CSC Mutual Funds and ETFs 5

Question 1

A balanced mutual fund typically allocates assets between which two major asset classes?

Accepted Answer

Equities and fixed income securities

Answer

Balanced funds blend equities for growth and fixed income for income and stability, aiming to offer a middle ground between pure equity and bond funds.

Question 2

When a mutual fund distributes a return of capital (ROC), what is the immediate tax consequence for a Canadian investor?

Accepted Answer

It is not immediately taxable but reduces the investor's adjusted cost base

Answer

ROC distributions reduce the investor's adjusted cost base rather than being immediately taxable, deferring taxation until the units are sold.

Question 3

Which ETF replication method holds all (or a representative sample of) the actual securities in an index?

Accepted Answer

Physical replication

Answer

Physical replication means the ETF directly holds the underlying securities of the index, either all of them (full replication) or a representative sample (sampling).

Question 4

What is a 'clone fund' in the context of Canadian mutual funds?

Accepted Answer

A Canadian fund that mirrors a foreign fund using derivatives to gain foreign exposure within RRSP rules

Answer

Clone funds used derivatives to replicate foreign fund returns within a Canadian registered plan, historically used before the foreign content limits for RRSPs were eliminated.

Question 5

Under CSC principles, what does 'dollar-cost averaging' through regular mutual fund purchases achieve for investors?

Accepted Answer

Reducing the average cost per unit by buying more units when prices are low and fewer when prices are high

Answer

Dollar-cost averaging means investing fixed amounts regularly, automatically purchasing more units when prices fall and fewer when prices rise, potentially lowering average cost.

CSC - Canadian Securities Course Practice Test

CSC - Canadian Securities Course Practice Test

CSC Mutual Funds and ETFs 5