Question

7. Tammy is comparing three different mutual funds. She would like to purchase the fund with the best prospects for future capital appreciation. Which of the following factors should she use to compare the funds in order to determine mutual fund outperformance?

I. Weighted average P/E ratios.

II. Expense ratios.

III. Asset turnover ratios.

a. II only

b. I and II only

c. I and III only

d. II and III only

8. Mel is willing to accept low levels of liquidity and markeability in return for an investment that generate a moderate level of current income. Which of the following investments would be most appropriate for Mel?

a. Precious metals.

b. Money market mutual fund.

c. Rental real estate.

d. Collectible coins.

Answer 1

7.

P/E of a mutual fund indicates the investment approach followed by a mutual fund scheme. It tells you whether the fund follows a growth style of investing or value investing.

Growth investment approach focuses on capital appreciation

Asset turnover ratio, which is a measure of how efficiently the assets of the company are used to generate sales.

The expense ratio is the annual fee that all funds or exchange-traded funds charge their shareholder.

Weighted average P/E ratios and III. Asset turnover ratios are related to the performance of the company/mutual fund whereas Expense ratios is related to fees charged

Option c. I and III only is correct

8.

Money market mutual fund have high levels of liquidity which invest in  short-term debt securities however the returns are limited, they are close to the risk-free rate of return.

Collectible coins have low levels of liquidity and marketability, regular income cannot be generated, as it is difficulty to get ready buyers/sellers who are willing to pay the price you want.

Precious metals and Rental real estate is correct option as even though they have relatively low liquidity moderate level of current income can be generated given that there is a huge market for the same.