Types of Pooled Investments

A is correct. Open-end mutual funds continuously issue new shares when investors buy and redeem shares when investors sell. This unlimited share structure means transactions occur directly with the fund at NAV, calculated at the end of each trading day.

B (Trade on exchanges) is incorrect because open-end funds do not trade on exchanges. Investors buy and sell shares directly with the fund company. C (Trade at premiums or discounts) is incorrect because open-end funds always transact at NAV, never at premiums or discounts. D (Purchased on margin) is incorrect because mutual funds cannot be purchased on margin, though closed-end funds can.

B is correct. The fund is trading at a 10% discount to NAV. The calculation is: ($18 - $20) / $20 = -$2 / $20 = -10%. A negative percentage indicates a discount, meaning the market price is below the NAV.

A (10% premium) is incorrect because the market price ($18) is below NAV ($20), indicating a discount, not a premium. C (11% discount) uses the wrong denominator. The correct calculation divides by NAV ($20), not market price ($18). D (Price equal to NAV) is incorrect because only open-end mutual funds trade at NAV. Closed-end funds can and often do trade at premiums or discounts.

C is correct. Unit Investment Trusts (UITs) have fixed portfolios with no active management. Once the portfolio is assembled, securities are typically held to maturity with no buying or selling. UITs also have a termination date when they self-liquidate, returning proceeds to investors.

A (Open-end mutual fund) is incorrect because mutual funds have actively or passively managed portfolios with ongoing buying and selling of securities. B (Closed-end fund) is incorrect because closed-end funds have professional managers who actively trade the portfolio. D (ETF) is incorrect because while many ETFs are passively managed to track an index, the portfolio is not fixed and shares can be created or redeemed through authorized participants.

A is correct. Authorized participants (APs) create arbitrage opportunities that keep ETF prices aligned with NAV. When an ETF trades at a premium, APs create new shares by delivering a basket of underlying securities to the fund, increasing supply and pushing the price down. When trading at a discount, APs redeem shares for the underlying basket, decreasing supply and pushing the price up. This in-kind creation and redemption process is continuous.

B (SEC regulations) is incorrect because there are no regulations requiring ETFs to trade at NAV. The market mechanism, not regulation, keeps prices aligned. C (Mutual fund companies) is incorrect because ETF sponsors do not guarantee prices, and mutual funds are separate from ETFs. D (Federal Reserve) is incorrect because the Fed does not intervene in ETF pricing.

C is correct. REITs must distribute at least 90% of their taxable income to shareholders annually to avoid paying corporate income tax. This high distribution requirement is why REITs are popular income investments, though it also means they retain less capital for growth.

A (50%) is incorrect as it is too low and does not meet REIT qualification standards. B (75%) is incorrect. While REITs do have 75% tests for assets and income sources, the distribution requirement is 90%. D (95%) is incorrect. Although there is a 95% income test (95% of gross income must come from real estate plus passive sources), the distribution requirement is 90%, not 95%.

B is correct. ETFs trade on exchanges like stocks and can be purchased on margin, sold short, and traded throughout the day. Mutual funds cannot be purchased on margin because they are bought directly from the fund company at end-of-day NAV, not traded on exchanges.

A (Mutual funds offer intraday pricing) is backwards. ETFs offer intraday pricing because they trade on exchanges, while mutual funds use forward pricing at 4 PM ET. C (Mutual funds more tax efficient) is backwards. ETFs are generally more tax efficient due to their in-kind creation and redemption mechanism, which avoids triggering capital gains. D (ETFs always have higher expense ratios) is incorrect. ETFs typically have lower expense ratios than actively managed mutual funds, though some specialized ETFs may have higher fees.

C is correct. This is the exception. Closed-end fund shares are non-redeemable, meaning investors cannot redeem shares with the fund company. Instead, investors must sell shares on the exchange to other investors, just like stocks. Only open-end mutual funds offer redemption at NAV.

A (Fixed number of shares) is a true characteristic of closed-end funds. Unlike open-end funds with unlimited shares, closed-end funds issue a fixed number of shares at their IPO. B (Leverage up to 33.3%) is a true characteristic. Traditional closed-end funds can use leverage up to 33.3% debt-to-assets, which is not permitted for open-end mutual funds. D (Trading at premiums or discounts) is a true characteristic. Because there is no creation/redemption mechanism, closed-end funds commonly trade away from NAV.

B is correct. Section 3(c)(7) funds can accept up to 2,000 qualified purchasers. A qualified purchaser must have at least $5 million in investments. This is a higher threshold than accredited investor status and allows for more investors than Section 3(c)(1) funds.

A (Accredited investor) is incorrect because Section 3(c)(7) funds require qualified purchaser status, which has a higher investment threshold than accredited investor. Section 3(c)(1) funds are limited to 100 accredited investors. C (Accredited client) refers to a different standard used for performance-based fee eligibility under the Investment Advisers Act, not fund investor qualification. D (Qualified client) is also an Investment Advisers Act term related to performance fees, not an investor qualification for private funds.

D is correct. Mortgage REITs (mREITs) invest in mortgages and mortgage-backed securities rather than owning and operating physical real estate. They generate income from the interest on these debt instruments and are more sensitive to interest rate changes than equity REITs.

A (Equity REIT) is incorrect because equity REITs own and operate income-producing real property such as apartments, office buildings, and shopping centers. They represent approximately 90% of all REITs. B (Hybrid REIT) is incorrect because hybrid REITs combine both equity and mortgage investments, holding both physical properties and mortgages. C (Public non-traded REIT) refers to a REIT's trading status (SEC registered but not exchange-listed), not its investment focus.

D is correct. Under Rule 23c-3, interval funds must offer to repurchase between 5% and 25% of outstanding shares at NAV at regular intervals of 3, 6, or 12 months. This structure provides some liquidity while allowing the fund to hold less liquid assets (up to 95% illiquid assets, compared to 15% for open-end funds).

A (Daily) is incorrect because that describes open-end mutual funds, which offer daily redemption. Interval funds provide much less frequent liquidity. B (Weekly) is incorrect as weekly repurchases are not part of the interval fund structure. C (Annually) is too restrictive. While 12 months is one option, interval funds can also choose 3-month or 6-month intervals.