Investments Analysis And Management 3rd Canadian Edition By W. Sean Cleary – Test Bank

Complete Test Bank With Answers

Sample Questions Posted Below

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Investments: Analysis and Management, Third Canadian Edition

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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Investments: Analysis and Management, Third Canadian Edition

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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Investments: Analysis and Management, Third Canadian Edition

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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Investments: Analysis and Management, Third Canadian Edition

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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Investments: Analysis and Management, Third Canadian Edition

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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Investments: Analysis and Management, Third Canadian Edition

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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Cleary/Jones

Investments: Analysis and Management, Third Canadian Edition