Canadian Securities Course (CSC) Level 2 Practice Exam

What is a benefit of closed-end funds?

1. Trade at NAVPS and are highly liquid.

2. More liquid than open-end mutual funds.

3. Directly trading on exchanges.

4. Can short and don't need reserves like open-end mutual funds.

The correct answer is: Can short and don't need reserves like open-end mutual funds.

The benefit of closed-end funds lies significantly in their unique structure and trading characteristics. Closed-end funds are traded on stock exchanges, similar to individual stocks, allowing investors to buy and sell shares throughout the trading day at market prices. This structure provides flexibility and can lead to a wide range of trading strategies, including short selling, which is not typically available for open-end mutual funds due to their continuous offering of shares and requirement to redeem shares at the net asset value (NAV). Closed-end funds do not have to hold reserves to meet redemption requests as open-end funds do. This distinction enables them to use leverage and potentially offer higher returns, albeit with higher risk. Additionally, the ability to short sells adds to the strategies available to investors when dealing in the closed-end fund market. The other choices, while touching on some aspects of closed-end funds, do not capture this primary benefit as effectively as the ability to short and the lack of reserve requirements do. Trading at NAVPS and liquidity capabilities do exist but are inherently tied to how closed-end funds operate on exchanges, emphasizing the strategic advantage that they can provide to investors through short selling and flexibility in trading.