Chapter 24-Professional Money Management, Alternative Assets, and Industry Ethics

CHAPTER 24—PROFESSIONAL MONEY MANAGEMENT, ALTERNATIVE
ASSETS, AND INDUSTRY ETHICS
MULTIPLE CHOICE
1. Which of the following is an approach to asset management?

a. Management and advisory firms
b. Investment companies
c. Strategic management
d. Choices a and b only
e. All of the above
ANS: D PTS: 1 OBJ: Multiple Choice
2. An open-end investment company is commonly referred to as a(n)

a. Balanced fund.
b. Mutual fund.
c. Money market fund.
d. Accessible fund.
e. Unit trust.
ANS: B PTS: 1 OBJ: Multiple Choice
3. The main difference between a closed-end fund and an open-end fund is

a. The way each is traded after the initial public offering.
b. There is no significant difference.
c. The minimum initial investment.
d. The type of allowable investments.
e. The way in which each is regulated by the SEC.
ANS: A PTS: 1 OBJ: Multiple Choice
4. Net asset value (NAV) is determined by

a. The total market value of all its assets multiplied by the number of fund shares
outstanding.
b. The total market value of all its assets divided by the number of fund shares outstanding.
c. The total market value of all its assets divided by the number of shareholders.
d. Supply and demand for the investment company stock in the secondary market.
e. Supply and demand for the investment company stock in the primary market.
5. The market price of a closed-end investment company has generally been

a. 5 to 20 percent below the NAV.
b. 25 to 35 percent below the NAV.
c. Equal to the NAV (within a 2 percent range).
d. 5 to 20 percent above the NAV.
e. 25 to 35 percent above the NAV.
6. The closed-end fund index is

a. Value weighted and based on market values.
b. Value weighted and based on NAVs.
c. Price weighted and based on market values.
d. Price weighted and based on NAVs.
e. Equally weighted and based on market values.
ANS: C PTS: 1 OBJ: Multiple Choice
7. Open-end mutual funds that charge a sales fee when the fund is initially offered to the investor are
known as
a. 12b-1.
b. Americus trusts.
c. Unit investment trusts.
d. Load funds.
e. Contingency funds.
8. A 12b-1 plan allows funds to

a. Charge a redemption fee.
b. Deduct 7 to 8 percent commission at the initial offering.
c. Deduct .75 percent of the average net assets per year.
d. Charge a contingent deferred sales load.
e. Switch from closed-end to open-end.
9. When the offer price and the NAV of a mutual fund are equal it is an indication that
a. The fund's assets are in equilibrium.
b. The fund is trading at par.
c. It is strictly a coincidence.
d. The fund has no initial fee.
e. The fund is backloaded.
10. All investment companies charge an annual

a. 12b-1 fee.
b. Marketing and distribution.
c. Management fee.
d. Maintenance fee.
e. Market adjustment.
11. The offering price of a load fund equals the NAV of the fund
a. Less an initial requirement.
b. Plus a sales charge.
c. Plus a sales charge and an administrative fee.
d. Less a negotiated discount.
e. At its stated value.
12. Funds that normally contain a combination of common stock and fixed income securities are known as
a. Section 401(k) plans.
b. Balanced funds.
c. Contractual plans.
d. Income funds.
e. Flexible funds.
13. Funds that attempt to provide current income, safety of principal and liquidity are known as
a. Balanced funds.
b. Flexible funds.
c. Income funds.
d. Money market funds.
e. Index funds.
14. A money market fund would be likely to invest in a portfolio containing all of the following except
a. Commercial paper.
b. Banker's acceptances.
c. U.S. Treasury bills.
d. Bank certificates of deposit.
e. U.S. Treasury notes.
ANS: E PTS: 1 OBJ: Multiple Choice
15. A mutual fund typically performs all of the following functions, except
a. Provides alternative risk-return options.
b. Eliminates unsystematic risk.
c. Provides diversification.
d. Derives a risk-adjusted performance that is consistently superior to risk-adjusted net
return of the aggregate market.
e. Administers the account, keeps records and provides timely information.
16. Mutual fund performance studies have shown that most funds
a. Have risks and returns that are inconsistent with their stated objectives.
b. Have risks and returns that are consistent with their stated objectives.
c. Do not have stated objectives.
d. Have experienced risk-adjusted returns above the market.
e. Have changed their objectives over time.
17. The text offers a number of suggestions for investing in mutual funds. Which of the following is not
such a suggestion?
a. Choose only those mutual funds which are consistent with your objectives and
constraints.
b. Invest in no-load funds whenever possible.
c. Avoid investing in index funds.
d. Use a dollar cost average strategy.
e. None of the above (that is, all are valid suggestions for investing in mutual funds)
18. The gross return of closed-end investments companies has typically been
a. 10-20 percent less than their NAV.
b. 10-15 percent less than their NAV.
c. Less than the net return.
d. About the same as the net return.
e. None of the above
19. A major question in modern finance regarding closed-end investment companies is

a. Why do these funds sell at discounts?
b. Why do the discounts differ between funds?
c. What are the returns available to investors from funds that sell at a large discount?
d. Choices a and b only
e. All of the above
20. A portfolio manager should be able to perform all of the following functions, except
a. Determine risk-return preferences.
b. Eliminate systematic risk.
c. Maintain diversification ensuring a stabilized risk class.
d. Attempt to derive a risk-adjusted performance that is superior to the market.
e. Administer the account, keep records and provide timely information.
21. An investment company is

a. A corporation that handles the administrative functions for a fund.
b. A corporation that has its major assets in a portfolio of securities.
c. A corporation that invests in financial services firms.
d. a and b.
e. a and c.
22. An investment management company is

a. A corporation that handles the administrative functions for a fund.
b. A corporation that has its major assets in a portfolio of securities.
c. A corporation that invests in financial services firms.
d. a and b.
e. a and c.
23. In the case of private management firms

a. Investors deal with a fund company and do not have separate accounts tailored to their
specific needs.
b. Investors deal with a fund company and have separate accounts tailored to their specific
needs.
c. Investors deal with an asset manager and do not have separate accounts tailored to their
specific needs.
d. Investors deal with an asset manager have separate accounts tailored to their specific
needs.
e. None of the above.
24. In the case of investment companies

a. Investors deal with a fund company and do not have separate accounts tailored to their
specific needs.
b. Investors deal with a fund company and have separate accounts tailored to their specific
needs.
c. Investors deal with an asset manager and do not have separate accounts tailored to their
specific needs.
d. Investors deal with an asset manager have separate accounts tailored to their specific
needs.
25. In the case of open-end investment companies, shares of the company

a. Trade on the secondary market.
b. Can be bought from or sold to the investment company at the NAV.
c. Are determined by supply and demand.
d. a and c.
e. b and c.
26. In the case of closed-end investment companies, shares of the company

a. Trade on the secondary market.
b. Can be bought from or sold to the investment company at the NAV.
c. Are determined by supply and demand.
d. a and c.
e. b and c.
27. The following are examples of mutual fund companies

a. Common stock funds.
b. Bond funds.
c. Hedge funds.
d. a and b.
e. a, b and c
28. An example of an international fund would be one that consisted of investments in securities from
a. The U.S., Germany, and Japan.
b. Germany, Italy, and the U.K.
c. The U.S., Korea, and Argentina.
d. All of the above.
29. The Investment Company Act of 1940

a. Contains various anti-fraud provisions and record keeping and reporting requirements for
fund advisors.
b. Regulates broker-dealers.
c. Requires federal registration of all public offerings of securities.
d. Regulates the structure and operations of mutual funds.
e. Contains a code of ethics and standards of professional conduct.
30. The Securities Act of 1933

fund advisors.
31. The Securities Exchange Act of 1934

fund advisors.
32. The Investment Advisors Act of 1940

fund advisors.
33. Soft dollars are generated when

a. A manager commits to paying a higher than normal brokerage fee in exchange for
additional bundled services.
b. A manager commits to paying a higher than normal brokerage fee in exchange for
secretarial services.
c. A manager commits to paying a higher than normal brokerage fee in exchange for office
equipment.
34. Which of the following is a characteristic of hedge funds?
a. They are generally less restricted in how and where they can make investments.
b. They are more liquid than mutual fund shares.
c. They have no limitations on when and how often investment capital can be contributed or
removed.
35. In a long short-short hedge fund strategy

a. Managers take long positions in undervalued stocks and short positions in overvalued
stocks.
b. Managers take short positions in undervalued stocks and long positions in overvalued
stocks.
c. Managers take offsetting risk positions on the long and short side.
36. In a convertible arbitrage strategy hedge fund managers attempt to

a. Generate profits by taking advantage of convertible bond pricing disparities caused by
changing market events.
b. Generate profits by taking advantage of disparities in the relationship between prices for
convertible bonds and the underlying common stock.
c. Generate profits by taking advantage of disparities in the relationship between prices for
convertible bonds and the underlying common stock option.
37. Ethical conflicts may arise as a result of

a. Incentive compensation schemes.
b. Soft dollar arrangements.
c. Marketing investment management services.
38. Which of the following are guiding principles for ethical behavior in the asset management industry as
put forward by the CFA Center for Financial Market Integrity?
a. The interests of investment professional come first.
b. The preferred method for promoting fair and efficient markets is to set up a central
oversight board.
c. Financial markets in various countries should develop high-quality standards for reporting
financial information that reflect local customs.
d. Financial statements should be reported from the perspective of firm shareholders.
e. All of the above.
39. Which of the following are functions that a portfolio manager should perform for clients?
a. Determine investment objectives and constraints, diversify the portfolio, eliminate tax
payments.
b. Determine investment objectives, diversify the portfolio, maintain ethical standards and
eliminate tax payments.
c. Determine investment objectives and constraints, diversify the portfolio, and maintain
ethical standards.
d. Determine constraints, diversify the portfolio, eliminate tax payments.
e. Determine investment objectives and constraints, diversify the portfolio, eliminate tax
payments, and achieve risk adjusted return superior to the relevant benchmark.
40. The 12b-1 plan permits funds to deduct as much as ____ percent of average net asset per year to cover
distribution costs, brokers' commissions, and general marketing expenses.
a. 0.25
b. 0.50
c. 0.75
d. 1.00
e. 1.50
41. What type of funds are typically no-load funds that impose no penalty for early withdrawal and
generally allow holders to write checks against their account?
a. Mutual funds
b. Open-end funds
c. Closed-end funds
d. Money market funds
e. Balanced funds
42. Which of the following is not an example of an alternative asset class?

a. Hedge funds
b. Private equity
c. Real estate
d. Commodities
e. All of the above are examples of alternative asset classes.
43. When alternative assets of investors are pooled together into a single pool of assets
a. The collection of assets is formed as a limited partnership.
b. One or more general partners are responsible for running the organization.
c. The limited partners are only liable to the extent of their investments.
d. Both a and c.
e. All of the above.
44. Investing in emerging markets can be viewed as a global application of

a. Fixed-income arbitrage.
b. Convertible arbitrage.
c. Merger arbitrage.
d. Distressed opportunistic strategies.
e. Equity market neutral.
45. An investment vehicle that acts like a mutual fund of hedge funds, and allows investors access to
managers that might otherwise be unavailable is known as
a. Managed futures funds
b. Long-short equity funds
c. Fund of funds
d. Private equity funds
e. Leveraged Buyouts (LBOs)
46. Which of the following statements regarding the closed-end investment company's net asset value
(NAV) is false?
a. NAV is computed throughout the day based on prevailing market prices for the portfolio
of securities
b. The market price of the shares is determined by how they trade on the exchange
c. NAV and market price of a closed-end fund are almost never the same
d. No new investment dollars are available for the investment company unless it makes
another public sale of securities
e. All of the above are true
47. Investment companies or mutual funds that continue to sell and repurchase shares after their initial
public offerings are referred to as
a. Closed-end
b. Open-end
c. No-load
d. Load
48. Funds that adjust the asset allocation weights in the portfolio to match the needs of an investor who is
nearing retirement are known as
a. Balanced funds
b. Flexible portfolio funds
c. Lifetime funds
d. Money market funds
e. Target date funds
49. Hedge funds that are organized as a limited partnership

a. Are less restricted in how they make investments than general partnership hedge funds
b. Typically have larger abnormal returns than general partnership hedge funds
c. Are usually less correlated with traditional asset class investments than general
partnership hedge funds
d. Have less liquid investments than mutual funds

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Chapter 24-Professional Money Management, Alternative Assets, and Industry Ethics

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CHAPTER 24—PROFESSIONAL MONEY MANAGEMENT, ALTERNATIVE

ASSETS, AND INDUSTRY ETHICS

1. Which of the following is an approach to asset management?

2. An open-end investment company is commonly referred to as a(n)

3. The main difference between a closed-end fund and an open-end fund is

4. Net asset value (NAV) is determined by

5. The market price of a closed-end investment company has generally been

6. The closed-end fund index is

8. A 12b-1 plan allows funds to

10. All investment companies charge an annual

19. A major question in modern finance regarding closed-end investment companies is

21. An investment company is

22. An investment management company is

23. In the case of private management firms

24. In the case of investment companies

25. In the case of open-end investment companies, shares of the company

26. In the case of closed-end investment companies, shares of the company

27. The following are examples of mutual fund companies

29. The Investment Company Act of 1940

30. The Securities Act of 1933

31. The Securities Exchange Act of 1934

32. The Investment Advisors Act of 1940

33. Soft dollars are generated when

35. In a long short-short hedge fund strategy

36. In a convertible arbitrage strategy hedge fund managers attempt to

37. Ethical conflicts may arise as a result of

42. Which of the following is not an example of an alternative asset class?

44. Investing in emerging markets can be viewed as a global application of

49. Hedge funds that are organized as a limited partnership

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