Series 6: QBank Unit 4
A retired man has $100,000 to invest for growth. He also owes a $10,000 note due in six months, a $20,000 note due in one year, and a $25,000 note due in two years. How much of the $100,000 should he allocate to growth investments?
$45,000 The man will pay a total of $55,000 over two years. This period is too short to invest in stocks for growth. The man can invest the remaining $45,000 because he will not need it to pay the notes
Examining a customer's current investment holdings may help with which of the following tasks?
- Identifying the customer's risk tolerance - Understanding what type of securities may be needed for the customer to reach their goals - Identifying a customer's investment experience All of these parts of suitability may be informed by taking a good look at a customer's current investment mix
An analysis of the existing portfolio is important when doing which of the following?
- Understanding a customer's tolerance for risk - Understanding a customer's circumstances - Selecting new investments All of these parts of suitability may be informed by taking a good look at a customer's current investment mix
Seabird Airlines stock has a beta coefficient of 0.8. Last year the stock declined 2% while the overall market declined 5%. What is Seabird's stock's alpha?
2% Alpha is calculated by first finding the expected return by multiplying the index return by the security's beta (-5% × 0.8 = -4%). Then subtract the expected return from the actual return (-2 - -4 = 2)
Which of the following is a financial consideration?
A customer's IRA balancE Financial considerations are those that are expressed as a dollar amount of a stream of payments. Financial considerations may be found on a customer's balance sheet or income statement.
Which of the following is not a financial consideration?
A customer's risk tolerance Financial considerations are those that are expressed as a dollar amount of a stream of payments. Financial considerations may be found on a customer's balance sheet or income statement
Which of the following funds would you recommend to a moderate-risk client seeking long-term capital gains who also values professional stock selection?
A large-cap growth fund A large-cap growth fund is the most appropriate choice for a moderate-risk client because large capitalization stocks are generally less volatile than small-cap stocks and provide long-term capital growth. This is a more appropriate choice than the index fund because there is no stock selection there, only investing to parallel the index
Selling which of the following is not a violation of the Conduct Rules?
AAA bonds to a client who has income as an objective The Conduct Rules require that client suitability be paramount. AAA-rated bonds are suitable for an income-oriented client. Government bonds will not provide high returns; they are designed for moderate income with safety of principal. Options are not suitable for a growth client. No one security is suitable for all investors because each investor has different goals, objectives, and risk tolerances
Your customer is 24 years old, earning $20,000 a year, and seeking to invest $1,000. She does not want a fund that undergoes extreme fluctuations in net asset value. Instead, she is looking for maximum diversification and will accept a moderate amount of risk. Which of the following mutual funds is most suitable for this customer?
ABC Asset Allocation Fund This customer is a young investor with a relatively small amount to invest and a goal of maximum diversification. An asset allocation fund allows her small investment to benefit from the return potential of the stock, bond, and short-term debt markets
Your customer has heard about precious metals funds. He asks about the types and amounts of various precious metals these funds might own. You tell him he has mistaken the focus of these funds. A gold fund, for example, might own
Barrack Gold Corporation common stock Investment companies invest in securities. A precious metals fund would own stock in companies involved in the mining and refining of precious metals. The fund would not own the commodity itself
Your customer wishes to invest $25,000 using investment company securities as a means of diversification, but she states that she is not comfortable with stock market risk. Which of the following fund types would be the least appropriate recommendation?
Blend/core fund Stock market risk is reduced by owning shares of bond funds, particularly those containing government or municipal bonds. Of the equity funds, the balanced fund is generally considered to offer the greatest protection of principal. Blend/core funds, which own value and growth stocks and even some blue-chip stocks, carry a higher degree of market risk than these others
Tyler opens a new account and notes that he is most concerned about the safety of his money. Tyler is likely to be what type of investor?
Conservative A person concerned about safety is likely a conservative investor
Seabird Airlines owes JetA Fuel Corporation $250,000 for fuel delivered at the Seattle-Tacoma airport. Where would this figure be included on Seabird's balance sheet?
Current liabilities These funds are owed by Seabird, so they are a liability. A liability that is due and payable in the immediate future (less than a year) is a current liability
The capital asset pricing model (CAPM) attempts to do which of the following?
Derive the expected return on an asset on the basis of the asset's systematic risk CAPM attempts to derive the expected return on an asset on the basis of the asset's systematic risk
"Don't put all your eggs in one basket" is another way of describing which of these important investment concepts?
Diversification Diversification means placing part of your portfolio into different sorts of investments to help protect against non-systematic risk. If your money is in different "baskets" the impact of systematic risks on the overall portfolio is reduced
Which of the following would be the least important to have in a customer profile?
Educational degrees earned by the customer Note that the question asks for the least important. Surely, when trying to determine the best course of investing, the type of degree earned by the client is of much less importance than any of the other choices
Where on a balance sheet would you find a company's real estate holdings?
Fixed assets Real estate, buildings, and equipment are fixed assets
The business cycle is generally viewed as having how many stages?
Four Economists recognize four stages in the business cycle: peak (prosperity), contraction (decline), trough, and expansion (recovery). Because it is a cycle, there is no set starting or ending point to the business cycle, but the four stages always occur in the same order
If an investor is in a low tax bracket and wishes to invest a moderate sum to gain some protection from inflation, which of the following would you recommend?
Growth mutual fund Growth funds invest chiefly in common stock. Historically, common stock provides greater protection from inflation than debt securities do
Which of the following investments are considered illiquid?
Hedge fund Hedge funds are often organized as limited partnerships, which often have lock periods. Information on the specific investments may be found as part of your SIE study material.
If an investor has $20,000 to invest, but requires $500 per month to pay for her mother's nursing home care, which of the following funds should you recommend?
Money market The client's monthly income requirements suggest that the money market fund, the most liquid and safest of the investments, is the most appropriate
Diversification helps protect against which of the following types of risk? - Nonsystematic - Systematic - Market - Business
Nonsystematic Business Diversification reduces non-systematic risk such as business risk, which is associated with the decline of an individual security's value. Systematic risk, such as market risk, affects all securities and therefore is not significantly reduced by diversification
Which of the following does not require the delivery of a specific disclosure regarding liquidity or the option disclosure document? - Limited partnerships - Option income fund - Options - Hedge funds
Option income fund An option income fund is a type of mutual fund and requires no special disclosure beyond those required for a mutual fund (a prospectus)
Strategic asset allocation is considered what style of portfolio management?
Passive management Strategic asset allocation calls for fixed percentage allocations with little trading. It is a strategic approach to asset management
Which of the following would be a reasonable comparison when choosing between two investments?
Small company fund and a small company index fund The two that hold small companies are the closest and fairest comparison. The investments used here are not specifically mentioned in this section but are covered earlier in this course and are extensively covered in the SIE material. Familiarity with them is an assumption of the exam
Which of the following would be a reasonable comparison when choosing between two investments?
Small foreign company fund and an emerging market fund The two foreign company funds are the closest comparison. The other investments used here are not specifically mentioned in this section but are covered earlier in this course and are extensively covered in the SIE material. Familiarity with them is an assumption of the exam
When making recommendations to an advisory client, which of the following carry the most weight? - The client's risk tolerance - Past performance of the adviser representative's recommendations - The client's investment needs and objectives - The client's previous investment experience with other advisers
The client's risk tolerance The client's investment needs and objectives Investment objectives and risk tolerance should determine recommendations to an individual advisory client
A customer that trades frequently and attempts to time the market is an example of
an aggressive investor Frequent trades and timing are traits of an aggressive investor. Passive and index investors do not trade frequently, nor are these traits of a conservative investor
All of the following appear on a corporation's balance sheet as fixed assets except - furniture - computer equipment - inventory - real estate
inventory Inventory is considered a current asset—not a fixed asset—because the company expects to convert its inventory into cash within a short time. The other choices are fixed assets and cannot be liquidated easily
Albert, an accredited investor, invested $100,000 into a hedge fund last year. His investment is now valued at $110,000. An unfortunate set of circumstances requires him to sell his shares immediately. Albert's need to turn his investment into cash quickly results in
liquidity risk If Albert needs money in a hurry, he will probably find that his hedge fund has restrictions on redemption and it will take time to turn his investment back into cash. This is marketability, or liquidity risk, not to be confused with market risk
Diversification is a proven way to reduce
non-systematic risk Diversifying a portfolio helps reduce the impact of non-systematic risk. It is not as effective at offsetting systematic risks like market and investment risk
All the following are cyclical industries except
precious metals Cyclical industries are those that grow during expansions and shrink during declines. Automobiles, home appliances, and heavy equipment are all cyclical industries. Precious metals are the exact opposite; they grow during declines and contract during expansions in the business cycle, and are termed countercyclical.
A defensive investment strategy would be best described as one where the investor builds a portfolio consisting largely of
public utilities, food manufacturers, and tobacco companies A defensive strategy is one that concentrates investments into those industries that are less likely to suffer during an economic decline. Regardless of current economic conditions, people still eat, smoke, and use their utilities
Recommendations to a customer must
reflect the facts disclosed by the customer regarding other holdings and financial situations Recommendations made to a customer must be suitable for that particular customer. They need not be approved in advance by a principal, but they may include speculative securities if they are in line with the customer's objectives, means, and tax status
All of the following are financial considerations except - the value of a customer's home - the size of a customer's mortgage - a customer's debt service - the size of a customer's home
the size of a customer's home Financial considerations are those that are expressed as a dollar amount of a stream of payments. Financial considerations may be found on a customer's balance sheet or income statement
Your married customers, ages 48 and 50, have a combined annual income of more than $200,000. They are concerned about the effects of rising inflation, and because they are heavily invested in bonds, they seek to invest a portion of their portfolio in a fund that will provide additional diversification. Which of the following mutual funds is the most suitable for these customers?
ATF Overseas Opportunities Fund Investment in an overseas equity fund will provide diversification not necessarily subject to U.S. inflation. The tax-free fund will not provide additional diversification or the best hedge against inflation. A high-grade bond fund will not add diversification
An investor purchased the stock of an 80-year-old blue-chip stock company as a core investment in her portfolio. After several years of steady growth, a major class action lawsuit was filed that could cost the company billions of dollars. This litigation resulted in a 40% loss in market capitalization. What kind of risk is this?
Business risk The investor's loss was the result of apparent bad business on the part of the company, rather than some change in the law or event in the securities world. This is known as a business risk
A 45-year-old investor is in the highest tax bracket and wants to save over the next 20 years for a retirement income. Which of the following recommendations is least appropriate?
Open an IRA and fund it with municipal bonds IRAs are tax-favored accounts. Funding tax-favored accounts with municipal securities that already offer tax-free interest negates the advantage of the tax-free IRA account and therefore would not be considered an appropriate recommendation. Each of the remaining answer choices offer advantages to a high-income individual with a long-term retirement objective and are therefore more appropriate and suitable recommendations
Taylor is an active trader that believes they can achieve higher return by moving in and out of the market. Taylor is best described as which of the following?
Taylor is an aggressive investor Taylor is an aggressive investor. Mutual funds do not work well for most frequent traders
All of the following are financial considerations except - value of investments - mortgage balance - risk tolerance - debt payments
risk tolerance Financial considerations are those facts that may be stated in dollar terms, either as a cash flow (debt payments) or a lump sum (account values and mortgage balances). Risk tolerance cannot be defined in strict dollar terms and is a nonfinancial consideration
Credit risk involves
the possibility of issuer default Credit risk is the danger of losing all or part of the invested principal as the result of the issuer's failure
A 26-year-old with $5,000 is seeking a secure place to invest the amount and begin a periodic investment plan. He is willing to take some risk, but he is uncomfortable with the thought of losing money. He would prefer moderate overall returns rather than high returns accompanied by high volatility. Which of the following mutual funds is the most suitable for this customer?
ABC Balanced Fund This customer is a young investor at the beginning of his earnings cycle. For other investors in his situation, an aggressive growth fund might help achieve maximum capital appreciation over a long-term time frame. However, he is risk averse and has not had any experience with investing in the securities markets. A balanced fund is a good place to begin investing for high total return and low volatility
A customer must receive which of the following disclosure documents before placing a trade for an option income fund? - The fund's prospectus - An option disclosure document - A liability release - An option account agreement
The fund's prospectus An option income fund requires only the delivery of the fund's prospectus. The fund manager is the person placing the option trades, not the customer
If an investment company has a fixed portfolio of municipal bonds with high duration, how will substantial changes in general interest rates affect the company's portfolio?
The market value will fluctuate significantly, but the investment income will remain stable For an investment company with a fixed portfolio of high duration municipal bonds (a UIT), the market value of the portfolio will fluctuate with changing interest rates, but the income will remain stable because the same bonds remain in the portfolio and there has been no change to their coupon rates
Which of the following would be found on a customer's balance sheet?
The value of a customer's comic book collection Information on a balance sheet will be financial assets and liabilities. Income and expense information is on the income statement. Where you went to school is a non-financial consideration
A security's actual performance versus expectations is known as which of these?
Alpha The alpha is the extent to which an asset's or portfolio's actual return exceeds or falls short of its expected returns. A positive alpha rather than a negative one is desirable
Which of the following is considered to be the order of the stages in a business cycle?
Expansion, peak, contraction, trough The correct order for the stages of a business cycle is expansion followed by a peak, then a contraction that ends in a trough. The cycle then repeats. Note that because this order represents a cycle, the correct answer has no set starting point or ending point, as long as the stages are shown in the right order, the answer is correct
Erin has a stated objective of safety and liquidity. Which of the following investments is least suitable for Erin?
Limited partnership Limited partnerships are well known as near illiquid investments. Information on the specific investments may be found in your SIE study material.
Which of the following investments require that the customer receive a specific disclosure document?
Options Options require the delivery of an option disclosure document to the customer
Which of the following are likely to have a low beta?
Public utility stocks Public utility stocks tend to have low betas, as do other defensive stocks. Technology, aerospace, and software stocks tend to have high betas
Which of the following would be found on a customer's balance sheet?
The value of the customer's 401(k) account Information on a balance sheet will be financial assets and liabilities. Income and expense information is on the income statement. Education is a non-financial consideration. LO 4.f
When a registered representative is deciding on the suitability of a particular investment for a customer, that customer's need for liquidity is
an important element to be considered Liquidity is a very important factor when determining suitability for a customer
A customer wishes to open a new account but refuses to provide suitability information. Under FINRA rules, the member
may open the account but may not make any recommendations If a customer fails to provide suitability information, the account may be opened but the member may not make any recommendations
An aggressive investor will likely have which of the following traits? - Frequent trading - Attempt to time the market - Buy and hold positions - Little trading activity
Frequent trading Attempt to time the market Aggressive traders often try to time the market and trade frequently
If an investor's sole objective is to have a tax advantage, he most likely would invest in which of the following funds?
Municipal bond fund The interest received from investing in municipal bonds is exempt from federal income tax. This tax advantage is passed to the fund investor via the dividends paid by the fun
Rank the following from least to most capital risk. - GNMA - Treasury bill - Adjustable preferred stock - Zero-coupon bond
Treasury bill GNMA Zero-coupon bond Adjustable preferred stock Capital or principal risk is the potential for investors to lose all their money (invested capital) under circumstances either related or unrelated to an issuer's financial strength. Preferred stock has less capital risk than common stock but more capital risk than debt securities
Certain investments require special disclosures. Among the special disclosures associated with a limited partnership (LP) are
that LPs are very difficult to liquidate LPs are very difficult to liquidate, and this disclosure needs to be made clear. That investments entail risk, and the specific risks, need to be disclosed, but this is true for all investments and is hardly special. LPs do not trade on the secondary market, so the statements regarding trading or listing are false
The securities market investment theory that attempts to derive the expected return on an asset on the basis of the asset's systematic risk is known as
the capital asset pricing model The CAPM is a securities market investment theory that attempts to derive the expected return on an asset on the basis of the asset's systematic risk. The basic premise is that every investment carries two distinct risks: systematic (think market) risk, which cannot be diversified away, and unsystematic (think business) risk, which can be mitigated through appropriate diversification
You would like to introduce a new client to investment company securities as a method of diversifying his portfolio. Important factors to consider when comparing mutual funds would be - the fund's investment objective - how many people invest in the fund - how fund shares are valued each day - fees and expenses
the fund's investment objective fees and expenses Nothing comes ahead of matching the fund's objectives to those of the client. Once that is done, comparing fees and expenses is important. How many people invest in a fund is not a relevant factor. All mutual funds are valued based on NAV using forward pricing
Mesa Verde Coffee Company (a mid-sized company) stock has a beta of 1.5 when compared to the mid-cap index. Last year the index increased 10% and Mesa Verde grew 13% over the same period. What is Mesa Verde's alpha?
-2% Alpha is calculated by first finding the expected return by multiplying the index return by the security's beta (10% × 1.5 = 15%). Then subtract the expected return from the actual return (13% - 15% = -2)
If a customer is concerned about interest rate risk, which of the following securities is least appropriate?
25-year municipal bonds Interest rate risk is the danger that interest rates will rise and adversely affect a bond's price. This risk is greatest for long-term bonds; short-term debt securities are affected the least if interest rates change
Which of the following statements is true?
A measure of a stock or portfolio's volatility is beta, and a measure of its performance is alpha A stock's beta is a measure of its volatility in relation to the overall market. Alpha is a measure of performance that adjusts for risk, relative to a known benchmark
Which of the following best defines credit risk?
A risk associated with default of a debt security Credit risk is associated with debt securities and is the risk that an issuer may suffer financial failure and default on its obligation to an investor
Mr. and Mrs. Smith, both nearing retirement, want to maximize their income. They want to reallocate $100,000 of their $400,000 portfolio of securities for this purpose. Of the possible investment choices below, which would be the least suitable recommendation given their investment objective?
AAA convertible corporate bonds Convertible bonds offer a lower coupon in exchange for the conversion feature and, therefore, are not a good choice for maximizing income
Your customer, age 29, is seeking a long-term growth investment, is concerned about the loss of purchasing power as a result of inflation, and often complains about high commissions that reduce his investment returns. When he was in college, he took a few economics courses and firmly believes that securities analysts cannot consistently outperform the overall market. Which of the following mutual funds is the most suitable for the customer?
ARG Stock Index Fund The customer requires a mutual fund that offers potential for long-term capital growth. Because the client believes that money managers cannot outperform the market, an index fund, which simply mimics the market, is the appropriate investment. The client's complaint about high commission charges is a further argument for index funds, which have low expense ratios
Your customer, age 45, is single and in search of maximum capital appreciation. She inherited a substantial amount of money a few years ago and has taken an active interest in managing her investments. Currently, her portfolio is diversified among common stocks, tax-exempt bonds, international investments, and limited partnerships. She has a long-term time frame and is not risk averse. Which of the following mutual funds is the most suitable for this customer?
ATF Biotechnology Fund This customer has a high net worth and substantial investment experience. She is capable of assuming the higher risk and return potential of a speculative investment such as the biotechnology sector fund
Your married customers, both 34 years old, have one daughter, age 4. They want to begin accumulating the money required to send their daughter to one of the nation's top universities in 14 years. In addition, they have not yet begun to accumulate money for their retirement. Which of the following mutual funds is the most suitable for these customers?
ATF Capital Appreciation Fund These customers require maximum capital appreciation. Their long-term time frame allows them to ride out the stock market fluctuations. The best investment for them is the stock mutual fund that concentrates solely on achieving long-term growth rather than generating current income
Which of the following would be found on a customer's balance sheet?
The customer's cash on hand Information on a balance sheet will be financial assets and liabilities. Income and expense information is on the income statement. Risk tolerance is a non-financial consideration
Which of the following investments will require specific disclosure regarding the cost of liquidation?
Windmill Growth Fund Class B Class B shares generally have contingent deferred sales charges (back-end loads) associated with liquidation. The load reduces over the holding period, eventually dropping to zero. Customers buying Class B shares should be fully informed of the costs of selling
An accredited investor, age 39, would like to invest $10,000 and wants an investment that is liquid. You recommend
a mutual fund that invests in both stocks and bonds A product is liquid if a customer can sell it quickly at face amount (or very close to it) or at a fair market price without losing significant principal. A mutual fund is the only choice given that is considered liquid
A client who is a manager of a pension plan has recently liquidated approximately $1 million in securities and now has only cash and cash equivalents in the account. This client's outlook concerning the market is
bearish Because the investor has moved all assets into cash or cash equivalents, the investor must expect a bear market and is taking this action in an attempt to protect against incurring losses from the anticipated market decline. Bullish and bearish are terms discussed on the SIE exam. You should know these
An investor purchased 1,000 shares of the KLP Corporation common stock. KLP was late in introducing a new product and lost half its market to a competitor, resulting in the investor's shares losing substantial value. This is an example of
business risk The shares' loss in value was caused by an event in the business world, not a new securities law or some other event in the securities markets. This is called business risk
A 40-year-old client with an annual income of $25,000 has been investing $100 per month in XYZ mutual fund through a dollar-cost-averaging strategy for the last 10 years. After winning the lottery, the client asks for investment recommendations for his $1 million winnings. The representative should recommend
reevaluating the customer's goals and objectives in light of his new financial situation Before making recommendations, registered representatives must know their customers. When significant life changes occur, it is important to gain a full understanding of how that affects their investment goals before making any further recommendations
Liquefying home equity to generate funds for investment purposes
requires communication by the broker-dealer of the unique risks associated with this investment strategy This investment strategy requires the broker-dealer to communicate the unique risks associated with it, which could include losing one's home. Note that, in some states, knowingly investing funds generated this way may actually be illegal
Which investment is exposed to the greatest price sensitivity when interest rates increase?
20-year bond with a 4% coupon Duration is often used to assess the sensitivity of a bond in response to interest rate changes—the greater the duration, the greater the sensitivity, and thus greater interest rate risk in an environment of changing interest rates. Duration is a measure of the amount of time a bond will take to pay for itself. Each interest payment is taken to be part of a discounted cash flow, so there is more to the calculation than simply adding up the interest payments. The 4% coupon has a longer duration than the 6% coupon. (So, $40 of interest per year versus $60 of interest per year means the 4% coupon will take more time for the bond to pay for itself.) Long-term bond prices are more volatile than short-term bond prices; therefore, the 20-year bond with the lower coupon represents the greatest risk when interest rates rise
A young, recently married couple, would like to purchase a home within five years. They have $2,000 in savings and $400 a month to invest. In addition, they owe $35,000 on student loans to be repaid over the next 10 years. What type of mutual fund investment would likely be the best recommendation?
Build up cash reserves and then save for a down payment on the new home. Investing must wait Under these circumstances, the investors should be encouraged to postpone the investing until they have a sufficient emergency reserve of ready cash and money set aside for their goal of purchasing a home in five years
Your client, a wealthy business owner, owns 40,000 shares of a stock that was amassed over many years. With this single holding equaling close to 5% of the client's investment portfolio, the risks have been identified, discussed and ultimately acknowledged and accepted by the client. Suddenly, adverse unexpected news regarding the safety of a key product sold by the company sends the stock tumbling, losing over 10% of its value in a single day. Regarding suitability, while a number of risks could have been discussed, which risk would have been the most important to discuss with the client?
Business risk Business risk impacts companies individually and should have been discussed, especially with a substantial percentage of an investment portfolio allocated to a single stock. This is tied to the client's lack of diversification. Credit risk, the risk of losing principal due to the failure of an issuer, is associated with debt securities, as is reinvestment risk. Timing risk has to do with trading in and out of the market and, given that this single stock position was amassed over many years, would not be of concern when risks should have been discussed
Your customer is interested in a fund that follows a buy-and-hold style of investing. He also insists on the lowest fees and expenses possible. Which of these funds might you recommend?
Index A manager of an index fund would use a buy-and-hold style. As the composition of the index changes through stock distributions or recapitalizations, the fund manager would buy or sell the issues to keep them in proportion to their position in the index before the distribution or recapitalization. Because this does not happen often, fees and expenses would also tend to be low
Your customer has $200 per month of discretionary income and currently invests $200 monthly into a mutual fund. His daughter plans to enter college soon, and he would like to send her $100 monthly. Which of the following actions should you recommend to him?
Invest $100 monthly into the mutual fund and send his daughter $100 monthly There is some cost to investing money and immediately withdrawing it. Anytime that funds are deposited into a mutual fund, a sales charge of some sort would apply (unless it is a money market fund). For this reason, your customer should reduce his investment in the mutual fund and send the remaining money to his daughter
A couple in their early 30s has been married for four years, their disposable income is relatively high, and they are planning to buy a condominium. If they need a safe place to invest their down payment for about six months, which of the following mutual funds is the most suitable for these customers?
LMN Cash Reserves Money Market Fund These customers are preparing to make a major purchase within the next few months, so they require a highly liquid investment to keep their money safe for a short amount of time. The money market fund best matches this objective
Your customer is a retired widower, age 72, seeking a moderate level of current income to supplement his Social Security benefits and his company pension plan. He has a very conservative attitude toward investments. An equally important investment goal for him is capital preservation. Which of the following mutual funds is the most suitable for this customer?
LMN Government Income Fund This customer requires maximum safety and current income. While all fixed-income funds aim to provide current income, the U.S. government bond fund offers the best combination of safety and a higher yield of the choices offered
A married couple in their early 50s saving for retirement would most likely have which of the following objectives?
Moderate risk, moderate safety, low liquidity Questions like this are the worst because they call for an opinion (and I really could defend each of these choices because we don't know enough about these people). However, we must pick the answer the test wants. Because they still have more than 10 years until retirement age, that long a time horizon allows them to take more risk than if they had been in their early 60s. Because they won't need the money for a while, liquidity is not a concern
Your customer, age 32, makes $48,000 annually and has $15,000 to invest. Although he has never invested before, he wants to invest in something exciting, with investment returns in the 20%+ range. Which of the following should you suggest?
More information from the customer before you can make a suitable recommendation It is necessary to get more information about this customer and his definition of an exciting investment opportunity before making any recommendations. A suitability and risk-tolerance analysis should be performed before a recommendation is made
A debt fund manager, extremely sensitive to interest rate risk, has taken the opinion that interest rates will begin to come down and perhaps stay at low rates for the foreseeable future. With that opinion in mind, and wanting to take a conservative approach, which of the following would be a suitable recommendation for the portfolio?
Noncallable corporate bonds When interest rates fall, issuers with outstanding callable bond issues are likely to call them in. From the issuers' perspective, why pay the higher rate the bonds were initially issued with if they can be called in and new bonds issued at the now lower rates. From the investor (our fund manager) perspective, if you anticipate that interest rates will be falling, noncallable bonds would be better because there is no risk of them being called and you can continue to earn the higher rate the bonds were issued with. In addition, no call risk means mitigating reinvestment risk as well. Adjustment bonds and below-investment-grade (high-yield) bonds are speculative in nature.
A married couple comes to a small branch office looking to open a securities account. They are recent immigrants to the United States. They refuse to give any information about accounts held at another firm. What would you do?
Open the account but take unsolicited orders only It is required that when a broker recommends a buy or sell of a particular security, the broker must have a reasonable basis for the recommendation—that it is suitable for that customer. In making the assessment, the broker must consider the risk tolerance, other security holdings, financial situation and needs, and objectives. SEC rules further require that brokerage firms create a record for each account that includes, in part, name, address, date of birth, passport information, net worth, investment objectives, and so on. If the customer is not forthcoming, you may still open the account. SEC rules excuse the broker from obtaining it so long as there was a good-faith effort to get the information. But, without information with which to make a recommendation, only unsolicited transactions can take place. Customer account information is updated at least every 36 months
An investor has a portfolio diversified among many different asset classes. If there was an immediate need for cash, which of the following would probably be the most liquid?
QRS Money Market Mutual Fund Money market funds generally come with a check-writing privilege, offering this investor the opportunity to immediately convert his asset to cash. While all mutual funds are readily redeemable, under the Investment Company Act of 1940, the fund has seven days to redeem. With the insurance company's variable contract, cash value withdrawals or loans may be delayed, by law, for as long as six months (not tested on your exam)
One of the most important functions of a registered representative is to do which of the following?
Select investments to meet the customer's needs The function of a registered representative is to select investments that meet the customer's needs, not what is best for the broker-dealer. There is some risk of loss in all investments
A customer would like to know which of the following mutual funds has the highest potential for capital growth. Which would you choose?
Small-cap technology stock fund Bond funds and preferred stock funds offer income and little, if any, potential for growth. A blue-chip stock fund offers conservative growth potential. A technology fund invests in risky stocks and has the highest potential for growth. The customer should be aware that high growth potential also carries high risk
Diversification is best defined as which of the following?
Spreading of portfolio funds among different asset classes "Spreading of portfolio funds among different asset classes" is a standard description of diversification. Placing investment dollars in a variety of investments to reduce the impact of non-systematic risks is a proven approach to lowering a portfolio's volatility
A customer of yours owns a corporate bond fund with a long duration. Mortgage rates are going up. What impact will this have on the investment?
The current yield will increase because the price of the shares can be expected to fall Bonds (the chief investment of this fund) display an inverse relationship between prices and interest rates. Because interest rates are going up, bond prices can be expected to decrease. A given bond, then, will experience a decrease in price and a corresponding increase in the calculated current yield. The same can be expected of mutual funds that invest in bonds
Which of the following would be found on a customer's balance sheet?
The value of the customer's primary residence Information on a balance sheet will be financial assets and liabilities. Income and expense information is on the income statement. Risk tolerance is a non-financial consideration
Taylor opens a new account and notes that they intend to trade aggressively. This means that Taylor will likely take which of the following courses of action?
Trade frequently Aggressive investors tend to trade frequently and move into and out of the market. Treasury bonds are not aggressive
Your client informs you that he has recently sold his home and is constructing a new one. He has approximately $150,000 in proceeds from the sale, on which he would like to earn a return. The funds must be available in about six months to pay the contractor. Which of the following might you suggest? - ABC 8% preferred stock, callable at par in five months - U.S. 5% Treasury bond, maturing in six months - Banker's acceptance - XYZ common stock, listed on the NYSE
U.S. 5% Treasury bond, maturing in six months Banker's acceptance This client's needs are best met by placing the funds into the money market, defined as high-quality debt securities with one year or less to maturity. The banker's acceptance and the Treasury bond meet those criteria.
Which of the following investments will require specific disclosure regarding the cost of liquidation?
Windmill Retirement Funder Variable Annuity Though there are a limited number of no-load variable annuities, most have surrender charges that must be clearly disclosed. Class A shares have no liquidation costs. Stocks and bonds are traded in the secondary market
If an elderly widower wants his investments to provide high current income, the representative should recommend
a mutual fund that matches the investor's stated objective Investors should be careful not to be misled by a mutual fund's name. Although the name of a fund should bear a resemblance to its objective, the investor and the representative should read the fund's prospectus carefully to be sure that the fund's objective matches the investor's objective. Growth funds and zero-coupon bonds are not designed to meet the requirement of providing maximum current income
A registered representative is talking with a new customer at his firm, a 60-year-old man who has accounts at several other broker-dealers and a net worth of just over $700,000. The customer considers himself to be extremely skilled at selecting new companies that will perform well, and over the years, through numerous small investments, he has built a portfolio consisting of about 80% equity securities. His company mandates retirement for its personnel at age 65, and he is becoming worried about retirement income. He has selected another new company, one with a speculative bond issue. He would like to invest $250,000 in this issue to augment his projected retirement income and would like the registered representative's opinion. The registered representative should
agree that it is appropriate to move toward emphasis on income, if that is his retirement objective, but not with such a large investment in one speculative security This investment would amount to over one-third of the customer's net worth and is speculative to boot. The registered representative should urge the customer to begin moving more slowly into income securities. Index funds are not purchased for income, the sector fund is speculative and not income oriented, and although high-yield bond funds are income oriented, they are also speculative. So, the overall mix is not the best recommendation
An investor who purchases stock in two technology companies with high projected earnings and growth potential but little performance history is considered
an aggressive investor An investor is taking an aggressive investment posture in investing in a growth company with little history. He is willing to take on high risk for high potential returns
A portfolio management style that calls for short-term adjustments that adjust the portfolio mix between asset classes in consideration of current market conditions is an example of
tactical asset allocation This is a description of tactical asset allocation. This style is more active than a strategic approac
Stocks, bonds, and cash are the three major categories of asset allocation. Some advisers add another class of assets called
tangible assets Some experts say that tangible assets should also be included in a balanced allocation because these types of assets tend to reduce inflation risk. Options and futures are derivatives of other securities or commodities. Insurance is generally seen as part of the fixed income (bond) allocation
A registered representative would likely be accused of a prohibited practice if he encouraged a customer to switch her mutual fund when
the fund's ranking changes in her favorite financial periodical. Significant changes in an investor's investment objective, tax status, or retirement planning may be justification for switching from one fund to another. Constantly switching to a higher-rated fund ("chasing the leader") can result in continual tax exposures and possibly new sales loads. When a switch between funds occurs, the shareholder must recognize any capital gain or loss
