66- Final 4
Which of the following are "asset classes"? I StocksII AnnuitiesIII Real EstateIV Indexes A. I and III B. I and IV C. II and III D. II and IV
The best answer is A. Asset allocation theory says that allocating assets among a selection of asset classes based on investment objectives and risk tolerance provides needed diversification. These allocations are rebalanced periodically (typically at least annually) based on changing needs over time as well as relative performance of each asset class. The typical asset classes are: Cash/Money Market Instruments Fixed Income Securities Equities Commodities Real Estate Note that annuities and indexes are not asset classes.
Which statements are TRUE? I The weak form of efficient market theory states that past price movements of stocks cannot be used to predict future price movementsII The weak form of efficient market theory states that past price movements of stocks can be used to predict future price movementsIII The strong form of efficient market theory states that current securities prices fully and instantaneously reflect all information, whether it is publicly available or notIV The strong form of efficient market theory states that current securities prices fully and instantaneously reflect all publicly available information, but not inside information A. I and IIIB. I and IV C. II and III D. II and IV
The best answer is A. Efficient market theory is an academic approach to securities pricing in the market that states that securities prices instantaneously and fully reflect all available information. There are 3 versions of this theory: Weak Form: States that historical patterns in stock prices are of no use in predicting future price movements. The use of technical analysis to create "trendlines" is therefore, useless. This version is not widely accepted. Semi-Strong Form: States that current securities prices reflect all publicly available information. Thus, the value of securities in the market reflects publicly distributed information, but does not reflect information known by "insiders." This is the most widely accepted version. Strong Form: States that current securities prices reflect all information, whether publicly available or not. Thus, information known by "insiders" that has not been publicly disseminated, is already reflected in a security's price. This version is also not widely accepted. question # 4-1-51-3Portfolio / Fixed Income Basics: Portfolio Basics: Efficient Market Theory - Strong FormCopyright 1989-2019 Pass Perfect, LLC All Rights Reserved
If a customer purchases in a 200% leveraged ETF, the customer can lose: A. the investment amount B. more than the investment amount C. two times the investment amount D. an unlimited amount
The best answer is A.A leveraged ETF is designed to move at a faster rate than the overall market. A 200% leveraged ETF will move at twice the rate of the general market. If the market rises by 10%, the ETF will rise by 20%. If the market falls by 10%, the ETF would fall by 20%. However, the maximum potential loss is still that person's investment!
Active asset managers select investments based primarily upon: A. inefficient market pricing of the investment B. efficient market pricing of the investment C. minimum time needed to achieve projected investment returns D. minimum number of investments needed to achieve projected investment returns
The best answer is A.Active asset managers believe that by performing fundamental analysis, they can find undervalued companies - that is, companies that are not "efficiently priced." Passive asset managers believe that the market is basically efficient, and that one cannot consistently find "undervalued securities" - so why bother. Instead, just invest in an asset that mimics the index - that is, an index fund. This will do as well as the "market" with much lower expenses than those associated with "active" asset management.
An agent for a broker-dealer tells a customer that the price of a stock is higher than it actually is. Based on this information, the customer sells the stock. Which statement is TRUE? A. The agent is subject to civil action taken by the Administrator B. The agent is only subject to civil action taken by the Administrator if the customer loses money C. The agent's actions are acceptable if the customer is given the opportunity to make up for the trade with purchases of stocks at prices below the current market D. The agent's actions are acceptable if the agent buys the shares back from the customer at an agreed upon price
The best answer is A.Giving fictitious quotes and then trading based on erroneous information is considered a manipulative practice subjecting the agent to civil action.
If tax rates rise, the value of municipal bonds will: A. increase B. decrease C. be unaffected D. become volatile
The best answer is A.If tax rates rise, the value of "tax-free" municipal bonds will increase. Higher tax rates make tax-free interest income more valuable. question # 4-2-25-5
An agent of a broker-dealer puts up a website that promotes the benefits of dollar cost averaging, including the caveat that it is suitable for investors only if they can maintain their periodic payments regardless of economic conditions and that it requires a long-term investment time horizon. If the website is viewed by an individual in another State where both the broker-dealer and agent are not registered, which of the following disclosures are required on the site in order not to be in violation of the Uniform Securities Act in that State? I "The broker-dealer or agent may only transact business in the State if registered in the State or if exempted or excluded from registration"II "Follow ups or individualized responses to persons in the State that involve either effecting or attempting to effect transactions in securities will not be made absent compliance with State registration requirements or an applicable exemption or exclusion"III "The services being offered do not represent an offer to sell securities or a solicitation of an offer to buy the securities in the State unless the subject securities are registered or are subject to an applicable exclusion"IV "The Securities and Exchange Commission has not approved, nor has it disapproved of offering made in this advertisement" A. I and II only B. III and IV onlyC. I, II, III D. I, II, III, IV
The best answer is A.Since the internet can be viewed from anywhere, Uniform State Law gives a safe harbor to having to register in a State if the following legend appears on the site:"The broker-dealer agent or investment adviser representative may only transact business in the State if registered in the State or if exempted or excluded from registration;" and"Follow ups or individualized responses to persons in the State by the broker-dealer agent or investment adviser representative that involve either effecting or attempting to effect transactions in securities, or the rendering of personalized investment advice for compensation, will not be made absent compliance with State registration requirements or an applicable exemption or exclusion." So, basically, the disclaimer required is that anyone who views the site cannot be solicited by persons associated with the site unless those persons are registered in that State (or are excluded or exempt from registration). There is no requirement to give a disclaimer regarding whether securities being offered are registered or exempt in the State; and the SEC has nothing to do with State law, so Choice IV does not apply (it does apply to prospectus disclosure on new issues of non-exempt securities registered under the 1933 Act, however).
A hedge fund wishes to make a seed capital investment in a start-up company under Rule 504 of Regulation D. The maximum permitted investment by the hedge fund is: A. $5,000,000 B. $10,000,000 C. $20,000,000 D. $50,000,000
The best answer is A.The Regulation D Private Placement exemption consists of Rules 501-506. Rules 501-503 are definitional rules, basically explaining who is an accredited investor and who is a "sophisticated" investor. The actual permitted offerings are detailed under Rules 504-506. Rule 504 is for small offerings, and is pretty much obsolete (but still tested!). Rule 505 has been rescinded. Rule 506 is the one everyone uses and can be used to raise any dollar amount. Rule 504: Covers offerings of up to $5,000,000. For such very small offerings, the rule does not specify required investor disclosures, and does not place any limit on the number of investors. Also, there is no audit requirement for the issuer's financial statements. While there is no Federal registration required, the State(s) where the issue is offered can still require State registration. Rule 505: Rescinded. Rule 506: Covers offerings of more than $5,000,000: This is the private placement rule used by pretty much everyone. The rule requires detailed disclosure to investors, similar to that required in a prospectus. The offer can only be made to a maximum of 35 non-accredited investors; and to an unlimited number of accredited investors. However, the States cannot require registration at the State level - a big financial benefit.
The measure of incremental return earned for taking on incremental risk is: A. (Total Return - Risk Free Return) / Standard Deviation B. (Sum of All Cash Flows / # of Years) / Investment Amount C. (Annual Income + Annual Accretion - Annual Amortization) / Average Life D. (Total Return - Risk Free Return) / Duration
The best answer is A.The Sharpe Ratio ((Total Return - Risk-Free Rate of Return) / Standard Deviation) measures incremental return earned for taking on incremental risk. Standard deviation is the statistical measure of risk, and what gives this question away is that only Choice A has "Standard Deviation" as part of the answer.
The manager of a broker-dealer is discussing investment strategies with her in-house research assistant. The conversation leads to a discussion about a client for whom the broker-dealer is negotiating to underwrite a common stock offering. The research analyst tells the manager that she is preparing a report indicating that the company is having sales difficulties and is going to downgrade the stock from "Accumulate" to "Hold." What should the research analyst do? A. Wait until the status of the underwriting contract is resolved before taking any further action B. Issue the report as scheduled after changing the recommendation back to "Accumulate" C. Issue the report immediately D. Sell short the stock and then issue the report
The best answer is A.This one is a bit sticky. During the period when an underwriter is negotiating with an issuer to do an underwriting, the firm cannot issue research reports on that stock (except under very specific rules where the issuer has always previously been publishing reports about that company; and the new report is no more favorable than the old reports). The issue here is that a favorable report would tend to influence that issuer's price upward; and then if the underwriter gets the deal, the underwriter could then sell the issuer's shares at a higher price and earn a larger underwriting spread. This is a conflict of interest. In this case the research analyst is going to issue a report that would influence the price of the stock downward - and the underwriting firm probably would not go through with the underwriting deal if the downgrade made the public too negative on the stock. The best course of action is to wait until the status of the underwriting contract is resolved before issuing the report.
An Investment Adviser Representative (IAR) has been employed by a Registered Investment Adviser (RIA) for the past 12 years and has accumulated $18,000,000 of customer assets under management in accounts for 47 different customers. The IAR has experienced a personal economic decline and has been trading these customer accounts with ever-increasing frequency to generate the commissions necessary to meet his personal debt obligations. Which statements are TRUE? I The IAR has regulatory liabilityII The IAR has no regulatory liabilityIII The RIA has regulatory liabilityIV The RIA has no regulatory liability A. I and III B. I and IV C. II and III D. II and IV
The best answer is A.This representative is churning his customer accounts, which is an unethical business practice. Not only does the investment adviser representative have liability, but his employing firm has liability for failing to supervise this individual.
An individual is considering leasing a new automobile. Which quantitative method is used to calculate the monthly payment? A. Rule of 72B. Time value of moneyC. Net present value D. Internal rate of return
The best answer is B. A monthly lease payment consists of 2 components - the monthly depreciation amount and the cost of the money borrowed to finance the lease. Since the borrowing charge is the interest rate on a loan, based on the number of years that the car will be leased, this computation uses the "time value of money" to compute the compound interest paid on the financed amount. The Rule of 72 is an oversimplified rule that states that if one takes the interest rate being earned on an investment and divides it into 72, then the result is the number of years that it will take for the investment to double in value. For example, if an investment earns 10%, then it will take 72 / 10 years = 7.2 years for the investment value to double. Net present value takes future cash flows and discounts them by today's interest rate to arrive at today's "net present value" (essentially, this is the opposite of compound interest). Internal rate of return is the interest rate needed to discount future cash flows to "0" - it is the true yield to maturity of an investment.
When computing standard deviation of returns against the mean, the measure used for the mean is: A. geometric meanB. arithmetic mean C. weighted average mean D. moving average mean
The best answer is B. Standard deviation of investment returns is computed by comparing all of the investment returns against the "average" investment return. The more broadly dispersed the investment returns are as compared to the arithmetic mean (which is simply the average of all investment returns), then the greater the standard deviation. Standard deviation is a "risk" measure. Geometric mean considers compounding of annual returns, as compared to arithmetic mean, which is a simple average. The other 2 choices are not tested.
An investor buys 1,000 shares of XYZ stock at $34. It goes to $43 in the next year and pays a $3 dividend. At the end of the year following, the stock is trading at $40 and the stock pays another $3 dividend. What is the total return? A. 15.0%B. 17.7% C. 30.0%D. 35.3%
The best answer is B. Total return must be presented on an annualized basis. This stock paid a $3 dividend during each of the last 2 years. Over these 2 years, the stock's price went from $34 original cost to $40 at the end of the second year, for a total capital gain of $6 over 2 years = $3 capital gain per year. $3 Dividend + $3 Capital Gain$34 per share = 17.7% Note that the relevant market price for the capital gain is the current market value of $40 per share - any interim price is irrelevant.
Hedge funds are set up as: A. management companiesB. limited partnerships C. general partnerships D. unit investment trusts
The best answer is B.A hedge fund is a private investment fund that uses sophisticated investment strategies and leverage to enhance returns but also takes on higher levels of risk. They are set up as limited partnerships, where the investor is a limited partner in the venture. They are not set up as general partnerships because general partners assume unlimited risk. They are not set up as management companies or unit trusts, because then they would be subject to regulation under the Investment Company Act of 1940.
Sarah Sacks has an individual account at a broker-dealer. Sarah calls her agent at the broker-dealer and states that she wishes to open an account for her sister Sally in her sister's name and buy 1,000 shares of PDQ stock. Which statement is TRUE? A. The agent can open the accountB. The agent can open the account only if the sister Sally gives authorization in writing C. The agent can open the account only if the manager approves in writing D. The account cannot be opened unless the sister Sally orally approves
The best answer is B.A third party is prohibited from opening an account in someone else's name. The customer must open the account personally. Sarah cannot open an individual account in her sister's name. Sally (the customer in this case) must either sign the new account form to open the account; or can give her sister Sarah a full power of attorney, signed by Sally, that names Sarah as a person allowed to act of Sally's behalf. question # 1-3-160-3
An investment adviser enters into an arrangement with a broker-dealer where the adviser, in return for directing trades to that broker-dealer, will receive payments for order flow. The payment, of one cent for each trade, is conditioned upon the adviser directing a minimum number of trades each month. Which statement is TRUE about this arrangement? A. This is a prohibited practice and violates that adviser's fiduciary responsibility to its clientsB. This action on the part of the adviser is permitted only if it is disclosed in the Form ADV Part 2A ("Brochure") given to clients C. This action on the part of the adviser is permitted because it reduces the adviser's operating costs D. This action on the part of the adviser is permitted because it is based on a minimum number of trades occurring each month
The best answer is B.An investment adviser is supposed to be impartial when deciding which brokerage firm does its portfolio trades - the overriding concern for the adviser is that it gets the best execution at a "fair" price (which is not necessarily the lowest price). A "payment for order flow" is a small payment made by a market making firm for each order sent to it. This is used by the market maker to attract order flow - and almost all market makers pay for order flow. This creates a conflict of interest for an adviser, because the adviser may choose an executing broker based on the payments it will get rather than on best execution. This conflict of interest must be disclosed in the Form ADV given to clients and most advisers that accept such payments apply them as a credit to their customer accounts, so they benefit the customer directly and not the adviser.
The Internal Rate of Return computation assumes that cash flows will be reinvested at the: A. Real Interest RateB. Internal Rate of Return C. Risk Free Interest Rate D. Nominal Interest Rate
The best answer is B.Internal Rate of Return is the true compound rate of return generated by an investment (basically the same as the yield to maturity). Implicit in the formula is that any cash flows generated are reinvested at the "IRR."
Under the provisions of the Sarbanes-Oxley Act of 2002, the annual audited 10K report filed with the SEC MUST be certified by the: I chief financial officer of the issuerII chief executive officer of the issuerIII chief compliance officer of the issuerIV chief information officer of the issuer A. I onlyB. I and II only C. III and IV only D. I, II, III, IV
The best answer is B.Sarbanes-Oxley was passed after the Enron fraud was uncovered in 2001. Enron basically produced fictitious financial statements that gave "market support" to the stock's price. When the fraud was uncovered, the stock price collapsed, taking a lot of innocent investors with it. As a result, "SarbOx" made auditors take personal liability for certifying a company's financial statements; and also made the CEO and CFO take personal liability for any misrepresentations or misstatements in the company's financial statements.
Under the NASAA Statement of Policy on Dishonest and Unethical Business Practices, which of the following is (are) prohibited business practices? I Sharing commissions between a registered broker-dealer and an agentII Sharing gains in an account between an agent and a customerIII Sharing inside information between an agent and a customer A. I onlyB. II and III C. I and III D. I, II, III
The best answer is B.Sharing gains in a customer account is prohibited unless very specific tests are met. To do this, a written agreement must be executed between the customer and the agent, and this must be approved by the broker-dealer. In addition, any sharing must be proportionate to the capital contributed. Sharing "inside information" is prohibited under Federal law. Sharing of commissions between a broker-dealer and an agent registered with that broker-dealer is the normal business practice in the industry, and is not prohibited. question # 1-3-142-2Uniform Securities Act: Business Practices: Borrowing/Lending/Sharing/Guaranteeing - Customer Account: SummaryCopyright 1989-2019 Pass Perfect, LLC All Rights Reserved
Information received by the Administrator in a private investigation may: I be shared among the officers and employees of the AdministratorII not be shared among the officers and employees of the AdministratorIII be shared with any interested party that makes a written requestIV not be shared with any interested party that makes a written request A. I and IIIB. I and IV C. II and III D. II and IV
The best answer is B.The Administrator can conduct both public and private investigations. When conducting a private investigation the Administrator will not disclose any information about the investigation to anyone, other than the employees of officers of the Administrator (which makes sense, since they are conducting the investigation).
Under the provisions of the Uniform Prudent Investor Act, a trust: A. can only invest in securities that are included on that State's "Legal List"B. can customize its investments based on suitability as determined by the needs of the beneficiaries C. must determine that each individual investment is prudent D. gives the trustee complete discretion as to which investments are suitable
The best answer is B.The Uniform Prudent Investor Act allows the plan trustee to consider overall portfolio composition when determining whether an investment is prudent, with the goal of diversification. The trustee cannot be held liable for a "bad pick" as long as this is adhered to. It also states that when selecting investments, the trustee must take into account the suitability and needs of the beneficiaries. Thus, the trustee has some flexibility as to investment choices. Prior to this, the only permitted investments were those that were included on the State's "Legal List" - and these were typically only investment grade bonds. Note that the trustee does not have complete discretion as to investment choices - for example, the trustee is still liable if the investments are overly speculative.
Under the Uniform Securities Act, in a civil suit brought by a purchaser against a seller that is alleged to have violated the Uniform Securities Act, the burden of proof rests with the: A. DefendantB. Plaintiff C. State securities administrator D. Judge presiding over the state court hearing the case
The best answer is B.The burden of proof in any lawsuit is placed on the plaintiff - not the defendant. The buyer of the securities is the plaintiff in the suit and must prove to the satisfaction of the court, that the seller (the defendant) violated the Uniform Securities Act.
An investment adviser enters into a contract with a customer that states that: "The customer shall hold the investment adviser, its officers, and its employees, harmless if the adviser, its officers or employees act in bad faith, are grossly negligent, or violate any State or Federal statute." This contract provision is: A. binding if the customer signs the contractB. void under both Federal and State law C. acceptable under State law; but void under Federal law D. void under State law; but acceptable under Federal law
The best answer is B.This is an "exculpatory" clause - and these are not enforceable in a court of law. The adviser will always be liable for gross negligence, acting in bad faith or for violating any State or Federal law. Writing in a contract that the adviser is not liable for these is meaningless.
Life insurance companies developed variable life policies from the: A. term life policyB. whole life policy C. universal life policy D. fixed annuity
The best answer is B.Variable life policies are similar to whole life in that they:are permanent insurance policies;have fixed annual premiums:have an investment component that builds cash value against which owners may take policy loans. Unlike whole life, which guarantees a fixed rate of return, variable life does not. The rate of investment return depends on the performance of the securities in the separate account that funds the variable policy. Term life offers no cash buildup - it is a pure insurance product without any investment features. Universal life policies are also similar to whole life, but in a different way. Universal policies allow the holder to increase or decrease the premiums to buy a different death benefit amount. These policies build cash value from the interest income of the insurer's investments. Insurers fund universal policies from their general account - not from a separate account. As with whole life, they guarantee a fixed rate of return. A fixed annuity offers an unchanging annuity payment - there is a guaranteed rate of return. Variable products offer a rate of return that will vary, depending upon the performance of the separate account.
If an investment adviser maintains an account that will hold customer securities positions at a broker-dealer, but the broker-dealer does not know who the individual customers are, this is a(n): A. violation of Federal law B. prime brokerage accountC. omnibus account D. discretionary account
The best answer is C. Investment advisers that take custody will typically open a brokerage account to hold all customer securities positions. If the investment adviser opens an "omnibus account," then the clients' funds and securities are held together in 1 account, where the broker-dealer does not know the identity of the IA's clients. In such an arrangement, it is the responsibility of the IA to send out customer account statements and trade confirmations, since the broker-dealer does not know who the individual customers are. Prime brokerage is used by hedge funds, where the hedge fund uses a clearing "prime broker" to settle all trades and maintain custody of the positions. However, the prime broker agrees to accept trade executions from a list of broker-dealers given up by the hedge fund. In this way, a hedge fund can route its trade executions to differing brokers in return for getting research and investment insight from those firms. question # 2-3-77-1Federal Securities Acts: Investment Advisers Act of 1940: Taking Custody of Customer Funds: Omnibus AccountCopyright 1989-2019 Pass Perfect, LLC All Rights Reserved
"DRIPs": I are offered by broker-dealersII are offered by issuersIII allow for investment in an issuer's securities with no commission chargesIV allow for investment in an issuer's securities with regular commission charges A. I and III B. I and IVC. II and III D. II and IV
The best answer is C."DRIP" stands for "Dividend Re-Investment Plan." These are plans offered by corporate issuers that give shareholders the ability to reinvest cash dividends paid by the company in additional shares of that company. This is a feature similar to automatic reinvestment of dividends at NAV in a mutual fund. There are no commission charges on reinvested dividends and fractional shares can be purchased. The issuer's DRIP allows the shareholder to build an increasing position in that issuer's stock over time in a passive fashion. Because additional shares are purchased periodically with the reinvested dividends, this is a form of dollar cost averaging. The disadvantage of a DRIP is that the investor cannot determine the timing of these incremental purchases.
The financial leverage of a broker-dealer would be measured by its: A. Net Capital amount B. Aggregate Loan amountC. Ratio of Loans to Net Capital D. Ratio of Income to Net Capital
The best answer is C."Leverage" is the use of debt in the capital base of a business. The standard measure of leverage for a business is the Debt to Equity ratio. For a broker-dealer, equity is often measured by the firm's "liquid" equity, called net capital. It is the money that would be left over if all of the firm's liquid assets were converted to cash and this was used to pay off all liabilities. The ratio of debt to net capital would be a leverage measure for a broker-dealer.
Which of the following individuals are defined as an agent under the Uniform Securities Act? I An individual who represents an issuer in selling exempt securitiesII An individual who represents an issuer in selling non-exempt securitiesIII An individual who represents a broker-dealer in selling exempt securitiesIV An individual who represents a broker-dealer in selling non-exempt securities A. II and IV only B. III and IV onlyC. II, III, and IV D. I, II, III, IV
The best answer is C.An agent is an individual who represents a broker-dealer selling any type of security - whether it is exempt or non-exempt. Individuals who represent issuers in trading exempt securities or in exempt transactions are not defined as agents. However, an individual who represents an issuer selling non-exempt securities is an agent, and must be registered.
One of the oldest portfolio strategies that is used in a stable interest rate environment is: A. swaps B. optionsC. buy and hold D. momentum
The best answer is C.Buy and hold is the oldest and simplest portfolio strategy. If interest rates are stable, then interest rate risk for a bond portfolio is minimized, and the risk of rising interest rates hurting stock valuations minimizes market risk for stock portfolios. Momentum investing is a technical strategy that says that stocks that have momentum behind them are likely to continue in that direction. Swaps and options are not strategies - they are derivatives.
An insurance company that sells an Equity Indexed Annuity (EIA) could use which of the following methods to credit the change in investment value? I Annual resetII Point-to-pointIII High-water markIV Moving average A. I and II only B. III and IV onlyC. I, II, III D. I, II, III, IV
The best answer is C.EIAs base the annuity payments on the performance of a broad-based index, such as the S&P 500 Index. However, the return is capped and there is a minimum guaranteed return, regardless of the performance of the index. The most common methods of measuring index performance are the: Point-to-point method; Annual reset method; and High-water-mark method. Assume that a client buys an EIA that is based on a 7-year return. The "point-to-point" method compares the index value at purchase date to the value at the end date, 7 years later. Any value fluctuations that occur in-between the 2 measurement dates are irrelevant. Another common valuation method is the "annual reset" method, which would measure the return achieved each year over a 7-year life and add interest to the annuity based on the annual reset. The annual interest credit is based on the difference between the year-beginning index value and the year-ending index value. This risk here is that the market dumps at year end, so that the credit only equals the floor amount. The "high water mark" method avoids the "bad timing risk" that you can have with the "annual reset" method. Instead of basing the annual interest credit on year-beginning and year-ending index value, it bases the credit on year-beginning index value and the highest value that it had during that year.
Which of the following persons is defined as an "investment adviser" under SEC Release IA-770? A. A professor who teaches a class open to the general public on investment strategy B. An insurance agent that sells insurance products to customers for compensationC. A financial planner who charges no fee for a financial plan and who takes commissions on recommended securities transactions D. A broker-dealer that recommends securities transactions to clients but does not charge for the recommendations
The best answer is C.If a financial planner claims to charge "no fee;" but then receives payment (from anyone) based upon transactions recommended to customers, then the adviser really is being paid for rendering such services and is being "compensated" under the IA-770 compensation test. Professors who teach classes about investing are specifically excluded from the definition of an investment adviser; insurance agents who only sell insurance are not recommending securities, so they are excluded; and broker-dealers who do not charge separately for advice are excluded.
All of the following risks are essentially equivalent for long term corporate bonds EXCEPT: A. Interest rate risk B. Market riskC. Default risk D. Inflation risk
The best answer is C.Interest rate risk is the risk that market interest rates rise, forcing bond prices down. This is the same as market risk for bonds. In an inflationary environment, market interest rates rise, so bond prices are forced down. Thus, these 3 risks are very similar for bonds. Default risk is specific to each corporate bond issuer, so it is the exception in this question.
Modern portfolio theorists use CAPM to find the: A. highest return investments B. lowest risk investmentsC. most efficient investments D. most economic investments
The best answer is C.Modern Portfolio Theory states that the best investments are those that lie on or above the "efficiency frontier." These are the investments that give the highest return per unit of risk assumed. The Capital Asset Pricing Model finds this efficient set of investments.
Attaching any of the following to a prospectus delivered to a customer in connection with the purchase of a new non-exempt securities offering would be a violation of the Uniform Securities Act EXCEPT a(n): A. summary of the important points in the prospectus prepared by the broker-dealer offering the securities B. copy of the most recent advertisement published by the issuer in the mass mediaC. supplement that presents the issuer's most recent audited financial statements D. internal report prepared by the issuer that shows the next 12 months' sales projections
The best answer is C.Prospectuses cannot be altered or summarized by anyone - to do so would change the content and disclosures made to investors. Prospectuses are legal disclosure documents that are non-promotional, so copies of company advertisements cannot be attached. Similarly, reports showing the prospects of increasing sales for the company cannot be attached because they are promotional. A supplement attached to the prospectus of the company's most recent audited financial statements is non-promotional and can be attached. This is valuable unbiased investment information.
Under NASAA rules, advertisements by investment advisers: I can contain testimonialsII cannot contain testimonialsIII can unconditionally make an offer of free servicesIV cannot unconditionally make an offer of free services A. I and III B. I and IVC. II and III D. II and IV
The best answer is C.The NASAA rule on IA advertising parallels the SEC rule included under the Investment Advisers Act of 1940. The NASAA rules states that any advertisement from an investment adviser:cannot contain a testimonial (broker-dealer advertising may, however);cannot state that any report or research will be provided for free unless this is offered without condition;cannot contain false, untrue or misleading statements;can include a list of recommendations made with their performance as long as all recommendations over that period (a minimum of 1 year) are included, along with the market price at the time of the recommendation and the current price of the security. This list cannot be deliberately selective. There is no restriction on the offer of free services, as long as they are truly "free" and not conditioned on making a purchase or trade.
Federal securities laws supersede the provisions of the Uniform Securities in all of the following areas EXCEPT: A. registration requirements applicable to securities offerings B. registration requirements applicable to investment advisersC. investigation and bringing of enforcement actions with respect to unlawful broker-dealer conduct D. broker-dealer capital, custody, financial responsibility and recordkeeping requirements
The best answer is C.The National Securities Markets Improvement Act of 1996 (NSMIA) was passed to reduce the overlap of Federal and State securities regulation. As a general rule, States have jurisdiction over securities transactions that occur within the State; while Federal legislation applies to "interstate" transactions. In addition, Federal securities law supersedes State securities law - since under the Constitution's "Supremacy Clause," if any State law impedes Federal legislation, the Federal law prevails. NSMIA formalized this structure by defining: Federal Covered Securities - securities registered with the SEC that cannot be required to be registered with the State (but the State can require a "notice" filing). Essentially, these are exchange and NASDAQ listed issues. Federal Covered Advisers - investment advisers that are registered with the SEC that cannot be required to be registered with the State (but the State can require a "notice" filing). These are investment advisers to investment companies and advisers with $100,000,000 or more of assets under management. Activities That State Law Cannot Preempt - broker-dealer net capital requirements, custody rules, margin rules, financial responsibility rules and recordkeeping rules (all set by the SEC or FRB) cannot be preempted by State rules. However, States are specifically permitted to retain the right to require notice filings; require registration of broker-dealers and their agents; require the registration of advisers with less than $100,000,000 of assets under management; require the registration of all investment adviser representatives (whether the investment adviser is "federally covered" or not); and the State is empowered to "investigate and bring enforcement actions with respect to fraud or deceit; or any unlawful conduct by a broker or dealer or investment adviser; in connection with securities or securities transactions."
Which of the following statements is true when comparing the purchase of a put and selling a security short? A. The maximum potential loss for both positions is unlimited B. The capital requirement to purchase a put and the capital requirement to sell a security short are the sameC. Both positions will have the maximum potential gain if the market falls to "0" D. There is the same amount of risk in owning a put and in selling a security short
The best answer is C.The maximum potential loss when buying a put is just the premium paid, whereas in selling a security short, the individual is exposed to an unlimited loss potential. Paying the premium to buy a put is less than the 50% margin requirement needed to sell a security short. If the market value of the security falls to "0," both the holder of a put and the individual who shorted shares will achieve the maximum profit. Choice D is false since selling a security short exposes the customer to unlimited loss potential; the maximum loss potential for the holder of a put is the premium paid.
A person CANNOT transact business as an investment adviser in a State unless that person: I is registered in the State as an Investment AdviserII has no place of business in the State and only handles the accounts of insurance companies in that StateIII has a place of business in the State and only handles the accounts of insurance companies in that StateIV registers in the State as a Broker-Dealer A. I and IV only B. II and III onlyC. I and II only D. I, II, III
The best answer is C.To transact business in a State, an investment adviser must be registered in that State (unless an exemption is available). Thus, Choice I is true. If a person has no place of business in a State, and only deals with "professional investors" such as broker-dealers, banks, insurance companies, etc., then that person is exempt from registration. Thus Choice II is true. However, if a person has a place of business in the State (an office), it makes no difference whether the investment adviser's customers are individuals or institutions - the adviser must register. Thus, Choice III is incorrect. Finally, there is no requirement for investment advisers to register as broker-dealers to transact business in a State, making Choice IV incorrect.
The Administrator will give a specific response before the effective date for issues that are registered by: A. Filing B. CoordinationC. Qualification D. Any of the above
The best answer is C.Under Registration by Filing, registration becomes effective 5 business days after the filing. Under Registration by Coordination, registration becomes effective when the Federal registration becomes effective. Under Registration by Qualification, registration becomes effective on a date set by the Administrator.
If an investment adviser representative (IAR) receives a written complaint from a customer, the IAR: A. decides the appropriate action to take B. must file the complaint with the AdministratorC. must forward the complaint to a supervisor D. must disclose the complaint to any new customers
The best answer is C.Under the NASAA Statement of Policy on unethical practices, a written complaint from a customer received by an investment adviser representative cannot be handled solely by the representative. It must be forwarded to a manager or supervisor for resolution. Note that this only applies to complaints in writing - not to verbal complaints.
A broker-dealer registered in States A and B has an agent that is registered in State A. The agent takes an unsolicited order from a customer in State B. The agent will have to register in State B if: A. this is an existing customer who resides in State A but is temporarily vacationing in State BB. the customer is the issuer of the securities involved in the transaction C. this is an isolated transactionD. the customer is an accredited investor
The best answer is D. If an agent of a broker-dealer resides in the State; or is a non-resident who solicits customers in a State; then the agent must be registered in the State. An exemption is granted to the broker-dealer (and also the agent) having to register in the State if the firm has no office in the State and is contacting an existing customer who is temporarily in that State (e.g., a customer who is on vacation). An exclusion is granted to non-resident broker-dealers (and their agents) who are only dealing with issuers or financial institutions. Another exemption that is available in many States permits an out-of-State broker-dealer to effect an isolated trade in that State without having to register. If the broker-dealer or agent is not a resident, but is dealing only with wealthy investors in the State, there is no exemption granted and both must be registered in the State.
A salesperson is offering a promissory note to a customer in a State of a start-up company that is developing a luxury resort in the Dominican Republic. All of the following statements made by the salesperson about this security are fraudulent EXCEPT: A. "The payment principal and interest on these notes is guaranteed by the Caribbean Regional Insurance Authority" B. "These are "prime quality" notes that are risk-free" C. "The securities are registered with the Dominican Republic Securities Commission and therefore are approved for sale"D. "These securities offer an above-market interest rate that is commensurate with the business risk of this venture"
The best answer is D. Legitimate promissory notes are marketed to sophisticated, corporate investors that have the ability to thoroughly research the company issuing the notes and determine whether the issuer will be able to repay principal and interest. However, there have been many instances of "promissory note fraud" where unlicensed individuals push bogus promissory notes that are sold as investments that offer above-market fixed interest rates and safeguarding of principal - and most of these are frauds. This is a major concern to State regulators. To offer a promissory note, both the salesperson and the note must be registered in the State. Only promissory notes that have maturities of 9 months or less, that are investment grade, and that are sold in minimum increments of $50,000 are exempt from State registration. Thus, smaller note offerings (under $50,000 amount) to smaller investors are non-exempt and must be registered; and unrated note offerings or non-investment grade rated note offerings must also be registered in the State. Finally, the tell-tale signs of fraud in promissory note offerings are: Statements that the notes are "guaranteed" or "insured" - especially by bogus foreign entities Promises of above-market rates of return (an above-market rate of return is not offered by a "low-risk" investment, but rather by a high-risk investment) Statements that the notes are "risk-free" (these are corporate issues that have risk of default) The labeling of a start-up company's notes as "prime" (since only established companies with a history of operations and earnings can be called "prime") Offers of promissory notes from a stranger who does not know the customer's financial situation
A 20-year, 6% bond is quoted by a dealer on a 5% basis. The bond is callable in 10 years at par. To calculate the dollar price for the bond, the dealer would use the: A. redemption date to find the number of years over which the discount would be earned B. call date to find the number of years over which the discount would be earned C. redemption date to find the number of years over which the premium would be lostD. call date to find the number of years over which the premium would be lost
The best answer is D. This is a premium bond. To approximate the price for a long-term bond, divide the coupon by the basis = 6/5 x $1,000 par = $1,200. The issue is that a premium bond is one that the issuer is likely to call - because the issuer can refund at lower current market rates. To bring a 6% coupon down to a 5% yield implies that 1% will be lost each year = 1% of $1,000 = $10 annual loss of premium. If the bond is called in 10 years at par, the dealer cannot charge a $200 premium because then $20 would be lost each year to the call date. The dealer could only price the bond at $1,100 (so that $100 would be lost over 10 years at the rate of $10 per year). The bottom line is that premium bonds quoted on a yield basis are priced to the near-term call date. This is where the premium is lost the fastest, since the bond will, in all likelihood, be called. In contrast, discount bonds are priced to maturity. These are bonds the issuer will not call, since market interest rates are higher than the coupon rate being paid by the issuer.
A customer sells short 100 shares of PDQ at $49 and sells 1 PDQ Sep 50 Put @ $6. The customer will have a loss at which of the following market prices for PDQ? A. 42 B. 43 C. 55D. 56
The best answer is D.A customer with a short stock / short put position loses if the market rises. The customer sold the stock at $49 and collected $6 in premiums, for a total of $55. To breakeven, the stock must be bought for this amount. If the stock is bought for more than $55, the customer loses. Therefore, a loss is experienced at $56. To summarize, the formula for breakeven for a short stock / short put position is:
All of the following are defined as "affiliated persons" under the Investment Company Act of 1940 EXCEPT a(n): A. officer of the management company B. employee of the management company C. 5% holder of the management company's sharesD. outside counsel for the management company
The best answer is D.An affiliated person of an investment company is an officer, employee or 5% shareholder of the investment company. The Board of Directors of a management company cannot consist of more than 60% of these affiliated persons. Other persons that the fund compensates, such as accountants and lawyers for the fund, are termed "interested" persons.
An investment adviser representative (IAR) is opening an account for a new customer. The IAR tells the client that the firm uses a broker-dealer owned by the same parent company to effect any recommended transactions. The IAR gives the customer the Investor Brochure and tells the customer: "This document gives all the details of how our company is structured; how fees are assessed; and any potential conflicts of interest that the firm may have. Since I have already told you about this, reading the document is entirely optional on your part." Which statement is TRUE? A. Because the IAR disclosed the potential conflict of interest verbally to the customer, this obviates the client's need to read the investor brochure B. Because the customer did not receive the brochure prior to entering into the advisory contract with the firm, the contract is void C. This is permitted if the conversation with the customer is taped and retained for 3 yearsD. This is not acceptable, since the customer should read the brochure carefully prior to making an investment decision
The best answer is D.An agent cannot minimize the importance of any disclosure document that is required to be given to the customer by law. The idea is that the customer should read the document carefully prior to making an investment commitment.
Which issue would be subject to registration under the Uniform Securities Act? A. Harris Bank, selling an additional common stock offering B. Travelers Insurance Company, selling a debenture offering C. San Francisco, California, selling a general obligation bond offeringD. Nanotech Corporation, (OTCBB listed), selling an additional common stock issue
The best answer is D.Exempt securities under the Uniform Securities Act include bank issues, insurance company issues and municipal issues. The corporate issues that are exempt under State law must be either exchange or NASDAQ listed. Note that the OTCBB (Over-The-Counter Bulletin Board) consists of stocks that do not meet NASDAQ listing standards - basically penny stocks - and these are non-exempt under State law.
Which statement is TRUE about an offer of rescission? A. The offer can only be made prior to the institution of a lawsuit alleging a securities violation B. An offer must be made to buy back the security at the original purchase price C. The customer must be paid interest at the legal rate in the State, less any dividend or interest income received from that securityD. All of the above
The best answer is D.If an offer of rescission is made on the inadvertent sale of a non-exempt security that should have been registered under the Act, the offer can only be made prior to the institution of a lawsuit alleging a securities violation. An offer must be made to buy back the security at the original purchase price, plus the customer must be paid interest at the legal rate in the State (6%), less any dividend or interest income received from that security. Any offer of rescission must be accepted within 30 days of the offer.
Insurers generally give a variable life insurance owner investment choices including which of the following investments? I Common stock fundsII Bond fundsIII Money market funds A. I only B. I and II only C. II and III onlyD. I, II, III
The best answer is D.Insurers generally offer a variety of investment choices in each separate sub-account, including equity funds, bond funds, and money market funds. Insurers may offer other types of funds as well.
Which of the following investments trade in the market? I Limited partnershipII Closed-end fundIII Variable annuityIV Listed option A. I and III B. I and IV C. II and IIID. II and IV
The best answer is D.Limited partnerships are illiquid - they do not trade because partnership units are not transferable unless the general partner approves. Closed-end funds are listed and trade like any other stock; in contrast, open end funds do not trade - they are redeemable, not negotiable. Variable annuities use a mutual fund held in a separate account to fund the annuity - they are also not negotiable. Listed options trade, so they are negotiable.
Which of the following activities are allowed prior to the filing of a registration statement? I Solicitations of indications of interestII Solicitations of ordersIII Sending a preliminary prospectusIV Publishing a tombstone announcement A. I and II B. III and IV C. I, II, III, IVD. None of the above
The best answer is D.Prior to the filing of a registration statement for a new issue, nothing can be done. Once the registration statement is filed, a preliminary prospectus can be sent; indications of interest can be accepted; and a "tombstone" announcement can be published. Once the registration is effective, orders can be accepted if customers receive the final prospectus, at or prior to, confirmation of sale.
A registered agent is permitted to share commissions on securities transactions with all of the following EXCEPT: A. the manager of the branch office to which the agent is assigned B. a registered trading assistant who takes orders for the agent C. another registered agent working at the same firm that renders services to the agent's clientsD. a personal friend of an existing client that refers new customers to the registered agent
The best answer is D.Registered agents are stockbrokers. A licensed broker is permitted to share commissions with other registered persons that work at the same broker-dealer. Thus, a registered stockbroker can share commissions with the branch manager (the BOM is registered); with a registered sales assistant in his or her office; or with another registered representative in the same firm. A registered agent cannot share commissions with unlicensed persons (Choice D); and also cannot share commissions with licensed individuals that work for OTHER broker-dealers.
Registration by Qualification would most likely be used for a(n): A. issue that is being registered in another State B. issue that is being registered with the SEC C. secondary offering from an established companyD. primary offering from a new company
The best answer is D.Registration by Qualification would be used by a first time issuer in a state that has never previously registered securities with the state. Since the state knows nothing about the registrant, the registrant must "qualify" in the state. Registration by coordination allows the coordination of an SEC registration with the state registration (Choice B). Registration by filing would be used by an issuer that has already registered issues in that state - since the state "knows" the issuer, it can simply register a subsequent securities offering in that state by "filing" (Choice C).
The SEC administers all of the following EXCEPT: A. Securities Act of 1933 B. Investment Advisers Act of 1940 C. Investment Company Act of 1940D. Uniform Securities Act
The best answer is D.The SEC administers 4 major Federal Acts - the Securities Act of 1933, Securities Exchange Act of 1934; Investment Company Act of 1940 and the Investment Advisers Act of 1940. NASAA - North American Securities Administrators Association - is the organization of State Administrators. Each State Administrator administers the Uniform Securities Act - the State "Blue Sky Laws" that require registration of broker-dealers, their agents, non-federal covered advisers, and investment adviser representatives, in each State where they deal with the public.
The State Administrator, as a condition of registration in the State as an investment adviser, can require which of the following: I An oral examination by the officer of the advisory firmII Publication of an opening announcement in a local newspaperIII Posting of a surety bondIV Filing of advertising A. I and III only B. II and IV only C. II, III, IVD. I, II, III, IV
The best answer is D.The State Administrator can require written or oral exams as a condition of registration; can require an opening announcement published in a local newspaper; can require the posting of a surety bond; and can require the filing of advertising (unless the security or transaction is exempt).
Which term is NOT defined under the Uniform Securities Act? A. Investment Adviser B. Investment Adviser Representative C. Broker-DealerD. Broker-Dealer Representative
The best answer is D.The Uniform Securities Act defines a "broker-dealer;" it defines an "agent" of a broker-dealer (which is a representative, but this is the federal name, not the State name); it defines an "investment adviser;" and it defines an "investment adviser representative" (the agent of an investment adviser). Note the inconsistency here!
When comparing a "buy and hold" strategy to annual rebalancing of a portfolio consisting of 50% equities and 50% bonds, all of the following statements are true EXCEPT: A. there are negative tax implications associated with annual rebalancing that do not exist with a buy and hold strategy B. the asset allocation percentages are likely to shift over time with a buy and hold strategy but will remain relatively constant over time if the portfolio is rebalanced annually C. transaction costs associated with a buy and hold strategy are lower than for a portfolio that is rebalanced annuallyD. market risk of the portfolio over its life is more consistent with a buy and hold strategy than with a portfolio that is rebalanced annually
The best answer is D.There are costs associated with annual portfolio rebalancing. Commissions must be paid on the trades effected to rebalance the portfolio. If appreciated securities are sold, then capital gains taxes must be paid. If a customer just "Buys and Holds," these costs are not incurred. However, with a "Buy and Hold" strategy, as the asset values move and the percentages allocated to each asset class shift over time, the customer's relative risk exposure will move over time as well, since the portfolio is not being rebalanced.
An investment adviser that solely follows and recommends listed securities is: A. exempt from State registration B. exempt from Federal registration C. subject to State registration onlyD. subject to either State or Federal registration
The best answer is D.There is no exemption from registration for an investment adviser that follows only listed securities, at either the State or Federal level. The adviser must be registered in the State if it manages assets of less than $100,000,000; and if the adviser manages assets of $100,000,000 or more, it must register with the SEC.
A broker-dealer that has a place of business in State A would be required to register in State A if it: I sold securities to customers in State AII made an offer to sell securities to customers in State AIII effects securities transactions solely with institutional investors in State AIV effects securities transactions solely with issuers in State A A. I and II only B. III and IV only C. I, II, IIID. I, II, III, IV
The best answer is D.This one comes down to 1 simple fact. Because the broker-dealer has a place of business in State A, it must register in State A. End of story.
A client has been following a certain security and tells his broker that he would like to buy it if the price reaches a certain level. The client leaves town for 2 weeks, and during that time, the security rises to the level mentioned as the buying target. The representative should: A. buy the security for the customer's account B. buy the security for his personal account and sell those shares to the customer when he returns from the trip C. buy the security in a numbered account and then reassign the account number to that customer when he returns from the tripD. do nothing
The best answer is D.This situation makes no mention of the customer giving the representative a written power of attorney over the account; therefore, the representative cannot take any action without the customer's specific authorization.
An agent moves from one broker-dealer to another. Notification of the change of employer must be made by the: A. agent only B. agent and new broker-dealer C. old broker-dealer and new broker-dealerD. agent, old broker-dealer and new broker-dealer
The best answer is D.When an agent moves from one broker-dealer to another, the old broker-dealer, the new broker-dealer, and the agent must notify the Administrator.
Short stock/short put breakeven =
short sale price + premium
What is the diffferenc between Net Present Valuye and the Time Value of Money>
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