CMFAS Collective Investment Schemes M3 3 — Questions and Answers
Question 1: What is dollar-cost averaging?
- Investing a lump sum at one time
- Investing a fixed amount at regular intervals regardless of price (Correct answer)
- Only investing when prices are low
- Converting all investments to US dollars
Correct answer: Investing a fixed amount at regular intervals regardless of price
Dollar-cost averaging involves investing a fixed amount regularly, which buys more units when prices are low and fewer when prices are high, averaging the cost.
Question 2: What is a feeder fund?
- A fund that feeds animals
- A fund that invests substantially all its assets into another fund (Correct answer)
- A fund that only invests in agriculture
- A type of pension fund
Correct answer: A fund that invests substantially all its assets into another fund
A feeder fund channels virtually all its capital into a single master fund, which does the actual investing. This structure allows access to foreign funds.
Question 3: What is the expense ratio of a fund?
- The fund's total returns
- The total annual fund operating expenses expressed as a percentage of average net assets (Correct answer)
- The management fee only
- The sales charge
Correct answer: The total annual fund operating expenses expressed as a percentage of average net assets
The expense ratio includes all operating costs (management fee, trustee fee, audit fees, etc.) expressed as a percentage of the fund's average net assets.
Question 4: What is a fund-of-funds?
- A fund that only invests in bonds
- A fund that invests in other funds rather than directly in securities (Correct answer)
- A fund that is managed by multiple managers
- A fund that has no fees
Correct answer: A fund that invests in other funds rather than directly in securities
A fund-of-funds invests in a portfolio of other investment funds rather than investing directly in stocks, bonds, or other securities.
Question 5: What is redemption in the context of unit trusts?
- Buying new units
- Selling units back to the fund manager in exchange for cash (Correct answer)
- Converting units to shares
- Transferring units to another person
Correct answer: Selling units back to the fund manager in exchange for cash
Redemption is the process of selling your units back to the fund manager, who will pay you the redemption price (bid price) based on the current NAV.
Question 6: What does the Sharpe ratio measure?
- The total return of a fund
- The risk-adjusted return of an investment (Correct answer)
- The size of a fund
- The management fee
Correct answer: The risk-adjusted return of an investment
The Sharpe ratio measures how much excess return an investment generates per unit of risk taken. A higher Sharpe ratio indicates better risk-adjusted performance.
CMFAS Collective Investment Schemes M3 3
What is dollar-cost averaging?