SIE Understanding Products and Their Risks Question 50: Answer and Explanation

Question: 50

Which of the following is correct regarding the Expense Ratio?

• A. The largest proportion is the up-front sales load.
• B. The management fee is usually a smaller percentage of net asset value (NAV) in a small mutual fund, as compared with a large fund.
• C. The company does not calculate the performance of the investor's shares.
• D. The Expense Ratio includes the cost of record-keeping, which can help the investor when filing taxes.

Correct Answer: D

Explanation:

D: Choice D is correct because the cost of record-keeping is covered by the service fee. Choice A is incorrect because the up-front sales load is not included in the calculation of the Expense Ratio, as the Expense Ratio is made up of ongoing fees: the management fee, service fee, and 12b-1 fee. Each of these is an annual percentage of NAV, deducted from the fund on a daily basis. Choice B is incorrect because, due to economies of scale, the management fee is usually a smaller percentage of net asset value (NAV) in a large fund, as compared with a small fund. Choice C is incorrect because the company does calculate the performance of the investor's shares. The cost of doing this is covered by the service fee.