BUSF 51 – MR. FARINANAME______

HOMEWORK #4

MORNINGSTAR

Instructions: Complete the following short-answer questions. Place your answers in the space below the question.

CHAPTER 2

  1. True or false: The total return of a mutual fund includes the capital return of a fund but ignores the income distributed by the mutual fund.
  1. True or false: Mutual funds are required to distribute (pay out) almost all income they receive to shareholders.
  1. True or false: Mutual fund shareholders must receive their distributions in cash.
  1. True or false: It is appropriate to compare the returns of a small-cap value to fund with the S&P 500.
  1. What is the name of the best benchmark for judging foreign funds’ performance?
  1. What is the name of the best benchmark to judge the return of a taxable bond fund?
  1. True or false: it is a good idea to chase “hot returns” when investing in mutual funds.
  1. True or false: an investor buying a fund for a tax-deferred account should not be concerned with investigating a fund’s after-tax return.

CHAPTER 3

  1. True or false: large-cap stocks will be more volatile than small-cap stocks.
  1. True or false: a mutual fund with a high standard deviation will be more volatile than others in its classification.

CHAPTER 4

  1. True or false: the author prefers fund managers who have several years of experience, and who learned about investing from firms who have successful mutual funds.

CHAPTER 5

  1. True or false: a mutual fund is required to disclose its expense ratio regularly to its shareholders.
  1. True or false: the expense ratio reflects all of the costs associated with owning shares of a mutual fund.
  1. True or false: funds with higher expense ratios tend to outperform those with lower expense ratios.
  1. Which category of funds has the lowest expense ratio, on average?
  1. Which category of funds has the highest expense ratio, on average?
  1. A mutual fund that carries a front-end load (sales charge) is called a(n) ____ share.
  1. True or false: “B” shares do not require a front-end load but carry higher expense ratios than do “A” shares.
  1. True or false: an example of a “hidden cost” of owning a mutual fund is brokerage commissions paid by the fund when it trades stocks.
  1. True or false: the turnover rate is an indication of how often a fund manager trades stocks owned by the fund.

CHAPTER 6

  1. According to the author, at least ___% of your equity holdings should be in core stock funds.
  1. True or false: fund managers practicing relative-value strategies favor stocks that look cheap compared to its benchmark.
  1. True or false: a growth manager is interested in a company’s earnings or revenues, with price of the company’s stock a secondary factor.
  1. True or false: the most common “blend” management style is growth at a reasonable price.
  1. What is the name of the index that tracks 400 mid-cap stocks that are too small to make the S&P 500?
  1. True or false: an exchange-traded fund is traded on a stock exchange.
  1. True or false: when purchasing an exchange-traded fund the buyer pays no brokerage commission.

CHAPTER 7

  1. True or false: Morningstar plots foreign-stock funds on its investment-style box grid.
  1. True or false: emerging-market funds add diversity to a portfolio, but at the risk of steep losses.
  1. True or false: according to the author, small-cap stock funds should represent between 40%-50% of an investor’s portfolio.
  1. True or false: asset size is matters more with small-cap funds than with large-cap funds.
  1. True or false: according to the author, all investors should own a fund focused on a single industry sector.
  1. What type of sector fund is the “top choice” of the author, for those investors seeking to diversify their portfolio?

CHAPTER 8

  1. True or false: funds invested in lower-quality bonds do well when the economy is in recession.
  1. True or false: the author recommends funds that own bonds with short and intermediate-term durations as a core bond-fund holding.
  1. True or false: expense ratios matter more with bond funds than with stock funds.

CHAPTER 9

  1. True or false: ultra-short bond funds are as risky as high-yield bond funds.
  1. What type of bond funds offer a guarantee that your returns will not be diminished by inflation?
  1. True or false: the author recommends emerging-market bond funds due to their relative safety.
  1. True or false: the author recommends multi-sector bond funds as core bond holdings.

CHAPTER 14

  1. True or false: the goal of a quarterly review is to check for major changes or trends within your portfolio.
  1. True or false: the author recommends rebalancing your portfolio once a year, or, alternatively, when your portfolio’s asset allocation veers by 5% or more.

CHAPTER 15

  1. True or false: according to the author, we should always sell our mutual funds when there has been a change in fund manager.
  1. True or false: a loss on sale of mutual funds in a tax-deferred account is deductible on your income tax return in the year of sale.
  1. True or false: one reason to sell a mutual fund is if the fund’s investment style has changed.