Series 6: Unit 4 Quiz 1
An option disclosure document must be provided to a customer before which of the following may take place? A) The account may be approved for option trading B) Options may be discussed C) Before opening a margin account D) Before suitability regarding options is determined
C) Before opening a margin account The option disclosure document must be provided to the customer before an account can be approved for options trading. Discussing options and making suitability determinations should occur before seeking option approval.
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? A) Taylor is a buy-and-hold investor. B) Taylor is likely a mutual fund investor. C) Taylor is an aggressive investor. D) Taylor is a conservative investor.
C) Taylor is an aggressive investor Taylor is an aggressive investor. Mutual funds do not work well for most frequent traders.
When recommending an investment to a customer, one of the most important items to consider is A) commission generated. B) market capitalization. C) investment performance. D) name of the investment.
C) investment performance Investment performance is very important when choosing investments. Commission and the name should be near to irrelevant. Market cap (size of the company) is a factor in diversification, but is secondary to performance.
A moderate-risk customer who has been funding a self-directed IRA since her late 20s is now in her early 60s. The investment vehicle currently weighted heavily toward equities for growth has allowed her to accumulate a robust nest egg to be used during retirement. Hoping to keep the IRA investments limited to mutual funds, she asks for a more conservative allocation given her age. Which of the following is suitable and conservative allocation? A) 70% municipal bond funds, 30% index funds B) 60% high-yield bond funds, 40% index funds C) 50% growth funds, 40% sector funds D) 70% balanced fund, 30% U.S. government bond funds
D) 70% balanced fund, 30% U.S. government bond funds As this customer gets closer to retirement, the need to move away from equities toward fixed income should be evident. A balanced fund that is split between equities and debt securities coupled with U.S. government bonds that are considered safe and with no default risk is appropriate. An immediate red flag should arise regarding the use of municipal bonds (or funds) in a tax-favored account. With tax-free interest, there is no suitable reason to utilize such assets in an IRA. A 60% position in high-yield bond funds are speculative and not suitable for a conservative portfolio.
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? A) Credit risk B) Timing risk C) Reinvestment risk D) Business risk
D) 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.
Which of the following is a financial consideration? A) A customer's risk tolerance B) A customer's marital status C) A customer's favorite pastime D) A customer's income
D) a customer's income 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.
During a fact-finding interview with a potential client, your client information sheet is used to list detailed financial information. Which of the following items would be relevant in determining a prospect's net worth? A) $78,000 current IRA balance B) Recently paid off $3,000 credit card balance C) $225,000 annual income D) A potential inheritance
A) $78,000 current IRA balance Net worth is computed by subtracting liabilities from assets. The IRA balance is an asset. The credit card debt was a liability, but because it has been paid, it no longer appears on the financial statement. Income is important, but it does not figure into net worth until it is deposited into a bank or invested in something. Similarly, the inheritance is not part of net worth until it is received.
Which of the following best defines credit risk? A) A risk associated with default of a debt security B) The risk of a corporation's inability to borrow money C) When a bond is not rated by credit rating agencies such as Moody's or Standard and Poor's D) The downgrading of a debt security to below investment-grade status
A) 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
Your customers, ages 60 and 58, are married and have raised three children. Both want to retire this year. They have accumulated a nest egg of about $1 million, which they will use to travel around the world, pursue their hobbies, and care for each other's health. Both are concerned about rising inflation and are comfortable with a reasonable level of risk. Which of the following mutual funds is the most suitable for these customers? A) LMN Growth & Income Fund B) XYZ Government Income Fund C) ABC Investment-Grade Bond Fund D) LMN Cash Reserves Money Market Fund
A) LMN Growth & Income Fund These customers are preparing for retirement, and they want to maintain a comfortable standard of living, which means staying ahead of inflation. A combined fund that offers both current income and growth potential is the best choice for this couple
Which of the following is not a financial consideration? A) The size of a customer's home B) The value of a customer's home C) A customer's debt service D) The size of a customer's mortgage
A) 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.
Seabird Airlines owes Jet Fuel Corporation $250,000 for fuel delivered at the Seattle-Tacoma airport. Where would this figure be included on Jet's balance sheet? A) Intangibles B) Current assets C) Long term liabilities D) Current liabilities
B) Current assets These funds are owed to JetA, so they are an asset. An asset that is (or is easily converted to) cash is a current asset. This is an example of an account receivable.
If your customer has $100,000 to invest and will need the money when he retires in six months, which of the following is the most suitable investment for this customer? A) Growth fund B) Money market fund C) International stock fund D) Immediate variable annuity
B) Money Market fund This customer has a very short investment period; the most suitable recommendation is the money market fund.
Which of the following is a customer probably referring to when he speaks of safety in investments? A) Steady current income B) Preservation of capital C) Reducing inflation risk D) Long-term capital growth
B) Preservation of capital When a customer speaks of safety, he is almost always referring to preservation of capital.
One of the most important functions of a registered representative is to do which of the following? A) Recommend proprietary investments of the broker-dealer B) Select investments to meet the customer's needs C) Suggest investments with the highest overall payout to the broker-dealer D) Recommend only investments that do not decline in value
B) 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 registered representative is preparing a profile on one of his customers. Which of the following should he list as a nonfinancial consideration? A) The customer's monthly discretionary income B) The amount of money the customer is willing to risk C) The customer's yearly salary D) The amount of money in the customer's savings accounts
B) The amount of money the customer is willing to risk Financial considerations involve real assets or debts, whether part of total income, debt, or net worth. The amount of money the customer is willing to risk involves attitude, not something that can be placed on a balance sheet or income statement, and is thus nonfinancial.
Those industries that are least affected by normal business cycles are A) growth industries. B) defensive industries. C) special situation. D) cyclical industries.
B) defensive industries Defensive industries are least affected by normal business cycles. Companies in defensive industries produce nondurable consumer goods, such as food, pharmaceuticals, and tobacco, or supply essential services such as those offered by utility companies. Public consumption of such goods remains fairly steady throughout the business cycle.
Phyllis purchased stock in a tobacco company several years ago. Last month, the cigarette tax was increased by 25% and the stock price dropped significantly. Phyllis's investment was subiect to A) market risk. B) legislative risk. C) constant dollar risk. D) business risk.
B) legislative risk When investments are affected by tax law or other changes made by the government, this is considered legislative risk.
When comparing investment alternatives, all of the following must be considered except A) relative time period of returns on investment. B) state of incorporation of the companies. C) differences in risk exposure between the two investments. D) relative after-tax returns, when appropriate.
B) state of incorporation of the companies. The state of incorporation is generally not a relevant factor when comparing investments.
If an elderly widower wants his investments to provide high current income, the representative should recommend A) a growth fund. B) a zero-coupon bond. C) the ABC Widow Fund. D) a mutual fund that matches the investor's stated objective.
D) 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.
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 A) credit risk. B) reinvestment risk. C) legislative risk. D) business risk.
D) 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.
Diversification is a proven way to reduce A) interest rate risk. B) systematic risk. C) market risk. D) non-systematic risk.
D) 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.