Explanation:
Best single answer: C
This question appears to contain more than one inaccurate statement, but C is the clearest false statement.
A is true. The geometric mean return is:
which is less than 13%.
B is true. Mutual funds are more regulated than hedge funds: they disclose policies, face leverage limits, compute NAV daily, and are redeemable.
C is false. A back-end load is charged when shares are sold/redeemed, not when they are purchased. The 2.0% load could be viewed as about 40 bps per year over five years if amortized, but the timing in the statement is wrong.
D is also inaccurate. Late trading is illegal, market timing may be legal though often restricted, but front running is not legal.
Because the item is somewhat flawed, C is the intended false answer, though D also contains an error.
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Q-705.3 Quadholding Mutual is a mutual fund in the United States who reports the following sequence of per annum returns over the last five years: +7.0%, +15.0%, +20.0%, +5.0%, +18.0%. Quadholding Mutual charges a back-end load of 2.0%. Each of the following statements about this mutual fund is true EXCEPT which is false?
A
Quadholding's five-year geometric mean must be less than 13.0%
B
Unlike a hedge fund, Quadholding must disclose its investment policies, must limit its use of leverage, must calculate NAV daily, and must make its shares redeemable at any time
C
When purchasing shares in Quadholding, a 2.0% fee will be charged to the investor; and if the shares are held for five years then subsequently sold, then the total expense ratio amortizes to about 40 basis points per year
D
Quadholding is heavily regulated primarily by the Securities and Exchange Commission (SEC) who does not permit the illegal practice of "late trading;" although investors can legally engage in "market timing" or "front running" the fund but only if such trades are based on publicly available information
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