Pooled Investments - Review Questions Flashcards
Assume that, as of yesterday’s trading day, the Orion Fund held $11,700,000 worth of common stock securities, $3,000,000 of cash, and $700,000 of liabilities. If the fund had 1,000,000 shares outstanding, then yesterday’s NAV would be what amount?
NAV = ($11,700,000+$3,000,000−$700,000)/1,000,000=$14.00
Which of the following are advantages of investing in a pooled investment over buying individual securities? (Pick all that are true.)
1) The ability to take advantage of more risk
2) The ability to save money on transaction costs and get a better price of the securities
3) The ability to pick and choose which securities to buy and sell
4) The ability to lower risk by investing in a greater variety of securities at once
5) The ability to sell shares back to an issuer who stands ready to buy them back
6) The ability to control capital gains tax
2) The ability to save money on transaction costs and get a better price of the securities
4) The ability to lower risk by investing in a greater variety of securities at once
5) The ability to sell shares back to an issuer who stands ready to buy them back
Investing in mutual funds provides investors with many benefits. For instance, by investing in more than one company, the fund increases its diversification, creating less risk for investors. Investing in mutual funds is also more cost efficient, and provides individual investors with both volume discounts and exposure to a wider variety of stocks. Another benefit to investors is that open-end funds stand ready to buy back shares, making it easy for investors to sell their shares.
Which of the following is true about the India Fund that has a NAV of $9 and a market price of $10? (Pick all that are true.)
1) It is a closed-end fund
2) It is at premium
3) It is at a discount
4) It is an open-end fund
5) Its supply is greater than its demand
6) Its demand is greater than its supply
1) It is a closed-end fund
2) It is at premium
6) Its demand is greater than its supply
The India Fund is a closed-end fund because its NAV is different from its market price. This does not happen to an open-end fund. It is at premium because its market price is greater than its NAV. Therefore, its demand is greater than its price supply.
Which of the following statements concerning the diversification of mutual funds is correct?
1) An index fund is generally more diversified than a sector fund.
2) An international fund is likely to be more diversified than a global fund.
3) A country fund is likely to be less diversified among industries than a single sector fund.
4) An all-equity asset allocation fund is likely less diversified than an index fund.
1) An index fund is generally more diversified than a sector fund.
An index fund will typically have investments in many sectors, and therefore will most likely be more diversified than a sector fund. Global funds invest in U.S. companies as well as foreign companies while international funds have only foreign stocks. A country fund can invest in different sectors of that country, therefore will typically be more diversified than a single sector fund. An all-equity asset allocation fund invests in more generally more areas than any particular index fund.
What is the net asset value of an investment company with $28,000,000 in assets, $2,300,000 in liabilities, $25,700,000 in owner’s equity, and 1,800,000 shares outstanding?
1) $14.28
2) $15.56
3) $1.09
4) $16.83
1) $14.28
The net asset value is found by taking the asset value, subtracting the liabilities, and dividing this amount by the shares outstanding. The calculation is: $28,000,000- $2,300,000/1,800,000= $14.28
Which of the following statements regarding open-end mutual fund shares is (are) correct?
I) Shares are always redeemed at NAV
II) Shares may sell above or below NAV
III) Shareholders can redeem shares at quoted prices on stock exchanges
IV) Real time prices are readily available
I and III only I only I, II and III only III and IV only
I only
Shares are redeemed at their net asset value. Prices for open-end mutual funds are not known until the closing of the market, and do not have price quotations on stock exchanges during trading hours. Open-end mutual funds may have expenses (loads), but they are in addition to NAV.
Which of the following statements concerning closed-end investment companies is correct?
1) They never use hedging techniques.
2) Market supply and demand determine share prices.
3) Shareholders must sell shares to the fund when they liquidate their share holdings.
4) The capitalization of these funds is always changing.
2) Market supply and demand determine share prices.
Closed-end funds are traded on security exchanges. Therefore, supply and demand determine share prices. The capitalization of closed-end funds is fixed. Investors sell their shares to other investors, not to the fund. Closed-end funds may use hedging as well as leverage as part of their strategies.
Which of the following statements concerning money market mutual funds is (are correct)?
1) The net asset value can never fall below $1 per share.
2) The interest rate is relatively high because of their low liquidity.
3) They typically have no purchase or redemption fees.
(1) only (3) only (1) and (2) only (1), (2), (3) only
(3) only
Money market funds typically have no sales commission or redemption fees. Interest rates are generally low for these funds because the underlying investments are liquid and short-term. Although rare, It is possible for money market funds to “break the buck”, and have prices at times below $1 per share. This happens at times due to several factors, including credit quality of underlying holdings.
Which of the following fixed income funds typically has the highest dividend yield?
1) Treasury Inflation Protected Bond Fund
2) Money Market Fund
3) Investment Grade Corporate Bond Fund
4) Junk Bond Fund
4) Junk Bond Fund
Junk bond funds, otherwise known as high yield bond funds, invest in corporate bonds with lower ratings, and give higher income payments than higher rated bonds, such as investment grade bond funds. Treasury Inflation Protected funds pay shareholders a typically very low interest return. Money market funds invest in short-term, liquid securities, which pay low interest rates.
