8.4 Mutual Funds

Approximately how many individual stocks can an investor choose from within the U.S. market?

• thousands

• hundreds of thousands

• millions

• a few hundred

Which of the following are reasons why investors might choose to invest in mutual funds?

• diversification

• professional management

• to pool capital with other investors

• diversification, professional management, and to pool capital with other investors

Systematic risk is best defined as:

• portfolio risk

• the risk that always remains in a portfolio

• total risk

• diversifiable risk

Mutual finds can be broadly classified into two categories:

I. Passive management

II. Strategic management

III. Active management

IV. Tactical management

• I and IV only

• II and III only

• I and III only

• I and II only

Which of the following best describes an index mutual find?

• passively managed funds designed to mimic a specific market

• mutual funds managed based on a person's anticipated year of retirement

• mutual funds managed based on a preset ratio of stocks and bonds

• mutual funds that attempt to earn rates of return that exceed the return of the market

A market index is an unmanaged grouping of stocks that has been identified as representative of some aspect of the stock market. What is true of the Dow Jones Industrial Average?

• the index is market weighted based on market capitalization

• it is designed to follow the broad bond market

• it is an actively managed index designed to outperform the market

• it consists of a small number of most highly regarded U.S. stocks from a variety of sectors of the economy

Common stock market indices include the:

• Dow Jones Industrial Average

• Standard & Poor's 500 Composite Stock Price Index

• Russell 2000 Index

• Dow Jones Industrial Average, Standard & Poor's 500 Composite Stock Price Index, and Russell 2000 Index

Over a recent 10-year period, passively managed large company mutual funds outperformed actively managed mutual funds by:

• 0.94 percentage points

• 6.74 percentage points

• 7.68 percentage points

• 0 percentage points because there was no difference in performance

Which of the following statements is TRUE?

• a sales load is a measure of the total management fees and expenses charged to a mutual fund

• no-load mutual funds do not charge an upfront sales load but do charge a back-end sales load

• a mutual fund's expense ratio is a commission paid to the mutual fund company

• a sales load is a one-time commission paid to an investment salesperson when the mutual fund is bought or sold

If all of the following mutual funds are designed to passively mimic the S&P 500 stock index, then which mutual fund would be the best choice?

• mutual fund A with and expense ratio of 0.28%

• mutual fund B with and expense ratio of 0.59%

• mutual fund C with and expense ratio of 0.07%

• mutual fund D with and expense ratio of 0.12%