chp 7 - mock exam

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What is one of the main reasons for investing collectively in an investment fund?

To avoid paying any fees for managing the fund
To have full control over the investments made
To access the investing skills of the fund manager (correct)
To guarantee superior results during market downturns

Why might an investor end up spending a large amount on commission if they make individual purchases?

For easier diversification across different sectors
Due to minimum commission rates on each purchase (correct)
As a result of guaranteed high profits on individual investments
Because individual purchases attract higher taxes

What is one of the drawbacks of actively managed investment funds mentioned in the text?

They offer diversification across different investments
They often fail to beat their benchmarks (correct)
They have lower entry fees compared to passive funds
They guarantee higher returns during market downturns

What purpose do the fees charged by fund managers serve as mentioned in the text?

Cover fund managers' salaries, technology, and research (C) Signup and view all the answers

Why do few investors choose to manage their portfolios without professional help?

Lack of time, skill, and inclination to follow markets closely (C) Signup and view all the answers

Why might an investor choose to invest in an investment fund rather than making individual purchases?

To access the investing skills of the fund manager. (B) Signup and view all the answers

What is a key advantage of investing in an investment fund with pooled investments?

Reduced risk through diversification from an industry perspective. (C) Signup and view all the answers

What is one reason why investment funds might choose to invest in shares from different sectors?

To achieve diversification from an industry perspective. (C) Signup and view all the answers

What is one of the purposes of the fees charged by fund managers for their services?

To cover the cost of technology and research. (B) Signup and view all the answers

Why do some investors opt for passive investing over actively managed funds, according to the text?

Due to the inconsistent performance of actively managed funds. (A) Signup and view all the answers

What is a potential drawback of employing indexation?

Higher portfolio turnover compared to active portfolios (D) Signup and view all the answers

How does the timing of dividend reinvestment differ between passive funds and most indices?

Most indices reinvest dividends after the ex-dividend date (C) Signup and view all the answers

What can lead to a tracking error in passive portfolios?

Rebalancing the portfolio based on index changes (C) Signup and view all the answers

Why do index funds assume dividends are reinvested on the ex-dividend date?

To mimic the performance of recognized indices (A) Signup and view all the answers

What is a key assumption underlying the concept of indexation?

Efficiency in stock pricing and market performance (D) Signup and view all the answers

What is the primary role of the unit trust manager in a unit trust?

Outsourcing decision-making to an investment manager (D) Signup and view all the answers

What is the purpose of the bid price in unit trusts?

The price the investor pays when selling units (B) Signup and view all the answers

How are the units in a unit trust priced on a daily basis?

By calculating the Net Asset Value (NAV) of the underlying constituents (A) Signup and view all the answers

Why are unit trusts described as dual-priced investments?

Due to the presence of bid and offer prices (A) Signup and view all the answers

What does the bid-offer spread represent in unit trusts?

The difference between the selling and buying prices (A) Signup and view all the answers

What differentiates a trustee from a unit trust manager in a unit trust?

The trustee is the legal owner of assets in the trust. (D) Signup and view all the answers

How are unit trust prices calculated based on the NAV?

Considering daily values at bid and offer prices (A) Signup and view all the answers

In a unit trust, what role does the trustee play with regard to asset ownership?

Holding assets for the beneficial owners (C) Signup and view all the answers

What is a distinguishing factor between open-ended funds and unit trusts mentioned in the text?

Unit trusts involve both unit trust managers and trustees. (B) Signup and view all the answers

Why might large banks or insurance companies be common trustees of unit trusts?

Due to their reputation for asset safeguarding (D) Signup and view all the answers

What is the primary role of an authorised corporate director (ACD) in an OEIC?

Undertaking day-to-day management of the fund (A) Signup and view all the answers

How is the structure of an OEIC similar to a SICAV?

Being structured as a company with investors holding shares (D) Signup and view all the answers

What is a distinguishing feature of an OEIC being single-priced?

Simplification of pricing calculations (B) Signup and view all the answers

How does the role of an OEIC depository compare to that of a trustee in a unit trust?

The trustee acts as legal owner while the depository looks after investments (D) Signup and view all the answers

What does the term 'OEIC' stand for and where is it predominantly used?

Open-Ended Investment Company, predominantly used in the UK (D) Signup and view all the answers

What key characteristic differentiates an investment trust from a unit trust?

Investment trusts can borrow money for long-term investment, while unit trusts cannot. (D) Signup and view all the answers

Which statement accurately describes a feature of investment trust companies?

They can use borrowing to invest in a more diverse range of stocks and shares. (B) Signup and view all the answers

What is a common distinguishing feature of split capital investment trusts?

They issue more than one type of share, such as ordinary shares and preference shares. (D) Signup and view all the answers

What enables some investment trust companies to invest in a broader portfolio of stocks and shares?

Utilizing gearing or leverage through long-term borrowing (A) Signup and view all the answers

In what way do investment trusts differ from OEICs and unit trusts with regard to borrowing money?

Investment trusts are not allowed to borrow money on a long-term basis. (D) Signup and view all the answers

What type of management style is employed by ETFs, as described in the text?

Passive investment management (D) Signup and view all the answers

Which type of indices do most index tracker funds, including ETFs, typically follow?

Market capitalisation-weighted indices (C) Signup and view all the answers

How do ETFs differ from investment trusts in terms of fund size?

ETFs are open-ended funds (B) Signup and view all the answers

What is the primary goal of passive investment management in ETFs?

To match the performance of a specific market index (A) Signup and view all the answers

How does an ETF ensure that its portfolio's performance aligns with the market index it is tracking?

By undertaking trading activities only as needed (A) Signup and view all the answers

Which index replication method is the most expensive but also the most accurate?

Full replication (B) Signup and view all the answers

What is a downside of using the stratified sampling method for index replication?

It lacks statistical analysis (D) Signup and view all the answers

In synthetic replication, what risk is the investor exposed to?

Counterparty risk (A) Signup and view all the answers

What is a characteristic of ETF shares trading on the stock exchange?

The ETF share price reflects the value of investments in the fund (B) Signup and view all the answers

What charge is typically deducted from investment funds?

Management charge (B) Signup and view all the answers

Which characteristic makes hedge funds inaccessible to most private individuals?

High initial investment requirements (B) Signup and view all the answers

What is a key feature that allows hedge funds to potentially enhance returns?

Ability to borrow funds and use derivatives (B) Signup and view all the answers

What investment style are hedge funds generally aimed at producing?

Absolute returns (B) Signup and view all the answers

What does the imposition of an initial 'lock-in' period in hedge funds help maximize?

Manager's investment freedom (C) Signup and view all the answers

What is a common fee structure characteristic of hedge funds?

Performance-related fees (C) Signup and view all the answers

What is the primary goal of traditional 'absolute return' hedge funds?

To profit regardless of the general movements of the market (B) Signup and view all the answers

How do hedge funds aim to profit regardless of general market movements?

By holding both long and short positions in asset classes (A) Signup and view all the answers

What distinguishes traditional 'absolute return' hedge funds from other hedge fund styles?

They attempt to profit regardless of market movements (B) Signup and view all the answers

Which factor has led to a wide range of complex hedge fund strategies according to the text?

The innovation in the field of hedge funds (D) Signup and view all the answers

What is one of the key reasons why generalizing about hedge funds is cautioned against?

There are many different styles of hedge funds with varying risk levels (C) Signup and view all the answers