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FIN 307 > Exam 1 - Chapter 4 - [Slides] > Flashcards

Exam 1 - Chapter 4 - [Slides] Flashcards

1
Q

Investment companies

A

Pool money from individual investors and invest in a wide range of se unities or other assets

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2
Q

What are the services the increment companies provide?

A
  • administration & record keeping
  • Diversification & divisibility
  • Professional management
  • Reduced translation costs
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3
Q

Open end investment company

A

Investors can buy shares of a fund directly from investment company

  • Fun issues new shares when investors buy4 in and redeem shared when investors cash out
  • Price at Net Asset Value (NAV)
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4
Q

This type of managed investment companies is known to be

Open-end: _____

A

Mutual Funds

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5
Q

NAV formula =

A

Market value of Assets Minus liabilities
/
Shares outstanding

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6
Q

Mutual funds invest in what

A
  • money market
  • equity
  • sector
  • bond
  • balanced
  • asset allocation and flexible
  • index
  • international
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7
Q

What are the two types of investment

A
  1. Active management

2. Passively management

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8
Q

Active management:

A

Goal to be the market

Beat the S&P 500

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9
Q

Passively management

A

TRack the performance of designated index

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10
Q

Which one is more expensive active management or passively management

A

Active management

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11
Q

Mutual funds by investment Classification

- What % is Equity

A

54.2%

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12
Q

What are the 3 fee structure for cost of Investing in mutual funds

A
  1. Operating Expenses
  2. A commission or sales charge
  3. 12b-1 Charges
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13
Q

Operating expenses

A

Costs in operating portifolio

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14
Q

12b-1 Charges

A

Annual fees charged by mutual fund to pay for marketin/distribution costs

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15
Q

What are the 2 commission or sales charge

A
  1. Front-end load

2. Back-end load (Contingent deferred sales charge)

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16
Q

Does all mutual have the same fee structure

A

No share classes with different fee combinations

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17
Q

Remember front-end load and back-end loads

A

Front end: A front-end load is a commission or sales charge paid when you purchase the shares.
Back-end: A back-end load is a redemption, or “exit,” fee incurred when you sell your shares. Typically, funds that impose back-end loads start them at 5% or 6% and reduce them by one percentage point for every year the funds are left invested. Thus, an exit fee that starts at 6% would fall to 4% by the start of your third year. These charges are known more formally as “contingent deferred sales loads.”

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18
Q

Rate of return formula

A

NAV^1 - NAV^0 + Income and capital gain distributions
/
NAV ^0

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19
Q

NAV ^0 =

A

Initial NAV

20
Q

NAV ^1 =

A

Ending NAV

21
Q

Taxation of mutual fund income

Who is taxes are paid by

A

Investors

22
Q

____ ____ do not control the timing of the sales of securities from the portfolio

A

Fund managers

23
Q

High portfolio turnover leads to ___ ________

A

Tax inefficiency

24
Q

What is the Average Turnover %

A

60%

25
Q

Does the investment company pay taxes?

A

No, only the investors

26
Q

What are the 4 types of Investment Companies

A
  1. Open-end investment company
  2. Closed-end investment company
  3. Unit Investment Trusts
27
Q

Closed-End Investment Company

A

No change in shares outstanding; old investors cash out by selling to new investors

28
Q

How is the Close-End Investment company priced?

A

Price at premium or discount to NAV

29
Q

Unit Investment Trusts

A
  • Fixed portfolio of assets with a definite life
  • unmanaged
  • Total assets have declined from $150 billion in 1990 to $29 billion in 2009
30
Q

Are the unit investment trusts company fixed or constantly changing?

A

Fixed

31
Q

What is a major benefit of investing in a unit investment trust?

A

It’s unmanaged so you don’t have to pay for that fee which can save u a lot of money

32
Q

Other investment organizations

A

Commingled funds
REITS
Hedge Funds
Private Equity Funds

33
Q

Commingled funds

A

Commingled funds are partnerships of investors that pool funds. The management firm that organizes the partnership, for example, a bank or insurance company, manages the funds for a fee.

34
Q

REITs (Real Estate Investment Trust)

A

A REIT is similar to a closed-end fund. REITs invest in real estate or loans secured by real estate. Besides issuing shares, they raise capital by borrowing from banks and issuing bonds or mortgages. Most of them are highly leveraged, with a typical debt ratio of 70%.

35
Q

What’s difference between mutual fund and hedge funds

A

Mutual funds - Invest in only one investment strategy
- They cant get loans to invest in
Hedge funds - Variety of different strategies

36
Q

HEDGE FUNDS 

A

Like mutual funds, hedge funds are vehicles that allow private investors to pool assets to be invested by a fund manager. Unlike mutual funds, however, hedge funds are commonly structured as private partnerships and thus are not subject to many SEC regulations.

37
Q

Private Equity funds are short term or long term

A

Long term

38
Q

Hedge funds are short term or long term

A

Short term

39
Q

Private Equity Funds

A

Equity funds invest primarily in stock, although they may, at the portfolio manager’s discretion, also hold fixed-income or other types of securities. Equity funds commonly will hold a small fraction of total assets in money market securities to provide the liquidity necessary to meet potential redemption of shares.

40
Q

Exchange Traded Funds

Potential advantages

A

Potential Advantages
- Trade Continuously like stocks
( Can be sold short or purchased on margin)
- Lower Costs (Often commission- free ETFs)
- Tax Efficient

41
Q

Exchange Traded Funds

Potential disadvantages

A
  • Prices can depart by small amounts from NAV

- Must be purchased from brokers for a management fee

42
Q

Well known ETF Teacher wants us to know

A

Spiders
Diamonds
Cubes

43
Q

What is spiders

A

S&P 500

44
Q

What is Diamonds

A

Dow Jones Industrials

45
Q

What is Cubes

A

NASDAQ 100

46
Q

Performance of actively managed funds

A

Below the Wilshire index return in 23 of the 39 year as from 1971 to 2009

  • Evidence for persistent superior performance (due to skill and not just good luck) is weak, but suggestive
  • Bad performance more likely to persist

FIN 307 (26 decks)

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