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Answer: Open-end mutual funds need to hold some liquid assets to meet redemptions, while closed-end mutual funds and ETFs do not need to hold any liquid assets on hand.
## Explanation **C is correct** because: - Open-end mutual funds must maintain liquid assets to handle daily redemptions as investors can redeem shares directly with the fund - Closed-end mutual funds trade on exchanges like stocks, so redemptions occur through market transactions, not directly with the fund - ETFs also trade on exchanges and use an authorized participant mechanism for creation/redemption, eliminating the need for daily liquid asset reserves **A is incorrect** because: - Open-end mutual fund shares fluctuate as investors buy/sell directly from the fund - Closed-end fund shares remain constant (barring secondary offerings) - ETF shares fluctuate through creation/redemption processes **B is incorrect** because: - Open-end mutual funds trade once daily at NAV - Closed-end mutual funds trade continuously on exchanges like stocks - ETFs also trade continuously on exchanges **D is incorrect** because: - Open-end mutual funds trade at NAV - ETFs typically trade very close to NAV due to arbitrage mechanisms - Closed-end mutual funds often trade at discounts to NAV due to limited arbitrage opportunities
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An equity analyst on a trading desk at an investment bank is comparing different investment vehicles. The analyst studies the characteristics of open-end mutual funds, closed-end mutual funds, and ETFs. Which of the following is a correct comparison of these investment vehicles?
A
The number of shares in open-end and closed-end mutual funds remains constant over time, while the number of shares in an ETF fluctuates.
B
Trades in open-end and closed-end mutual funds are executed once a day at the net asset value, while ETFs can be traded at the market price any time the market is open.
C
Open-end mutual funds need to hold some liquid assets to meet redemptions, while closed-end mutual funds and ETFs do not need to hold any liquid assets on hand.
D
Open-end and closed-end mutual funds typically trade at or very close to their net asset values, while ETFs typically trade at prices lower than their net asset value.
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