, the ______ of ETFs are significantly lower than those of mutual funds.

Answer 239

1. Brokerage Commission

2. Expense Ratios

Question 240

ETFs trade “______”, giving investors the flexibility to buy and sell during the day, rather than once a day, like mutual funds.

Answer 240

Intraday

Question 241

______ ETFs are designed to passively track a particular market index. They invest in all or a representative sample of the stocks in an index.

Answer 241

Passive

Question 242

______ ETFs are managed by a portfolio manager who buys and sells stocks based on a defined investment strategy, rather than tracking an index.

Answer 242

Active

Question 243

______ are investment companies whose objective traditionally is to achieve the same return as a particular market index, and who primarily invest in the securities of companies that are included in a selected market index.

Answer 243

Exchange Traded Funds (ETFs)

Question 244

______ do not sell individual shares directly to investors and only issue their shares in large blocks (50,000 shares, for example) that are known as “______”. The number of ______ varies depending on the fund.

Answer 244

1. ETFs
2. Creation Units
3. Creations

Question 245

After purchasing a(n) ______, a broker/dealer may split it up and sell the individual shares in a(n) ______ or sell it back to the ETF.

Answer 245

1. Creation Unit

2. Secondary Market

Question 246

Unlike in mutual funds, investors do not purchase or redeem shares from the ______, but instead buy and sell shares on an exchange.

Answer 246

Exchange Traded Fund (ETF)

Question 247

Like stocks, ______ prices fluctuate continuously throughout the day according to changes in the underlying portfolio of securities.

Answer 247

Exchange Traded Fund (ETF)

Question 248

ETFs offer the same intraday ______ as other securities traded on exchanges, such as closed-end funds. However, as opposed to closed-end funds which can trade at a premium or discount to their ______, ETFs usually trade near their ______.

Answer 248

1. Liquidity
2. NAV
3. NAV

Question 249

ETFs can also be purchased on margin ______ after the initial public offering or IPO.

Answer 249

30 Days

Question 250

______ differ from more traditional ETFs because they use a multiplier. For example, a 200% or 300% multiplier may be used which would make it more ______ than a more traditional ETF.

Answer 250

1. Leveraged ETFs

2. Volatile

Question 251

The underlying instruments in a(n) ______ are not only the securities found in the index but also derivatives such as options, futures, and swaps.

Answer 251

Leveraged ETF

Question 252

______ have a higher margin maintenance requirement than more traditional ETFs, which mirror the underlying stocks maintenance of 25%. The maintenance requirement for 200% leverage ETF would be ______ of the market value for a long position or ______ the normal maintenance requirement of 25%.

Answer 252

1. Leveraged ETFs
2. 50%
3. Two Times

Question 253

______ are created from various derivatives to profit when an underlying benchmark or market sector declines.

Answer 253

Inverse ETFs

Question 254

Most investors use inverse ETFs to hedge their portfolio against ______.

Answer 254

Market Declines

Question 255

______ can also be used instead of short positions without establishing a margin account.

Answer 255

Inverse ETFs

Question 256

______ are senior unsecured debt instruments issued by an underwriting bank or other large institutions.

Answer 256

Exchange-Traded Notes (ETNs)

Question 257

Normally, ______ do not pay periodic interest and have no principal protection. Instead, they are backed by the credit of the issuing bank.

Answer 257

Exchange-Traded Notes (ETNs)

Question 258

Most ______ are based on and track the performance of an underlying index or benchmark. ______ are not equities or index funds; rather, they are debt securities and do not own the underlying index/benchmark.

Answer 258

Exchange-Traded Notes (ETNs)

Question 259

Like other debt instruments, ______ have a maturity date. At maturity, the underwriting bank pays the investor the value of the ______ based on the underlying market index, minus fees.

Answer 259

Exchange-Traded Notes (ETNs)

Question 260

______ can be traded on an exchange, held until maturity, or large blocks may be redeemed directly with the issuer prior to maturity.

Answer 260

Exchange-Traded Notes (ETNs)

Question 261

During the trading day, it is possible for an ETN to trade at a premium or discount to its “______”, which is the value of the ETN based on the underlying benchmark.

Answer 261

Indicative Value

Question 262

A major difference between ETNs and ETFs is that ETFs carry ______ and ETNs carry both ______ risk and ______ risk because they rely on the issuer’s ability to pay at maturity.

Answer 262

1. Market
2. Market
3. Credit

Question 263

ETNs are adversely affected if the issuer’s credit rating is ______.

Answer 263

Downgraded

Question 264

______ can provide investors exposure to strategies or investments that would otherwise be costly or difficult for them to implement on their own. ______ are generally considered complex investments only suitable for experienced investors.

Answer 264

Exchange-Traded Notes (ETNs)

Question 265

Exchange-traded notes (ETNs) are subject to _____ risk since they are backed by the credit of the issuing bank.

Answer 265

Credit

Question 266

______ are traded on the NYSE AMEX (American Stock Exchange) and allow investors to trade on security compromised of a bucket of stocks in a specific market sector or industry.

Answer 266

Holding Company Depository Receipts (HOLDRs)

Question 267

______ fluctuate in value based on the performance of the stocks in the bucket.

Answer 267

Holding Company Depository Receipts (HOLDRs)

Question 268

A(n) ______ is a hybrid debt instrument linked to the equity markets. The performance of a(n) ______ is linked to a single stock, a group of stocks, or a stock index.

Answer 268

Equity-Linked Security (ELKS)

Question 269

______ typically guarantee principal and offer small returns based on the underlying security or index. ______ are structured as annuities, mutual funds, or CDs.

Answer 269

Equity-Linked Security (ELKS)

Question 270

For many investors, investing in public REITs, limited partnerships, or other security types backed by real estate provides additional ______ for their portfolio with less ______.

Answer 270

1. Diversification

2. Risk

Question 271

______ are companies that own, and usually operate, income-producing real estate or products related to real estate.

Answer 271

Real Estate Investment Trusts (REITs)

Question 272

REITs invest at least ______ of their investment portfolios in real estate or products related to real estate. The assets are selected by the ______, placed in a(n) ______, and monitored.

Answer 272

1. 75%
2. Portfolio Manager
3. Trust

Question 273

REIT portfolios are ______; there is no active trading. There are also a(n) ______ number of shares and REITs have a(n) ______ life. On a date designated in the prospectus, the REIT will ______ the portfolio holdings and pay each investor a share.

Answer 273

1. Static
2. Finite
3. Finite
4. Liquidate

Question 274

When distributing REIT shares in an IPO, it is important to note that in the second half of the tax year no more than ______ of the shares may be owned by ______ or fewer people in order to qualify as a REIT.

Answer 274

1. 50%

2. 5

Question 275

REITs are traded in the ______ at either a premium or discount to _____.

Answer 275

1. Secondary Market

2. Net Asset Value (NAV)

Question 276

When the REIT sells a property, the profit is considered to be a(n) ______.

Answer 276

Capital Gain

Question 277

REITs enjoy tax-advantaged income without double taxation; they pay tax only on the income they ______. In order to enjoy a pass-through of the taxation and for the trust to avoid paying taxes, the REIT must distribute at least ______ of its income in the form of dividends to the investors.

Answer 277

1. Keep

2. 90%

Question 278

REITs are unlike DPPs and do not distribute ______ to the investors; the REIT takes ______ at the trust level. Only the REIT’s ______ passes through to the investors.

Answer 278

1. Losses
2. Losses
3. Income

Question 279

Both REITs and DPPs have ______ and ______.

Answer 279

1. Centralized Bookkeeping

2. Professional Management

Question 280

______ are not investment companies and are not regulated by the Investment Company Act of 1940. The portfolio holdings are not securities; they are real estate, real estate mortgages, or a combination of the two.

Answer 280

Real Estate Investment Trusts (REITs)

Question 281

______ sell shares to investors. Each share represents a proportionate ownership interest in all of the investments in the trust.

Answer 281

Real Estate Investment Trusts (REITs)

Question 282

______ REITs, also called ______ REITs or ______ REITs, are registered with the SEC and are required to file reports with the SEC. They trade on the NYSE or OTC on NASDAQ and are traded in the secondary market.

Answer 282

1. Publicly-Traded
2. Exchange-Traded
3. Listed

Question 283

______ REITs are typically a liquid investment that an investor can readily buy and sell.

Answer 283

Publicly-Traded

Question 284

______ REITs, or ______ REITs, are also registered with the SEC, but they are not listed on an exchange and are not publicly traded.

Answer 284

1. Nontraded

2. Nonlisted

Question 285

_____ REITs are characterized by greater risks, including lack of liquidity and high fees.

Answer 285

Nontraded

Question 286

Investors in ______ REITs cannot easily convert their investment to cash, but instead must wait until the REIT is listed on an exchange or liquidates its assets.

Answer 286

Nontraded

Question 287

Nontraded REITs typically have high upfront fees, which can be up to ______ of the offering price. ______ costs, such as property acquisition fees and asset management fees, add to the cost of owning a REIT.

Answer 287

1. 15%

2. Transaction

Question 288

______ REITs often offer high distributions, or dividend yields, but they may not be generated by operations. In fact, ______ REITs may use the proceeds from the offering and borrowings to pay distributions.

Answer 288

Nontraded

Question 289

With no public market to determine the value of the shares of a(n) ______ REIT, it is difficult for an investor to gauge current performance. Share valuation is based on ______ of the real estate properties.

Answer 289

1. Nontraded

2. Periodic Appraisals

Question 290

______ REITs are typically ______ managed. They do not have their own employees. Rather than being aligned with the interests of the shareholders, the ______ may collect large transaction fees from the REIT and may work for other REITs in a similar fashion.

Answer 290

1. Nontraded
2. Externally Managed
3. External Manager

Question 291

There are three types of REITs: ______, ______, and ______, which are differentiated by their holdings.

Answer 291

1. Equity
2. Mortgage
3. Hybrid

Question 292

______ REITs are real estate funds or companies that are exempt from SEC registration and whose shares do not trade on a national stock exchange. They are not subject to the same disclosure requirements as stock exchange-listed or public nonlisted REITs.

Answer 292

Private

Question 293

______ REITs are issued pursuant to certain exemptions from SEC registration, including Regulation D and Rule 144A. Under Regulation D, an issuer may sell securities to “______.” Rule 144A exempts securities issues to ______.

Answer 293

1. Private
2. Accredited Investors
3. Qualified Institutional Buyers (QIBs)

Question 294

A(n) ______ REIT investment is usually illiquid and share redemption programs may be limited.

Answer 294

Private

Question 295

Broker costs for ______ REITs may include formation fees, annual management fees, and a percentage of profits or “______”. They are typically externally advised and managed. Minimum investments vary, but are generally ______.

Answer 295

1. Private
2. Promoted Interest
3. High

Question 296

______ REITs invest in real estate, either for income or capital appreciation.

Answer 296

Equity

Question 297

A(n) ______ REIT is a type of equity REIT that provides an income for investors by investing in income-producing properties, such as apartments, shopping centers, or office buildings.

Answer 297

Income

Question 298

A(n) ______ is a type of equity REIT that invests in often established properties that are already producing income, so the investor receives dividends immediately.

Answer 298

Income

Question 299

______ REITs are a type of equity REIT that invests in vacant land and then develops the property and sells it. The objective is to profit through appreciation.

Answer 299

Capital Appreciation

Question 300

______ REITs are a type of equity REIT that typically purchases commercial developments, such as office or retail space, or even apartments.

Answer 300

Capital Appreciation

Question 301

______ REITs invest in real estate mortgages. These mortgages are typically held on commercial properties, and provide immediate income to investors.

Answer 301

Mortgage

Question 302

A(n) ______ REIT is a combination of an equity and a mortgage REIT. It engages in both real property and in mortgages, so is more diversified in its activities.

Answer 302

Hybrid

Question 303

A hybrid REIT can provide both ______ and potential ______.

Answer 303

1. Income

2. Capital Appreciation

Question 304

______ are pooled investment vehicles that are typically structured as either limited partnerships or limited liability companies. Their investment objective is to preserve capital and provide positive or absolute returns under all market conditions.

Answer 304

Hedge Funds

Question 305

______ are very risky investments and have no guarantee that they will provide any investment return at all. The investor could all, or part, of their original capital investment.

Answer 305

Hedge Funds

Question 306

______ use aggressive and, sometimes, complex strategies that involve investing in derivatives (options and futures contracts), distressed or bankrupt companies, volatile international markets, tangible assets such as real estate, and private equities.

Answer 306

Hedge Funds

Question 307

Hedge funds employ the following techniques:

1. ______: borrowing money.
2. ______: simultaneous buying and selling a security in different markets to take advantage of the difference in prices.
3. ______: selling a security that is not owned.
4. ______: buying a security to offset a potential loss.
5. ______: investing in a single issuer or market index.

Answer 307

1. Leverage
2. Arbitrage
3. Short Selling
4. Hedging
5. Concentrating Positions

Question 308

Hedge funds may be broadly categorized by strategies, including the following:

1. ______ : take long and/or short positions in individual stocks or ETFs that partially offset each other, limiting overall equity exposure.
2. ______ : trade various spreads taking advantage of relative price differentials.
3. ______ : trade stocks and bonds issued by companies that are in distress, bankrupt, or involved in a merger.
4. ______ : take directional positions in stock indices, currency exchange rates, interest rates, and commodities.

Answer 308

1. Equity Market Directional Funds
2. Relative Value (or Arbitrage) Funds
3. Corporate Restructuring Funds
4. Macro Trading Funds

Question 309

While hedge funds offer greater investment flexibility relative to traditional investments, they are ______ investments that employ ______ investment strategies. There is often a(n) ______ provision that precludes investors from making withdrawals during a specified initial period.

Answer 309

1. Illiquid
2. Risky
3. Lock-Up

Question 310

The available information about hedge funds is generally ______. If they are ______, they are not subject to the SEC’s registration and disclosure requirements.

Answer 310

1. Limited

2. Unregistered

Question 311

Hedge funds are appropriate only for the ______, ______, ______ investor.

Answer 311

1. Experienced
2. Sophisticated
3. Wealthy

Question 312

If the adviser of a hedge fund manages ______ or more, she would be required to register but the fund itself would not be required to register with the SEC.

Answer 312

$150 million

Question 313

Traditional unregistered hedge funds are regulated by the ______ and ______. As such, they can only accept investment capital from accredited investors or qualified purchasers.

Answer 313

1. Securities and Exchange Commission (SEC)

2. Commodity Futures Trading Commission (CFTC)

Question 314

If a hedge fund were a(n) ______, it would mean that less than 75% of the investments are known in advance.

Answer 314

Blind Pool

Question 315

A hedge fund that has no specific business plan is considered a(n) ______.

Answer 315

Blank Check Company

Question 316

Hedge funds are still subject to the general prohibitions against securities ______.

Answer 316

Fraud

Question 317

______ hedge funds that do not advertise or publicly offer their securities but, rather, are open only to a limited number of wealthy, financially sophisticated investors, are usually not required to register with the SEC. However, the fund’s principal offices must be located in the ______ and assets under management must be below ______.

Answer 317

1. Private
2. U.S.
3. $150 Million

Question 318

Hedge funds typically charge an annual asset management fee of ______ to ______ of assets as well as a performance fee of ______ to ______ of a hedge fund’s profit. Fund managers only get a performance fee is the fund makes money.

Answer 318

1. 1 to 2%

2. 10 to 20%

Question 319

______ (also called ______) are pooled investments in unregistered, private hedge funds. They offer an investor the opportunity to invest in a number of funds through a single investment. This provides greater diversification among investment styles, strategies, and hedge fund managers.

Answer 319

Funds of Funds

Question 320

Funds of funds may register with the ______ under the ______. Additionally, the fund of fund’s securities can be registered for sale to the public under the ______.

Answer 320

1. SEC
2. Investment Company Act of 1940
3. Securities Act of 1933

Question 321

______ have several disadvantages:

1. Shares may be redeemed directly with the fund only if and when offered.
2. Shares are not usually listed on an exchange.
3. There is no secondary market available.
4. Registered ______ may have adverse tax consequences due to the complex nature of their tax structure.
5. Tax reporting information may be delayed.

Answer 321

Funds of Funds

Question 322

An experienced, aggressive investor who is comfortable with a high level of risk and who desires a higher rate of return.

Answer 322

Hedge Fund

Question 323

A retired couple whose top priority is preservation of capital.

Answer 323

Government Bond Fund (in return for safety, the investors must accept a small rate of return)

Question 324

An investor who is approaching retirement and seeks preservation of capital along with a reasonable rate of return.

Answer 324

Balanced Fund

Question 325

An experienced investor with a diversified portfolio who is interested in a particular industry.

Answer 325

Sector Fund (small portion of portfolio)

Question 326

An investor who is concerned about expenses and skeptical that an investment adviser can consistently outperform the market.

Answer 326

Index Fund

Question 327

A young investor saving for retirement.

Answer 327

Growth Fund (with a long investment horizon, the investor can afford to assume greater risk and appreciation potential of growth stocks)

Question 328

An investor with an investment horizon shorter than 3 years.

Answer 328

Money Market

Question 329

An investor who wants stock market exposure but wishes to stay at the stable, high-quality end of the stock spectrum.

Answer 329

Blue Chip Fund

Question 330

A successful investor in a high tax bracket seeking maximum tax relif.

Answer 330

Municipal Bond Fund

Question 331

An investor with a small amount to invest who wants immediate exposure to several investment styles.

Answer 331

Fund of Funds

Question 332

An investor who seeks monthly income.

Answer 332

GNMA Bond Fund (because it pays monthly principal and interest)

Question 333

An investor who desires preservation of capital, but wants a higher yield than a traditional government bond fund.

Answer 333

GNMA Bond Fund (because it pays monthly principal and interest)

Question 334

An investor who seeks an investment allocation which is appropriate for his age and life stage.

Answer 334

Asset Allocation Fund / Target Date Fund

Question 335

An investor who seeks a hedge against inflation.

Answer 335

Precious Metals Fund

Question 336

An investor who wishes to avoid capital gains taxes and seeks a fund that is managed in a tax efficient manner.

Answer 336

Exchange Traded Fund (ETF)

Question 337

An investor who speculates and seeks opportunities to profit from price changes where they believe the changes of gain are relatively high.

Answer 337

Options (hedging their position to avoid losing their entire investment)

Question 338

FINRA considers interactive investment analysis tools ______ and regulates their use by members.

Answer 338

Retail Communications

Question 339

FINRA defines a(n) ______ as an interactive technology that creates simulations that allow investors to see the possible outcomes of various investments, investment styles, and investment strategies, and provides an analysis of potential risks and rewards.

Answer 339

Investment Analysis Tool

Question 340

A member that offers an investment analysis tool to retail customers must make the tool and any templates for reports produced by the tool available to FINRA’s ______ within ______ of its first use. In addition, any retail communications regarding the investment tool must also be submitted within ______ of their first use.

Answer 340

1. Advertising Regulation Department
2. 10 Business Days
3. 10 Business Days

Question 341

A married couple has a large investment portfolio concentrated in stocks and stock mutual funds, including an international and a global fund. They maintain their cash reserves in a money market account at their local bank. They own their own business and earn $600,000 a year. They are looking for a safe investment because they are planning to retire in a few years. They also recognize the need for diversification of their portfolio.

A. Biotechnology Fund
B. Overseas Fund
C. Investment-Grade Corporate Bond Fund
D. Equity Income Fund
E. Capital Appreciation Fund
F. Index Fund
G. Balance Fund
H. Government Bond Fund
I. Municipal Bond Fund
J. Cash Management Fund

Answer 341

I. Municipal Bond Fund

The fund is designed to provide tax-free income creating a tax-exempt current yield for the investor. This portfolio consists of high-quality municipal bonds from several different states and municipalities located east of the Mississippi river. Although the income distributions are exempt from federal income tax, it is important to note that for individual investors the income received may or may not be taxable at a state and local level. Lastly, any capital gains distributed to the investors will be taxed as ordinary income.

The couple has the majority of their investments in the stock market. As the couple moves closer to retirement, they should move some of their portfolio to bonds. Because they have high earnings, they will also be in a high tax bracket. The best choice for them to provide diversification and safety would be the municipal bond fund.

Question 342

A 28-year-old professional who earns $70,000 a year would like to start investing. He has $10,000 to invest and is seeking a secure investment and a periodic investment plan. He knows his long time frame, and should be willing to take some risk. However, he is uncomfortable with the thought of losing money. The investor would prefer modest returns with preservation as a major objective rather than high returns accompanied by high risk.

A. Biotechnology Fund
B. Overseas Fund
C. Investment-Grade Corporate Bond Fund
D. Equity Income Fund
E. Capital Appreciation Fund
F. Index Fund
G. Balance Fund
H. Government Bond Fund
I. Municipal Bond Fund
J. Cash Management Fund

Answer 342

G. Balance Fund

This fund is designed for preservation of capital, income generation, and long-term capital growth. Its strategy currently is to invest 55% of its portfolio in common stocks and 45% in bonds and fixed-income securities. Through diversification, the fund intends to provide protection against downturns in the market and may not fully participate in rising markets. Additionally, the fund may adjust the percentages in equity and debt to preserve capital and maintain a reasonable return based on market conditions. However, it will always maintain a position in each.

The investor is at the beginning of his investment cycle and in theory, should be willing to take some risk and invest in an aggressive growth fund. However, this investor is risk averse and has not had any experience investing in the securities markets. A balanced fund is a good place to invest for high total return and low volatility.

Question 343

A young couple with small children would like to start saving money for their children’s college education. Their first child will be ready to start college in 12 years. This is the first time that they will be investing, so they are concerned about having money later in life for retirement.

A. Biotechnology Fund
B. Overseas Fund
C. Investment-Grade Corporate Bond Fund
D. Equity Income Fund
E. Capital Appreciation Fund
F. Index Fund
G. Balance Fund
H. Government Bond Fund
I. Municipal Bond Fund
J. Cash Management Fund

Answer 343

E. Capital Appreciation Fund

The fund’s objective is to achieve maximum capital appreciation. It invests in stocks of small and medium-size companies that have the potential for significant long-term growth. The fund’s management believes that investing in these small to medium-size companies that are possibly undervalued could show strong growth and create a superior investment return.

The couple requires maximum capital appreciation, and their long-term time frame enables them to handle the fluctuation of the stock market. The best investment for them is the capital appreciation fund that has an investment objective of long-term growth rather than income generation.

Question 344

An investor seeking a long-term growth investment is concerned about inflation and the loss of purchasing power. The investor does not like to pay high commissions or invest in funds with high expense ratios. The investor believes that an investment adviser cannot outperform the overall market in the long run.

A. Biotechnology Fund
B. Overseas Fund
C. Investment-Grade Corporate Bond Fund
D. Equity Income Fund
E. Capital Appreciation Fund
F. Index Fund
G. Balance Fund
H. Government Bond Fund
I. Municipal Bond Fund
J. Cash Management Fund

Answer 344

F. Index Fund

The fund duplicates the price and yield performance of Standard & Poor’s Composite Index of 500 stocks. The fund invests in each of the index’s 500 stocks in approximately the same composition as the index. The portfolio has a low turnover ratio and therefore, has a low expense ratio. In addition, the management fee is very low because the manager only needs to mirror the index.

This investor does not want to pay high fees and is interested in the potential for long-term capital growth. He believes money managers cannot outperform the overall market in the long-term. This would indicate that an index fund would be the most appropriate because it would attempt to match the performance of the stock market.

Question 345

A couple in their mid-thirties make a good living and have sufficient money in their retirement plan. The couple has been saving money to purchase a vacation home and currently have saved over $50,000 for a down payment. They are planning to start shopping for their new vacation home in the next few months.

A. Biotechnology Fund
B. Overseas Fund
C. Investment-Grade Corporate Bond Fund
D. Equity Income Fund
E. Capital Appreciation Fund
F. Index Fund
G. Balance Fund
H. Government Bond Fund
I. Municipal Bond Fund
J. Cash Management Fund

Answer 345

J. Cash Management Fund

The fund maintains a stable net asset value, provides current income, and has check writing privileges. The fund invests in high-quality short-term debt obligations, including U.S. Treasury bills, commercial paper, certificates of deposit, and repurchase agreements.

This couple is planning on buying a vacation home in the next 6 months and will need easy access to the money that they have saved for their down payment. The cash management fund is a money market fund and is very liquid, even allowing check writing privileges, which makes this fund the best match to their objective.

Question 346

A 78-year-old investor is seeking a moderate level of current income to supplement his Social Security benefits and his company’s 401(k) plan. The investor is very conservative and is not willing to risk his principal investment.

A. Biotechnology Fund
B. Overseas Fund
C. Investment-Grade Corporate Bond Fund
D. Equity Income Fund
E. Capital Appreciation Fund
F. Index Fund
G. Balance Fund
H. Government Bond Fund
I. Municipal Bond Fund
J. Cash Management Fund

Answer 346

H. Government Bond Fund

The fund is primarily concerned with preservation of capital. In addition to safety of principal, the fund provides current income. The fund invests in U.S. Treasury notes and bonds, as well as government agencies such as the Government National Mortgage Association. It aims for a current yield higher than the yield of short-term government debt and money market instruments.

The retired investor is looking for maximum safety and current income. All fixed income funds are designed to provide income. The government bond fund offers safety and a higher yield than a money market fund.

Question 347

A couple in their early 50s have a combined annual income of more than $350,000. Their portfolio is well diversified and currently consists of common stocks and bonds that offer a wide range of safety and return potential. The couple has become more concerned about the effects of inflation on the U.S. economy. They are seeking to invest a small percentage of their portfolio in a fund that will provide additional diversification and help hedge against inflation in the U.S.

A. Biotechnology Fund
B. Overseas Fund
C. Investment-Grade Corporate Bond Fund
D. Equity Income Fund
E. Capital Appreciation Fund
F. Index Fund
G. Balance Fund
H. Government Bond Fund
I. Municipal Bond Fund
J. Cash Management Fund

Answer 347

B. Overseas Fund

The fund’s investment objective is to achieve the maximum capital appreciation by investing in common stocks of companies located outside the United States. The fund has selected established companies that are listed on foreign exchanges. The fund’s management has chosen companies that have demonstrated high earning and growth potential. Although the fund may be affected by fluctuations in currency exchange rates, over the long term it may provide protection against downturns in US markets.

These investors have a substantial portfolio that includes both equity and debt investments. However, they have become concerned about the U.S. economy and its effects on their portfolio. They believe it is time to diversify their investments and place a portion of their assets in the international fund.

Question 348

A couple in their mid-forties have three children: ages 9, 12 and 16. They have been accumulating money to provide for their children’s college education. Their oldest child will be entering college in 2 years, and they are not willing to take risks with the money they have accumulated. They need a safe investment that provides regular income to help them meet tuition payments for all three children over the next several years.

A. Biotechnology Fund
B. Overseas Fund
C. Investment-Grade Corporate Bond Fund
D. Equity Income Fund
E. Capital Appreciation Fund
F. Index Fund
G. Balance Fund
H. Government Bond Fund
I. Municipal Bond Fund
J. Cash Management Fund

Answer 348

C. Investment-Grade Corporate Bond Fund

The fund’s investment objective is to try to achieve high current yield accompanied by reasonable risk. It invests its portfolio incorporate debt obligations, both long term and short term, that are in the top three ratings according to Moody’s and Standard &Poor’s.

The couple’s investment goal is to provide for their children’s education starting with the first child in 2 years. They are not willing to take a risk that the stock market have a downturn within that time. They feel that a safe alternative that also provides reasonable returns would be a high-quality corporate bond fund.

Question 349

An investor in her mid-forties is looking for the maximum capital appreciation. She has accumulated a large sum of money and actively manages her own investment portfolio. The investor’s portfolio is well diversified in both debt and equity investments. The investor’s portfolio currently includes common stocks, tax-exempt bonds, international investments, and limited partnerships. The investor has a long-term timeframe and is not averse to risk.

A. Biotechnology Fund
B. Overseas Fund
C. Investment-Grade Corporate Bond Fund
D. Equity Income Fund
E. Capital Appreciation Fund
F. Index Fund
G. Balance Fund
H. Government Bond Fund
I. Municipal Bond Fund
J. Cash Management Fund

Answer 349

A. Biotechnology Fund

The fund has invested in stocks of companies that are focused on innovative products in the biotechnology sector. These companies include pharmaceutical developers and medical equipment suppliers. Fund management continues to evaluate the emerging economic and political trends and to select companies that benefit from technological advances.

This investor has a high net worth and substantial investment experience. This investor is sophisticated enough to evaluate the risk of an investment, balancing that risk against the investment’s potential return. Therefore, this investor is qualified for a speculative investment, such as the biotechnology fund.

Question 350

A retiring couple who have a substantial amount of money that they have saved up over the years would like to discuss new investment opportunities. They are in their early sixties and currently in good health, and are planning to have an active retirement which will include traveling. They have accumulated about $1.5 million, which they plan to use for their retirement. They are concerned about inflation and are comfortable with a reasonable level of risk.

A. Biotechnology Fund
B. Overseas Fund
C. Investment-Grade Corporate Bond Fund
D. Equity Income Fund
E. Capital Appreciation Fund
F. Index Fund
G. Balance Fund
H. Government Bond Fund
I. Municipal Bond Fund
J. Cash Management Fund

Answer 350

D. Equity Income Fund

The fund’s primary objective is current income, with a secondary objective of capital appreciation. The portfolio consists of common stock, preferred stock and convertible securities of large, well-established companies with a history of paying high dividends. Because the investments are inequities, this will help protect against inflation and purchasing power risk.

As the couple prepares for retirement, they want to ensure that they maintain a comfortable standard of living, which includes staying ahead of inflation. A fund that offers both current income and growth potential is the best choice for this couple.