Investments Analysis And Management 3rd Canadian Edition By W. Sean Cleary – Test Bank
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Sample
Questions
Factual
3. Which of the following statements regarding investment
company prices is not true?
a. The effective price for open-end investment companies is the NAV.
b. Open-end shares often sell at discounts from their actual per-share value.
c. Closed-end shares may sell at discounts from their actual per-share value.
d. All of these statements are true.
Answer: b
Topic: Closed-End Funds
Level of Difficulty: Difficult
Type: Factual
4. Which of the following trade on stock exchanges?
a. unit investment trusts
b. closed-end investment companies
c. open-end investment companies
d. All trade on stock exchanges.
Answer: b
Topic: Closed-End Investment Funds
Level of Difficulty: Moderate
Type: Factual
5. Which of the following is not a reason for investing indirectly through
investment funds?
a. The investor has a small capital base and cannot properly diversify on their
own.
b. The investor does not have adequate time to manage the investment portfolio.
c. The investor perceives a benefit to invest exclusively in the shares of one
corporation.
d. The investor does not wish to manage their own portfolio.
Answer: c
Topic: Investing Indirectly through Investment Funds
Level of Difficulty: Moderate
Type: Conceptual
6. Mutual funds that are constantly changing their capitalization as new shares
are sold and
outstanding shares are redeemed are also known as:
a. unit investment trusts.
b. closed-end investment funds.
c. regulated investment companies.
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d. open-end investment funds.
Answer: d
Topic: Open-End Investment Funds (Mutual Funds)
Level of Difficulty: Easy Type: Factual
7. It is not important to have a secondary market for mutual funds because:
a. investors hold the securities till maturity.
b. investors trade between themselves.
c. investors sell their shares back to the company.
d. banks will cash their shares as long as they have accounts at the bank.
Answer: c
Topic: Open-End Investment Funds (Mutual Funds)
Level of Difficulty: Easy Type: Factual
8. For closed-ended funds:
a. if NAV > market price, the fund is selling at a discount.
b. if NAV < market price, the fund is selling at a discount.
c. if NAV > market price, the fund is trading at a premium.
d. Closed-ended funds cannot trade at either a premium or a discount.
Answer: a
Topic: Closed-End Investment Funds
Level of Difficulty: Moderate
Type: Factual
9. Which of the following is an objective of a money market mutual fund?
a. Growth
b. Capital gains
c. Long-term capital appreciation
d. None of the above is an objective of a money market fund.
Answer: d
Topic: Money Market Funds
Level of Difficulty: Easy
Type: Factual
10. Mutual funds may be affiliated with an underwriter. This
means:
a. the underwriter has an exclusive right to distribute shares.
b. the underwriter selects the securities in the portfolio.
c. there is no risk to the issuer of the mutual fund.
d. there is no risk to the investor of the mutual fund.
Answer: a
Topic: Open-End Investment Funds (Mutual Funds)
Level of Difficulty: Difficult
Type: Factual
11. A professionally managed fund that is sold to sophisticated high net worth
investors that may
pursue higher risk positions not available to more traditional mutual fund
investors is known as:
a. a specialty fund.
b. an international or global fund.
c. an ethical fund.
d. a hedge fund.
Answer: d
Topic: Equity and Bond and Income Funds
Level of Difficulty: Moderate
Type: Factual
12. The most common type of payment for load fees in Canada is:
a. front-end sales charges.
b. back-end (redemption) charges.
c. giving the investor the option of front- or back-end charges.
d. no loads.
Answer: c
Topic: Mutual Funds Level of Difficulty: Difficult
Type: Factual
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13. In addition to load fees, a mutual fund investor may also
have to pay:
a. NAV.
b. NAVPS.
c. MER.
d. EFT.
Answer: c
Topic: Mutual Funds Level of Difficulty: Moderate
Type: Factual
14. No-load funds sell:
a. at net asset value.
b. below net asset value.
c. above net asset value.
d. at a discount.
Answer: a
Topic: Mutual Funds
Type: Factual
Level of Difficulty: Easy
15. No-loads charge no sales fee because:
a. they are legally prohibited from doing so.
b. they charge a redemption fee instead.
c. they have no sales force.
d. they charge a back-end load fee instead.
Answer: c
Topic: Mutual Funds Level of Difficulty: Moderate
Type: Factual
16. A fund that has a sales charge of 2 to 3 percent is said to
be a:
a. back-end load fund.
b. discount fund.
c. front-end load fund.
d. low load fund.
Answer: d
Topic: Mutual Funds Level of Difficulty: Difficult
Type: Factual
17. Which of the following is true when one looks at both mutual
funds in relation to ETFs?
a. ETFs are more like mutual funds than closed-ended investment companies.
b. There are no commission fees when purchasing an ETF.
c. ETFs have lower MERs than mutual funds.
d. ETFs can be redeemed any time by the holder just like a mutual fund holder.
Answer: c
Topic: Exchange Traded Funds (ETFs)
Level of Difficulty: Difficult
Type: Factual
18. Which of the following is not a feature of an ETF?
a. ETFs are priced continuously during a trading day.
b. ETFs can only be purchased in a cash account and cannot be margined.
c. ETFs can be sold short.
d. Most ETFs are passively managed funds designed to mimic the performance of a
market index.
Answer: b
Topic: Exchange Traded Funds (ETFs)
Level of Difficulty: Difficult
Type: Factual
19. Which of the following statements regarding fund expenses and performance
is true?
a. The higher-performing funds generally have the highest expenses.
b. The stock funds generally have higher expenses than bond funds.
c. The index funds generally have higher expenses than non-index funds.
d. The lower performing funds generally tend to have the highest expenses.
Answer: d
Topic: How important Are Expenses?
Level of Difficulty: Difficult
Type: Factual
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20. Which of the following is not an ETF?
a. Spider
b. Diamonds
c. Cubes
d. LSVCC
Answer: d Topic: Exchange Traded Funds (ETFs)
Level of Difficulty: Easy
Type: Factual
21. One of the biggest advantages of passively managed country
funds is their:
a. higher performance.
b. lower expenses.
c. increased liquidity.
d. decreased risk.
Answer: b
Topic: Investing Internationally through Investment Funds
Level of Difficulty: Moderate
Type: Factual
22. LSVCCs have all of the following characteristics except:
a. They must be sponsored by labour organizations.
b. Their specific mandate is to invest in small to medium-size business.
c. Among their main purposes are to create and protect jobs.
d. They increase the amount of angel and bridge financing in the market.
Answer: d
Topic: Labour Sponsored Venture Capital Corporations (LSVCCs)
Level of Difficulty: Moderate
Type: Factual
23. An example of a mutual fund “supermarket” is a:
a. large mutual fund family that offers funds in a large variety of funds.
b. brokerage firm that offers funds of various fund families through one
source.
c. mutual fund family that offers banking, insurance and other financial
services.
d. brokerage firm that offers its own funds to account holders.
Answer: b
Topic: Mutual Funds Level of Difficulty: Moderate Type: Factual
24. Funds that have the unique feature of guaranteeing that, regardless of how
poorly the fund
performs, investors are entitled to at least a minimum percentage of their
total investments after a
certain period of time are referred to as:
a. segregated funds.
b. hedge funds.
c. ETFs.
d. LSVCCs.
Answer: a
Topic: Segregated Funds
Level of Difficulty: Moderate Type: Factual
25. All of the following statements about Labour Sponsored Venture Capital
Corporations (LSVCCs)
are true except:
1. Eligible investments are restricted to taxable Canadian businesses that are
active in
Canada.
2. LSVCCs may be considered hybrid securities, since they are speculative
investments
that offer tax benefits.
3. RRSPs holding LSVCCs are allowed to hold double the current 20% foreign
content.
4. Unlike mutual funds, LSVCCs are not restricted to 10% ownership in a given
company.
a. 1 and 2
b. 1 and 3
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c. 1, 2, and 4
d. All of these statements are true.
Answer: d
Topic: Labour Sponsored Venture Capital Corporations (LSVCCs)
Level of Difficulty: Moderate
Type: Conceptual
TRUE-FALSE
1.
Despite the popularity of mutual funds, investors still directly
hold a majority of all Canadian
publicly traded stocks.
Answer: False
Topic: Investing Indirectly through Investment Funds
Level of Difficulty: Moderate
Type: Factual
2.
Buying units in a mutual fund is an example of direct investing.
Answer: False
Topic: Investing Indirectly through Investment Funds
Level of Difficulty: Easy
Type: Factual
3.
Investment funds offer investors an easy vehicle for
diversification, where funds from thousands of
investors are used to buy a wide variety of securities.
Answer: True
Topic: What Is an Investment Fund?
Level of Difficulty: Easy
Type: Factual
4.
The NAV of a mutual fund considers both realized and unrealized capital
gains.
Answer: True
Topic: Types of Investment Funds
Level of Difficulty: Moderate
Type: Factual
5.
Value funds would be more likely to buy stock based on a sound
earnings record, while growth
funds might invest in companies with limited or no earnings records.
Answer: True
Topic: Equity and Bond and Income Funds
Level of Difficulty: Moderate
Type: Factual
6.
Loaded funds generally outperform the no-load funds.
Answer: False
Topic: Mutual Funds Level of Difficulty: Difficult
Type: Factual
Most loaded funds do not charge a redemption fee.
Answer: True
Topic: Mutual Funds Level of Difficulty: Moderate
Type: Factual
7.
8.
Investors desiring no-load funds must generally seek them out
since there is no sales force.
Answer: True
Topic: Mutual Funds Level of Difficulty: Easy
Type: Factual
9.
No-load funds charge a one-time expense fee to cover all
operating expenses.
Answer: False
Topic: Mutual Funds Level of Difficulty: Difficult
Type: Factual
10.
Total return for a mutual fund includes capital gains less any
reinvested dividends.
Answer: False
Topic: Mutual Funds Level of Difficulty: Difficult
Type: Factual
11.
By showing average total return for mutual funds, investors are
able to make direct comparisons
among funds as to their performance.
Answer: True
Topic: Mutual Funds Level of Difficulty: Moderate Type: Factual
12.
Passively managed country funds are designed to match a stock
index of a particular country.
Answer: True
Topic: Exchange-Traded Funds (ETFs)
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Level of Difficulty: Moderate
Investments: Analysis and Management, Third Canadian Edition
Type: Factual
13.
Global funds tend to hold a higher percentage of their portfolio
in domestic securities than do
international funds.
Answer: True
Topic: Major Types of Mutual Funds
Level of Difficulty: Difficult
Type: Factual
14.
ETFs funds tend to have lower MERs than most mutual funds.
Answer: True
Topic: Exchange-Traded Funds (ETFs)
Level of Difficulty: Moderate
Type: Factual
15.
If the NAV is greater than the market price on a closed-end
fund, the fund is selling at a premium.
Answer: False
Topic: Closed-End Funds
Level of Difficulty: Easy
Type: Factual
16.
A disadvantage to LSVCCs is that they do not provide any tax
breaks.
Answer: False
Topic: Labour Sponsored Venture Capital Corporations (LSVCCs)
Level of Difficulty: Easy
Type: Factual
17.
Segregated Funds are sold by insurance companies and are required
by law to guarantee that at a
minimum, investors will receive all of their contribution back after a stated
amount of time.
Answer: False
Topic: Segregated Funds
Level of Difficulty: Easy
Type: Factual
SHORT ANSWER
1. Briefly explain the fees charged by funds.
Answer: Load fees are sales charges and management fees include advisory fees
and operating
expenses.
2. What are the main differences between a closed-end and an open-end
investment company?
Answer: A closed-end investment company has a fixed number of shares, and the
price depends
on supply and demand. An open-end fund’s shares increase as long as new
investors contribute
money, and the price is the net asset value of the securities owned.
3. Would one expect to find higher P/E ratios in the shares that are purchased
for an aggressive growth
fund or in a growth and income fund?
Answer: One would expect higher P/Es in the shares for an aggressive growth
fund because
investors are willing to pay a high current price for expected future growth.
4. Would you recommend a 65-year old retiree to invest all of his/her
retirement assets in an income
fund?
Answer: Probably not. The retiree may have a long time to live and should
consider investing
part of the portfolio in growth funds to provide protection against inflation.
The individual
circumstances of the retiree including attitude toward risk, need for liquidity
and expected life span.
5. You have decided to invest in an aggressive growth fund for long-run future
needs. You have a
publication listing a number of such funds with their most recent 12-month
total returns. Is this a
good predictor of future performance?
Answer: Not necessarily. The best fund last year may or may not be in the
rankings next year. The
literature is divided on the usefulness of past performance in predicting fund
performance in the
future. Some investors prefer longer-run performance measures such as five-year
or ten-year
compounded returns, but none are sure-fire guides to future performance.
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6. How is the individual investor’s income tax position affected
by owning investment companies
compared to owning securities directly?
Answer: The investor’s tax position should be the same whether he/she invests
indirectly through
an investment company or directly in the securities themselves. The investment
companies are
intermediaries that pass on income and losses to the shareholder.
7. Does an investor with $5,000 to invest have a wide or narrow selection of
mutual funds available?
Answer: An investor with $5,000 has a wide range of funds from which to choose,
because a
large majority of mutual funds have minimum investment requirements of $5,000
or less.
8. Which classification of funds are expected to have the lowest management
fees?
Answer: Index funds, particularly ETFs—due to passive investment strategy.
9. Does one mutual fund provide all the diversification that an investor needs?
Answer: One fund typically has many (perhaps several hundred) securities, which
should provide
adequate diversification for risks that are unique to any particular company.
Nonetheless, some
investors prefer to invest in several funds in order to participate in more
than one market and to
gain some protection from market risk in a particular market.
CRITICAL THINKING/ESSAY
1. Is an investor able to achieve significant diversification by purchasing a
single-country fund?
Answer: The fund itself might be well diversified within that country if the
fund owns a wide
variety of securities. However, an investor who is seeking international
diversification would not
be well diversified in terms of country risk and exchange-rate risk.
2. What are some of the advantages individual investors seek by buying mutual
funds or closed-end
investment company shares rather than through purchasing securities directly?
Answer: Substantial diversification even for a small amount of funds,
professional management
(questioned by some), international securities, capability to participate in
the money market with a
small investment.
PROBLEMS
1. An environmentally friendly balanced mutual fund began the year with a net
asset value (NAV) of
$12.25 per share. During the year, it received $1.00 dividend and interest
income, $0.25 in realized
capital gains, and $0.50 in unrealized capital gains. Ninety percent of the
income and all of the
realized capital gain were distributed to shareholders. Calculate the year-end
NAV.
Answer:
Beginning NAV = $12.25
Income from investment operations
Net investment income
Net realized and unrealized gain ($.25 + .50)
Total income from investment operations
Less distributions to shareholders
From net investment income (90% × $1)
From net realized capital gain
$1.00
0.75
$1.75
($0.90)
(0.25)
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Total distribution
($1.15)
Ending NAV = $12.85
2. An aggressive equity mutual fund began the year with a net asset value (NAV)
of $6.50 per share.
During the year, it received $0.15 dividend income, $1.25 in realized capital
losses, and $0.50 in
unrealized capital gains. Ninety percent of the income was distributed to
shareholders. Calculate the
year-end NAV.
Answer:
Beginning NAV = $6.50
Income from investment operations
Net investment income
Net realized and unrealized gain (–$1.25 + .50)
Total income from investment operations
Less distributions to shareholders
From net investment income (90% × $.15)
From net realized capital gain
Total distribution
$0.15
(0.75)
($0.60)
($0.135)
––
($0.135)
Ending NAV = $5.765
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Investments: Analysis and Management, Third Canadian Edition
CHAPTER 4
Securities Markets
MULTIPLE CHOICE
1. Which of the following is not a primary market transaction?
a. an IPO
b. a new bond issued by the Bank of Canada
c. treasury bills auctioned by the Bank of Canada
d. All of the above are primary market transactions.
Answer: D
Topic: The Primary Markets
Level of difficulty: Easy
Type: Factual
2. In the U.S., which exchange member is assigned to a specific
trading post where they handle one or
more stocks assigned to that post?
a. Commission broker
b. Floor trader
c. Specialist
d. Dealer
Answer: C
Topic: The Secondary Markets: US Exchanges
Level of difficulty: Easy Type: Factual
3. In an underwriting of an IPO the risk of issuing the security:
a. remains with the issuing firm.
b. is assumed by the underwriter.
c. is transferred to the commercial bankers.
d. is assumed by the institutional investors subscribing to the issue.
Answer: B
Topic: Investment Dealers
Level of difficulty: Moderate
Type: Factual
4. Investment dealers are compensated by:
a. the underwriting spread.
b. commissions paid by the buyers of the security.
c. commissions paid by the sellers of the security.
d. guaranteed investment contracts.
Answer: A
Topic: Investment Dealers
Level of difficulty: Moderate
Type: Factual
5. All public offerings regulated by the Canadian Business
Corporations Act require that a(n) _____
be prepared to outline full, true, and plain disclosure of material facts
relating to the securities
offered.
a. indenture
b. debenture
c. prospectus
d. MOU
Answer: C
Topic: Investment Dealers
Level of difficulty: Easy
Type: Factual
6. The TSX is:
a. smaller than the NYSE but larger than Nasdaq.
b. smaller than the NYSE and the TSX Venture Exchange.
c. smaller than both the NYSE and Nasdaq.
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d. bigger than both NYSE and the TSX Venture Exchange.
Answer: C
Topic: The Secondary Markets Level of difficulty: Moderate
Type: Factual
7. A listed company can be cancelled or delisted for the
following reasons except:
a. it no longer exists.
b. the company has no assets or is bankrupt.
c. the company cut its dividend in two successive quarters.
d. public distribution of the security is no longer sufficient.
Answer: C
Topic: The Secondary Markets Level of difficulty: Moderate
Type: Factual
8.
Trading large basket blocks of stocks to take advantage of price
discrepancies between markets to
earn arbitrage profits is referred to as:
a. swapping.
b. program trading.
c. day trading.
d. insider trading.
Answer: B
Topic: The Secondary Markets: US Exchanges
Level of difficulty: Easy
Type: Factual
9. Aside from the NYSE, the only other national organized stock
exchange in the United States is:
a. American Stock Exchange (Amex).
b. Midwest Exchange.
c. Nasdaq.
d. CBOE
Answer: C
Topic: The Secondary Markets: US Exchanges
Level of difficulty: Easy
Type: Factual
10. Which of the following statements regarding the Nasdaq Stock Market is not
true?
a. All OTC stocks trade on the Nasdaq Stock Market.
b. Dealers make a market by standing ready to buy and sell securities.
c. Nasdaq is both a national and international stock market.
d. Nasdaq’s electronic trading system provides instantaneous transactions.
Answer: A
Topic: Equity Securities—Negotiated Markets
Level of difficulty: Difficult
Type: Factual
11. The OTC stocks that trade in Canada on the NEX Board of the TSX Venture
Exchange has which
of the following characteristic?
a. It is dominated by blue chip companies.
b. It has companies that have a thin trading volume.
c. Because it is computerized, it is a highly liquid market.
d. All of the above represent characteristics of OTC trading in Canada.
Answer: B
Topic: Equity Securities—Negotiated Markets
Level of difficulty: Moderate
Type: Factual
12. A computerized trading network of market makers in OTC stocks, that reports
up-to-the-minute
trades is the:
a. Nasdaq/National Markets System (Nasdaq/NMS).
b. Nasdaq/Electronic Communications Networks (Nasdaq/ECN).
c. Nasdaq/Internet Investment Service (Nasdaq/IIS).
d. Nasdaq/Global Investment Network (Nasdaq/GIN).
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