Question

5) In the Wall Street Journal’s darts versus pros competition, the difference in returns generated by the two portfolios is explained by:

I. the darts were poorly thrown
II. the pros pick riskier stocks
III. other investors buying the stocks that the pros pick
IV. the pros are simply good at picking stocks

A. I and II
B. II only
C. IV only
D. II and III

6) __________ is a false statement regarding open-end mutual funds.

A. They offer investors a guaranteed rate of return
B. They offer investors a well diversified portfolio
C. They redeem shares at their net asset value
D. None of the above (A, B, and C are all true)

7) When we analyze the performance of an actively managed mutual fund we find that the fund generated a beta of 1.5 and an alpha of zero.

A. this result shows that the manager took relatively high risk when investing

B. this result shows that the manager did not add any value to performance with his/her decision-making

C. both (A) and (B) are true

D. none of the above

8) An attractive feature of Exchange Traded Funds (ETFs) is:

A. the price of the fund always matches the Net Asset Value

B. the investor has more control over tax implications of trading than with a mutual fund

C. ETFs only trade once a day, making it easier to keep track of their prices.

D. the fund is highly likely to produce a positive alpha

Answer 1

(5): The answer is option “D” – II and III.

Explanation – After this contest it was concluded that the stocks picked by pros led to an announcement effect as many readers added these stocks to their portfolio. Secondly pros picked riskier stocks and the pros advantage would disappear if this fact is accounted for.

(6): The answer is option “A” – they offer investors a guaranteed rate of return.

Explanation – No investment fund can offer a guaranteed rate of return.

(7): The answer is option “B” – this result shows that the manager did not add any value to performance with his/her decision-making.

Explanation – An alpha of zero means that the fund has earned a return commensurate with the risk but has not outperformed.

(8): The answer is option “B” – the investor has more control over tax implications of trading than with a mutual fund.

Explanation - Mutual funds typically have higher tax implications because they pay investors capital gains distributions. These capital distributions paid out by the mutual fund are taxable. ETFs usually do not payout capital distributions, and therefore, can have a slight tax advantage.