Certified Plan Sponsor Professional (CPSP) Practice Exam

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Which type of investment fund is valued and traded continuously throughout the day?

Index funds
Mutual funds
Exchange traded funds
Hedge funds

The correct answer is: Exchange traded funds

The correct choice is Exchange Traded Funds (ETFs) because they are specifically designed to be bought and sold on an exchange throughout the trading day, similar to individual stocks. This continuous trading allows investors to react to market changes immediately, gaining the flexibility to purchase or sell shares at current market prices. In contrast, mutual funds are typically priced at the end of the trading day, meaning all buy and sell transactions are executed at the same price after the market closes, which does not allow for real-time trading. Index funds, being a subset of mutual funds, share the same pricing structure. Hedge funds, on the other hand, often have restrictions on trading frequency, and they may not be available for daily trading by the general public, usually targeting accredited investors with specific strategies. Understanding the fundamental characteristics of these investment vehicles clarifies why ETFs stand out for their continuous trading feature, catering to investors looking for optimal timing and liquidity in their investment decisions.