Exam 4- Chapter 17 Flashcards
A fund for which the supply of shares is not fixed but can increase or decrease daily with purchases and redemptions of shares.
open-end mutual fund
A closed-end investment company that specializes in investing in mortgages, property, or real estate company shares.
real estate investment trust (REIT)
Specialized investment companies that have a fixed supply of outstanding shares.
closed-end investment companies
A fund that sells a fixed number of redeemable shares that are redeemed on a set termination date.
unit investment trust (UIT)
mutual fund
let you pool your money with other investors to “mutually” buy stocks, bonds, and other investments
- run by professional money managers who decide which securities to buy
why invest through mutual funds?
- diversification
- liquidity
- professional management
Market value of all assets owned divided by shares outstanding
Net Asset Value (NAV)
- Shares traded on primary market
- Directly bought from (sold to) fund
- All transactions occur at 4pm
- Share price is Net Asset Value (NAV)
- Majority of funds
Open-end Funds
- Shares traded on secondary market
- Share price could deviate from NAV
- Minority of funds
Closed-end Funds
- Attempt to ‘beat’ a benchmark
- Trade frequently
- Fees can be > 1%
- Majority of funds
Active Funds
- Attempt to ‘track’ a benchmark
- Trade infrequently
- Fees often < 0.10%
- Minority of large funds
Passive Funds
short term funds: (3)
- Money market funds
- Tax-exempt
- Ultra short bond funds
types Long-term Funds: (3)
- Equity
- Bond
- Hybrid / Balanced
Funds consisting of common and preferred stock securities.
- Growth
- Income
- Value
- Sector
- International
equity funds
bond funds
Funds consisting of fixed income capital market debt securities.
- Intermediate term
- Long term
- Corporate
- Sovereign
- Municipal
fund managers buy securities in proportions similar to those included in a specified major stock index
index funds
long term mutual funds that are also designed to replicate a particular stock market index
- mostly passive
- generally more liquidity than closed-end funds
- extremely low cost (<20%)
exchange-traded funds (ETFs)
- fixed number of shares
- shares traded on exchange
- price based on NAV
- trading occurs all day
exchange-traded funds (ETFs)
- no limit on shares
- shares not traded on an exchange, but bought from and sold to fund
- price based on NAV
- trades at market close only
open-end mutual fund
- fixed number of shares
- shares traded on an exchange
- price based on supply and demand, not NAV
- trading occurs all day
closed-end mutual funds
marked to market
Describes the prices on outstanding futures contracts that are adjusted each day to reflect current futures market conditions.
equal to the market value of the assets in the mutual fund portfolio divided by the number of shares outstanding.
The net asset value of a share in a mutual fund
A mutual fund with an up-front sales or commission charge that the investor must pay.
load fund
no-load fund
A mutual fund that does not charge up-front sales or commission charges on the sale of mutual fund shares to investors.
Fees relating to the distribution costs of mutual fund shares.
- Covers marketing and administrative expenses
12b-1 fees
Management Fee
generally the largest fee charged
- Compensates managers
Expense Ratio =
Management Fee + 12b-1 Fee
hedge fund
investment pools that invest funds for (wealthy) individuals and other investots (e.g. commercial banks).
- offer a high degree of privacy for their investors
- arent subject to regulations for protection of individuals
a pooled investment fund that holds liquid assets and that makes use of complex trading and risk management techniques to improve investment performance and insulate returns from market risk
- Not required to register with SEC or disclose information about fund (style, holdings, performance)
- Even if they get >100 investors and/or assets > $100 million, still very limited disclosure
- Only “accredited” investors (high minimum investments)
hedge funds
- Borrow money to invest
- Not uncommon for hedge funds to have 20:1 leverage ratio
- Margin Calls (2007 Death Spiral)
Buying on margin
- Borrow a security and sell it
- If it’s price falls, you buy it back at a lower price (sell high, buy low)
- If it’s price increases, you lose money
Short selling
when a trader borrows shares from a broker and immediately sells them with the expectation that the share price will fall shortly after. If it does, the trader can buy the shares back at the lower price, return them to the broker, and keep the difference, minus any loan interest, as profit
- Forecast Stock A will outperform Stock B
- Short Stock B
- Use funds to go long Stock A
- As long as A has a higher return than B, fund profits
- Event Driven, Fixed-Income, Global Macro, etc….
Long/short
market directional - these funds seek high returns using leverage, typically investing based on anticipated events
more risky
market neutral or value orientation - these funds have moderate exposure to market risk, typically favoring a longer-term investment strategy
moderate risk
market neutral - these funds strive for moderate, consistent returns with low risk
risk avoidance
Returns: REVENUE
- payments (dividends)
- capital gains (change in NAV)
___ ___ load ___ revenue
front end loads reduce revenue
Returns: EXPENSES
- Fees (% of assets under management at some point in time)
__ __ load __ expenses
rear end loads increase expenses
