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Answer: An index fund (or exchange-traded fund, ETF) to achieve diversification with low fees
The most suitable recommendation is **an index fund or ETF**. Why: - Joe wants **diversification** without having to research and pick individual stocks. - His main preference is **low fees**, and index funds/ETFs generally have the lowest expenses among the choices. Why the other choices are less appropriate: - **B:** Closed-end fund discounts do not guarantee outperformance, and active management usually means higher fees. - **C:** Fund of hedge funds typically adds another layer of fees, which conflicts with Joe’s preference. - **D:** Past mutual fund performance is not a reliable predictor of future performance, and active funds usually have higher expenses. So the best recommendation is **A**.
Author: Manit Arora
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Question 21.7.3. Joe is a 29-year-old single male who prefers to invest in a fund because he has neither the time nor interest to spend researching and selecting individual stocks. His financial advisor Sally is experienced in the following fund categories: closed- and open-end mutual funds, hedge funds, and index funds. When Sally asks for Joe’s preferences, his only strongly felt opinion is that he prefers to avoid paying high expenses or fees (reading the financial news gives him the impression that he should seek low fees because fees are trending toward zero). Which of the following is she MOST LIKELY to recommend to Joe?
A
An index fund (or exchange-traded fund, ETF) to achieve diversification with low fees
B
An active closed-end mutual fund that trades below its net asset value (NAV) because it will outperform as it pulls to maturity
C
A fund of hedge funds (FOHF) in order to overcome the principal-agent problem and ensure alignment between Joe's interest and the managers
D
An open-end mutual fund that has beaten the market in the prior three consecutive years because mutual fund performance tends to be persistent
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