Week 12 Flashcards
What is a closed end fund?
In a closed end fund a fixed number of shares are issued, and supply and demand does not alter this number of shares. They publish their net asset value to indicate a fair value, because supply and demand can mean these funds can trade at significant discounts or premiums to their net asset value.
They can be traded on exchanges and are quite rare.
What makes mutual funds different from ETFs and closed end funds?
They are bought and sold directly from the fund management company, rather than on the exchange?
What seperates ETFs from mutual funds and closed-end funds?
ETFs are convertible into their underlying stocks. If the net asset value of the assets underlying the ETF differs from the ETF share price by more than the transaction costs required a large institution will step in and execute an arbitrage transaction. If the ETF is cheap relative to the net asset value then the institution buys shares and delives them to the ETF manager to have the shares extinguished and delivered to the institution, who sells them. Pushing up the ETF price down the price of underlying assets.
This arbitrage keeps ETFs following their net asset value closely.
What is pragmatic diversification?
Pragmatic diversification occurs when we achieve diversification from a few well chosen mutual funds or ETFs, with no attempt to obtain Markowitz-type optimal diversification.
What is a defined benefit retirement plan? What are the main risks?
In a defined benefit retirement plan the benefits at retirement are defined via some known formula in advance. The employer will bear the risks associated with providing this promised benefit, and will manage this risk by making big contributions to a fund that is managed for all past, present, and future employees. Sadly, if the employer faces poor financial performance they may freeze the defined benefit plan?
What is a defined contribution retirement plan? What are the main risks?
The funds are held in the employees name, and a defined contribution is made to the employees retirement plan, deducted from their pay. In this case the employee bears all the risk, and manages it by contributing enough and choosing investment funds wisely.
Is a CLOB a lit or dark market? what is the difference.
The CLOB is a lit market, in in a dark market we only know the midpoint price.
What is a DRIP?
A DRIP or dividend reinvestment program captures the dividend being paid and reinvests them back into the stock. These can be particularly useful because they are often at a small discount from market price, and don;y have commission. They also allow people who don’t want an income stock to just reinvest the income automatically.
