Mutual Fund Investing Exam Study Guide
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1 Mutual Fund Investing Exam Study Guide This document contains the questions that will be included in the final exam, in the order that they will be asked. When you have studied the course materials, reviewed the questions in this document, and feel that you are ready to take the exam, return to the login page to take the online exam. A Center for Continuing Education 1465 Northside Drive, Suite 213 Atlanta, Georgia (404) (800) Fax: (404) Mutual Fund Investing Final Exam Study Guide P age 1
2 Mutual Fund Investing Final Exam 1. Mary is an executive of a large corporation. Her current income is $220,000 per year and while she is a good saver, her investment knowledge is limited. She is interested in investing, but wants to start with an investment that will provide income. What would you not recommend? a. Corporate investment grade bonds b. Preferred stock c. Municipal securities d. Treasury bills 2. Charles has been investing for a few years and most of his investments are in blue chip stocks. He wants to expand his portfolio to provide current income. a. Buying more shares of blue chip stock b. Buying call options on one of his current investments c. Buying put options on one of his current investment d. Selling call options on one of his current investments 3. An investor is concerned about market risk and has been keeping money in bank CDs and money market accounts. What type of risk is at play by not being able to use the money in an alternative investment? a. Call risk b. Opportunity cost c. Market risk d. Interest rate risk 4. A bond investor is concerned that interest rates may go up in the future while she holds a large position of low interest bonds she bought at a discount. Interest rates have been at a steady incline since she purchased the bonds. What could she do to protect the value of the portfolio? a. Sell the bonds in the current market while hoping to buy higher interest bonds later b. Buy stocks to offset her loss c. Hold the bonds to maturity and live with the lower interest rate d. Buy municipal bonds Mutual Fund Investing Final Exam Study Guide P age 2
3 5. What is the risk that treasury investors are least likely have as a concern? (pick the best answer) a. Credit risk b. Market risk c. Interest rate risk d. Reinvestment risk 6. An investor living in GA is trying to compare bond issues for the highest possible net return. Her current tax bracket is 30%. She compares a 5% municipal bond, a 5.5% treasury bond and a 7% corporate bond. Which would provide the highest nominal yield? a. 7% corporate bond b. 5.5% treasury bond c. 5% municipal bond 7. Using the same information from question 6, what would be the best investment for the highest possible net return? a. 7% corporate bond b. 5.5% treasury bond c. 5% municipal bond 8. Of the following types of investments, which would have the potential of providing the greatest current income? a. Treasury strips b. Selling options c. Treasury bills d. Common stock 9. Which provides the greatest security of return of principal? a. Common stock b. A secured bond currently in default c. A debenture d. Preferred stock Mutual Fund Investing Final Exam Study Guide P age 3
4 10. One of your high net worth clients wants to diversify his equity position into a greater stability of principal. What would be the best recommendation to maintain equity while stabilizing the portfolio from business risk? a. Buy corporate bonds b. Buy preferred stock c. Sell stock and purchase treasuries d. Buy corporate stock when the price decreases 11. Teaching your client how to interpret the prospectus is valuable for both the client and the representative. A good best practice is to make notes in the proper sections (underline or highlight) in order that the client can refer to these sections if they have questions later. a. True b. False 12. A client wishes to be able to hedge their long term investment from market downturns. Which of these options would provide the best opportunity for a client to hedge their investment with options? a. S&P 500 index mutual fund b. S&P 500 ETF c. S&P 500 A share mutual fund d. You cannot hedge mutual funds with options 13. An investor makes a purchase in a closed end mutual fund. He later calls the representative with a complaint that his investment was sold improperly because the NAV of the fund is not the same as the price that is reported on the exchange. What is the probable cause of the client s complaint? a. The client doesn t understand the pricing of closed end funds relative to the NAV b. The client simply got scared and wants out of the investment c. The representative sold a product that pays the highest commission d. Closed end funds are for sophisticated investors and the client simply did not meet the investment profile of the fund 14. Which type of equity investment will have price movements that closely track treasury bond prices? a. Common stock fund b. Direct purchase of treasury bonds c. Money market fund d. Treasury bond fund Mutual Fund Investing Final Exam Study Guide P age 4
5 15. A client who lives in CA has a need for liquidity. She is in the highest tax bracket and want to keep her exposure to taxes to a minimum. What would be the best investment choice for this client? a. CA municipal bonds b. Tax free money market fund c. CA tax free money market fund d. Preferred stock 16. The secondary market for mutual funds is becoming a popular place for speculators. In order to trade mutual funds on the secondary market an investor would have to a. Be qualified as high net worth b. Only trade no-load funds c. Open a margin account d. This is not possible 17. In order for a mutual fund to be classified as no-load it must have which of the following? a. A contingent deferred sales charge of less than or equal to 2.5% b. Investment management fees of less than or equal to.25% c. 12b-1 fees less than or equal to 2.5% d. 12b-1 fees less than or equal to.25% 18. Although hedge funds are not typically recommended for every investor, one advantage is they are regulated and limited on the fees to a maximum of 9.5%. a. True b. False 19. An advisor is always better placing a client in a mutual fund with a Contingent Deferred Sales Charge since the client s total investment will be invested from the inception of their initial deposit. a. True b. False 20. Factors affecting the declining expense ratio of a fund can be attributed to a. The direct relationship of lower fund assets b. Competition in the industry c. More investors moving out of index fund investing and less interest in no-load funds d. Both B and C Mutual Fund Investing Final Exam Study Guide P age 5
6 21. An investor has retirement goals that she wishes to implement at age 67. She is currently working, has limited investing experience and plans to work for the next 20 years. What would be the best investment option to recommend for this client? a. Target date funds based on specific retirement dates b. A variety of mutual funds to diversify risk c. A heavily weighted portfolio of stock funds since the investor has a long term time horizon d. A strategy that she can implement to move from more risky to less risky fund options as she plans to retire 22. The risk for target date funds may change as the fund moves closer to the investment year objective. a. True b. False 23. Retirement planning has a dramatic influence on the amount of assets in mutual fund portfolio investments. As an investment professional what is an important factor when working in this market? a. The suitability of the client s investment toward their goals b. The actual time horizon for a client s retirement c. Understanding the client s needs in relation to their retirement objectives d. A, B and C 24. Investing in hedge funds is of primary concern to which type of investor? a. An executive wanting to gain a 20% or higher return on investment b. An investor who wishes to take advantage of derivative investments while still maintaining the flexibility of a mutual fund c. A person who wants to hedge against losses with options d. None of the above 25. A breakpoint for a client is an advantage because a. Clients will receive a discounted 12b-1 fee b. The breakpoint will be available for the invested assets above the breakpoint level, however they will have to qualify each year c. The client will receive a discount if they reach the investment level within 13 months d. A breakpoint is not an advantage if the client invests in different funds within the same family of funds Mutual Fund Investing Final Exam Study Guide P age 6
7 26. A client with a long term investment time horizon is better with a(n) a. A share fund b. B share fund c. C share fund d. Spread load fund 27. The popularity of mutual funds could be contributed to a. More aggressive investing in corporate stocks b. Outflows from pensions c. The public willingness to take more risk d. The growth in corporate and personal retirement plans 28. Which is the best solution if a client is interested in trading to take advantage of gains? a. Purchasing no load funds since there is not a sales charge b. Trading options on C share mutual funds c. It is not proper to trade mutual funds unless the client and representative have the proper written authority d. Purchasing ETFs 29. A letter of intent is valid for a. 13 months after the initial deposit b. No load fund owners c. Lowering the amount of 12b-1 fees d. 12 months after the initial deposit 30. Which investment would have the potential for the largest share price volatility due to a change in interest rates? a. Treasury bond fund b. Treasury bill fund c. Money market fund d. Preferred stock fund 31. A client is concerned about the stability of the money manager of her investments. The fund manager is nearing retirement and she is not sure what will happen if the manager leaves. What would you suggest as her advisor? a. Just stay with the fund. It has performed well and the change in management is really not significant. b. Quickly switch to an A share fund to take advantage of potential price breaks. c. Look for funds with management groups instead of a single fund manager. d. Transfer the money to a fund with a younger fund manager Mutual Fund Investing Final Exam Study Guide P age 7
8 32. You have a long term relationship with your client and they indicate interest in taking on some speculative risk in their portfolio. They have plenty of liquid assets and only want to allocate a portion of their portfolio to this risk. a. Long term clients should not take on extra risk since they are older b. Suggest a hedge fund c. Suggest a fund of a hedge fund d. Move into a variety of international funds 33. An investor wishes to invest in countries that are outside of the United States. What would you suggest as their advisor? a. Invest in global funds b. Steer them away from risky international investments c. Invest in international funds d. Also suggest investing in foreign currencies 34. Which would have potential for the highest degree of credit risk? a. Treasury bond funds b. Corporate bond funds c. Municipal funds d. Tax free funds 35. Pricing of mutual funds at the end of the trading day is known as a. Market pricing b. Forward pricing c. Closing pricing d. NAV pricing 36. A mutual fund prospectus has to include information of the fund s return for how long? a. 10 years or the inception of the fund whichever is shorter b. The first 10 years of inception c. A 10 year projection if the fund has not been in operation for that long d. There is no minimum time period 37. A closed end fund is trading at a premium to NAV. This means that a. The underlying bonds must have lowered interest rates b. The investor is guaranteed to lose money c. The market demand for the security has driven the price up d. Nothing. It is not possible for a closed end fund to trade at a premium Mutual Fund Investing Final Exam Study Guide P age 8
9 38. Breakpoints are an advantage to the investor because the more a person is willing to invest the lower the potential sales charge to the client. In order to receive the breakpoint a client must a. Deposit enough money into the fund to receive the breakpoint b. If the initial deposit is not enough, make subsequent deposits that will reach the threshold within 13 months c. Deposit the required amount across several funds within the same family d. Any of these 39. Retirement assets invested in mutual funds a. Is on the rise due to the popularity of defined benefit plans b. Is on the decline due to the popularity of defined benefit plans c. Is on the decline due to the unpopularity of defined contribution plans d. Is on the rise due to the popularity of defined contribution plans 40. Dollar cost averaging in mutual fund investing is a popular accumulation method. This guarantees the investor a. The average cost per share will be lower than a lump sum investment b. Will have a larger profit due to the lower cost per share c. Nothing d. A greater return than other mutual funds in the same category 41. An index mutual fund could have an advantage over an ETF in what way? a. Index funds have the ability to vary the investment mix while ETFs are more rigid b. The index fund would typically have lower fees c. Index funds allow an investor to trade options d. Index funds have the advantage of trading based on supply and demand 42. An investor is long the S&P 500 in an index fund. What would be one potential way to hedge this long term investment? a. Buy a call option b. Invest in an inverse ETF based on the S&P 500 c. You cannot hedge against long term index funds d. Purchase convertible bonds of blue chip stocks 43. Selling B or C class shares could place an investor at a disadvantage in what scenario? a. The investor has a short term time horizon b. The investor has a long term time horizon c. The investor relies on their mutual fund investment for periodic cash flow d. The investor is not sophisticated to understand B share investing Mutual Fund Investing Final Exam Study Guide P age 9
10 44. No-load funds may not be suitable for a. Investors who need professional advice b. Investors who have extensive knowledge of markets c. Investors wishing to limit exposure to sales charges d. Investors who already have a portfolio of no-load investments 45. Investors who wish to diversify their investment dollars while still maintaining the ability to take advantage of market volatility could consider a. Leveraged ETFs b. Hedge Funds c. Index Funds d. Value Funds 46. When evaluating a fund using the prospectus this measure is a good indicator of the amount of times the fund buys and sells their portfolio; the lower the measure typically results in lower fund costs. a. 12b-1 fees b. Expense ratio c. Sales load d. Turnover rate 47. As a general rule, mutual funds will result in lower risk versus a stock portfolio. a. True b. False 48. An investor has a sizeable portfolio of bonds and wishes to diversify against market risk. What would be a suitable recommendation? a. S&P 500 index fund b. Municipal bond fund c. Treasury bill fund d. Inverse bond ETF 49. An investor with a long term time horizon has suitable assets invested for their goals and wishes to speculate on a portion of their portfolio. The do not need the funds immediately but want the option to access the money if needed. What would you recommend? a. Hedge Fund b. Fund of Hedge Funds c. Aggressive growth stock fund d. Covered call options against current ETF investments Mutual Fund Investing Final Exam Study Guide P age 10
11 50. Your client is concerned about diversification, their changing needs and proper allocation when saving for retirement. One possible investment solution would be a. Target date funds b. Value funds c. Money market funds d. A solid bond portfolio Mutual Fund Investing Final Exam Study Guide P age 11
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