Laura is considering investing in a closed-end fund focused on renewable energy infrastructure. The fund's prospectus indicates it has a fixed capital structure and trades on the stock exchange. What is a primary implication of this structure for Laura compared to an open-end mutual fund with similar underlying assets?

Question: Laura is considering investing in a closed-end fund focused on renewable energy infrastructure. The fund's prospectus indicates it has a fixed capital structure and trades on the stock exchange. What is a primary implication of this structure for Laura compared to an open-end mutual fund with similar underlying assets?

Answer options:

• Laura will always be able to redeem her shares directly from the fund at their Net Asset Value (NAV). ✅ The fund’s market price could diverge significantly from its Net Asset Value (NAV), trading at either a premium or a discount.
• The fund will be required to issue new shares continuously to meet investor demand, potentially diluting existing shareholders.
• Laura will incur redemption fees when she sells her shares back to the fund.

Correct answer: The fund’s market price could diverge significantly from its Net Asset Value (NAV), trading at either a premium or a discount.

Explanation: Unlike open-end mutual funds, closed-end funds have a fixed number of shares and trade on exchanges, meaning their market price is determined by supply and demand and can deviate from their NAV, trading at a premium or a discount.