42 Questions
Which type of mutual fund is most popular based on market share?
Equity funds
What percentage of US individuals had mutual funds in 2015?
44%
What type of securities do individuals in their 80s prefer, according to the text?
Bonds
What does the Sharpe Ratio measure?
Performance relative to risk
What are the two main structures of mutual funds mentioned in the text?
Open-end and closed-end
Which type of fund offers higher returns than bank deposits but is not federally insured?
Money market funds
What type of funds do 20-year-olds favor, according to the text?
Equity Funds
What indices are involved in mutual fund trading, as per the text?
S&P, performance indices, and Net Asset Value (NAV)
What do index funds (ETFs) offer, as mentioned in the text?
Diversification, low fees, and roughly the same return as actively managed funds
What type of mutual fund fees can significantly impact investment returns, as per the text?
Operating expenses
What is the Net Asset Value (NAV) of a mutual fund?
The total value of all securities in the fund's portfolio divided by the number of outstanding shares
What is the primary advantage of liquidity intermediation provided by mutual funds?
The ability to invest in long-term securities while offering quick conversion into cash for investors
What does 'Asset under Management' (AUM) refer to in the context of mutual funds?
The total value of securities held in the fund's portfolio
What is the purpose of denomination intermediation provided by mutual funds?
To enable investment in offerings requiring more capital than an individual investor has
What is one of the benefits of diversification provided by mutual funds?
Realizing diversification even with small amounts of investment
What advantage do mutual funds have in terms of cost negotiation?
They can negotiate lower prices for securities due to the larger pool of funds
In the context of mutual funds, what does AUM Fee refer to?
The fee charged for managing the fund's portfolio based on its total asset under management
What happens to the Net Asset Value (NAV) of a mutual fund if it realizes a gain?
It increases
What is the primary characteristic of a closed-ended fund?
It has a limited number of shares and operates for a fixed duration
Do fund managers consistently beat markets?
Not necessarily, as it is difficult to consistently outperform the market
What is the minimum investment required for hedge funds?
$1 million
What strategy do hedge funds engage in?
Market-neutral trades
What investment vehicle was banned after the 2007/2008 financial crisis?
Short selling
What type of funds do not involve active management?
Index funds
How is the Net Asset Value (NAV) of a mutual fund calculated?
By adding the value of all assets and dividing by the number of outstanding shares
What conflict of interest arises from managers being compensated as a percentage of funds under management?
Conflict with shareholders
What has led to increased government responses in the mutual fund industry?
Late trading and market timing
What type of funds saw more inflows before 2015?
Actively managed funds
What does the new number of shares and price per share depend on when an investor sends a fund a check?
The new fund value and the amount of the check
What type of investment has high profitability but a decreased internal rate of return due to increased competition?
Private equity
What is the new number of shares and price per share after the investor sends a fund a check for $50,000 with no front-end load?
The new number of shares is 8,420 and the price per share remains at $119.05
What is the Net Asset Value (NAV) per share for the mutual fund with 8,420 shares outstanding?
$119.05
If the manager purchases 1,800 shares of stock 3 and the rest is held in cash, what is the value of the stock 3 purchased by the manager?
$214,740
What is the Net Asset Value (NAV) per share for the mutual fund with 8,420 shares outstanding?
$119.05
If the manager purchases 1,800 shares of stock 3 and the rest is held in cash, what is the value of the stock 3 purchased by the manager?
$214,200
What is the new number of shares and price per share after the investor sends a fund a check for $50,000 with no front-end load?
8,420 shares at $119.05 per share
If the manager purchases 1,800 shares of stock 3 and the rest is held in cash, what is the value of the stock 3 purchased by the manager?
$26440
What is the Net Asset Value (NAV) per share for the mutual fund with 8,420 shares outstanding?
$119.05
What is the new number of shares and price per share after the investor sends a fund a check for $50,000 with no front-end load?
New number of shares: 420, Price per share: $119.05
If the investor sends a fund a check for $50,000 with no front-end load, what is the new number of shares outstanding?
8,320
What is the price per share after the investor sends a fund a check for $50,000 with no front-end load?
$118.50
If the manager purchases 1,800 shares of stock 3 and the rest is held in cash, what is the value of the stock 3 purchased by the manager?
$214,710
Study Notes
Understanding Investment Vehicles and Conflicts of Interest
- Hedge funds are available to wealthy investors, require a minimum investment of around $1 million, have high fees (around 1% of assets and 20% of profits), and are highly leveraged.
- ETFs mimic hedge funds but are more accessible, liquid, and have lower fees, and are priced via stock exchanges.
- Hedge funds engage in market-neutral trades and the LTCM investment in Treasury bonds illustrates this strategy.
- Short selling involves borrowing shares, selling them, and then buying them back at a lower price, but it was banned after the 2007/2008 financial crisis.
- Private equity invests in private companies and has high profitability, but the internal rate of return has decreased due to increased competition.
- Conflicts of interest in the mutual fund industry include late trading and market timing, leading to government responses such as requiring more independent directors and imposing redemption fees.
- Index funds do not involve active management and have lower fees than actively managed funds.
- Conflict of interest between shareholders and investment managers arises from managers being compensated as a percentage of funds under management, incentivizing them to increase total assets at the expense of shareholder return.
- Calculating the Net Asset Value (NAV) of a mutual fund involves adding the value of all assets and dividing by the number of outstanding shares.
- When an investor sends a fund a check, the new number of shares and price per share are calculated based on the new fund value and the amount of the check.
- After selling shares, the profit and annualized return can be calculated, and the fund may need to sell assets to raise needed funds.
- Actively managed fund rates saw more inflows, but since 2015 index funds have become more popular due to their lower costs.
Test your knowledge of investment vehicles and conflicts of interest with this quiz. Explore topics such as hedge funds, ETFs, short selling, private equity, mutual funds, index funds, and conflicts of interest in the investment industry.
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