Chapter 9-Specialty Categories

Question 1

Potential problems of ethical funds include:
1) Excluding certain types of companies ____.
2) It is impossible to totally ____.
3) There may be _______ in the portfolio.

Answer 1

1) can limit
2) screen out undesirable businesses
3) diversification holes

Question 2

As a target date fund’s date approaches, the composition starts to favor ___.
Some target-date funds begin with an allocation of ___ in stocks and ___ in bonds, moving to a ____ split at the target date.
These funds either merge into a ____ or adopt an ___.

Answer 2

bonds and cash.
90%; 10%; 50/50
retirement income fund; allocation that preserves purchasing power.

Question 3

3 fund companies manage over ____ of the money in the target date fund category: ____, ____ & ____.
Target date funds are particularly popular in ___.

Answer 3

80%; Fidelity; T. Rowe Price; Vanguard.
retirement plans like 401K plans.

Question 4

Possible problems with target date funds include:
1) ________ of people in a similar target date can be quite different.
2) The greatest concern about target retirement funds is their ____ (according to IBF).

Answer 4

1) financial objectives
2) allocations are all over the board.

Question 5

Mutual fund life cycle studies* show:
1) investors pick ____ than their age warrants.
2) when a couple retires, it should be expected that __.
3) the biggest risk to retirees is ___.

Answer 5

1)more aggressive portfolios
2) at least 1 will reach their 90s.
3) outliving their assets.

Question 6

Most advisors think of FOCUSED funds as being funds holding ____

Answer 6

less than 40 stocks.

Question 7

A focused fund should have …
1) ___ management
2) ____ family
3) superior ____
4) reasonable ____
5) a ____ strategy

Answer 7

1) seasoned
2) a highly regarded
3) long-term performance
4) expenses
5) risk reduction

Question 8

Aggressive investors should probably ____ in a focused fund, and this focused fund should be in the ___ of their portfolio.

Answer 8

only have a small portion of their holdings; aggressive portion.

Question 9

Focused funds with a low turnover tend to also have ___.
Funds that were in the quartile with the fewest ____ and in their category’s ____ quartile had a lower ___ than the category average in ____ of rolling 1-, 3-, 5-, & 10-year periods combined.

Answer 9

low volatility.
stocks; lowest-turnover; SD; over 75%

Question 10

Flexible funds have the potential to _____ environments.
Advisors, investors, and media are wary of flexible funds, but there are no __.
____ was the best known flexible fund manager.

Answer 10

thrive in all sorts of market.
long-term studies indicating that this approach is better or worse than style-specific (growth, value, etc) funds.
Peter Lynch

Question 11

Sector Fund facts
1) You can select hundreds of sector funds representing ___.
2) Funds investing in the same sector may hold ___.
3) The ___ and ___ performing funds are sector funds.
4) Sector funds can be significantly hurt by ___.

Answer 11

1) over 4 dozen industry segments
2) different stocks and use nearly opposite strategies
3) best; worst
4) the performance of just 1 company (since SFs hold so few stocks).

Question 12

Reasons to buy sector funds
1) To invest in the ____ where you may have more of an ear to the ground.
2) To obtain ___ industry or theme.
3) A hands on investor may reason that having a few sector funds allows them to have an ____.
4) To obtain above average ____. Funds focusing on ___ stocks pay some of the largest dividends.
5) To ___ a portfolio. I.e. a gold fund can mitigate high inflation or other catastrophes.

Answer 12

1) industry in which you work
2) concentrated exposure to a promising
3) an industry expert managing each fund
4) income with some growth potential. financial, real estate & utility
5) hedge

Question 13

If a client demands to be in a sector fund, consider the following:
1) long-term ___ and ____ sectors
2) make sure your client ____ years
3) help your client consider what sectors are ____.
4) it may be wise to use ____ funds to reduce overall risk. ___ or ___ are often underrepresented in a portfolio
5) risk-reducing sector funds should make up ____ of a portfolio; generally all other sector funds should ___ of a portfolio.

Answer 13

1) trends; out-of-favor
2) dollar-cost averages over 1-2
3) already represented in the portfolio
4) conservative sector
5) less than 20%; no more than 5-10%

Question 14

Utility funds offer diversification with an R-squared of ____ vs.___ for large cap blend funds and ___ for the S&P 500.

Answer 14

43; 94; 100

Question 15

Correlation to the S&P 500:
Large cap value funds__; Large cap blend funds ___; Large cap growth funds _.
Mid cap value funds & blend funds ___; mid cap growth funds __
Small cap value funds & small cap blend funds __; small cap growth funds __

Answer 15

.97; .99; .94
.90; .87
.84; .83

Question 16

From 1974-2010, dividends accounted for ___ from utility stocks compared to ___ for the S&P 500.

Answer 16

69% of total returns; 42%

Question 17

Bank loan funds are also referred to as ___.
The bank lends money to borrowers with ___.
The bank then packages these loans and sells them to ____; thus, ___ is transferred to purchasers of those packages.

Answer 17

prime rate or senior loan funds.
imperfect credit profiles
institutional investors and funds; all credit risk

Question 18

Bank loan funds can be appealing because ___ even compared to medium or long-term bonds And because yields are ____.

Answer 18

yields are high; adjusted quarterly

Question 19

3 Negatives of bank loan funds are
1) ___ is possible
2) ___ marketability
3) high ___

Answer 19

1) loss of principal
2) limited
3) fees

Question 20

Most bank loan funds only allow ____.
As of early 2024, bank loan funds own debt instruments with an average maturity of ___; the average bank loan fund had ____.
Because the market for these loans is so thin, it is ____ to fulfill redemptions; a quarterly redemption policy allows a ____.
Floating rate longs have correlation of __ to investment grade corporate bonds, __to US gov bonds, __ to US equities, __ to foreign equities.

Answer 20

redemptions quarterly.
5 years; 420 different holdings.
difficult for the fund to find ready buyers; certain level of liquidity.
.1; -.1; .3; .4

Question 21

Floating-rate (bank loan) funds have credit ratings ___.
The interest rate on bank loans is reset every ___; the reset is usually based on the ____.

Answer 21

BB & below.
30-90 days; London Interbank Offered Rate (LIBOR)

Question 22

Most inflation-indexed bond funds are comprised of ___; principal of these is tied to ___.
___ pay interest every 6 months, a fixed rate applied to ____.
Each interest payment is calculated by multiplying adjusted principal by ____.

Answer 22

TIPS; the CPI
TIPS; adjusted principal
1/2 the interest rate

Question 23

On a $1000 bond, it its initial coupon rate is 3% and CPI is 1% after 6 months, principal is adjusted to ___; the investor receives a semiannual payment of ___ (1.5% of ___).

Answer 23

$1010; $15.15; $1010

Question 24

During deflationary periods, ___ bonds can perform extremely well.

Answer 24

medium- and long-term

Question 25

Bear market funds sound appealing, BUT the category’s asset base is ___.
Bear markets occur about once ___; these funds have little ____ and ___ holdings, so expenses tend to be high.

Answer 25

extremely small.
every 4-6 years; competition; limited

Question 26

Market neutral funds balance their ____, giving them zero net market exposure.
Long-short funds either have a consistent ___ or adjust the long-short mix over time.

Answer 26

short and long positions
long bias

Question 27

Long-short funds give smaller investors access to ____.
Although they are less expensive than ___, costs can still be high-as high as ___ expense ratios.

Answer 27

certain hedge fund strategies.
hedge funds (2X)

Question 28

130/30 funds may invest $100 in a basket of stocks, then you borrow stocks valued at $30, then you short those stocks you borrowed (which gives you the cash immediately) and spend that money on more stocks. So $100 buys you ___ worth of stocks while you’re shorting __ of stocks.

Answer 28

$130; $30

Question 29

Merrill Lynch Frontier Index tracks __ of the largest and most highly traded stocks in __ countries.
Over half the index is from stocks in ____ (29%), ___ (7%), ___ (6%), ___ (6%), and __ (5%).

Answer 29

50; 17.
Vietnam; Nigeria; Morocco; Bangladesh; Peru

Question 30

MSCI Frontier Markets Index is comprised of stocks from ___ (i.e. Argentina, ___, Bulgaria, Croatia, … ___, and Vietnam).

Answer 30

26 countries; Trinidad; Qatar

Question 31

A typical target retirement fund ___ once its date is reached.

Answer 31

merges into a retirement income fund

Question 32

A) 1-fund portfolios had the highest ___; adding another fund to these portfolios drops ___.
B) After 4 funds are in a portfolio, the effect of adding additional funds ____ while additional funds can reduce ___.
C) After 7 funds, risk is ____; after ___, SD stays the same regardless of how many funds you add.
D) The more funds you own above ___, the more likely that your funds are ____.

Answer 32

A) SD; SD significantly
B) diminishes; overall portfolio volatility
C) mostly leveled out; 10 funds
D) 10; redundant

Question 33

You obviously want to minimize overlap in holdings within an investor’s portfolio.
___ isn’t a problem, but __ can be very problematic.
Portfolio overlap isn’t a problem during a ___ or ___ market.
One way to gauge overlap is to review the ___ of funds in the ___.
An easier way to determine portfolio overlap is using a fund advisory ____.
Overlap is frequently an issue within ____; it’s not uncommon to see ___ in 2 different funds offered by the same company.

Answer 33

1-2% overlap; 5-8% overlap
flat; rising
top 20 holdings; same broad categories
service’s software.
a fund family; 5-10 of the same stocks

Question 34

Deposits needed to reach $1 million with an 8% return.
Over 30 years, you need ___ in monthly deposits for a total deposit of ___.
Over 15 years, you need ___ in monthly deposits for a total deposit of ___.
Over 5 years, you need ___ in monthly deposits for a total deposit of ___.

Answer 34

$681; $245K
$2,842; $512K
$13,153; $789K

Question 35

A ___ mix has less risk and similar return as a ___ allocation to small caps.
On average, stocks that leave the NASDAQ lose ___.

Answer 35

40/60 (mid cap/S&P 500); 40%
over 50% of their value