I really hope CFAI does better of writing the actual exam… below are all correct in my opinion…You can certainly redeem a MF anytime during the day but you get the closing price of the day … am I reading this wrong or do you agree that question is poorly written… or they really try to make it hard by throwing tricks in there… I feel bad for those who have English as Second Language; they are at a massive disadvantage writing this exam because the way CFAI word things…so tricky even for me yet alone an ESL… Disclosure: just my opinion and not breaking any ethical standards; not trying to badmouthing CFAI… LOL
“There are a number of ways to get passive equity exposure; we can invest in an equity index mutual fund, a stock index futures contract, or a total return equity swap. Stock index futures and equity swaps are low-cost alternatives to equity index mutual funds; however, a drawback of stock index futures is they have to be rolled over periodically. One advantage of investing in equity mutual funds is that shares can be redeemed at any point during the trading day.”
In his statement to Lafite, Gatchell is least likely correct with respect to:
A cost.
B redemption.
C periodic rollover.
KEY = B
Equity Portfolio Management, Gary L. Gastineau, Andrew R. Olma, and Robert G. Zielinski
Modular Level III, Vol. 4, Reading 23, Section 4.2
Study Session 12–23–e
Compare alternative methods for establishing passive exposure to an equity market, including indexed separate or pooled accounts, index mutual funds, exchange-traded funds, equity index futures, and equity total return swaps.
B is correct. Gatchell is correct that stock index futures and equity swaps are low-cost alternatives to equity index mutual funds. He is also correct that a drawback of stock index futures is they have to be rolled over periodically. He is incorrect about the pricing of mutual funds: They are priced once daily.
I agree that some of the CFAI materials can be poorly written, but have to respectfully disagree with your interpretation of the question. The question is essentially asking which of the following 3 statements is false/not true.
Forwards and Futures have expires, hence they have to be rolled over. This is a disadvantage because of the uncertainty with F prices and such.
Futures and Swaps are a more cost efficient way of achieving exposure than direct investment. You could buy actual Oil Barrels, but then you have to transport it, store it, maintain it etc. Or you can just buy Oil Futures.
All transactions for Mutual Funds are bought and sold at closing prices. Regardless of when the redemption order is sent in, its effectively “redeemed” only at closing. Additionally the Mutual Fund Manager has to liquidate a portion of the portfolio and it’s respective holdings to satisfy the redemption - so relative to alternatives this is a disadvantage. An ETF for example, if i wanted to redeem it at noon, i’d more or less get the noon quote. With a Mutual Fund if I wanted to redeem at noon, i’d get the 5pm price.
Disagree with OP (sorry)- you cannot redeem at any time of the day in a mutual fund. You’re free to submit an order to redeem whenever you want (just like you’re free to enter a market order over the weekend), but the shares are redeemed at the close of business after the NAV of the fund has been determined. This is a well documented attribute of mutual funds.
If anything, the word advantage should have tipped you off. When talking about ETFs vs mutual funds, one of the advantages of an ETF is that you can make intraday trades as opposed to a mutual fund where you cannot. Wording or not, the way a mutual fund is traded would never be considered an advantage over an ETF or common stock position.