Series 65 Comprehensive exam 1
The following table shows the individual weightings and expected returns for the 3 stocks in an investor's portfolio: Stock Weight E(Rx) V 04.0 12% M 0.35 8% S 0.25 5% What is the probable return of this portfolio? A) 9.05% B) 8.85% C) 8.33% D) 9.55%
B) 8.85% Multiplying the weight of each asset by its expected return, then summing, produces the following: E(RP) = 0.40(12) + 0.35(8) + 0.25(5) = 8.85%.
Which of the following are characteristics of commercial paper? I. Backed by money market deposits II. Negotiated maturities and yields III. Issued by insurance companies IV. Not registered with the SEC A) III and IV B) I and III C) II and IV D) I and II
C) II and IV Commercial paper represents the unsecured debt obligations of corporations needing short-term financing. Both yield and maturity are open to negotiation. Because commercial paper is issued with maturities of no more than 270 days, it is exempt from registration under the Securities Act of 1933.
When discussing employment and production, which of the following industries are typically more affected by a recession? I. Capital goods II. Consumer durable goods III. Consumer nondurable goods IV. Services A) III and IV B) II and IV C) I and III D) I and II
D) I and II Durable goods and capital goods are more affected by a recession than are nondurable goods and services. This is primarily because they are larger items, last for a longer period, and are somewhat discretionary.
What generally happens to outstanding fixed-income securities when the rate of inflation slows? A) Coupon rates go up. B) Short-term securities are affected the most. C) Yields go up. D) Prices go up.
D) Prices go up. When the rate of inflation slows and is expected to remain stable, coupons on new issue bonds will often decline to offer lower yields. The prices of outstanding bonds will go up to adjust to the lower yields on bonds of similar quality.
In the technical analysis of the value of securities, which of the following items is NOT important? A) The breadth of market volume B) Resistance and support levels C) A prevailing market trend in response to shifts in supply and demand D) The amount of a company's past earnings
D) The amount of a company's past earnings The amount of a company's past earnings is a factor used in the fundamental analysis of securities, but not technical analysis. Technicians rely on market trends and supply and demand factors, as well as chart indications such as resistance and support levels.
Under the current gift tax marital deduction, how much can an individual give a spouse who is a U.S. citizen without incurring a gift tax? A) An unlimited amount B) No more than $152,000 per year C) No more than $30,000 per year D) No more than $15,000 per year
A) An unlimited amount The gift tax marital deduction permits an individual to give a spouse an unlimited amount of property without incurring a gift tax. However, if the spouse is not a U.S. citizen, the maximum marital gift is $155,000 (2019).
In discussing a direct participation program with your customer, rank the following items in order of importance from most to least. I. Tax write-offs II. Liquidity and marketability III. Potential for economic gain A) II, III, I B) I, II, III C) III, I, II D) III, II, I
C) III, I, II A program's economic viability is the first priority in the assessment of DPPs. The IRS considers programs designed solely to generate tax benefits abusive. Because there is a very limited secondary market for DPPs, liquidity and marketability should be a low priority
When saving money for a child's college education, one consideration is the impact that those savings will have on the child's eligibility for financial aid. Funds saved in which of the following vehicles has the most detrimental effect on financial aid? A) UTMA B) Prepaid tuition plan C) Coverdell ESA D) Section 529
A) UTMA Assets held in custodial accounts (UTMA or UGMA) are counted at 20% of their value, which compares unfavorably with the 5.64% valuation of Section 529 or Coverdell ESA assets. Please note: It is highly unlikely that you will need to know the percentages - but you will need to know that custodial accounts do not receive as beneficial treatment when applying for financial aid.
An investor purchases a 6% callable senior lien mortgage bond at par. Exactly two years later, the bond is called at 102½. The investor's total return is A) 9.5%. B) 7.25%. C) 8.5%. D) 14.5%.
D) 14.5%. Total return consists of income plus gain. Buying this bond at par and having it called at 102½ ($1,025) results in a $25 gain. With a 6% coupon, there will be four semiannual interest payments of $30 in a two-year holding period. Adding the $25 + $120 = $145 total return on an investment of $1,000 which = 14.5%. Please note that the question didn't ask for the annualized rate of return. That would be approximately 7.25% per year.
Mary Baker is an investment adviser registered with the SEC. Eight years ago, she was the subject of an SEC investigation involving improper actions between her customers and herself which resulted in a $5,000 fine. Under the Investment Advisers Act of 1940, Mary's obligation to her clients is to I. disclose to prospective clients in her Form ADV Part 2 that she was the subject of a proceeding and the proceeding's outcome II. make disclosures in her Form ADV Part 2 regarding the case only if the prospect becomes a client III. make disclosures in her Form ADV Part 2 only if the event was resolved her favor, or was reversed, suspended, or vacated A) I only B) II only C) I and III D) I, II, and III
A) I only If an investment adviser has been the subject of a material criminal, civil, or regulatory action within the past 10 years, that fact must be disclosed to all clients and prospective clients in the Form ADV Part 2A. The only time disclosure of an investigation need not be made is when the event was resolved in her favor, or was reversed, suspended, or vacated. In other words, no guilty verdict, no fine
A foreign private adviser is defined in the Dodd-Frank Act as any investment adviser that I. has no place of business in the United States. II. has, in total, fewer than 15 clients and investors in the United States in private funds advised by the adviser. III. has aggregate AUM attributable to clients in the United States and investors in the United States in private funds advised by the adviser of less than $25 million. IV. holds itself out to the public in the United States as an investment adviser or acts as an investment adviser to an investment company registered under the Investment Company Act of 1940. A) I, II, and III B) I and IV C) II and III D) IV only
A) I, II, and III There are 4 requirements to be considered a foreign private adviser. Choices I, II, and III are all included, and, if choice IV said - does not hold..., it would have been the fourth requirement. By holding itself out to the public, it can't be a private adviser.
Municipal bonds are often called tax-exempts. This refers to the exemption of their income from A) federal income taxes B) state, federal, and inheritance taxes C) federal estate taxes D) state income taxes
A) federal income taxes Although municipal bonds are sometimes exempt from state income tax (if issued in the state of residence of the taxpayer), all references to tax exemption refer to their exemption from federal income taxes.
Your client with $100,000 to invest is looking for maximum current income. Which of the following would offer the highest current return? A) $200,000 of utility common stock paying a current dividend of 3.5% B) $100,000 market value of corporate bonds selling at a premium and yielding 6% to maturity C) $100,000 of zero-coupon bonds with a yield to maturity of 6% D) $100,000 AA-rated corporate bonds trading at par with a 6% coupon rate
B) $100,000 market value of corporate bonds selling at a premium and yielding 6% to maturity Bonds selling at a premium have higher coupons than those selling at par. Therefore, the current yield on those bonds is higher than the ones at par, even though they would have the same yield to maturity. The zero-coupon bonds offer no current income and the investor only has $100,000 to invest, so the utility stock is not a viable option.
A 50-year-old client with modest means wants to construct an investment program. He has no investment experience, his major consideration is saving for retirement, and he has limited risk tolerance. Which of the following would you recommend? A) Aggressive growth mutual funds B) Growth and income mutual funds C) High-grade bond fund D) Call options on the S&P 500 Index
B) Growth and income mutual funds Mutual funds that offer growth and income best meet the client's needs, offering growth for retirement and current income. A high-grade bond fund would not offer the growth that the client needs for retirement, although the fund would supplement the modest income of the client. A client of modest means may not be able to sustain the risk of principal that accompanies an aggressive growth fund; in addition, this alternative is unsuitable because the client has limited risk tolerance. Index options are a speculative investment.
Margin is borrowing money from a broker-dealer to buy a stock using the investment as collateral. In many cases, the brokerage firm then uses that collateral for a loan from a bank. Which of the following account documents authorizes the firm to pledge the customer's stock? A) The credit agreement B) The hypothecation agreement C) The securities pledge agreement D) The loan consent agreement
B) The hypothecation agreement The hypothecation agreement gives permission to the broker-dealer to pledge a customer's margin securities as collateral. The firm hypothecates customer securities to the bank, and the bank loans money to the broker-dealer on the basis of the loan value of these securities. The credit agreement contains the terms of the loan, including the method of computing interest on the borrowed money. The loan consent agreement, granting permission to the broker- dealer to lend out the customer's securities, is optional.
An analyst computing a stock's Sharpe ratio would need to know the stock's A) alpha. B) standard deviation. C) correlation coefficient. D) beta coefficient.
B) standard deviation. The formula for the Sharpe ratio is: actual return minus the risk-free rate which is then divided by the standard deviation.
All of the following situations are exempt transactions complying with the requirements of the USA EXCEPT A) the executor of an estate liquidates 1,000 shares of IBM held by the estate B) broker-dealer A has put together a syndicate of 15 insurance companies and pension funds to purchase the entire issue of XYZ Corporation's preferred stock C) broker-dealer B offers a private placement to 15 regular public customers and closes the offering at the end of 30 days D) Mammoth Mutual Fund purchased 250,000 shares of common stock in a nonissuer transaction
C) broker-dealer B offers a private placement to 15 regular public customers and closes the offering at the end of 30 days Under the Uniform Securities Act, an unregistered private placement may be offered to no more than 10 prospective purchasers, with the exception of financial institutions and other broker-dealers. Transactions by executors, the sheriff, marshals, receivers, trustees in bankruptcy, guardians, or conservators are exempt. Sales to financial institutions, such as mutual funds and insurance companies, are also exempt.
On the initial public offering, an investor buys a $10,000 Aa-rated, 20-year corporate bond with a 4% coupon rate. One year later, the prevailing market rate is 5% and the bond has had its rating increased to Aa1. Which of the following is most likely TRUE with reference to the current market price of this bond? A) Par value B) Premium C) Cannot be determined from the information given D) Discount
D) Discount When interest rates go up, bond prices go down. Had interest rates remained the same, the slight improvement in rating would have probably caused the bond to sell at a very slight premium, but that rating increase is not nearly strong enough to offset a 25% increase in market interest rates
Which of the following statements concerning market efficiency is not correct? A) The fundamental assumption of market efficiency is that current stock prices reflect all available information for a company and that prices rapidly adjust to reflect any new information. B) Any new information must be unexpected; therefore, any changes in the stock price resulting from this new information will be random. C) The efficient market hypothesis (EMH) is the proposition that the securities markets are efficient, with the prices of securities reflecting their current economic value. D) Investors who accept the efficient market hypothesis (EMH) usually adopt an active investment strategy.
D) Investors who accept the efficient market hypothesis (EMH) usually adopt an active investment strategy. Investors who accept the EMH usually adopt a passive investment strategy; investors who do not accept the EMH, pursue an active investment strategy. If the market is efficient, the best strategy is indexing rather than stock picking
Which of the following does not benefit both the employee and the employer? A) SERP B) Defined benefit plan C) SEP-IRA D) Traditional IRA
D) Traditional IRA There is no employee/employer relationship in a traditional (or Roth) IRA. A SEP-IRA is different in that the employer makes the contribution, gets the tax deduction, and the employee's account is enriched by that contribution. The same is true for the defined benefit plan and the SERP. A supplemental executive retirement plan is a nonqualified plan designed to provide additional retirement benefits limited to a select group of management or highly-compensated employees.
When advisory clients wish to structure their portfolios to support companies that engage in social or environmental policies that they agree with, it is known as A) asset allocation B) program-related investing C) engineered investing D) impact investing
D) impact investing Impact investing can be defined as the intentional allocation of capital to generate a positive social or environmental impact.
A client has just finalized her divorce and intends to sell her gold wedding band. Because the price of gold has risen significantly since she married 20 years ago, she will be able to realize a profit on the sale, but she does not know what to use as the cost basis. You suggest she speak to a tax specialist who will tell her to A) ignore the profit for tax purposes because precious metals are not subject to capital gains taxation B) obtain an appraisal from a qualified jeweler and use that as the cost basis C) use the original cost of the ring D) use a cost basis of zero because it was a gift
C) use the original cost of the ring Regardless of the nature of the asset, the cost basis of any asset acquired as a gift is that of the donor. Although not tested, the maximum rate on capital gains from collectibles, such as a gold ring, is 28% (higher than the rate for securities).
All of the following activities and communications would fall outside the definition of a recommendation EXCEPT A) a broker-dealer sends an email to its more conservative clients stating this would be an excellent time to invest in public utility stocks, and includes a list of those paying the highest dividends B) a broker-dealer's website was created to be available to customers that contains a link to an electronic library of research reports that contains buy-sell recommendations from the author of the research reports C) a broker-dealer provides research tools on its website that allow customers to screen through all Nasdaq securities D) a broker-dealer's website places a search engine in a prominent spot on its landing page that can be used to access charts of multiple stocks in the large- cap sector
A) a broker-dealer sends an email to its more conservative clients stating this would be an excellent time to invest in public utility stocks, and includes a list of those paying the highest dividends Specificity, such as a list of securities, invariably results in a communication being deemed a recommendation. All of the other choices given would generally be viewed as falling outside the definition of recommendation
A computerized mathematical technique that is often used by investment advisers to project future financial outcomes, such as the probability of a client's funds lasting through retirement, is called A) capital asset pricing model (CAPM). B) efficient market hypothesis (EMH). C) asset allocation modeling (AAM). D) Monte Carlo simulation (MCS).
D) Monte Carlo simulation (MCS). A popular form of mathematical modeling that uses computer-generated distributions is the Monte Carlo simulation (MCS). For those approaching (or in) retirement, it can be very useful to answer questions such as: "Do savings need to be increased?", "Can I retire earlier?", "Must I retire later?", "Do I need to reduce my withdrawal rate?", "Can I increase my withdrawal rate?".
Which of the following best describes net present value? A) It is the true interest yield expected from an investment expressed as a percentage B) The amount of money that must be invested today at some specified rate of return to equal a targeted value in a specified number of years C) The discount rate that results in a return of zero for a series of future cash flows D) The difference between the sum of the discounted cash flows that are expected from an investment and its initial cost
D) The difference between the sum of the discounted cash flows that are expected from an investment and its initial cost Net present value is a computation taking into consideration future cash flows, discounted to the present, and comparing that to the capital investment necessary to obtain those flows. It is always expressed in monetary units and, if positive, indicates a potentially worthwhile investment.
An investor signed a letter of intent to purchase $50,000 worth of Sky-High Mutual Fund. At the end of 13 months, he had only invested $48,000 in the fund. Which of the following is TRUE? A) He must sign a new letter for the $2,000 to receive the breakpoint. B) There are no additional requirements; he will receive the breakpoint. C) He has 90 days to invest the additional $2,000 for the breakpoint. D) The fund will liquidate shares to meet the additional sales charge.
D) The fund will liquidate shares to meet the additional sales charge. An investor has only 13 months to meet a letter of intent commitment. Once that period of time has elapsed, the investment company is entitled to a refund of the discount it had originally given the investor. This is accomplished by liquidating a sufficient number of shares to cover the additional sales charge to be imposed.
A registered investment adviser, in his financial planning practice, recommends and sells proprietary products offered through a broker-dealer affiliated with his investment advisory firm. All of the following statements are true EXCEPT A) the adviser must receive a signed statement from the customer that authorizes this practice before collecting any payment B) this practice is ethical if full disclosure is made to all clients C) the adviser may collect fees for investment advice and commissions for executing trades D) the adviser must state that the client may be subject to certain limitations because of this arrangement
A) the adviser must receive a signed statement from the customer that authorizes this practice before collecting any payment Disclosures are required, but written consent is not. If the client does not agree with these arrangements, he can take his business elsewhere. There are cases, such as agency cross transactions, where prior written consent of the client is needed.
Which of the following statements regarding the general partner in a direct participation program (DPP) is NOT true? A) A GP has a fiduciary relationship to the limited partners (LPs). B) The GP, as the active manager of the partnership, does not maintain a financial interest in the partnership and only receives income distributions from profits on the business prior to the limited partners. C) The GP cannot borrow from the partnership, compete with the partnership, or commingle personal funds with partnership funds. D) The general partner (GP) is the active investor in a limited partnership and assumes responsibility for all aspects of the partnership's operations.
B) The GP, as the active manager of the partnership, does not maintain a financial interest in the partnership and only receives income distributions from profits on the business prior to the limited partners. General partners (GPs) must maintain a financial interest in the partnership and generally do not receive distributions from profits before those paid to the limited partners. The GP is the active investor in a limited partnership and assumes responsibility for all aspects of the partnership's operations and has a fiduciary relationship to the LPs. The GP, as a fiduciary, cannot borrow from the partnership, compete with the partnership, or commingle personal funds with partnership funds.
Question #2 of 130 Question ID: 1199812 Which of the following investment adviser compensation arrangements is (are) permitted under the Uniform Securities Act? I. The value of a client's account at the start of the year is subtracted from the value at the end of the year. The adviser's compensation is 5% of the difference. II. The adviser charges an annual fee of $2,000, but the agreement calls for a waiver of the fee if the client's portfolio value has not increased by at least $20,000. III. The adviser charges a fee of 1% of the average value of the account portfolio during the year. IV. The adviser charges a flat fee of $1,000 if the client's portfolio assets are $100,000 or more or $2,000 if the client's assets increase to $200,000 or more. A) I and IV B) I and II C) III and IV D) III only
C) III and IV Unless the question states that it relates to the exception for wealthy investors ($1 million under management of the adviser or more than $2.1 million in net worth), always assume that performance-based compensation is not permitted. Flat fees and fees based on total portfolio value are permitted.
Among the reasons to consider investing in a variable annuity would be all of the following EXCEPT A) a guaranteed death benefit for death before annuitization B) avoiding probate upon the death of the investor C) capital gains treatment on any realized gains upon withdrawal D) basically, no limit on the amount that can be contributed
C) capital gains treatment on any realized gains upon withdrawal In return for granting tax deferral on all gains in the account, the IRS taxes everything over the investor's cost basis as ordinary income. There is never a capital gain with a variable annuity. Some insurance companies will place a limit on the amount that may be invested, especially for older clients, but unlike IRS rules on retirement plans, this is strictly a company-by-company decision, not a law. Variable annuities are generally sold with a death benefit provision guaranteeing that the beneficiary will receive the higher of the amount invested or the current value of the account. Because there is a specifically named beneficiary, annuities do not go through the probate process.
The board of directors of DDC omitted dividends in 2016 on their $100 par 6% noncumulative preferred stock. In 2017, a $2 preferred dividend was paid. For DDC, 2018 has been a good year, and the board wishes to pay a common dividend. How much must be paid per share on the preferred for 2018 in order to pay a common dividend? A) $6.00 B) $8.00 C) $16.00 D) $12.00
A) $6.00 Because this preferred stock is noncumulative, any missed dividends need not be paid before common dividends can be declared. If this were a cumulative issue, any dividends not fully paid would go into arrears and accumulate until paid to the preferred cumulative stockholder. During this time, common dividends could not be declared or paid until the cumulative holders were paid in full. A 6% dividend on a $100 par means a $6 dividend each year per share
Which of the following statements is TRUE regarding Section 529 plans? I. Funds withdrawn for qualified education expenses are always free of federal income tax. II. Funds withdrawn for qualified education expenses are always free of state income tax. III. The maximum contribution limits are determined on a federal level. IV. The maximum contribution limits are determined on a state level. A) I and IV B) I and III C) II and III D) II and IV
A) I and IV Section 529 plan withdrawals are exempt from federal income tax if used for the right expenses. In almost all cases, if the plan is one operated by your state of residence, it will be exempt from your state's income tax. But, if you elect to contribute to a plan operated by another state, more than likely, any withdrawals will be subject to your state's income tax. Because the plans are state operated, the maximum contribution limits are set by each state.
Mr. Hawkins sets up a revocable trust for the benefit of his adult daughter, Madeleine. His wife may draw from it only if she needs to. Income on the trust will be taxed to A) Mr. Hawkins as the donor B) the trust because it is a separate legal entity C) Mrs. Hawkins as the contingent beneficiary D) Madeleine as the primary beneficiary
A) Mr. Hawkins as the donor Because Mrs. Hawkins has an economic interest, this is a grantor trust. Thus, all income will be taxed to the donor, Mr. Hawkins.
Because a trust account is managed for the beneficial interest of the beneficiary, the investment adviser representative handling the account can A) have a check drawn on the account payable to the trustee for trustee expenses B) arrange to have the trust's funds pledged to support a loan for the trustee C) place the securities in the trust fund in a noncustodial brokerage account D) have funds withdrawn from the account at the direction of the beneficiary
A) have a check drawn on the account payable to the trustee for trustee expenses The trustee can be reimbursed for trustee expenses that are reasonable. A trust account must be managed by the trustee and not by the beneficiary. Only the trustee can direct a withdrawal of funds, provided the withdrawal is done in a manner consistent with the trust document. Trust funds must be placed in custodial accounts (not to be confused with custodian for minors), not in noncustodial accounts.
One respect in which an LLC differs from an S corporation is that A) there is no statutory limit on the number of investors in an LLC B) not only income, but losses, if generated, pass through to investors in an LLC C) an LLC can be formed with as little as a single investor D) there is more favorable tax treatment afforded to members of an LLC
A) there is no statutory limit on the number of investors in an LLC There is no limit to the number of investors (members) in an LLC, while current regulations limit the number of investors (shareholders) in an S corporation to 100. The tax treatment is the same, and both can be formed with a single owner.
A client is risk averse and is planning on retiring in 16 years. The client is rolling over $100,000 from his 401(k) plan, all of which is currently invested in his former employer's stock. As the client's investment adviser, which of the following would you recommend? A) Laddering U.S. Treasury bills B) AAA-rated zero-coupon bonds maturing in 16 years C) Highly rated preferred stocks paying liberal dividends D) Keeping the money in the employer's stock
B) AAA-rated zero-coupon bonds maturing in 16 years Because the assets are in a rollover IRA, the "phantom" tax on zero-coupon bonds is not an issue here. Being risk averse, the safety of AAA bonds with the guaranteed return of increased principal in 16 years makes this the most appropriate investment. The T-bills will probably not offer as much return and will be subject to continual reinvestment risk. Dividends on preferred stock are not guaranteed, even with a highly rated company, and the current tax advantage offered to dividends is wasted in an IRA. Most would agree that the worst option would be to keep the money in one single stock.
Your manager is reviewing the activity in your customer accounts to detect trading irregularities. Among the factors the manager will look for to determine if churning is occurring are I. the financial resources of the account II. the number of winning trades versus losing trades III. the objectives of the account IV. the marital status of the customer A) II and IV B) I and III C) I and II D) II and III
B) I and III Inspecting an account for churning focuses primarily on comparing account activity to the account's financial resources and objectives. The number of winning versus losing trades does not influence a determination that excessive trading has taken place.
a0Under the Uniform Securities Act, which of the following investment advisers would be required to include a balance sheet in their brochures? I. An adviser who exercises discretion in client accounts II. An adviser who maintains custody over client funds and securities III. An adviser who maintains less than $35,000 in net worth IV. An adviser who, 6 or more months in advance, collects prepaid fees of more than $500 A) I and II B) II and IV C) II and III D) I and IV
B) II and IV The Uniform Securities Act requires that a balance sheet accompany an adviser's brochure when the adviser maintains custody of client assets or accepts substantial prepayments of fees.
Which of the following statements regarding preemptive rights is TRUE? A) Neither common nor preferred stockholders have the right to subscribe to a rights offering. B) Preferred stockholders do not have the right to subscribe to a rights offering. C) Common stockholders do not have the right to subscribe to a rights offering. D) Both common and preferred stockholders have the right to subscribe to a rights offering.
B) Preferred stockholders do not have the right to subscribe to a rights offering Preferred stockholders have a preference as to liquidation and distribution of dividends, but the right to maintain a proportionate interest in the company only applies to common stock.
James Stillman is an investment adviser representative with Rock, Feller, and Standard (RFS), a covered adviser with its principal office in State O. Stillman works out of an office in State P and has 4 retail clients there. In addition, Stillman has 25 retail clients in State D, 6 retail clients in State M, and 1 retail client in State O. Stillman would be required to register as an investment adviser representative in A) States P, D, and M. B) State P. C) States D and M. D) States P and O.
B) State P. As an IAR for a federal covered investment adviser, Stillman is only required to register in those states in which he (Stillman) has a place of business. Please note that, as long as an IAR with a covered adviser does not maintain a place of business in a state, there is no numerical limit on the number of clients he can have and still be exempt from registering in that state.
Phocine and Ursus, LLC, a covered investment adviser, has a client with a large short position in PQR common stock. Their chief analyst believes that PQR is an attractive target for an acquisition. Based on this information, it might be wise for the firm to suggest this client A) take a long position in PQR. B) purchase call options on PQR. C) sell call options on PQR. D) purchase put options on PQR.
B) purchase call options on PQR If the analyst is correct, a takeover usually occurs at significant premium to the current market. That would be bad news for the client with a short position because covering the short would be at that higher price. The best protection for a short stock position is buying a call because that fixes the future purchasing price. In the event the analyst is wrong, or the takeover bid fails, the client has maintained the short position and is only out the premium paid for the "insurance".
When reviewing potential securities to select for an investor's portfolio, a technical analyst would be most likely to evaluate A) the price-to-earnings ratio B) the daily trading volume C) the price-to-bookratio D) the management tenure
B) the daily trading volume A technical analyst charts price and volume over time. The other choices are of interest to a fundamental analyst.
Which of the following statements regarding an investment company's board of directors is NOT true? A) No convicted felon or person convicted of a misdemeanor involving the securities industry within the past 10 years may serve on the board of directors of an investment company. B) The board of directors contracts with an outside investment adviser or portfolio manager to invest the cash and securities held in the fund's portfolio. C) An investment company's board of directors manages the portfolio on behalf of the investor shareholders. D) An investment company's board of directors concerns itself with policy and administrative matters.
C) An investment company's board of directors manages the portfolio on behalf of the investor shareholders. The board of directors sets policy and manages the administrative affairs of the investment company, but it does not manage the portfolio. The board contracts with an outside investment manager to invest the funds. It is unlawful for any person to serve or act in the capacity of employee, officer, director, or investment adviser of any registered investment company, or principal underwriter for any registered open-end company, registered unit investment trust, or registered face-amount certificate company if that person, within the past 10 years, has been convicted of any felony or a misdemeanor involving the purchase or sale of any security.
Which of the following statements regarding modern portfolio theory is not correct? A) The optimal portfolio for an investor depends upon the investor's ability to assume risk. B) The optimal portfolio offers the highest return for a given level of risk. C) The optimal portfolio will always lie above the efficient frontier. D) The optimal portfolio has the lowest risk for a given level of return.
C) The optimal portfolio will always lie above the efficient frontier. The optimal portfolio for an investor will always lie on the efficient frontier. That is where, for any given level of risk, the return is the highest. Stated another way, for a given level of return, the risk is the lowest.
A farmer who produces soybeans believes that this year's crop will be the biggest ever. The farmer would most likely hedge this risk by A) going short soybean futures B) going long soybean forwards C) going short soybean forwards D) going long soybean futures
C) going short soybean forwards A big crop means more supply and lower prices when the crop is harvested. Hedging involves taking an opposite position (benefiting if prices fall). If the farmer is correct, selling short at today's price will enable delivery in the future at that higher price. Because this is a producer who will have product to deliver, forwards are likely to be more appropriate than futures.
Each of the following terms is commonly found in modern portfolio theory EXCEPT A) the efficient set B) the feasible set C) the internal rate of return D) the capital asset pricing model
C) the internal rate of return Internal rate of return (IRR) is not a component of modern portfolio theory as are the other 3 terms.
Tamika is an investment adviser representative with Financial Engineers, LLC, a covered investment adviser. The firm uses an investment policy statement to help design financial plans for their clients. One of Tamika's current clients plans to purchase a new boat 7 months from now. When using the IPS, this would be considered A) a capital need B) an investment goal C) a financial objective D) an investment constraint
D) an investment constraint Investment constraints are obstacles or restrictions that must be met in order to meet objectives. In this case, we are dealing with a liquidity constraint—in 7 months, cash will be necessary to make the purchase
A technical analyst would be least concerned with A) short interest B) S&P 500 index C) advance/decline D) book value per share
D) book value per share A technical analyst is not concerned with any fundamental aspects of a company, including company financials. Open short interest theory, overall market movements, and advance/decline ratios are of concern to technical analysts.
