Question

Which of the following is not a benefit of ETFs to investors?

(a) Diversification

(b) The ability to short-sell large portfolios of assets relatively easily

(c) Being available for both stocks AND bonds, as well as other asset classes

(d) The ability to trade throughout the day for NAV

(e) None of the above

7. Which of the following assets is most likely to trade over-the-counter but still have high liquidity?

(a) A long-term corporate bond

(b) A short-term corporate bond

(c) A short-term Treasury bond

(d) A large-cap stock

(e) A small-cap stock

8. Your friend Joe observes that the yield (maximum possible return) on IBM bonds is 5% and the expected return on IBM stock is 11%. Joe argues that the IBM bonds are more risky than the IBM stock because you can not make more than 5% return per year, but you can still lose part of your investment. Further, Joe argues that the IBM stock is less risky because you are not guaranteed to earn 5% or less, you can earn much more. Which of the following is the best counter-argument to Joe?

(a) The liquidity of the corporate bond is higher than that of the stock

(b) The liquidity of the stock is higher than that of the corporate bond

(c) Bondholders receive interest and principal payments before stock holders receive any cash flow from the firm and therefore a corporate bond can not be riskier than the stock of the same company

(d) Corporate bonds have no default risk

(e) Joe is right 9.

At the beginning of the year, a mutual fund has a NAV of $20. At the end of the year, the NAV is $21 and the fund has received no dividends or other distributions throughout the year. The return on the fund’s benchmark over the same period of time was 10%. What was the return to investors in the fund? Did the fund’s return to investors beat the benchmark return?

(a) 5%; No, the fund did not beat its benchmark

(b) 10%; No, the fund did not beat its benchmark

(c) 15%; No, the fund did not beat its benchmark

(d) 20%; Yes, the fund beat its benchmark

(e) None of the above

10. Suppose the fund incurred expenses of $2 per fund share during the year. What was the return on the fund’s underlying portfolio in problem 9 before any expenses that affect NAV ? Did this before-expense return beat the fund’s benchmark?

(a) 15%; No, the fund’s underlying portfolio beat its benchmark

(b) 0%; No, the fund’s underlying portfolio beat its benchmark

(c) 15%; Yes, the fund’s underlying portfolio beat its benchmark

(d) 20%; Yes, the fund’s underlying portfolio beat its benchmark

(e) None of the above

11. SnapYak is small tech firm preparing to issue publicly traded stock for the first time. Which of the following is most likely to be a step in this process?

(a) SnapYak advertises shares for sale to investors on their company website

(b) SnapYak takes shares to NASDAQ, who then lists them on their exchange

(c) SnapYak sells shares directly to a mutual fund who then trades them on a stock exchange

(d) SnapYak sells shares Goldman Sachs who then sells them to Goldman’s clients

Answer 1

6]

(a) is incorrect - ETFs offer diversification benefits because they follow indices which are diversified

(b) is incorrect - Short-selling large portfolios is made easy with ETFs because they track widely followed indices

(c) is incorrect - ETFs are available for stocks, bonds, real estate and other asset classes

(d) is correct - Although ETFs trade throughout the day, their market price can differ from their NAV