Which of the following statements is TRUE?A.FIs are regulated at a moderate level. B.Hedge funds are subject to the numerous regulations that apply to mutual funds for the protection of individualsC.One major economic reason for the existence of mutual funds is the ability to achieve diversification through risk pooling for small investors.D.Mutual funds and hedge funds both charge their customers two types of fees: management fee and performance fee. E.The number of shares outstanding of close end mutual funds is not fixed while the number of shares outstanding of open end mutual funds is fixed.
Question
Which of the following statements is TRUE?A.FIs are regulated at a moderate level. B.Hedge funds are subject to the numerous regulations that apply to mutual funds for the protection of individualsC.One major economic reason for the existence of mutual funds is the ability to achieve diversification through risk pooling for small investors.D.Mutual funds and hedge funds both charge their customers two types of fees: management fee and performance fee. E.The number of shares outstanding of close end mutual funds is not fixed while the number of shares outstanding of open end mutual funds is fixed.
Solution
The correct answer is C. One major economic reason for the existence of mutual funds is the ability to achieve diversification through risk pooling for small investors.
Here's why:
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Mutual funds pool money from many investors to invest in a diversified portfolio of stocks, bonds, or other securities. This allows small investors to achieve diversification, which can reduce risk.
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Diversification is the practice of spreading investments among different securities to reduce exposure to any one investment. It's based on the principle that different investments will, on average, yield higher returns and pose a lower risk than any individual investment within the portfolio.
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Therefore, mutual funds provide an important service by allowing small investors to achieve a level of diversification that would be difficult or impossible to achieve on their own.
Similar Questions
QUESTION 22Which of the following statements is FALSE?A.The return from investing in mutual funds can include dividends, gains from the sale of the mutual fund assets, and gains from the sale of the mutual fund shares. B.Mutual funds are financial intermediaries that invest in diversified portfolios of assets. C.Hedge funds offer a high degree of privacy for their investors.D.Life insurance companies tend to concentrate their investments at the short term of the investment spectrum. E.One of the goals of mutual funds is to achieve superior diversification through fund and risk pooling compared to what individual investors can achieve.
Do Mutual Funds help in Diversification of investment?2 pointsa) Not at allb) May Bec) TrueFalse
What is the main advantage of diversification in a mutual fund? A. Higher returns B. Lower investment risk C. No taxes on gains D. Access to exclusive investments
Which of the following statements is correct?Review LaterPension funds and insurance companies are able to take more risk than hedge funds because their stakeholders can’t withdraw money early.Traditional funds like pensions and insurance companies must ensure their portfolio is stable enough to pay pensions and policy claims in the future.Pension plans don’t attempt to make profits because they can’t afford to lose any money.Hedge funds have so much risk tolerance because they know more about the market.
Which of the following statements is FALSE?A.In a world without FIs, the level of fund flows between household savers and the corporate sector is likely to be low.B.In a world without FIs, the users of corporate funds in the economy would have to directly approach the household savers of funds in order to satisfy their borrowing needs.C.Households can only be the savers or the providers of funds if they consume less than they could earn.D.Households are often averse to directly investing in corporate securities because of three types of costs: monitoring cost, liquidity costs, and interest rate risk.E.The long-term nature of corporate equity and debt securities would likely eliminate at least a portion of those households willing to lend money.
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