Final Answer:
The theory behind the mutual fund cash ratio is: when mutual fund managers hold high levels of cash, they must eventually buy stocks with it.
The correct option is B) when mutual fund managers hold high levels of cash, they must eventually buy stocks with it.
Step-by-step explanation:
Mutual fund managers aim to maximize returns for their investors by investing in various securities, including stocks. When these managers accumulate high levels of cash, it implies they have not fully invested the fund's assets. To optimize returns, they must deploy this excess cash by purchasing stocks or other securities. Mutual funds pool money from multiple investors to invest in a diversified portfolio of stocks, bonds, or other securities. The cash ratio, or the proportion of a mutual fund's assets held in cash, is a crucial metric reflecting the fund manager's investment strategy.
When mutual fund managers hold high levels of cash, it indicates a temporary position of liquidity. This excess cash typically needs to be deployed to meet the fund's objective of generating returns for investors. The manager's responsibility is to navigate market conditions and allocate these funds optimally, often by investing in stocks or other assets.
This strategy aligns with the principle that holding substantial cash reserves for an extended period may not align with the fund's objective of capital appreciation. Therefore, the correct option is B, emphasizing the necessity for fund managers to eventually invest excess cash in stocks or other securities to fulfill their investment goals.
The correct option is B) when mutual fund managers hold high levels of cash, they must eventually buy stocks with it.