CFS CFS Mutual Funds & ETFs 2

Question 1

What is 'style drift' in mutual fund management?

Accepted Answer

When a fund deviates from its stated investment objective or style category

Answer

Style drift occurs when a fund manager invests outside the fund's stated mandate (e.g., a large-cap fund buying small-cap stocks), which can disrupt an investor's intended asset allocation.

Question 2

The 'expense ratio' of a mutual fund represents:

Accepted Answer

The annual cost of operating the fund expressed as a percentage of average net assets

Answer

The expense ratio is the annual percentage of fund assets used to cover operating costs including management fees, administrative expenses, and 12b-1 fees.

Question 3

What is a 'breakpoint' in mutual fund sales charges?

Accepted Answer

A discount on front-end sales loads available when investing above certain dollar thresholds

Answer

Breakpoints are volume discounts on Class A share sales loads that reduce the percentage charged as the investment amount reaches certain thresholds.

Question 4

What is the 'creation/redemption' mechanism that makes ETFs tax-efficient?

Accepted Answer

Authorized participants exchange baskets of securities for ETF shares, avoiding taxable sales

Answer

Authorized participants create or redeem ETF shares by exchanging baskets of the underlying securities in-kind, which avoids triggering capital gains distributions.

Question 5

A mutual fund's 'turnover rate' measures:

Accepted Answer

The percentage of fund holdings replaced through buying and selling during the year

Answer

Turnover rate indicates how actively the fund manager trades the portfolio; high turnover generally leads to higher transaction costs and potential tax distributions.

CFS - Certified Fund Specialist Practice Test

CFS - Certified Fund Specialist Practice Test

CFS CFS Mutual Funds & ETFs 2