FIN 400 Exam 1 Prep with Questions and
Answers
where do mutual funds fit into the wealth mgmt process ANSWER indirect investments into
asset allocation
3 types of pooled investments ANSWER mutual funds
exchange traded funds
hedge funds
2 potential advantages of MF/ETF compared to investing in securities ANSWER 1.
diversification is easier and cheaper
2. "professional" money mgmt
2 broad categories of pooled investments based on investment style ANSWER active and
passive
active style ANSWER attempt to outperform the mkt (S&P500) thru mkt timing and security
selection
More research and trading
(federated and american are 2 examples)
passive style ANSWER attempt to replicate the mkt (S&P500)
also called "index"
factors to consider when deciding btwn active and passive styles ANSWER turnover
expense ratio
,top 1 0 sectors & top 10 holdings
turnover ANSWER the % of fund assets that are replaced (sold and repurchased) in a year
higher= more taxes paid
expense ratio ANSWER (mgmt fees)
the % of fund assets that go to pay mgrs
reduces return to investors
top 1 0 sectors & top 10 holdings ANSWER the % of fund assets allocated across various
sectors/top 10 investments
characteristics of active style ANSWER high turnover
higher expense ratio
higher % in one sector/top 10 holdings
less tax efficient
characteristics of passive style ANSWER low turnover
lower expense ratio
lower % in one sector/top 10 holdings
more tax efficient
how do taxes play a role in choosing investment style ANSWER tax efficiency is important
when fund is in a taxable acct
less of a concern when investment fund is in a tax-deferred/sheltered acct
factors to look at to asses tax consquences ANSWER turnover rate
, tax cost ratio (more reliable)
tax cost ratio ANSWER the annual return, expressed as a %, that the investor loses to taxes
lower is better= more tax efficient
after the preferred investment style is chosen, what is the next decision that needs to be made
(with respect to asset classes) ANSWER ?? #7
5 options to consider pertaining to domicile?? of investments ANSWER 1. future
performance/returns
2. future volatility (range of returns)
3. correlation of returns with the mkt (S&P500)
4. govt policies
5. exchange rate risk
types of mutual funds available ANSWER balanced
target date
sector
equity
bond
money mkt
balanced MF ANSWER static mix of stocks and bonds
target date MF ANSWER low risk, mix of stocks and bonds, based on age (not risk tolerance)
Answers
where do mutual funds fit into the wealth mgmt process ANSWER indirect investments into
asset allocation
3 types of pooled investments ANSWER mutual funds
exchange traded funds
hedge funds
2 potential advantages of MF/ETF compared to investing in securities ANSWER 1.
diversification is easier and cheaper
2. "professional" money mgmt
2 broad categories of pooled investments based on investment style ANSWER active and
passive
active style ANSWER attempt to outperform the mkt (S&P500) thru mkt timing and security
selection
More research and trading
(federated and american are 2 examples)
passive style ANSWER attempt to replicate the mkt (S&P500)
also called "index"
factors to consider when deciding btwn active and passive styles ANSWER turnover
expense ratio
,top 1 0 sectors & top 10 holdings
turnover ANSWER the % of fund assets that are replaced (sold and repurchased) in a year
higher= more taxes paid
expense ratio ANSWER (mgmt fees)
the % of fund assets that go to pay mgrs
reduces return to investors
top 1 0 sectors & top 10 holdings ANSWER the % of fund assets allocated across various
sectors/top 10 investments
characteristics of active style ANSWER high turnover
higher expense ratio
higher % in one sector/top 10 holdings
less tax efficient
characteristics of passive style ANSWER low turnover
lower expense ratio
lower % in one sector/top 10 holdings
more tax efficient
how do taxes play a role in choosing investment style ANSWER tax efficiency is important
when fund is in a taxable acct
less of a concern when investment fund is in a tax-deferred/sheltered acct
factors to look at to asses tax consquences ANSWER turnover rate
, tax cost ratio (more reliable)
tax cost ratio ANSWER the annual return, expressed as a %, that the investor loses to taxes
lower is better= more tax efficient
after the preferred investment style is chosen, what is the next decision that needs to be made
(with respect to asset classes) ANSWER ?? #7
5 options to consider pertaining to domicile?? of investments ANSWER 1. future
performance/returns
2. future volatility (range of returns)
3. correlation of returns with the mkt (S&P500)
4. govt policies
5. exchange rate risk
types of mutual funds available ANSWER balanced
target date
sector
equity
bond
money mkt
balanced MF ANSWER static mix of stocks and bonds
target date MF ANSWER low risk, mix of stocks and bonds, based on age (not risk tolerance)
