CFA Institute CFA Institute Certifications CFA-LEVEL-1 Questions & Answers

• Question 711:

  About three-quarters of mutual funds are more than

  A. 70 percent diversified.

  B. 30 percent diversified.

  C. 60 percent diversified.

  D. 90 percent diversified.

  E. 50 percent diversified.

  Correct Answer: D

  One of the great advantages of mutual funds is the diversification they provide. Small investors do not have the resources to acquire 100 shares of 10 or 15 different shares, but can instead receive the same diversification by purchasing a mutual fund. Typically about three-quarters of mutual funds have a correlation above 0.90 with the market, meaning that they are more than 90 percent diversified.

• Question 712:

  The majority of venture capital funds are managed by

  A. investment companies.

  B. corporations.

  C. independent and private concerns.

  D. small business investment companies.

  Correct Answer: C

  In 1994, independent firms managed approximately 70 percent of the venture capital market.

• Question 713:

  The principle of ________ says that people do not really buy or rent real estate per se but, instead, judge properties as different sets of benefits and costs.

  A. substitution

  B. replacement

  C. equivalency

  D. surrogation

  Correct Answer: A

  Because of the principle of substitution, an analysis of supply should not limit potential competitors to geographically and physically similar properties.

• Question 714:

  Management fees are charged

  A. only by low-load and 12b-1 plan open-end investment companies.

  B. only be load open-end investment companies.

  C. by all investment companies.

  D. only by no-load open-end investment companies.

  Correct Answer: C

  All investment companies charge annual management fees to compensate the managers of the fund. These fees are typically 0.25 to 1 percent of average net assets of the fund and tend to decline with the size of the fund.

• Question 715:

  Each individual owning shares in an investment company's fund ________.

  A. owns the right to change the fund composition

  B. owns a percentage of the investment company's total portfolio

  C. owns a few individual investments within the fund

  D. owns a percentage of the investment company

  Correct Answer: B

  Because the fund is financed and owned by a pool of investors, each investor will be entitled to a portion of the earnings generated by the fund, although no one completely owns the fund. The investment company usually manages the fund composition.

• Question 716:

  Many different types of investment companies offer ________.

  A. only one investment fund that pools the risks and return characteristics of the Fortune 500 companies

  B. a wide variety of alternative instruments with a range of risk and return characteristics

  C. arbitrage opportunities

  D. risk-free investments

  Correct Answer: B

  Investment companies typically offer investments that are portfolios of various instruments that would take an individual a lot of effort to compose via direct investment. Such fund-portfolios are created based on target risks and return characteristics.

• Question 717:

  The share price of a closed-end investment company is

  A. generally lower than its NAV.

  B. generally higher than its NAV.

  C. typically equal to its NAV.

  D. always equal to its NAV.

  Correct Answer: A

  The share price of a closed-end investment company is determined by the market supply and demand for its stock. Over the long run, shares of closed-end investment companies have traded 5 to 20 percent below their NAVs. The reason for this disparity is still open to question.

• Question 718:

  Investment companies often start numerous funds to ________.

  A. justify investment in more securities

  B. attract many investors with different risk-return preferences

  C. diversify the aggregate portfolio

  D. all of these answers

  Correct Answer: B

  Investment companies often start numerous funds to attract many investors with different risk-return preferences, which increases the total capital managed by the investment company.

• Question 719:

  The market price of closed-end fund shares are historically ________ the NAV.

  A. about 20 percent premium above

  B. 5 to 10 percent discount to

  C. very close to

  D. none of these answers

  Correct Answer: D

  The NAV and the market price of a closed-end fund are almost never the same, because closed-end funds typically have market prices that has historically been a 5 to 20 percent discount to NAV.

• Question 720:

  Which of the following statements is true?

  A. The shares of an open-end investment company usually trade at a 10 to 25% discount to its NAV, but in some relatively rare instances, the shares trade exactly at NAV.

  B. The shares of a closed-end mutual fund almost never trade exactly at its NAV. Rather, shares typically trade at a 5 to 20% discount to the NAV.

  C. The shares of a closed-end investment company usually trade at exactly its NAV, but in some relatively rare instances, the shares trade at a small discount or premium to the NAV.

  D. The shares of an open-end investment company usually trade at exactly its net asset value (NAV), but in some relatively rare instances, the shares trade at a small discount or premium to the NAV.

  E. The shares of a closed-end investment company almost never trade at exactly its NAV. Rather, shares typically trade at a 5 to 20% discount to the NAV.

  Correct Answer: E

  Open-end investment companies continue to sell and repurchase shares after their initial public offerings. They sell shares at the net asset value with or without sales charges, and repurchase shares at the net asset value with or without redemption fees. The shares of closed end investment companies,however, are rarely sold or redeemed by the funds, but typically trade on a stock market. Over the long-run, the shares tend to trade at a 5 to 20% discount to their net asset value (NAV). There is no such thing as a closed-end mutual fund. Only open-end investment companies are referred to as mutual funds.