Practice Final Exam (test geek)
13. With life insurance, a "Capital Needs Analysis" maybe helpful for all of the following, except A. Planning for an income stream B. Capital for tax purposes C. Future life insurance needs D. Completion of investment objective
13. C. Capital Needs Analysis is used to determine the use and amount of insurance needed to meet future needs. You don't purchase insurance to buy insurance in the future.
24. The FDA has changed their rule regarding testing of a new drug from 1 year totwo years. This is an example of A. Market Risk B. Legislative Risk C. Regulatory Risk D. Inflation Risk
24. C. If rules are changed by an agency, this constitutes a regulatory change. If a law is change by a legislative body (Congress) it would constitute a legislative risk.
Which of these portfolio allocations below would you expect to show the least volatility over the next year? ABCD STOCK 50% 30% 10% 0% BOND 50% 70% 90% 100% High return 35.4% 37.2% 34.3% 32.7% Low return 4.4% 6.5% 7.2% 8.5% Avg. returns 15.8% 16.2% 15.5% 15.2% Std. Dev. 11.25 10.75 10.15 10.34 A. 50%/50% B. 30%/70% C. 10%/90% D. 100%/0
1. C. The measure of a portfolio's volatility is its standard deviation.
10. A company has two outstanding bond issues, both with a coupon rate of 8%. Bond A will mature in 2 years while Bond B will mature in 15 years. If interest rates were to increase to 10%, which of the following statements is correct? A. both bonds will be selling at a premiumB. bond B will be selling at a greater premium than Bond A C. bond B will be selling at a greater discount than Bond A D. The company will attempt to postpone the maturity of Bond A
10. C. Since interest rates are above the coupon rate, the price of both bonds would fall. The longer maturity, being more volatile, would fall furthest
100. The three parts of a family balance sheet are: A. Income, liabilities, net worth B. Assets, liabilities, net worth C. Income, expenses, taxes D. Assets, income, liabilities
100. B. Balance sheets contain assets, liabilities and net worth. Cash flows contain income, expenses and taxes.
11. An investor is long 100sh of XYZ. She fears a near-term correction but overall she remains bullish. Which of the following may allow her to profit from this situation? A. Buy a call B. Buy a put C. Sell a call D. Sell a put
11. C. In hedge strategies, the option always follows the risk direction of the stock, to generate a profit (income), you would then sell the option
12. An investor who is short 100sh of XYZ and would like to protect against risk would A. Buy a call B. Buy a put C. Sell a call D. Sell a put
12. A. Same as above answer except to protect the stock you must buy the option
14. Which of these describes a market maker? A. a broker/dealer who stands ready to buy or sell at least the standard unit of a specific stock traded in the over-the-counter market B. a broker/dealer who stands ready to buy or sell at least the standard unit of a specific stock traded on a listed exchange C. an investment banker who participates in a firm underwriting D. a subscriber to the NASDAQ system
14. A. Market makers exist in the OTC market. Specialists exist on exchanges.
15. An investor, looking to create a diverse portfolio, would most likely consider which of the following? A. STU stock, beta .95, correlation +.84, VWX stock, beta .90, correlation +.07; YZA stock, beta .88, correlation -.45. B. ABC stock, beta 1.20, correlation +.82; DEF stock, beta .90, correlation +.91; GHI stock; beta +.65, correlation +.56. C. DCB stock, beta 1.00, correlation +.75; HGF stock, beta .10, correlation +.25; KJI stock, beta -.50, correlation +.50. D. JKL stock, beta 1.50, correlation +.77; MNO stock, beta 1.00, correlation +.93, PQR stock, beta .50, correlation +.34
15. A. To create a diverse portfolio, you would most likely invest in investments that had a negative coorelation.
16. Among the various forms a business may take, there are the sole proprietorship and the LLC. Two things they have in common are: I. Limited liability II. Flow-through of income or losses III. Ease of formation IV. Unlimited number of owners A. I and II, B. I and IV C. II and III D. III and IV
16. C. Sole proprietors are solely individuals and assume all of the liability.
17. . A retiree is turning 70 in November, 2011. When would they be required to take a minimum distribution? A. December 31, 2011 B. April 1, 2012 C. December 31, 2012 D. April 1, 2013
17. D. The retiree will turn 70 1⁄2 in 2012. You must take distribution no later than April 1, the yearafter the year you turn 70 1⁄2. In this case, 2013.
18. An investor is looking to invest $200,000. He first researches individual companies. He then researches each individual industry in which these companies are in and notices that some industries are doing better than others. He makes his selection to invest in the individual companies within the best performing industries. This is referred to A. Top down approach B. Bottom up approach c. Due diligence d. Prudent
18. B. When first researching individual companies and then expanding eventually to broad economic conditions you are researching from narrow to broad or bottom-up. If you start first with broad economic conditions eventually focusing on individual companies you would be researching top-down.
19. An agent whose registration took effect November 11, 2008 would find that the first renewal would take place A. December 31, 2008 B. November 11, 2009 C. December 31, 2009 D. January 1, 2010
19. A. All registrations expire (unless properly renewed) each December 31st. This is true for agents, IAR's, IA's and B/D's.
2. If the S&P goes up 5% what is the MOST LIKELY result for XYZ with a Beta of 1.5? A. 3.33% B. 3.5% C. 6.5% D. 7.5%
2. D. Beta is a measure of volatility versus the overall market. 5% times 1.5 = 7.5%
20. An IA is meeting with a new prospect. Which of the following performance data could be presented? A. The 10 best performing portfolios B. The 10 worst performing portfolios C. An average of the portfolios most similar to the prospect's objective D. All of your accounts you have managed
20. D. When disclosing past recommendations, you must provide all past recommendations.
21. An IAR works for a federally covered IA. The IA's main office is in State A. The IAR travels to see clients in State B. Under the U.S.A. , which of the following is(are) true? I IAR need not be registered in State B II IAR need not be registered in State A since the IA is federally covered III IAR needs to be registered in State B IV IAR needs to be registered in State A A. I and II B. I and IV C. II and III D. III and IV
21. B. An IAR of a federally covered IA need be registered only in the state of the IA's home office (or any other office the IAR may work from - which does not apply in this question).
22. If an IA is registered in 5 states has its principal office in State B and three other states, the IA must: A. Meet capital requirements of State B B. Meet capital requirements in State A C. Meet SEC requirements since it is federally registered D. Meet each individual state capital requirement
22. A. An IA must meet the financial requirements of its home state only.
23. If a federally registered IA has its principal office in State A and has offices in 3 other states and a client of the IAR who is registered in State A moves to a state in which the IAR is not registered then the IAR may A. Continue business as usual since the IA is federally registered B. Continue business with the client because it is less than 5 clients C. Not continue business with the client until the IAR is registered in the client's new state D. Not continue business with the client until the IA is registered in the client's new state
23. A. An IAR need register in the IA's home state only if IA is federally coved
25. A customer has inquired about a covered call. Which option would you recommend? A. Buy a call B. Buy a put C. Sell a call D. Sell a put
25. C. Selling call options are a popular strategy in which to generate income when owning stock and are known as a covered call.
26. When does an SEC registered corporation NOT have to file an 8k: A. Acquire a major asset. B. Change in top management. C. Change in external CPA/auditing firm D. Relocation of wholly owned subsidiary
26. D. An 8k is filed by public traded companies to disclose reportable information. This is usually material, non-public information that may materially affect shareholders. Moving, across the street for example, is not deemed material.
27. Mary and Joe, age 55, and retired have a small inheritance that pays their living expenses, however they do not have enough for retirement. Which of the following should an agent recommend? A. investment in bonds B. bonds and equity C. equity D. money market
27. B. A husband and wife in their mid-50's would have a time horizon typically of 20 years or more therefore a balance of equities and bonds would be most appropriate.
28. A federally covered advisor has its home office in State A. It solicits 5 customers in State B and holds a seminar in state C. Which of the following is true? A. Must register in State A only B. Must register in State A and State C only C. Must register in State A, State B and State C D. Need not register in any State
28. D. Federally covered advisers register only with the SEC. IAR's register in the home state.
29. An advisor (IAR) is considering purchasing a thinly traded stock for his clients' accounts and his own account as well. He should A. Purchase stock for his clients first. B. Purchase stock for himself first. C. Purchase the stock all at once for everybody and average out the price paid. D. Purchase the stock all at once for his own account and then resell it to his clients at the market price.
29. A. Rules prohibit IA's and B/D's from front running, purchasing securities for their own account prior to purchasing for their clients. If the purchase were for the clients only, then they could have bought at an average price.
3. The method of computing long-term returns that takes into consideration time value of money is A. internal rate of return B. after-tax return C. real rate of return D. risk-adjusted return
3. A. One of the unique features of IRR is that it is a compounded rate using the time value of money.
30. The CEO of XYZ is the trustee for his company's employee pension fund. Hegives instructions to the IAR who manages theplan to loan the company several thousand dollars to pay off a company bad debt. The IAR should: A. Do as the trustee says. B. Do as the trustee says but document his reluctance (the IAR's) to do so in a letter. C. Not do as the trustee says because the IAR is a fiduciary. D. Require that the CEO put up some sort of collateral against the loan.
30. C. ERISA prohibits transactions on behalf of a party with interests adverseto the retirement plan.
37. An IAR notices, while compiling a financial report for their client, that there may be a significant tax consequence in the future. The IAR should: A. Refer the client to a qualified tax accountant B. Offer the client tax advice to fix the problem C. Present the financial report and say nothing D. Do not offer the financial report
37. A. NASAA's statement of Policy dictates that one knows the limits of their expertise. One may not give advice that one is not qualified to give.
31. A characteristic of the S&P Index Fund is: A. It significantly out performs the market. B. It has a high dividend payout rate. C. It has low management. D. It has moderate turnover.
31. C. Index Funds are considered passively managed and therefore would have very low management fees.
32. An advantage of investing in a mutual fund of foreign stocks is: A. Reduction of risk of currency fluctuation B. The investor does not have to choose the foreign stocks. C. Elimination of market risk through diversification D. Reduction of foreign tax liability.
32. B. An advantage of all mutual funds is that the investor does not have to research and select individual securities
33. Surrendering a whole life policy is appropriate for all of the following except: A. Cash B. Purchasing a paid up term life policy C. Purchasing a reduced coverage whole life policy D. Purchasing a non-qualified annuity
33. A. All of these would be a tax free 1035 exchange except taking cash.
34. If a client takes out a loan from his whole life policy and does not pay it back, the insurance company can do which of the following: A. Reduce the cash value at the next anniversary. B. Reduce the death benefit when the client dies. C. Increase the premium amortized over the life of the policy. D. Surrender the policy
34. B. Loans taken from an insurance policy reduce the death benefit unless paidback.
35. Which investment is most tax efficient? A. Corporate bond fund B. Growth fund C. Index Fund D. Government Bond Fund
35. C. Index funds are passively managed therefore there is very little trading within the portfolio and therefore very little taxable gains.
36. Brothers Jim and Joe inherited $10,000 and invested in mutual funds. Jim redeemed shares several times over the next several years and placed the money in a savings account leaving a balance of $11,000. Joe did not redeem any shares and has a balance of $50,000. Jim experienced which of the following risks? A. interest rate B. Inflation C. Liquidity D. Opportunity cost
36. D. Jim lost the opportunity to invest at a higher rate.
38. Which of the following would be the best way to file a tax return for a single father with two children? A. Joint tax return B. Married, filing separately C. Head of Household D. Single
38. C. Head of household would give you the lower tax rate. An exception to this would be had he been married at least a part of the taxable year.
39. A 68 year old woman is seeking preservation of capital with a secondary objective of income. Which of the following would be most appropriate? A. Savings account B. Money Market C. Certificate of Deposit D. Municipal Bond
39. B. Money market funds are generally safe and would also provide her with more income than a savings account.
4. An investor is looking at the past performance of a security over the past three years. In year one, it returned 8%; year two it returned 15% and year three it returned 10%. This computes to an average rate of return of 11%. This would be properly referred to as A. arithmetic mean B. geometric mean C. internal rate of return D. median return
4. A. When a true average return is shown, that is the arithmetic mean. The median return (the number in the middle of the group of three) is 10%
40. According to Modern Portfolio Theory, investing in multiple asset classes attempts to reduce which of the following? A. Liquidity risk B. Credit risk C. Interest Rate risk D. Market risk
40. D. Although market risk can never be entirely eliminated, Modern Portfolio Theory attempts to maximize return with reduced risk through diversifying over different asset classes.
41. According to the Uniform Securities Act, which of the following is considered a "sale"? I Giving a security as a bonus II Making a bona fide loan of stock III Entering into a contract to sell a security A. III only B. I and II only C. I and III only D. I, II and III
41. C. Loaning or pledging to loan securities is not considered an offer or sale of securities.
42. A husband and a wife are 55 and 57 respectively. The husband plans to retire at 62 and the wife at 65 and both are healthy. What is the appropriate time horizon for their retirement portfolio? A. 5 years B. 7 years C. 8 years D. 20+ years
42. D. The time horizon for retirement is life expectancy.
43. An IA hires a solicitor to recruit clients. According to the Investment Adviser act of '40, what records would the IA be required to keep? A. A receipt of any fee charged, signed by the client B. A written agreement between the client and the solicitor and signed by the client C. A statement that disclosures were given, signed by the client D. No records are required to be kept by the IA
43. C. If an adviser solicitor is hired to attract clients, the client is required to be given an adviser solicitor brochure and is the obligation of the IA to maintain records of this disclosure.
44. What information do you need to determine the discounted cash flow from abond? A. Principal, rate and number of payments B. Principal and rate C. Amount of interest payments and current bond value D. Current bond value, rate and maturity date
44. A. To Determine future cash flow of a bond you would need the par value, coupon rate and maturity date to calculate. Market value never determines cash flow.
45. According to the Uniform Security Act, which of the following is not considered a person? A. Corporation B. A prodigy, worth millions, age 16 C. Joint Stock Company D. U.S. Government
45. B. Minors, deceased and legally claimed incompetents are not considered legal entities.
46. An agent of a B/D whose home office is in state A, has a client in State B who has theirmail forwarded to State C for the winter. Which of the following is true? A. Agent must be registered in state A only B. Agent must be registered in State B only C. Agent must be registered in State A and B only D. Agent must be registered in State A. State B and State C
46. C. An agent must be registered in the state in which they have an office and any state in which their clients are residents. It is not the obligation of the agent to know where their clients may forward their mail.
47. A customer has purchased an index-based annuity with a minimum rate of 2%. The annuity has an 80% participation rate. If the index rises 20%, what would the customer receive? A. Gain of 20% B. Loss of 20% C. Gain of 40% D. Gain of 16%
47. D. An 80% participation rate means the client receives 80% of the index's' gain. 80% of 20% is 16%.
48. An IA is a trustee of a trust with two or more beneficiaries. According to the Prudent Investor Rule, which of the following is true? A. the Trustee should take into consideration the beneficiaries and act impartially. B. the Trustee should NOT take into consideration the beneficiaries and act according to his investment philosophy. C. the Trustee should pro rata the assets and manages each according to the beneficiaries needs D. The trustee should take into consideration the person with the lowest risk tolerance and manage accordingly.
48. A. A trustee must act prudently and follow the stated objective in the trust agreement.
49. Which of these efficient market hypotheses dictates that future performance cannot be based upon historical data? A. weak B. Moderate C. Strong D. Semi-strong
49. C. A stock's price currently reflects all known information about the stock which means all historical data is already priced into the stock. This is the strongest form of Efficient Market Hypothesis.
5. Which of the following pairs offers the most diversification? A. U.S. equity securities and foreign equity securities. B. Municipal GO bonds and long-term U.S. Treasury bonds. C. Large-cap stock/blue-chip stock. D. Corporate debentures/convertible bonds.
5. A. Diversification is generally accomplished by adding securities that don't have a high degree of correlation. Large-cap and blue-chip are essentially the same thing. Most convertible bonds are debentures. Only in the case of domestic and international stocks will we find a low correlation.
50. What do an S corp. and a general partnership have in common? A. The company enjoys not paying tax (something to that effect) B. ease of transfer of ownership C. They both provide limited liability D. ease of formation and continuation
50. A. Both an S-Corp and a General Partnership pass through profits and taxes to its owners. The business entity is not taxed.
51. The application for registration under the Investment Company Act of 1940 is filed with whom? A. SEC B. FINRA C. MSRB D. NASAA
51. A. The Investment Company Act regulates mutual funds which are federally covered securities. They are registered with the SEC
52. The internal rate of return calculation dictates that the interest earned in a portfolio is reinvested at the: A. IRR B. Inflation rate C. US Treasury rate D. Required Return
52. D. The internal rate of return is the required return to determine the time value of money.
53. Which one of these factors is NOT relevant in determining if someone is an IA? A. Frequency of Advice B. Specific or general advice C. Receives compensation for advice D. Holds themselves out to the public
53. A. The definition of an IA is someone in the business, holds themselves out and receives compensation. It does not include how often you give advice.
54. A diverse portfolio would hold tangible assets to address which risk? A. Inflation B. Market C. Risk adjusted return D. Liquidity
54. A. A tangible asset, such as gold, is often used as a hedge against inflation.
6. According to Efficient Market Hypothesis, information based on company financials and economic factors is considered to be: A Weak B Semi-strong C Strong D Exceptional
6. B. if we knew information known to insiders it would be strong
55. Both an IA and an IAR register in August. They do not renew their registration untilMarch 30th. Which of the following is true? A. The IA's registration did not lapse but the IAR's did on Dec 31st. B. The IAR's registration did not lapse but the IA's did on Dec 31st. C. Both registrations expired Dec 31st. D. Neither registration expired.
55. C. All registrations expire (unless properly renewed) expire each December 31st.
56. IA realizes Monday that they have fallen below Net Capitalrequirement. They contact administrator Tuesday. When do they have to provide administrator with full financial documents? A. Tuesday B. Wednesday C. Thursday D. Friday
56. B. IA's must give financial information to the administrator one business day after giving notice.
57. An individual employed by a federal covered adviser would be required to become registered as an IAR in the state if A. The only clients receiving the individual's advice are large pension plans organized for employees of municipalities located in the state where that individual maintains an office. B. The only clients receiving the individual's advice are banks located in states where the individual does not maintain a place of business C. The only clients receiving the individual's advice are insurance companies located in states where the individual does not maintain a place of business. D. The only function performed by the individual is preparing the layout of a research report prepared by the firm.
57. A. Individuals performing the duties of an IAR for a federal covered investment adviser are only required to register in states in which they maintain a place of business. Although pension plans (as long as the total assets of the plan are at least $1 million) are considered institutional investors for exemption purposes, that exemption only applies when the individual has no place of business in the state.
58. Under the Uniform Securities Act, when an IAR acting in the capacity of trustee of a family trust executes a transaction on behalf of the trust, it is A. An exempt transaction B. An exempt security C. A non-exempt transaction D. A violation of the trustee's fiduciary responsibility
58. C. Among the list of exempt transactions are those made by fiduciaries, including trustees in bankruptcy, but not other trustees. Therefore, this is a nonexempt transaction. The fact that this is an IAR who is the trustee has no bearing on the question.
59. Sharon Smith is an agent for a broker/dealer registered in all 50 states. Sharon receives an unsolicited order from a bank located in State X, a state in which she has no place of business. Under the Uniform Securities Act, A. Because Sharon has no place of business in State X and the client is an institution, Sharon may accept the order without registering in State X B. Sharon must be registered in State X in order to accept the order C. Because Sharon has no place of business in State X and the order isunsolicited, Sharon may accept the order without registering in State X D. Because the B/D is registered in all 50 states, Sharon must also be registered in all of them.
59. B. Regardless of whether the security is exempt or the transaction is exempt, one must be licensedin any state in which the client is placing an order (unless the agent is representing a broker/dealer who is exempt from registering in that state). One does not have to be registered as an agent in every state the B/D is, only in those where she expects clients to reside. Remember, there is no de minimis exemption for B/Ds and agents as there is for IAs and IARs.
60. Which of the following best depict/show time weighted return? A. The volatility of security holdings B. Uneven cash flows C. Dividends and interest only D. Return over time
60. A. Time-weighted return measures a portfolio manager's return excluding investors inflow and outflow of cash
61. An IA is registered in 10 states. Regarding financial requirements, IA must meet those of A. The state in which their principal office is located B. The state with the most stringent financial requirements C. The SEC D. Each state in which they have a place of business
61. A. Unlike broker/dealers, investment advisers register with either the SEC or the state(s), never both. Therefore, we know this must be a state covered adviser, not under the jurisdiction of the SEC. Under the Uniform Securities Act, when it comes to financial requirements, bonding, recordkeeping, etc., as long as the adviser meets the requirements of the state in which their principal office is located, the other states have no further claim
62. MidWest Advisers has $175 million in AUM and has offices in 10 Mid-western states. Regarding recordkeeping requirements, the IA must meet those of A. The state in which their principal office is located B. The state with the most stringent financial requirements C. Each state in which they have a place of business D. The SEC
62. D. With $175 million in AUM, MidWest is a federal covered adviser. As such, all financial requirements, bonding, recordkeeping, etc., requirements are those of the SEC, not any of the states.
63. With regard to the NASAA Statement of Policy on Dishonest and Unethical Business Practices of Broker/Dealers and Agents, proscribed actions would include I. Accepting an order from a 3rd party after written trading authorization hasbeen received II. Forwarding a written complaint from a customer to the appropriate supervisory person III. Offering to repurchase a security at its original cost if it does not increase in value IV. Borrowing money from a client who was your college roommate A. I and II B. I, II and IV C. II and IV D. III and IV
63. D. Prohibited actions under the policy would be guaranteeing a client against loss by agreeing to repurchase a security at its cost and borrowing money from a client who is not in the money-lending business.
64. A Savings and Loan association, organized in State A and authorized to do business in State B, has an offering of common stock being made in State B. In order for an individual selling the offering to be excluded from the definition of agent in State B,the individual A. would have to be employed by the Savings and Loan B. would have to be employed by a broker/dealer registered in the other state C. would have to be employed by a broker/dealer registered in this state D. could not sell without being an agent
64. A. Included in the USA 's list of exempt securities are those issued by any building and loan or similar association organized under the laws of any state and authorized to do business in this state. Therefore, an individual who is employed by the issuer of exempt securities to sell those securities, is excluded from the definition of "agent".
65. An IAR of a federal covered investment adviser splits his time between an office in State A and State D. The IAR has retail clients as follows: I. 16 clients in State A II. 12 clients in State B III. 6 clients in State C IV. 4 clients in State D The agent would have to register as an IAR in A. States B and C B. States A and D C. States A and C D. States A, B and C
65. B. When employed by a federal covered adviser, the only time that state registration is requiredis when there is a place of business in the state. Had this been an IAR with a state covered adviser, registration in all of the states would have been required.
66. Following the advice of their portfolio managers, a hedge fund executes most of its securities transactions through a registered full-service broker/dealer. In order to compensate for the commissions charged, the B/D allows employees of the hedge fund to use furniture and facility at a discounted rate. Under the soft-dollar provisions of Section28(e) A. As long as the discounted rate reflected the volume of business done by the hedge fund, this would be permitted B. This would be considered allowable soft dollar compensation C. This would not be considered allowable soft dollar compensation D. This would not be considered allowable soft dollar compensation unless the employees were those who directed the transactions to the B/D
66. C. The use of furniture or office facilities is not included in the list of safe harbor items, regardless of what role the employees of the fund play.
67. An investment adviser representative is assuring clients of steady returns on an investment. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives and Federal Covered Advisers, this activity is A. Prohibited because the IAR is guaranteeing a profit B. Prohibited because the customer may still experience loss C. Acceptable if the security being recommended is an investment grade bond D. Acceptable if the client has been made aware of the risks.
67. A. Assuring a steady rate of return is considered to be guaranteeing performance, apractice prohibited under the NASAA Model Rule on Unethical Business Practices. Even in the case of an investment grade bond, returns can never be "assured".
68. Which is true of a Joint Tenants with Rights of Survivorship account? A. Assets pass to survivor without probate B. Account owners must be non-spouses C. Account owners must not be related D. Assets pass to survivor after probate
68. A .Assets in a JTWROS avoid probate.
69. Included in the USA's definition of exempt transaction would be any transaction by any of the following EXCEPT one by A. A sheriff B. A guardian C. A trustee in bankruptcy D. A trustee of an irrevocable trust
69. D. Although the term trustee is found in the list of persons engaged in exempt transaction, the USA limits it to trustees in bankruptcy.
7. In modern portfolio theory, what is an efficient portfolio set? A. efficient frontier B. indifferent frontier C. attainable set D. feasible set
7. A. The set of portfolio's that maximize return versus risk is a curve known as the efficient frontier
70. A Federal Adviser would be required to notice file within a state in which of the following? A. Never since it is Federally Covered B. Maintains an office in the state or has more than 5 clients in a state C. Any state in which they do business D. If they are Sec registered, they would not be required to notice file
70. B. Federally covered advisers must make a notice filing with the state if they have a place of business in the state or have six or more clients in that state in a twelve-month period, regardless of place of business.
71. Which of the following statements regarding e-mail communications are correct? I. They are sometimes referred to as electronic communications II. Customer complaints received by e-mail are not considered to be inwriting III. Once received and reviewed, they may be discarded IV. They must be retained in the same fashion as any other record A. I and I B. I and IV C. II and III D. III and IV
71. B. E-mails are generally referred to as electronic communications on the exam and meet the requirement for customer complaints to be in writing. Just as with any other written record, these must be kept for the time periods specified in the Uniform Securities Act.
72. Present value is a computation that is frequently used to determine the amount of deposit needed now to meet a future need, such as college education. If an investor uses an expected return of 8%, but the actual return over the period is 10%, the future value will be A. Higher than anticipated B. Lower than anticipated C. The same as anticipated D. Too varying to tell
72. A. Present value is the amount deposited to meeta future goal based on an expected rate of return. If the return is higher than expected, the ending result will be greater (a good thing).
73. A client enters an order as follows: Sell stop 100 shares of LTC at 45 limit 45.50. Following the entry of that order, trades occur in the following sequence: 47; 46; 45.12; 44.97; 45.28; 45.97; 46.05. More than likely, the client received A. 45.97 B. 46.05 C. 45.28 D. 44.97
73. A. The stop order is triggered at 44.97 and limit is satisfied above 45.50.
74. Over the past five years, an investor'sportfolio has shown returns of 6%, 4%, 11%, 10%, and 4%. Which of the following statements is correct? I. The mean return is 7% II. The median return is 6% III. The mode is 4% IV. The range is 7% A. I, II and III B. I and II C. III and IV D. I, II, III and IV
74. D. The mean is the average return. Add these five numbers together and you have a total of 35% over a 5 year period. That is an average or mean return of 7% (35 divided by 5). The median is the return that has as many above as below and, in this case, that would be 6% (4, 4 below and 10, 11 above). The mode is the return that appears the most often and, with two of the five at 4%, that is the mode. The range is the difference between the high and low returns. In this case, from the high of 11% to the low of 4% is a range of 7%.
75. A fiduciary of an ERISA plan is preparing an investment policy statement. Included would probably be I. specific security selection II. Methods of performance measurement III. Determination for meeting future cash flow needs IV. The summary plan document A. I, II, and III B. II and III C. II and IV D. III and IV
75. B. The IPS will include methods of performance measurement (are we meeting our objectives) and a way to determine how future cash flow needs will be met (based on expected numbers of retirees). It will not include the specific securities that will be purchase, although it will include the types that may be placed in the portfolio. The Summary Plan Document (SPD), is a Department of Labor (DOL) requirement that gives employees a summary of the plan and its features - it has nothing to do with determining how the money is invested.
76. An investment adviser representative prepares a detailed portfolio restructuring for a new client. The client is not impressed with the recommendation and, at least to the IAR, it appears that the rejection is more due to a lack of understanding than a valid dislike. What should be the first step taken by the IAR? A. Prepare a new set of recommendations that will hopefully be received more favorably by the client. B. Go ahead with the recommendation anyway because the client's lack of understanding should not stand in the way of potentially superior results. C. Suggest that if the client will not follow the IAR's recommendations, it would bebest to find another firm to deal with. D. Attempt to educate the client as to what this portfolio is trying to accomplish for the client while at the same time recognizing that the final decision isclearly in the hands of the client
76. D. Even when the IAR is convinced that the optimal recommendations have been made, the final decision is always that of the client. However, there is nothing in the laws, or policies dealing with ethical conduct, that prohibit the IAR from attempting to "sell" the client, especially through an educational approach
77. In the course of a bankruptcy, the asset that backed a secured debt is liquidated but it doesn't pay off all of the debt holders for that particular secured debt. What happens to these debt holders: A. They get grouped in with another group of secured debt holders secured by another asset. B. They get grouped in with the general creditors C. They get grouped in with the non-secured debt holders D. They have priority to be paid off when the next asset is liquidated
77. B. After the assets have been liquidated, any remaining secured creditors then become general creditors
78. A beneficiary passes away and their heirs receive the assets held in trust. They are the: A. Corpus B. Trustor C. Grantor D. Remainderman
78. D. After a trust is closed, the assets are disposed to the heirs or remaindermen.
79. An agent of a B/D sells unregistered common stock to an Insurance Company that hasno office in the state. According to the Uniform Securities Act, this would be: A. Prohibited because the security is unregistered B. Allowed because it is considered an exempt transaction C. Allowed because it is an exempt security D. Prohibited because the Insurance Company has no office in the state
79. B. Sales of unregistered securities to an financial institution is an exempt transaction. Whether the institution has an office in the state is inconsequential.
8. Which two are most associated with a Treasury bond? I Credit risk II Liquidity risk III I Reinvestment risk IV Interest rate risk A. I and II B. I and IV C. II and III D. III and IV
8. D. All debt instruments are interest rate sensitive and nearly all (except zero coupon bonds) have reinvestment risk. U. S. securities are seen as one of the safest securities in the world.
80. Which of the following payout options from a nonqualified annuity would assure the annuitant the largest monthly payment? A. Unit refund B. Straight life with period certain C. Joint with last survivor D. Straight life
80. D. Straight life has the least amount of riders and, therefore, has the largest monthly payout.
81. An IA delivers an Investment Adviser Brochure to a client at time of contract. According to the Uniform Security Act, this would be A. prohibited B. Allowed, provided the client is given 48 hours to cancel the contract C. Prohibited because it must be delivered at least 48 hours prior to the contract D. Allowed, provided the client is given 5 days in which to cancel the contract
81. D. According to the U.S.A, an investor brochure is required to be delivered at least 48 hours priorto the contract or client receives an automatic 5 day free look period.
82. The CEO of XYZ, INC. offers securities of his company to the public and to its employees and receives remunerations for the sale. According to the Uniform Securities Act, the CEO A. must register as an agent of the Issuer B. must register as an agent of a B/D C. must register as an agent of a B/D and Issuer D. Is not required to register
82. A. The sale of securities by a non-exempt issuer requires registration as an agent of the issuer.
83. An agent overhears that XYZ, INC. will report negative earnings this quarter. According to NASAA's Statement of Policy on Ethical Behavior the agent may A. Use the information solely for the their own account B. Use the information solely for their institutional accounts C. Report this to their trading desk immediately D. Do nothing
83. D. Overhearing non-public information is not illegal. Using it is. So doing nothing is the best option of the choices listed.
84. A state registered IA is acquired by a federally covered IA and all of the clients' accounts are then transferred to the federally covered IA. According to the Uniform Securities Act, this would be A. Allowed, provided the clients have given written consent B. Allowed, provided the clients have given oral consent C. Prohibited D. Allowed, as long as clients do not object
84. A. Assignment of advisory accounts to new IA's is not permitted without client consent
85. One of your clients dies. Who can you take instructions from? A. Spouse B. CPA C. Person with durable power of attorney D. Administrator of intestacy
85. D. A client who has died intestate (without a will) is appointed an administrator by the state.
86. According to the Uniform Securities Act, which of the following clients may an agent borrow from? I Bank II Best Friend III B/D Iv Mortgage Broker A. I II III B. I II IV C. I and III D. I II III IV
86. C. Agents may not borrow from clients unless they are normal lending institutions. Mortgage brokers are middlemen and do not loan money. B/D's may loan through margin accounts.
87. An important measure of a company's liquidity is to determine the company'scurrent assets, less their inventory and divide this by their current liabilities. This is called A, Current ratio B. Quick ratio C. Working Capital D. Capital in excess of par
87. B. Current assets-inventories/current liabilities=quick ratio
88. An agent, sharing in commissions with another agent, may do so only if I disclose the arrangement and receive consent from his clients II both agents are registered in the same statesIII both agents are registered through the same or affiliated B/D IV disclose the arrangement and receive consent from the SEC A.I and III B. I and IV C. II and III D. II and IV
88. C. There no disclosure requirements for agents sharing commissions. As long as agents are registered in the same states and are with the same or affiliated B/D, there are no further requirements.
89. One respect in which an LLC differs from an S corporation is that A. an LLC can be formed with as little as a single investor B. there is no statutory limit on the number of investors in an LLC C. there is more favorable tax treatment afforded to members of an LLC D. not only income, but losses, if generated, pass through to investors in an LLC
89. B. An S-Corp is limited to 100 investors
9. When current interest rates are at 9%, you would expect a bond with a nominal yield of 8% to be A. selling at par B. selling at a discount C. selling at a premium D. in danger of default
9. B. Since current interest rates are above the nominal yield (coupon rate), the price of the bond would fall below par
90. Which of the following is included in Adjusted Gross Income (AGI)? A. Alimony B. Municipal Bond Interest C. Child Support D. 401k contributions
90. A. Alimony is reportable income. Child support is not.
91. Which of the following retirement plans would have the least tax consequence? A. a non-qualified annuity B. IRA C. 401(k) D. 403(b)
91. A. The (non-qualified) annuity typically would have a higher cost basis and thus lowertaxable amount
92. Which of the following would be most appropriate in an IRA? A. Life Insurance B. Art collection C. Municipal Bond D. Gold/Silver coins minted by the U. S. Treasury
92. D. Gold coins are legal tender (cash). Municipal bonds would be inappropriate since theretirement plan would essentially make the interest taxable.
93. An IA receives a check from a client made to a 3rd party. According to the U.S.A., to avoid custody the IA must forward the check to the 3rd party within A. 24 hours B. 72 hours C. 5 business days D. 10 business days
93. B. Checks received made out to a third party must be forwarded to the third party within 72 hrs. Funds or securities must also be forwarded within 72 hours.
94. Your client has won the lottery and is considering whether to take a lump sum payment or receive periodic payments. This an example of A. Holding period return B. Time value of money C. Opportunity cost D. Risk adjusted return
94. B. Receiving a lump sum or taking payments over time concerns the time value of money ("time is money"). It is not a return on investment nor does it involve a decision on an investment.
95. An Investment Policy Statement, which is not required by law, provided by the Plan Administrator, must include all of the following, except A. Methods for meeting future cash flows B. Identification of individual securities C. Procedures for monitoring performance D. Investment philosophy and objectives
95. B. An Investment Policy Statement, although not required by law, serves as a guideline for the fiduciary regarding funding and management decisions and does not include the identity of the actual, individual securities. That is decided by the investment manager - usually a mutual fundmanager.
96. A testamentary trust may only be created with which of the following? A. An attorney B. A Certified Accounted C. A trusted family member D. By a decedent's will
96. D. A testamentary trust is created by the decedent's will upon their death.
97. An IAR, preparing a statement of cash flow for her clients would include all of the following items EXCEPT: A. Assets B. Expenses C. Salary D. Taxes
97. A. Assets are part of a client's balance sheet and not the cash flow statement.
98. Three years ago, a customer bought 200 shares of ABC for $50.50 per share. Upon her death, she left the shares to her husband when ABC was trading at $68.25. If her husband sells the shares for $69.25, what is his cost basis for tax purposes? A. $19.25 B. $50.50 C. $68.25 D. $69.25
98. C. Upon inheriting stock, there is a step-up in cost basis to the market value at date of death.
99. A portfolio manager who has a value management style would seek stocksthat: I.Have high earnings growth II.Have high PE ratios. III.Are undervalued. IV.Have a high dividend payout ratio A. I and IV B. I and III C. II and III D. III and IV
99. D. Value stocks are characterized by high dividends and stable earnings with low PE ratios.