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Questions and Answers
Why might an investor choose a mutual fund or ETF over investing in the stock of a single, rapidly growing company?
Why might an investor choose a mutual fund or ETF over investing in the stock of a single, rapidly growing company?
- Mutual funds and ETFs provide guaranteed high returns, unlike individual stocks.
- Mutual funds and ETFs are actively managed to always outperform individual stocks. (correct)
- Mutual funds and ETFs offer diversification, reducing risk by spreading investments across many companies.
- Investing in a single stock requires more capital than investing in mutual funds or ETFs.
Fund 2 is described as a technology fund. What is the most accurate description according to the content?
Fund 2 is described as a technology fund. What is the most accurate description according to the content?
- It invests in large, international growth companies.
- It invests in all types of technology companies.
- It invests in every stock in the US. (correct)
- It invests exclusively in semiconductor companies.
If an investor wants broad diversification across the U.S. stock market, which of the funds would be most suitable?
If an investor wants broad diversification across the U.S. stock market, which of the funds would be most suitable?
- Fund 4: International
- Fund 2: Technology
- Fund 1: Semiconductors (correct)
- Fund 3: Every stock in the US
An investor is considering Fund 5. What asset allocation strategy does Fund 5 employ?
An investor is considering Fund 5. What asset allocation strategy does Fund 5 employ?
Which statement accurately describes a key difference between actively and passively managed funds?
Which statement accurately describes a key difference between actively and passively managed funds?
Sandra invests $350 in a mutual fund with a 5.5% front-end load. What amount of her investment actually goes toward purchasing shares?
Sandra invests $350 in a mutual fund with a 5.5% front-end load. What amount of her investment actually goes toward purchasing shares?
Gregg bought $500 worth of a mutual fund, but it decreased in value to $450. He then sold it with a 6% back-end load. What was Gregg's total loss?
Gregg bought $500 worth of a mutual fund, but it decreased in value to $450. He then sold it with a 6% back-end load. What was Gregg's total loss?
Why is understanding a fund's expense ratio important for an investor?
Why is understanding a fund's expense ratio important for an investor?
Dominique pays a 2% assets under management fee to her advisor and has an average fund expense ratio of 1.25%. If her portfolio is $250,000, what total dollar amount will DOMINIQUE pay?
Dominique pays a 2% assets under management fee to her advisor and has an average fund expense ratio of 1.25%. If her portfolio is $250,000, what total dollar amount will DOMINIQUE pay?
What describes a key difference between how mutual funds and ETFs are traded?
What describes a key difference between how mutual funds and ETFs are traded?
Flashcards
Diversification
Diversification
Owning a wide variety of investments instead of concentrating in a few, reducing risk.
Passively Managed (Index) Funds
Passively Managed (Index) Funds
Funds that aim to match the returns of a specific market index, like the S&P 500.
Actively Managed Funds
Actively Managed Funds
Funds managed by professionals who actively buy and sell investments to beat the market.
Expense Ratio
Expense Ratio
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Front-End Load
Front-End Load
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Back-End Load
Back-End Load
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ETFs (Exchange Traded Funds)
ETFs (Exchange Traded Funds)
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Mutual Fund
Mutual Fund
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Stock Funds
Stock Funds
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Balanced funds
Balanced funds
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Study Notes
Mutual Funds and ETFs
- Investing in mutual funds or ETFs provides diversification
- Diversification is key to long-term investment success, as it guarantees a share of the winners
Mutual Fund Investment Objectives
- Fund 1 invests in semiconductors (processing chips) and ignores other companies.
- Fund 2 focuses on technology stocks and is more diversified than Fund 1, but omits 10 of 11 market sectors like healthcare, utilities, real estate, and financials.
- Fund 3 invests in every stock in the U.S., offering maximum diversification within the U.S.
- Fund 4 invests internationally in large growth companies, excluding U.S., small, and mid-sized companies.
- Fund 5 holds 2/3 stocks and 1/3 bonds within the U.S., is balanced and well-diversified and one of the oldest mutual funds.
Actively vs Passively Managed Funds
- Actively managed funds aim to outperform the market, while passively managed funds try to match the market
- Actively managed funds are more expensive due to higher expense ratios
- Actively managed funds employ professionals for daily trading, unlike passively managed funds that follow a formula.
- Passively managed funds have historically outperformed actively managed funds
Front-End Load Investment Scenario
- A 5.5% front-end load on a $350 investment results in $19.25 going towards the load
- The actual investment amount is $330.75
Back-End Load Investment Scenario
- A $500 mutual fund investment with a 6% back-end load declines to $450
- The back-end load is $27
- The total loss, including the investment decline, is $77.
Expense Ratios in Funds
- An expense ratio is the percentage of investment used to pay fund managers.
- Minimizing expense ratios is crucial as they represent guaranteed losses.
- A fund with a 6.1% expense ratio would cost $6,100 annually on a $100,000 investment.
- A fund with a 0.03% expense ratio would cost $30 annually on a $100,000 investment.
Investment Advisor Fees
- Investment fees on $250,000 at a 3.25% rate totals $8,125.
- With a 4% investment return, the actual return after fees is 0.75%.
Mutual Funds vs. ETFs
- Both mutual funds and ETFs offer diversification across various sectors.
- Mutual funds trade once daily at 4 pm
- ETFs trade continuously like stocks between 9:30 am and 4:00 pm.
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Description
Exploring mutual fund and ETF investments for diversification. Understand how fund investment objectives impact diversification. Comparing actively vs. passively managed funds and their expense differences.
