ANSWERS

  1. Answer: A. Although an ADR is denominated in US dollars, it represents ownership of stock in a non-US company. The ADR’s price will track (in theory, anyway) the local price of the stock of the company on their local market. If the local price of a stock is stable, but the currency spikes up dramatically against the US dollar, the USD price of the ADR will drop.
  2. Answer: C. In order to qualify as a regulated investment company, the IRS requires that at the close of each quarter of the fund’s taxable year, at least 50 percent of the value of the fund’s total net assets must consist of cash, cash items, government securities, securities of other funds, and investments in other securities which, with respect to any one issuer, represent neither more than 5 percent of the assets of the fund nor more than 10 percent of the voting securities of the issuer. Further, no more than 25 percent of the fund’s assets may be invested in the securities of any one issuer (other than government securities or the securities of other funds), the securities (other than the securities of other funds) of two or more issuers which the fund controls and are engaged in similar trades or businesses, or the securities of one or more qualified publicly traded partnerships.
  3.  Answer: B. Opportunistic institutional traders will see a discrepancy in the prices between the ETF and its underlying basket of securities. For example, if the price of the iShares S&P 500 ETF (Ticker: IVV) is higher than the aggregated price of all 500 stocks (AKA the ETF is at a premium price), an institutional trader can effectively buy all the underlying stocks turn them into an ETF and sell them at the higher price. In this example, the activity of the trader will put downward pressure on the ETF price, moving it back towards the price of the underlying stocks
  4. Answer: B. Duration is a measure of a bond’s sensitivity to interest rate changes. Although coupon and credit quality are risks associated with investing in fixed income securities, when you believe that rates are going to change, you should be most concerned with how sensitive your portfolio is to those changes. If your portfolio has a duration of 1 (year), and interest rates rise by 1%, you would expect your portfolio to decrease in value by 1%. If your portfolio has a duration of 10 (years), you would expect it to drop by 10% for every 1% change in interest rates.

 

Although market makers will generally take advantage of differences between the NAV and the trading price of shares of ETFs through arbitrage opportunities, there is no guarantee that they will do so.