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Portfolio A has a standard deviation of 3.50%, while Portfolio B has a standard deviation of 2.75%. How are these portfolios related to one another?
Portfolio A has more risk than Portfolio B.
According to modern portfolio theory (MPT), the expected return of an investment is the:
Possible returns on the investment weighted by the likelihood of that return occurring
If material information that a state Administrator has on file is no longer accurate, when is an amendment required to be filed?
Promptly
Which TWO of the following are TRUE of most 457 plans? 1. Contributions are non-deductible (after-tax) 2. Contributions are deductible (pre-tax) 3. Eligible participants are certain employees of state and local government entities 4. Eligible participants are employees of public school systems
II and III
Which of the following statements best describes an equity-indexed annuity?
It is a fixed annuity that offers the potential for greater returns.
Under the Uniform Securities Act, an investment adviser is required to provide a balance sheet when it files Form ADV Part 2 in all of the following situations, EXCEPT when:
The investment adviser inadvertently received client securities, but returned them after two business days.
When is a mutual fund's prospectus required to be delivered?
When a client is solicited to buy mutual fund shares
An investment adviser representative who recommends a hedge fund to an accredited investor must confirm that the investor meets the financial test. The minimum net worth requirement is:
$1 million
A person is interested in investing in the oil and gas sector because she anticipates an increase in demand as the economy moves out of a recession. The person's IAR advises her on various vehicles to gain exposure to this sector, such as oil and gas mutual funds, oil and gas futures, options on the Oil and Gas Index, and oil and gas limited partnerships. When comparing these choices, what is one disadvantage of a limited partnership investment?
A limited partnership's interest is less liquid.
Two clients of an IAR are forming their own business entity and plan to incorporate. Which of the following entities has the MOST tax disadvantages?
A C Corporation
When a limited partnership is formed, which of the following documents is filed with the state in which the partnership operates?
A certificate of limited partnership
Which of the following fee structures is NOT permitted for broker-dealers that offer investment advisory services to retail customers?
A fee based on a percentage of the profits of the account
What can investment advisers include in their contracts with clients?
A guarantee of performance against a benchmark; however, if it is not met, they will surrender their fee for the year
An investor is long 1,000 bushels of wheat that she purchased for 50 cents per bushel. What's the investor's gain or loss if the price of wheat has dropped to 45 cents per bushel?
A loss of $50
According to the Uniform Securities Act, which of the following entities or persons must register as a broker-dealer in State A?
A person that is located in State A and executes securities transactions for its own account or the account of others.
Which of the following persons is required to register as an agent in State A?
A person who represents a broker-dealer that is located in State A and solicits securities transactions on an intrastate basis for clients' accounts.
According to the Uniform Securities Act, which of the following is an exempt security?
A public offering of U.S. government securities
Which of the following choices is a characteristic of equity-indexed annuities?
A rate of return that varies with the value of the underlying index
Of the following choices, which one is a derivative?
A swap
If a client is interested in purchasing a stock that has a low P/E ratio, a high dividend payout ratio, and wants the issuer to have a large amount of cash reserves, what type of stock should an IAR recommend?
A value stock
A broker-dealer is registered and intends to sell stock from its own account to a client. Which of the following statements is TRUE?
After the completion of this transaction, the firm must disclose that it acted in a principal capacity.
Which of the following is a risk-adjusted return?
Alpha
All the following are characteristics of passive asset allocation strategies, EXCEPT:
Altering a portfolio in anticipation of an economic event
An IAR is comparing an S Corporation and a limited partnership for a client. What is an advantage of investing in an S Corporation that is not available with a limited partnership?
An S Corporation provides investors with more control over management decisions.
According to the Uniform Securities Act, which of the following activities by an agent of a broker-dealer is unethical?
Executing orders to sell securities in a client's individual and joint account based on instructions from the client's spouse.
A client sells an XYZ November 40 call and receives a premium of $300. What is the client's maximum loss?
An unlimited amount
All the following activities by an investment adviser representative are considered unethical, EXCEPT:
Arranging a loan for a client conducted through a broker-dealer that is affiliated to the investment adviser for the purpose of paying for stock which is recommended by the investment adviser representative.
Under the Uniform Securities Act, an investment adviser must deliver a disclosure document (brochure) to a client:
At least 48 hours prior to signing the contract or, if given at the time that the contract is signed, the client must be given five days to rescind the contract
An investment adviser hires a new employee and her registration became effective July 14. When is the IA required to renew the IAR's registration?
At the calendar year end.
An investor has heard conflicting reports about the success of a company's latest products. Since the investor is unsure of the direction in which the stock's price will move, which option strategy should be recommended?
Buy a call and buy a put on the stock
According to the Uniform Securities Act, in which TWO of the following cases is an investment adviser exempt from sending clients a written disclosure document under the Brochure Rule? 1. The adviser's clients are only investment companies. 2. An adviser provides impersonal advisory services to online subscribers that cost $250 per year. 3. An investment adviser has no office in the state. 4. The adviser's clients are select institutional investors.
I and II
According to NASAA's Model Rule on Unethical Business Practices of IAs and IARs, all of the following are prohibited, EXCEPT:
Charging the customer a reasonable advisory fee.
An investment adviser is registered with the state Administrator in State A. The fee structure, which is disclosed on the registration form, indicates a flat fee which will be assessed annually. What is an investment adviser representative's responsibility as it relates to disclosing the fee structure?
Clients must be provided with the IA's brochure at the time of, or before, the commencement of advisory services.
If the average current ratio for a sector is 2.0, which of the following companies has the best short-term outlook?
Company A with a current ratio of 3.5
Which of the following metrics is the MOST important when attempting to diversify a stock portfolio?
Correlation
Which of the following business types is the LEAST likely to be affected by an increase in interest rates?
Cosmetics
Under NASAA's Statement of Policy on Unethical Business Practices, unethical activities of an investment adviser include: 1. Exercising discretion for a limited period based on oral instructions 2. Charging a client an excessively high advisory fee, as long as the client agrees to the terms 3. Failing to disclose compensation arrangements that are connected with advisory services
II and III
An investment adviser representative is preparing a financial plan for a client. As part of this process, he is helping her create a personal balance sheet and income statement. The income statement should include all of the following items, EXCEPT:
Depreciation on the primary residence
Which of the following factors is the BEST measure of a bond's volatility?
Duration
According to the Uniform Securities Act, the application process for an investment adviser includes:
Filing a completed Form ADV and a Form U4 for each IAR who will be providing advisory services
Assuming an expected rate of return, a specific holding period, and a sum to be invested, an IAR is able to determine an investment's:
Future value
A Canadian broker-dealer may continue to effect transactions for its Canadian clients who are in the U.S. temporarily, provided it satisfies which TWO of the following? 1. It is a member of a self-regulatory organization or stock exchange in Canada 2. It establishes an office in the appropriate state 3. It effects transactions only with Canadian residents who are in the U.S. temporarily 4. It only allows investors to trade exempt securities
I and III
According to the Uniform Gifts to Minors Act, a person may do which TWO of the following? 1. Give an unlimited amount of cash 2. Give only up to $15,000 in cash 3. Give securities 4. Revoke any gifts that are given
I and III
The factors that assist in determining a client's risk tolerance include: 1. Income 2. Age 3. Personality 4. Net worth
I, II, III, and IV
A Nasdaq listed company is offering 1,000,000 shares of common stock in State A. The Administrator in State A may: 1. Not require registration of the stock in State A. 2. Require the issuer to perform notice filing. 3. Require the issuer to pay a fee. 4. Investigate the underwriter for possible fraud in connection with the offering.
I and IV
Which TWO of the following are TRUE regarding an agent selling away? 1. The agent must provide verbal or written notification to her supervisor. 2. The agent must provide written notification to her firm. 3. The agent must notify the state securities Administrator or the SEC. 4. The agent must receive her firm's written permission before executing a transaction.
II and IV
Which of the following is TRUE of the investment policy statement of a qualified retirement plan?
It is a written document that describes the plan's investment objectives and guidelines
The retention requirements for the books and records of investment advisers and broker-dealers are: 1. Five years for a broker-dealer with two years easy accessibility 2. Three years for investment advisers with two years easy accessibility 3. Three years for a broker-dealer with two years easy accessibility 4. Five years for an investment adviser with two years easy accessibility
III and IV
Which of the following types of risk is MOST associated with the purchase of a five-year T-bond?
Interest-rate
An investor may purchase interests in a limited partnership for all of the following reasons, EXCEPT:
It is an illiquid investment
Two lifelong friends intend to open a joint trading account, with each contributing $30,000 to the account. Upon the death of either owner, each wants her share of the account to revert to her individual estate. The type of account the friends should open is:
Joint tenants-in-common
Which of the following types of stocks is the MOST suitable for a conservative investor who has a low-risk tolerance, but wants to invest in equity securities?
Large-caps
The beta of a stock would be useful when measuring:
Market risk
When analyzing strategic and tactical asset allocation, all of the following statements are TRUE, EXCEPT:
Sector rotation is a form of strategic asset allocation, while buy-and-hold is a form of tactical asset allocation.
According to the Uniform Securities Act, if a person has no place of business in State A and is not registered in State A, which of the following actions is permitted?
Selling unlisted securities to institutions that are located in State A.
A person who invests in a variable annuity is most concerned with the performance of the insurance company's:
Separate account
According to the Uniform Securities Act, which of the following activities is considered a prohibited business practice by a broker-dealer?
Stating to a client that the offering price of a security is the current market price, when the broker-dealer is the only firm making a market in that security.
An investor has a total of $350,000 to invest, but he wants to invest $150,000 in a manner that will follow the business cycle. This type of investing is referred to as:
Tactical asset allocation
If a client has no life insurance and low income, what life insurance policy should be recommended?
Term life
According to NASAA's Statement of Policy on Unethical Business Practices, all of the following disclosures are required when a client enters into an investment advisory contract, EXCEPT:
That performance-based fees are allowed for every client
An investment adviser representative and a client have similar financial resources, investment goals, and risk tolerance. However, despite the fact that the IAR recommends penny stocks as a small part of her client's portfolio, she does not personally invest in penny stocks. Which of the following statements is TRUE?
The IAR should disclose to her client that the recommendation is inconsistent with her own investment policy.
An investment adviser's sole office is located in State A and its only client is the State A Triple Tax-Free Municipal Bond Fund. The adviser exercises discretion over the fund's investments and also performs safekeeping services for the fund. Which of the following statements is TRUE?
The investment adviser is not required to meet the net worth requirements or post a bond since it is regulated at the federal level.
What is likely to happen if an investment adviser representative fails to appear at a hearing as directed by a subpoena?
The representative will be found in contempt of court.
An investment adviser representative recommends to a client the wrap fee program of a third-party adviser. The IAR will be entitled to compensation based on the client's participation. Which of the following disclosures is NOT required to be made in the wrap fee brochure?
The specific dollar amount of compensation that the person making the recommendation will receive
A company's price-to-earnings (PE) ratio measures:
The value of $1.00 of EPS
If an adviser inadvertently receives client funds and/or securities, it can avoid the implication that it is maintaining custody of the assets by returning them to the sender within:
Three business days of receiving them
All of the following fall under the jurisdiction of a state securities Administrator, EXCEPT:
Transactions that were forwarded into the Administrator's state
The difference between a corporation's current assets and its current liabilities is the:
Working capital
One month ago, a client purchased a convertible debenture, which is convertible at $20. If the underlying common stock is currently trading at $22 per share, what is the parity price of the bond?
$1,100
An agent is implementing a $500-per-month dollar cost averaging strategy for his client who is purchasing stock. The price of the stock decreases from $10 per share to $5 per share. How much will the client invest next month if he wishes to continue with this strategy?
$500
During the first quarter of the year, XYZ common stock paid a $1 dividend, but the stock's price fell from $50 per share at the beginning of the quarter to $48 per share at the end of the period. Based on the quarterly results, what is the stock's annualized total return?
-8%
An investor pays $100 per share for 1,000 shares of a 6% cumulative preferred stock which has one year of dividends in arrears. One year after making the purchase, the issuer has paid its normal preferred dividend, plus the dividends in arrears. At that point, if the investor then sells the preferred stock at $104 per share, what is the total return on the preferred stock for the period?
16%
A resident of State A buys a 4% general obligation bond offered by State B. The investor is in the 30% federal tax bracket and State A imposes a 5% tax. What is the bond's taxable equivalent yield?
5.71%
An investor is analyzing two bonds. Bond A has a 5% coupon and matures in three years; Bond B also has a 5% coupon, but matures in 10 years. If interest rates decline by 1%, what is to be expected?
Bond B's price will increase more than Bond A's price
A semi-retired IAR works for an investment adviser that is located in State A, but she intends to spend the winter months in her second home in State B. The IAR put the addresses of both her office in State A and her home address in State B on her business cards since she intends to continue servicing her clients that reside in State A over the winter months. If the investment adviser does not have an office in State B, which of the following statements is TRUE?
Both the IAR and the investment adviser need to be registered in State B since the IAR's residence in State B is considered an office and it is listed on her business card.
What is the name of the process by which an investor calculates the sum of the present values of projected cash flows to determine the fair market value of an investment?
Discounted cash flows
A client contacts an investment adviser representative to discuss the possibility of incorporating. Which of the following is a disadvantage of forming a C Corporation?
Double taxation
Which of the following statements is TRUE regarding American style versus European style exercise for option contracts?
European style options may only be exercised by the buyer on the business day of expiration.
Under the Uniform Securities Act, amendments to an investment adviser's Form ADV must be filed promptly. On August 31, an investment adviser closes one of its branch offices and must therefore file an amendment. What constitutes a prompt filing with the IARD?
Filing the notice by September 30 of the current year
Under the Uniform Securities Act, an investment adviser is exempt from registration if it:
Has no place of business in the state, its only clients are institutional investors, and /or the adviser does not direct communications to more than five non-institutional clients within 12 consecutive months
An individual earns $35,000 per year and has contributed to his Individual Retirement Account (IRA) for each of the past two years. The company for which he works has recently instituted a pension plan. Since he's now covered by a corporate pension plan, which of the following statements is TRUE regarding his IRA?
He may keep the IRA and make a contribution of up to $6,000 each year.
The accountant for a registered investment adviser representative has expressed an interest in directing accounting clients to the IAR's firm for investment advisory services. If the accountant wants a referral fee for his efforts, which TWO of the following statements are TRUE regarding this arrangement? 1. There must be a written agreement between the investment adviser and the accountant. 2. The investment adviser may not pay more than $250 for each client referral. 3. The accountant must not have been convicted of any felonies or securities-related misdemeanors. 4. The accountant must be fingerprinted and file a copy with the state securities Administrator.
I and III
The investment adviser of the ABC Fund typically invests a high percentage of the fund's assets in growth stocks, but has recently turned bearish on the market. Which TWO of the following strategies should be utilized based on the IA's bias? 1. Buy puts on the growth stocks 2. Buy calls on the growth stocks 3. Increase cash levels in the portfolio 4. Decrease cash levels in the portfolio
I and III
Which TWO of the following statements are TRUE regarding an investment adviser that maintains custody of its clients' assets? 1. The securities must be deposited with a qualified custodian. 2. The securities must be held in a vault that is maintained by the firm. 3. A notice must be sent to the clients to indicate the secure location or custodian of the securities. 4. Annual statements must be sent to each client of the investment adviser.
I and III
Disadvantages of investing in a C Corporation include which of the following choices? 1. Shareholders are taxed on dividends that they receive. 2. The corporation is taxed on its income. 3. Shareholders may not deduct their share of the corporation's losses on their personal tax returns. 4. Shareholders are paid last if the corporation liquidates.
I, II, III, and IV
Under NASAA's Statement of Policy on Unethical Business Practices and regarding a customer order, an agent is considered to be exercising discretionary authority if the client DOES NOT specify which TWO of the following? 1. The price of execution 2. The specific security and number of shares to be bought or sold 3. Whether to buy or sell 4. The time of execution
II and III
Two friends are starting their own business and are trying to decide whether to organize this new business as an S Corporation or a general partnership. What is a significant advantage of an S Corporation compared to a general partnership?
Limited liability
An entertainment representative for a number of famous actors is approached by a journalist who is doing research for a favorable article about one of his clients. The client has been very outspoken about the environment and limits his investments to socially responsible companies. The representative handles his client's investments and has discretion over the account. If the journalist wants the representative to provide her with a listing of some of the client's investments, the representative:
May only release the information if he receives his client's written permission
Regarding the influence of market risk on personal investments, an investor can:
Minimize market risk by investing in low-risk, low-return investments
Asset A has a correlation of +0.95 with Asset B. The assets:
Move in the same direction
An investment adviser maintains its home office in State A and is also registered there. State A has a minimum financial (net worth) requirement of $70,000. The firm intends to open an office and provide advisory services in State B, which has a minimum financial requirement of $80,000. Is any action required for the adviser to open the office in State B?
No, it is only required to satisfy the requirement of its home state.
Selling unlisted securities to institutions that are located in State A.
Once the registration is declared effective by the Administrator
According to the Investment Advisers Act of 1940, a notice that offers advisory services and appears in a publication, on radio, or on TV is considered an advertisement if it is offered to more than:
One person
An IAR is meeting with a prospective client. The client is in his late 20s, has a higher-than-average income, has several valuable assets, and little debt other than his home mortgage. The client indicates that his main goal is to retire at age 55, but that the stock market makes him very nervous, and that he has never been comfortable investing in any assets other than CDs and money-market funds. Which of the following statements is TRUE regarding this situation?
Regardless of whether the client is capable of financially bearing some risk, the IAR must take his low-risk tolerance into account when making recommendations.
A state Administrator is permitted to apply all of the following administrative actions, EXCEPT:
Require a higher minimum financial requirement than the state in which a broker-dealer maintains its principal office.
A person has established an IA as a sole proprietorship and works as an IAR out of his home office. To help promote and manage the IA, he has set up a website which contains personal information about his clients. A few weeks after setting up the website, the IAR discovers that the website has been hacked and his customers' account information has been stolen. What is the primary regulatory concern?
The IA did not prepare proper cybersecurity policies, procedures, and measures before launching the website.
While advising a client who is in a low income tax bracket, an investment adviser representative recommends that he purchase municipal securities. Which of the following statements best describes this action?
The advice given by the representative is unethical.
An investment advisory firm and an accounting firm have offices in the same building, but are otherwise unaffiliated. One of the investment adviser representatives pays a cash referral fee to a CPA in the other office for any clients she sends over to the adviser. All the following statements are TRUE, EXCEPT:
The adviser must give each client that is acquired through the CPA another copy of the separate solicitor disclosure document at the time the client agrees to enter into an advisory relationship.
When analyzing a client's personal balance sheet, which of the following items is classified as an asset?
The amount of cash the client has in a checking account.
The former CEO of a public company whose stock trades on the NYSE has recently retired. He liquidates his holdings in the company by selling his shares privately and intentionally withholds material information about the company. Shortly after the sale, the company files for bankruptcy. The state Administrator wants the former CEO prosecuted for fraud in court. Which of the following statements is TRUE?
The antifraud provisions of the Uniform Securities Act apply to any person conducting a sale of securities, regardless of the registration status.
If a client buys a futures contract and holds it to expiration, what is his obligation?
The buyer is obligated to take delivery of the underlying commodity
Which of the following statements BEST describes a discounted cash flow (DCF) analysis that could lead to a recommendation to a client?
The calculation results in the present value of the future cash flows exceeding the current market value
If an agent of a broker-dealer is granted a durable power of attorney over a client's account, all of the following statements are TRUE, EXCEPT:
The client must be an institution.
A client purchases a TIPS with a 2% coupon and, over the course of the year, the CPI increases by 1%. Which of the following statements is TRUE?
The client will earn 2% on an adjusted principal amount.
When executing a trade for a client, an agent inadvertently misrepresents the risks associated with U.S. Treasury bonds. Under the Uniform Securities Act, which of the following statements is TRUE?
This activity is unethical.
An agent represents a broker-dealer that is headquartered in State A, but has offices in numerous states. The Administrator of State B has revoked the broker-dealer's registration, causing the firm to close that office. One of the agent's clients has moved to State B and the agent wants to continue to do business with her. According to the Uniform Securities Act, which of the following statements is TRUE?
This is not acceptable and neither the broker-dealer nor any of its agents may conduct business in State B.
An investor opens an account with a local advisory firm and deposits $100,000. Some of the employees in the office recognize the investor from her early work as a child actor and begin discussing the rumors of her substantial wealth and real estate holdings. The investor indicates that she wants to trade aggressively, but refuses to give additional information about her income or net worth. Under these circumstances, what is the MOST appropriate action for the investment adviser to take?
To presume that the client has no other assets except the $100,000 in her account
An individual wants an insurance contract that will accumulate a market-competitive return on the cash value in her contract, but she also wants the ability to pay fixed premiums. She should buy a:
Variable life policy
Which of the following options positions has the MOST risk?
Writing an uncovered call
An investment adviser representative indicates to his compliance officer that he believes a new stock offering shows great promise and has a significant upside. The IAR plans to purchase significant amounts for his clients as well as his personal account. The research department of the IAR's firm does not currently follow the issuing company. Does this proposed course of action violate the IAR's fiduciary responsibilities to his clients?
Yes, since he does not have a reasonable basis for his recommendation and the purchase may not be suitable for each of his clients.
