Series 65 Part 4 review

As a registered investment adviser, you have managed $10 million of a customer's funds for several years. The customer asks you to prepare a trust for his children, to transfer $3 million of his funds into the trust, and to trade the trust with the same objectives as the existing account. You should A) refer the customer to an attorney that can set up the trust B) tell the customer to contact a tax specialist C) explain to the customer that trusts cannot be traded D) prepare the trust, transfer funds, and begin investing

A (The best choice is to have the customer contact a qualified attorney to set up a trust.)

If a client wanted an investment that would eliminate interest risk as to principal, you would recommend A) TIPS B) a bank-insured certificate of deposit C) a 91-day Treasury bill D) preferred stock

B (Because bank-insured CDs are nonnegotiable (we're not discussing the $100k minimum jumbos), there is no market fluctuation caused by changes in interest rates as with marketable securities. If you invest $10,000, you will always get back that $10,000 whenever you cash in the CD, regardless of current interest rates. This is true even when cashing in early. There may be a prepayment penalty, but that is considered separate from interest rate risk. TIPS offer inflation protection and preferred stock is interest rate sensitive in the same manner as a bond. The 91-day T-bill doesn't have much interest rate risk, but if an investor was to attempt to liquidate the holding prior to maturity and interest rates increased, there could be a loss.)

Which of the following is not included in adjusted gross income on an individual's federal income tax return? A) State income tax refunds B) Stock dividends C) Wages and tips D) Income from a sole proprietorship

B (Stock dividends (dividends paid as additional shares of stock rather than in cash) adjust the investor's cost basis and don't come into play until the stock is sold.)

Under the Securities Exchange Act of 1934, which of the following is (are) TRUE regarding the authority of the SEC to suspend trading? The SEC may suspend all trading on a specific exchange for up to 90 days. The SEC may summarily suspend trading on a particular nonexempt security for up to 10 days. The SEC may suspend trading on exempt securities. A) I, II, and III B) I and II C) I and III D) I only

B (The SEC may suspend all trading on a specific exchange for up to 90 days with prior notification of the president of the United States and may summarily suspend securities trading in a registered security listed on a stock exchange for up to 10 days. The SEC does not have the authority to suspend trading in exempt securities.)

A business organized as a sole proprietorship wishes to open an advisory account. When preparing an investment policy statement, the IA would have to consider the objectives of A) the partners B) the stockholders C) the sole proprietor D) the members

C (A sole proprietorship only has one owner. Therefore, the account would focus on the needs of that individual.)

Which of the following are characteristics of a money market mutual fund? I. Shares are offered without a sales charge. II. There is a redemption fee. III. All purchasers must receive a copy of the prospectus. IV. The letter of intent must be signed within 16 months. A) II and IV B) I and IV C) I and III D) II and III

C (Money market funds are offered without sales loads or redemption fees. As with all mutual funds, a prospectus is required.)

Money in an UTMA may be used to pay for certain expenses relating to the minor. Which of the following would be permitted usage of funds in an UTMA? A) Paying for the minor's share of the heating and lighting expenses B) Milk, bread, and eggs C) A new suit D) A vacation trip to Orlando

D (Although the custodian has wide latitude in how money in this account may be spent, in general, it is not permitted to use it for the basic necessities, such as food, clothing, and shelter.)

If Geraldine turned age 72 on November 15, 2020, when was she required to take her first IRA distribution? A) 31-Dec-21 B) 31-Dec-20 C) 1-Apr-22 D) 1-Apr-21

D (Geraldine's first RMD is due by April 1 of the year after which she turned 72. That would be April 1, 2021. Her second would be due by Dec. 31 of that same year, and then by Dec. 31 of each year thereafter.)

Under UTMA, the custodian must be A) a trustee. B) appointed by the court. C) a member of the minor's family. D) an adult.

D (The only requirement to be the custodian of an UTMA (or UGMA) account is being of legal age (an adult).)

All of the following are potential benefits of high frequency trading (HFT) except A) increased liquidity, especially in very active stocks. B) lower costs for institutional purchasers. C) arbitrage opportunities increase market efficiency. D) greater trading opportunities for the small investor.

D (With HFT, it is the smaller investors who lose out because they don't get access to the information as quickly.)

An investor purchases 100 shares of a stock at $100 per share on January 1. On the following July 1, the shares are sold for $120 per share. The tax consequences are A) $2,000 short-term loss B) $2,000 long-term loss C) $2,000 short-term gain D) $2,000 long-term gain

c (One hundred shares sold for $120 per share that were purchased for $100 per share results in a capital gain of $2,000. Because the holding period did not exceed one year, the gain is considered short term for tax purposes.)

Ebony sets up a revocable trust, naming her daughter, Sylvia, as the sole beneficiary. Ebony has appointed the Pacific Atlantic Trust Institution (PATI) as the trustee. Any distributed income will be taxable to A) the trust B) the trustee C) the beneficiary D) the grantor

d (In almost all cases, income received into a revocable (grantor) trust, whether distributed or not, is taxable to the grantor. Things are different when the trust is irrevocable, but much more complicated and not likely to be tested.)

Under the minimum distribution rules, Jason is required to take a minimum distribution of $10,000 this year from his IRA. However, a distribution of only $8,000 has been made. What is the dollar amount of penalty that may be assessed in this situation? A) $4,000 B) $200 C) $2,000 D) $1,000

d (The penalty for failure to make the correct amount of required minimum distribution is 50% of the difference between the minimum required amount and the actual distribution. In this case, this would be 50% of $2,000 ($10,000 − $8,000) or $1,000.)

The Wrights live in Texas, where Maria Wright has had an extremely successful cattle business for a number of years. As a very generous person, how much money can Maria give to her spouse, a Canadian citizen, in 2019 without incurring gift tax consequences? A) Unlimited B) $15,000 C) $100,000 D) A limited amount because her spouse is not a U.S. citizen

d (Under current tax regulations, there is a limit to the amount of a gift that may be made to a noncitizen spouse. For 2019, that limit is $155,000, (the amount is never tested).)

Which of the following is not a characteristic of a Monte Carlo simulation? A) Large changes in the projected rate of return will make small differences in the outcome. B) It is a technique used to model uncertainty in retirement planning. C) It provides insight into the range of outcomes. D) The user gets a best-case scenario and a worst-case scenario.

A (Small changes in the projected rate of return will make large differences in the outcome.)

An investor has $50,000 to invest in bonds. Currently, 10-year bonds are offering very attractive yields, but the client is concerned that in a few years, rates will be even higher. What would you suggest? A) Barbell bonds B) Bullet bonds C) Laddering D) Diversifying

A (With the barbell strategy, the investor would place $25,000 into bonds maturing in 10 years and the other half into bonds maturing in two years. This makes $25,000 available for reinvestment in two years enabling the investor to take advantage of the higher rates (if they materialize).)

The term security would include which of the following? A) 403(b) plans B) Section 529 plans C) Indentures D) Coverdell ERAs

B (Technically, Section 529 plans are known as municipal fund securities. As such, the rules of the MSRB require delivery of an official statement, sometimes called an offering circular but never referred to as a prospectus. Retirement plans are not included in the definition and an indenture is a document specifying the legal obligations of the bond issuer and rights of the bondholders. It is some¬times called the deed of trust, and although it details information about a security, it is not, in itself, a security.)

To assess the performance of a small-cap stock fund you compare its results against A) the S&P 100 B) the Russell 2000 C) the S&P 500 D) the Dow Jones Industrial Average

B (The appropriate benchmark for a small-cap fund is the Russell 2000 because it is composed of similar companies.)

A client is covered by a noncontributory pension plan. If his employer has terminated the pension plan and made lump-sum distributions, which of the following actions should the client take? A) Purchase a single premium annuity to maintain tax-deferred status B) Roll over the distribution into an IRA within 60 days to maintain tax-deferred status C) Place the distribution in a Section 529 account to avoid tax D) Purchase municipal bonds to avoid tax

B (To maintain the tax-deferred status, the distributions should be rolled over into an IRA within 60 days.)

A client of a brokerage firm purchases 100 shares of ABC common stock at a price of $50 per share. On settlement date, the firm journals $2,500 from the client's money market account to pay for the trade. No further call for money is made. This trade must have taken place in a A) depository account B) wrap fee account C) margin account D) cash account

C (When a purchase is made and only 50% of the cost of the transaction is required, the trade is being made on margin.)

Using industry jargon, the tax on the last dollar of income is at A) the effective rate B) the final rate C) the average rate D) the marginal rate

D (The IRS defines marginal tax rate as "the highest rate that you will pay on your income." Basically, as you make more money, you pay tax at a higher rate incrementally. The effective tax rate is the average that you pay on all of your income.)

An investor inherits 1,000 shares of the ABC Global Growth Fund when the NAV is $9.50, the bid price is $9.00, and the ask price is $9.15. Two years later, the investor sells all shares when the NAV is $14.25, the bid is $14.50, and the ask is $14.60. What are the tax consequences of this sale? A) Long-term capital gain of $4,750 B) Long-term capital gain of $5,450 C) Long-term capital gain of $5,350 D) Long-term capital gain of $5,500

D (Upon death, the beneficiary inherits closed-end funds at their bid price (what the estate could have sold them for), or $9.00 per share. The sale two years later takes place at the bid ($14.50) for a profit of $5.50 per share (times 1,000 shares). Remember, in the case of a closed-end fund, the NAV does not figure into any computations; prices are based on supply and demand and have a bid and ask price, the same as any stock. How did you know this was a closed-end company? Only in the case of a closed-end company can the ask price be lower than the NAV (ask = $9.15, NAV = $9.50).)

Which of the following statements regarding modern portfolio theory is NOT correct? A) The optimal portfolio will always lie above the efficient frontier. B) The optimal portfolio has the lowest risk for a given level of return. C) The optimal portfolio offers the highest return for a given level of risk. D) The optimal portfolio for an investor depends upon the investor's ability to assume risk.

a (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. Or, stated another way, for a given level of return, the risk is the lowest.)

Each of the following individuals is eligible to participate in a Keogh plan EXCEPT A) a securities analyst employed by a major research organization who makes $2,000 giving lectures in his spare time B) an executive of a corporation who receives $5,000 in stock options from his company C) a self-employed doctor in private practice D) an engineer employed by a corporation who earns $5,000 making public speeches in her spare time

c (Individuals with income from self-employment may participate in Keogh plans. Stock options, capital gains, dividends, and interest are not considered income earned from self-employment.)

Which of the following is not an assumption of the capital asset pricing model (CAPM)? A) All market participants are well-diversified investors, and specific risk has been diversified away. B) All investors want to achieve a maximum return for minimum risk. C) All market participants borrow and lend at the same risk-free rate. D) Corporate and government taxes affect all transactions.

d (CAPM assumptions include: 1. There are no tax or transaction costs to consider. 2. All market participants borrow and lend at the same risk-free rate. 3. All market participants are well-diversified investors, and specific risk has been diversified away. 4. All investors want to achieve a maximum return for minimum risk.)

A professional tennis player comes to you seeking advice on setting up a trust. She is interested in giving to charity and also wants discretion as to when income is distributed to the beneficiaries, her parents. Which trust do you advise she use? A) Complex trust B) Charitable lead trust C) Charitable remainder trust D) Simple trust

A (Only a complex trust allows the two features that she requires. Simple trusts may not make charitable contributions, and they provide no discretion on income distribution. The two types of charitable trusts mentioned provide no ongoing discretion as to when income is distributed or who the beneficiaries are.)

One respect in which an LLC differs from an S corporation is that A) there is more favorable tax treatment afforded to members of an LLC B) there is no statutory limit on the number of investors in an LLC C) not only income, but losses, if generated, pass through to investors in an LLC D) an LLC can be formed with as little as a single investor

B (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.)

Harry, age 52, is an unmarried individual currently earning $55,000 per year. He consults you about the possibility of establishing both a traditional IRA and a Roth IRA this year and making contributions to each. You have determined that Harry should make a $3,000 contribution to the traditional IRA for this year. What amount, if any, can Harry also contribute to the Roth IRA? A) $3,000 B) $0 C) $4,000 D) $2,500

C (Contribution amounts to the traditional and Roth IRA must be aggregated for purposes of determining a total amount. In addition, because Harry is over age 50, he is permitted a $1,000 catch-up contribution. Currently, his total allowable contribution is $7,000; Harry can contribute an additional $4,000 to the Roth IRA.)

When an income-oriented investor wishes to compute the current yield of a specific investment, which one of these items would NOT be considered? A) Interest coupon B) Dividends paid C) Net present value D) Current market price

C (The current yield of any investment is the income return (dividends on equity; interest on debt) divided by the current market price. The NPV is a tool that evaluates the reasonableness of the price of an investment.)

Which of the following would be used to provide end-of-life instructions once a person becomes incapacitated? A) An incapacitated will B) A durable power of attorney C) A living will D) A living trust

C (The purpose of a living will is to give clear instructions regarding end-of-life decisions, such as organ donation or when to "pull the plug." There is no such thing as an incapacitated will. A living trust deals with how assets are distributed, and a durable power of attorney grants authorization to a person to legally act on behalf of someone who cannot do so.)

One of the important roles of an investment adviser representative is assisting clients in analyzing the performance of securities held in their portfolios. Which of the following is the best measurement of a security's performance? A) Yield B) Beta C) Total return D) Standard deviation

C (Total return reflects the entirety of a security's performance because it includes both income and capital appreciation. Beta and standard deviation are risk measurements, and while they may be used to evaluate a security's performance when compared to the risk taken, they don't truly provide a measurement as does total return.)

Buying stocks with high P/E ratios normally reflects which of the following investment styles? A) Special situations B) Value C) Turnaround D) Growth

D (The purchase of stocks with high P/E ratios represents a growth investment style. Growth-oriented investors will pay for high P/E ratios. Value investment style is associated with the purchase of low P/E stocks or stocks trading below their intrinsic value.)

Which of the following is NOT required under ERISA Section 404(c)? A) Individual accounts must be provided for each plan participant. B) Each plan participant must have the ability to exercise independent control over assets in her account. C) Plan participants must have access to a broad range of investment alternatives. D) All plan participants must have been employed by the plan sponsor for a minimum of 3 years.

D (ERISA Section 404(c) relieves the employer of fiduciary responsibility for investment decisions made by employees. To qualify for this protection, employees must enjoy the benefits and risks of their decisions (individual accounts), have the right to exercise independent control over the account, and have a sufficiently broad range of choices to make the right of control meaningful. Section 404(c) has nothing to do with the employee's length of employment.)

If a new joint tenants with rights of survivorship account is opened by two related individuals, all of the following statements are true EXCEPT A) checks may be drawn in the name of either party B) orders may be given by either party C) in the event of death, the decedent's interest in the account goes to the other party D) mail may be sent to either party (with the permission of each party)

a (While either party may enter an order, any money or securities delivered out of the account must be in the names of both owners.)

Mr. Berg has been charting DMF stock prices. The stock usually fluctuates between 71 and 86. The stock is currently at 84, and the increasing upside volume makes him believe that a breakout is possible. Which of the following would he most likely enter? A) A buy limit at 85 B) A buy stop at 88 C) A sell stop at 70 D) A sell limit at 88

b (A breakout occurs when a security trades outside an established range. In this case, because Mr. Berg has no position, he would want to purchase only if the stock breaks through the resistance level already established.)

IRAs and Keogh plans are similar in each of the following ways EXCEPT A) rollovers are allowed once every 12 months and must be completed within 60 days B) the maximum allowable cash contribution is the same C) taxes on earnings are deferred D) distributions without penalty may begin as early as age 59½

B (Both IRAs and Keogh plans have maximum annual allowable contribution limits but they are significantly higher in a Keogh Plan.)

A customer who seeks to supplement his retirement income and has a high risk tolerance would find which of the following securities most suitable? A) High-yield bond funds B) Treasury receipts C) Investment-grade bond funds D) Municipal GOs

A (High-yield bonds yield more than investment-grade bonds. Because the client has a high risk tolerance, these bonds are more appropriate than investment-grade bonds that yield less.)

Which of the following statements about plan fiduciaries under ERISA are TRUE? I. Plan fiduciaries sometimes have conflicting obligations to plan participants and other parties in interest. II. Plan fiduciaries must ordinarily diversify plan investments. III. Plan fiduciaries are personally liable for fines if they violate their fiduciary duties. A) II and III B) I and II C) I, II, and III D) I and III

A (Under ERISA, plan fiduciaries must act solely in the interests of plan participants and beneficiaries, and they may not place the interests of other interested parties above those of the plan participants and beneficiaries. They must diversify plan investments to minimize the risk of large losses, unless it would not be wise to do so. If they violate any of their fiduciary duties, they may be personally liable for large fines.)

Which of the following statements about plan fiduciaries under ERISA are TRUE? I. Plan fiduciaries sometimes have conflicting obligations to plan participants and other parties in interest. II. Plan fiduciaries must ordinarily diversify plan investments. III. Plan fiduciaries are personally liable for fines if they violate their fiduciary duties. A) I and III B) I and II C) I, II, and III D) II and III

D (Under ERISA, plan fiduciaries must act solely in the interests of plan participants and beneficiaries, and they may not place the interests of other interested parties above those of the plan participants and beneficiaries. They must diversify plan investments to minimize the risk of large losses, unless it would not be wise to do so. If they violate any of their fiduciary duties, they may be personally liable for large fines.)

Your daughter is getting married and, to celebrate, you give her fiancé a beautiful watch that you purchased for $5,575. What are the tax consequences of this gift? A) No tax B) Anything over the FINRA gift limit of $100 per person per year would be considered taxable. C) Because they are not yet married, the fiancé is not actually a family member, so a gift tax would be levied. D) The fiancé would have to report this as ordinary income.

a (This very nice gift falls well within the annual exclusion, so no gift tax would be levied. As far as FINRA or the states, first of all, there is no indication that he is a client; and, even if so, the rules do permit gifts without concern for the $100 limit in a circumstance like this.)

If an investor purchases 500 shares of an aggressive growth stock, which strategy would limit his downside risk? A) Writing 5 straddles B) Buying 5 calls on the stock C) Buying 5 puts on the stock D) Writing 5 puts on the stock

c (A put gives the investor the right to sell stock at a set price (the strike price) for a period of time, and protects against losses below the strike price. Buying calls can protect a short stock position. If the customer is long stock, the purchase of calls on that security increases leverage and risk. Writing a put creates the obligation to buy more stock at the strike price, which increases downside risk.)

What is the latest date that an IRA participant may make a contribution based on the current year's income? A) July 15 of the following year, if extensions have been filed B) April 15 of the current year or the first business day following if the 15th is a Saturday or Sunday C) December 31 of the current year D) April 15 of the following year or the first business day following if the 15th is a Saturday or Sunday

d (Contributions to IRAs can be made up to April 15 of the year following the year for which the contribution is being made. If April 15 falls on a Saturday or Sunday, contributions can be made up to the 1st business day after the 15th. If the taxpayer has received an extension, that does not affect this deadline.)

All of the following statements regarding asset allocation done by or on behalf of an investor are true EXCEPT A) individual security selection is far more important than the asset allocation decision B) it is the process of dividing investable assets into different asset classes C) the process is concerned with the risk associated with different assets D) the process is concerned with the relationship among the returns of different assets

A (Studies have shown the asset allocation decision is the primary contributor to effective long-term portfolio management. Individual security selection is far less important in meeting investor objectives.)

The capital asset pricing model (CAPM) is used by many to assess the expected return of a security. If the current risk-free rate is 2%, the current return on the market is 10%, and a particular stock's beta is 1.5 with a standard deviation of 3.2, the expected return would be A) 14% B) 15% C) 12% D) 18.2%

A (The formula for this computation is as follows: 10% (the return on the market is a beta of 1.0) minus the risk-free rate of 2%, or 8%. Then, multiply that by the beta of this stock (1.5) to arrive at 12%. That is, the stock should return 12% above the risk-free rate of 2%, or 14%. The standard deviation is not relevant to this computation.)

Samantha Wells, a British citizen temporarily working in the United States, wants to form a business venture with other investors. She is looking for favorable tax treatment of earnings and losses. She also wants to limit the number of investors, but is willing to share control of the enterprise with others to attract them. What business form do you advise to her? A) C Corporation B) General Partnership C) S Corporation D) Limited Partnership

B (Limited partnerships would not work because the other investors have limited say in how the enterprise is run. C corporations do not provide favorable tax treatment of gains or losses. While an S corporation appears to be the right answer, only U.S. citizens or resident aliens can own one.)

Because a trust account is managed for the beneficial interest of the beneficiary, the investment adviser representative can A) place the securities in the trust fund in a noncustodial brokerage account B) have a check drawn on the account payable to the trustee for expenses C) have funds withdrawn from the account at the direction of the beneficiary D) arrange to have the trust's funds pledged to support a loan for the trustee

B (The trustee can be reimbursed for expenses that are reasonable. A trust account must be managed by the trustee and not by the beneficiary. Only the trustee can withdraw funds, provided the withdrawal is done in a manner consistent with the trust document. Trust funds must be placed in custodial or trust accounts, not in noncustodial accounts.)

A registered broker-dealer would not be able to open an account for A) the sovereign government of Poland. B) a convicted felon. C) a deceased individual. D) the American Cancer Society.

C (An account may only be opened in the name of a legal person. Deceased individuals are not considered legal persons - the account would have to be opened in the name of the estate. Governments meet that description as do charitable organizations. Although there are potential restrictions against convicted felons gaining employment in the securities industry, there are no specific prohibitions against opening an account for one.)

An investment adviser representative is evaluating DEF stock to see if it is a good fit for a client's portfolio. Using the security market line (SML), what is the expected return for DEF when the return on the market is 8%, the 91-day Treasury bill is yielding 6%, DEF's beta is 1.50, and the inflation rate, as measured by the CPI, is 4%? A) 8% B) 5% C) 9% D) 12%

C (The formula for this computation is as follows: 8% (the return on the market is a beta of 1.0) minus the risk-free rate of 6%, or 2%. Then, multiply that by the beta of this stock (1.5) to arrive at 3%. That is, the stock should return 3% over the risk-free rate of 6%, or 9%. Inflation rate is only important if we are looking for the real (inflation-adjusted) return, not the expected return.)

Which of the following statements about plan fiduciaries under ERISA are TRUE? I. Plan fiduciaries sometimes have conflicting obligations to plan participants and other parties in interest. II. Plan fiduciaries must ordinarily diversify plan investments. III. Plan fiduciaries are personally liable for fines if they violate their fiduciary duties. A) I and III B) I and II C) II and III D) I, II, and III

C (Under ERISA, plan fiduciaries must act solely in the interests of plan participants and beneficiaries, and they may not place the interests of other interested parties above those of the plan participants and beneficiaries. They must diversify plan investments to minimize the risk of large losses, unless it would not be wise to do so. If they violate any of their fiduciary duties, they may be personally liable for large fines.)

Which of the following stocks would probably be most appealing to a value investor? A) A stock with a relatively low dividend yield B) A stock with a relatively high price-to-book value ratio C) A stock with a relatively low P/E ratio D) A stock that has relatively high volatility

C (Value investors look for stocks in companies that have been overlooked or undervalued by other investors. They often focus on stocks with relatively low P/E ratios or price-to-book value ratios or on stocks with relatively high dividend yields compared to other stocks in the same industry.)

Janice is investing in stocks that are temporarily neglected by the market and often have high-dividend yields. Which of the following investment styles might she be following? A) Contrarian B) Growth C) Value D) Momentum

C (Value is the oldest style and is based on the premise that deep and rigorous analysis can identify businesses whose value is greater than the price placed on them by the market. By buying and holding such shares for long periods, a higher return than the market average can be achieved. Managers of equity income or income and growth funds often adopt this style, since out-of-fashion stocks often have high-dividend yields. Why isn't this contrarian? A key is the high-dividend yield. Contrarians invest opposite the general market consensus without regard to dividends.)

A customer who sold a bond at a loss must wait how long before he can buy back a substantially identical bond and not have the sale classified as a wash sale? A) 5 days B) 20 days C) 31 days D) There is no waiting period

C (When a customer sells a security at a loss, he may not buy back the same (or substantially identical) security from 30 days before to 30 days after the sale that established the loss, without having the loss disallowed.)

Although not required by DOL regulations, if a plan administrator prepared a written investment policy statement meeting ERISA requirements, you would expect to find all of the following EXCEPT A) performance measurement parameters B) methods to be used for determining how the plan will meet future cash flow needs C) investment philosophy D) the identity of the specific securities to be chosen for the portfolio

D (Although not required by law, most qualified plans have an IPS. One thing not found in that statement is a listing of specific securities to be selected. The method for determining how they are selected will be there, but not the specific securities.)

An investor owns a common stock that has been paying a dividend at an annual rate of $2.00. If the investor buys 100 shares of the stock at $50 and sells it 3 months later for $52, the approximate annualized rate of return is A) 20% B) 12% C) 5% D) 4%

A (Annualized rate of return is computed by taking the investor's total return and annualizing it. In this case, the investor had $2 of appreciation and $0.50 (1 quarter) in dividends. Total return of $2.50 divided by the $50 cost is 5%. But, that is for 3 months − 1 quarter. Multiply that by 4 to get the annual rate.)

In general, in a defined benefit plan, the pension to be received upon retirement is based on the number of years of service and the individual's A) current salary. B) final salary. C) life expectancy. D) agreed salary.

B (The final salary at retirement and the length of service at the employer are most commonly used to calculate the total benefit to be paid to the employee in the defined benefit pension plan.)

What is the name given to an order to purchase or sell a stock where the investor has specified a price? A) A market order B) An all or none order C) A limit order D) A discretionary order

C (The distinguishing feature of a limit order is that the investor sets a specific price limit. In the case of a buy limit, it is the maximum price he is willing to pay; in the case of a sell limit, it is the lowest price he is willing to accept. Although an all or none order does specify a price, it is categorized as a type of limit order so you must choose the most all-encompassing answer.)

Which of the following actions should be taken by an agent when a client decides to open an options account? A) Obtain approval from the designated options supervisor to open the account no later than 1 business day after the first options trade B) Assure that an options agreement has been signed prior to the first trade taking place C) Provide an options disclosure document no later than 15 days after the first trade D) Review with the client the risks involved when trading options before the first options trade

D (It is imperative that suitability and risk be addressed with the client before allowing option trading to take place. The ODD must be delivered no later than with account opening, and the options agreement must be returned no later than 15 days after the account opening. An options account must be approved by a designated supervisor prior to any trading takes place in the account.)

Which of the following forms of the efficient market hypothesis claims that technical analysis works? A) Weak B) None of these C) Semi-strong D) Strong

B (The efficient market hypothesis is in direct contradiction to technical analysis because the efficient market hypothesis is founded on the notion that all historical price and volume data, which is used by technical analysts, is already accounted for in the current stock price. The weak form claims that fundamental analysis works and the semi-strong form claims that inside information works. True believers in EMH claim that none of these can outperform random selection.)

When attempting to construct the optimal portfolio, the investment adviser is looking to obtain A) the maximum return with the greatest risk. B) returns that fall within the efficient frontier curve. C) the maximum return for the least risk. D) the maximum return in the shortest time period.

C (The optimal portfolio is the one which provides the greatest return for the least risk. It will fall on the efficient frontier. It is important not to get hung up on terminology when common sense works. As an investor, wouldn't you always want the highest return you could get for the least risk?)

While managing a client's portfolio, an investment adviser representative attempts to take advantage of perceived market inefficiencies. The IAR is not concerned with the client's long-term goals; rather the interest lies in continuously changing the investment mix in an attempt to take advantage of overall investor sentiment. Based on this information, what type of portfolio management style is the investment adviser representative using to manage the client's money? A) Buy and hold B) Tactical asset allocation C) Strategic asset allocation D) Portfolio ratio analysis

B (Tactical asset allocation continuously adjusts the asset allocation in an attempt to take advantage of changing market conditions. This is unlike strategic asset allocation which, due to its focus on the long-term goals of the client, tends to be a passive style. Buy and hold is another example of a passive (not active) style.)

A 401(k) offering which of the following choices would be most likely to be in compliance with Section 404(c) of ERISA? A) Long-term bond fund, large-cap stock index fund, foreign equity fund B) Money market fund, intermediate-term government bond fund, large-cap stock index fund C) Money market fund, intermediate-term municipal bond fund, large-cap stock index fund D) Small-cap fund, large-cap stock ETF, money market fund

B (The trustee of a 401(k) would be able to reduce her ERISA fiduciary exposure and meet the safe harbor provisions of 404(c) if the plan offered a broad index fund, a medium term government bond fund, and a cash equivalent fund. It isn't the number of funds that counts; it is the different asset classes available. In general, a municipal bond fund (or municipal bonds themselves) would be an inappropriate investment for a tax-qualified plan.)

An advantage of structuring a business operation as an S corporation rather than a C corporation would be A) simplicity when raising capital through a public offering B) limited liability C) avoiding double taxation D) the C corporation is limited to a maximum of 100 shareholders while no such limit exists for the S corporation

C (Because an S corporation is taxed like a partnership, all earnings (or losses) flow directly through to the shareholders. This avoids the double taxation inherent in receiving a share of the profits (through dividends) from a C corporation. It is the S corporation that is limited to 100 shareholders. That is why it is not suitable for raising capital through a public offering. The shareholders of both S and C corporations enjoy the benefit of limited liability.)

If an employed client has $12,000 of capital gains and $15,000 of capital losses in the most recent taxable year, how much unused loss, if any, is carried forward by the client to the following tax year? A) $12,000.00 B) $15,000.00 C) $0.00 D) $3,000.00

C (In this question, the client had $12,000 of capital gains and $15,000 of capital losses. Step 1: Offset the capital gains with the capital losses ($15,000 - $12,000). This leaves $3,000 remaining in capital losses. Step 2: Note that the client can apply up to a maximum of $3,000 of any remaining losses against ordinary income. Once all $3,000 in remaining losses is used to reduce ordinary income, this would leave $0 to carry forward to the next year. Therefore, the reason you would not carry $3,000 to the next year is that it would be used to reduce ordinary income for the current year. U21LO3)

An advisory client of yours discusses a business project she is involved with where the partnership is using accelerated depreciation to maximize losses in the early years. It would be prudent of you to inform the client that A) accelerated depreciation could trigger the alternative minimum tax. B) a maximum of $3,000 in losses can be taken against ordinary income in any year. C) a maximum of $3,000 in losses can be taken against passive income in any year. D) accelerated depreciation leads to a reduction in the partnership's cash flow.

A (Accelerated depreciation is a tax preference item and could result in requiring this client to pay the AMT. These would be passive losses and they can only be taken against passive income. There is no limit to the amount of passive loss that can be deducted against passive income. Because the most common way for a company to compute cash flow is: net income plus depreciation, the reduction to net income is zeroed out by the increased depreciation added back in.)

A portfolio manager's performance is often measured against a benchmark such as the S&P 500. A manager whose performance beats the benchmark by taking greater risk than the S&P 500 may not have had superior returns as measured on A) an inflation-adjusted basis B) a risk-adjusted basis C) an expected-return basis D) a total-return basis

B (Unless the portfolio's performance is better than the extra risk taken, the manager has not beaten the performance benchmark, the S&P 500, on a risk-adjusted basis. Risk-adjusted return is calculated by computing the Sharpe ratio. Total return comprises the yield plus the growth in value of an investment over time and is not related to risk. The expected return is an estimate of the probable return an investment may yield, whereas inflation-adjusted return is the nominal return reduced by the inflation rate. Neither of these returns is related to risk. Inflation-adjusted returns are often compared to a benchmark such as the Consumer Price Index (CPI). Unadjusted rates of return are called nominal rates of return.)

The capital asset pricing model (CAPM) is a securities market investment theory allowing the investor to determine an asset's (or portfolio's) expected rate of return, a form of risk-adjusted return encapsulating how much risk the investor should assume to obtain a particular return from an investment. One of the offshoots of the CAPM is the capital market line (CML). The CML provides an expected return based on the total level of risk as measured by the stock or the portfolio's A) correlation B) alpha C) beta coefficient D) standard deviation

D (Remember there are two types of risk - systematic (non-diversifiable) and unsystematic (diversifiable). The CML calculation looks at the total risk, both systematic and unsystematic. Standard deviation measures both and that is why it is one of the components of the CML. The security market line (SML) uses beta and can be used to determine the alpha.)

Which of the following statements is TRUE about sales of new issues under the Securities Exchange Act of 1934? A) The use of credit to purchase new issues is prohibited for the first 30 days. B) Credit may be used in purchasing new issues. C) The SEC determines what issues may be purchased on margin. D) Installment payments are allowed on purchases

A (The Securities Exchange Act of 1934 specifically bars the use of credit in purchasing new issues for the first 30 days from the date of issue. In addition, it prohibits installment payments on issues that can be bought on margin. The Securities Exchange Act of 1934 also empowered the Board of Governors of the Federal Reserve Board (FRB) to set margin requirements, and the FRB determines which issues may be purchased on margin.)

A customer purchases stock for $40 per share and holds it for 1 year, selling it for $50 per share exactly 12 months after the date of purchase. Four quarterly qualifying dividends of $.50 were paid during the year. If the customer's tax bracket is 30%, what is the after-tax rate of return? A) 21.75% B) 21% C) 18.40% D) 17.5%

A (The customer's return on the stock includes the $10 per share short-term capital gain ($50 − $40) plus the $2 qualifying dividend (quarterly dividend of $0.50 × 4). Remember, an asset must be held for more than 12 months for the gain to be long-term. After-tax rate of return is found by computing the total after-tax earnings. Short-term gains are taxed at the same rate as ordinary income, and qualifying dividends are taxed at a maximum rate of 15% (except for very high income earners—not tested). The tax on the $10 gain is $3 ($10 × 30%), and the tax on the $2 qualifying dividend is $0.30 ($2 × 15%). The investor's total return is the $12 total minus the $3.30 in taxes, or $8.70; $8.70 divided by the original investment of $40 results in an after-tax return of 21.75%.)

Which of the following regarding customer accounts is NOT true? A) Stock held in a custodial account may be registered in the name of the minor. B) In some cases, a TOD account is referred to as a POD account. C) Margin trading in a fiduciary account requires special documentation. D) Asset held under JTWROS goes to the survivor(s) in the event of the death of one of the tenants.

A (The reason behind UTMA (or UGMA) accounts is because securities may not be registered in the name of a minor. Trading on margin is generally not permitted in fiduciary accounts except under special circumstances and with the appropriate documentation. TOD and POD are essentially the same. TOD is the preferred term in the securities business while banks generally use POD.)

Your married customers are both 42 years old, have 2 children ages 14 and 12, and have spent the past 10 years accumulating money to provide for their children's education. Their oldest child will enter college in 4 years, and the customers are very cautious investors. If they need a safe investment that provides regular income to help them meet tuition payments, which of the following mutual funds is the most suitable for these customers? A) LMN Investment-Grade Bond Fund B) RST Balanced Fund C) ABC Stock Index Fund D) ATF Overseas Opportunities Fund

A (These clients cannot afford a downturn in the stock market between now and the time they want to send their children to college. An investment-grade bond fund will provide the income and safety required for accumulating additional funds for college expenses.)

One of your clients is in the process of forming a new business venture with a friend and is considering whether to operate as a general partnership or a C corporation. Among the advantages of operating as a general partnership are I. ease of dissolution II. ease of raising additional capital III. flow-through of income or loss IV. limited liability A) III and IV B) I and III C) II and IV D) I and II

B (Unlike a C corporation, operating income or losses of a general partnership flow through directly to the partners. There are several easy ways to dissolve a partnership. However, they do not offer the limited liability protection of a corporation. The corporate form of business is generally the most suitable for raising additional capital.)

Mary Huggins is the ex-wife of Charlie Huggins. They were married for 12 years and then finalized a divorce. Charlie is now 70 and has begun taking his Social Security benefits. Mary remarried last year. It would be correct to state that A) Mary is entitled to Charlie's Social Security benefits only when she reaches full retirement age. B) Mary is entitled to Charlie's Social Security benefits or those of her new husband, whichever is the greater. C) Mary is entitled to full spousal benefits because they were married for at least 10 years. D) Mary is not entitled to any of Charlie's Social Security benefit.

D (When a couple has been married for at least 10 years, the ex-spouse is entitled to full spousal Social Security benefits unless remarried. By remarrying, Mary no longer has any claim on Charlie's Social Security benefits.)

Which of the following statements concerning market efficiency is least accurate? A) If weak form market efficiency holds, technical analysis cannot be used to earn abnormal returns over the long run. B) An efficient market assumes one can generate abnormal returns with active portfolio management. C) If strong form of market efficiency holds, even insider information cannot be used to earn abnormal returns. D) If semi-strong form market efficiency holds, technical and fundamental analysis cannot be used to earn abnormal returns over the long run.

B (Market efficiency assumes active portfolio management cannot help earn abnormal (excess) risk-adjusted returns. The weak form indicates that technical analysis doesn't work. The same is true for the use of inside information under the strong form. Semi-strong says that neither technical nor fundamental analysis will work.)

Jane and Malka are discussing the possible form of efficient markets. Jane states that, "A weak form price-efficient market is one in which security prices fully reflect past share price and trading volume data." Malka retorts that she is not sure of Jane's thoughts and says, "If markets are weak form efficient, we cannot consistently outperform the market based on technical analysis." A) Malka is correct, but Jane is incorrect. B) Jane is correct, but Malka is incorrect. C) Both Jane and Malka are correct. D) Both are incorrect.

C (A weak form price-efficient market is one in which security prices fully reflect past share price and trading volume data. Therefore, successive future share prices should move independently of this past data in a random fashion, thereby nullifying any perceived informational advantage from adopting technical analysis to analyze trends.)

Due to an inheritance, one of your clients now owns a large position in LMN stock. She is concerned that the stock may decline in the upcoming months while she is deciding what to do with the investment. What type of investment strategy could she employ to protect the stock from substantial downside risk? A) Diversify into an index fund B) Purchase put options on LMN stock C) Write call options on LMN stock D) Purchase call options on LMN stock

B (The best way to protect a long stock position against a potential substantial loss is to purchase put options on that stock. This is generally referred to as a protective put or portfolio insurance. Assuming the strike price is the same as the current market, the holding is fully protected and the investor's loss on the option is limited to the amount of the premium paid for the puts. Writing calls on LMN also offers protection against loss, but that protection is limited to the premium received on the calls. This question refers to substantial loss and the puts are the only way to protect against that. Once the client decides what she wants to do with the stock, she may decide to diversify into an index fund, but that does not answer the immediate need expressed in the question.)

Many parents prefer to use a Section 529 plan over a Coverdell ESA to finance their child's education plans because I. contribution limits are higher II. funds may be withdrawn tax-free if used for qualified education expenses III. there are no earnings limits IV. 529 contributions are tax deductible on the federal level A) III and IV B) I and II C) I and III D) I, II, and III

C (Contributions to a Coverdell ESA are limited to $2,000 per beneficiary per year while those to a Section 529 plan can be as high as $300,000 in some states. A married couple cannot make a Coverdell contribution if their income exceeds $220,000, while there is no earnings limit to contribute to a 529. In neither case is the contribution tax deductible on the federal level (although the Section 529 plans may have tax advantages in some states). We are often asked about choice II. The question is asking about differences between the two plans and choice II is true for both of them.)

Which of the following transactions for ERISA plans is not specifically prohibited? A) A transfer of plan income or assets to, or use of them by or for the benefit of a disqualified person B) Lending money or extending credit between a plan and a disqualified person C) A transfer of plan income or assets for the benefit of a plan beneficiary or plan participant which they are entitled according to the provisions within the plan D) Any act of a fiduciary by which plan income or assets are used for the fiduciary's own interest

C (ERISA serves as a basis of rules which protect the beneficiaries and plan participants. It is permitted for a fiduciary to transfer plan income or assets for the benefit of a plan beneficiary or a plan participant which they are entitled according to the provisions within the plan. It is not allowable for the fiduciary to transfer or loan plan assets for the benefit of a disqualified person such as the fiduciary of the plan or a person providing services to the plan.)

Which of the following accounts could be opened with a TOD designation? I. Individual II. Joint tenants in common III. Joint tenants with rights of survivorship IV. UTMA A) I, III and IV B) II and IV C) I and III D) I and II

C (The only types of accounts that may have the Transfer on Death (TOD) designation are individual and JTWROS. Minors cannot designate a beneficiary. Upon the death of a minor, any assets belong in the deceased's estate.)

A high-risk investment strategy is the short sale of stock. Each of the following is a method of offering some degree of protection EXCEPT A) buying a call on the short stock. B) selling a put on the short stock. C) buying a put on the short stock. D) entering a buy stop order for the short stock.

C (The risk in selling a stock short is that the price of the stock will rise rather than fall. Those who purchase put options have the same market view as those who sell short—they will profit if the price of the security declines. Buying a put would be the equivalent of "doubling down" on your bet. The best way to hedge (protect) a short stock position is to purchase a call option on the security because that gives you a guaranteed "buy-back" price regardless of how high the stock's price rises. If you sell a put on the stock and the price rises, the put will expire and the seller will have the premium to partially offset any loss. If the short seller enters a buy stop order, once the price rises (or goes through) the stop price, a market order to buy the stock will be entered and the position will be closed out preventing any further loss.)

Janice is investing in stocks that are temporarily neglected by the market and often have high-dividend yields. Which of the following investment styles might she be following? A) Momentum B) Contrarian C) Growth D) Value

D (Value is the oldest style and is based on the premise that deep and rigorous analysis can identify businesses whose value is greater than the price placed on them by the market. By buying and holding such shares for long periods, a higher return than the market average can be achieved. Managers of equity income or income and growth funds often adopt this style, since out-of-fashion stocks often have high-dividend yields. Why isn't this contrarian? A key is the high-dividend yield. Contrarians invest opposite the general market consensus without regard to dividends.)

One of your clients is discussing various options for funding his IRA. Current tax law would permit investing in which of the following vehicles? I. Collectible stamps issued by the U.S. Postal Service II. Gold or silver coins minted by the U.S. Treasury Department III. Fixed annuities VI. REITs A) II and IV B) I, II, III, and IV C) II, III, and IV D) I and III

C (In general, investments in collectibles are not permitted in IRAs. The one major exception is U.S. gold and silver coins minted by the Treasury Department. Although some might object to placing an annuity into a tax-deferred plan because it is already tax deferred, there could be a good reason for its inclusion and, more important for this question, it is permitted.)

To comply with ERISA Section 404(c), a 401(k) plan must satisfy all the following requirements EXCEPT A) sufficient information must be provided to plan participants about investment alternatives available under the plan to permit informed decision making. B) plan participants must have access to at least 3 core diversified investment options. C) plan participants must be provided with the services of a Certified Financial Planner at least annually to assist them with investment decision making. D) plan participants must have the ability to transfer assets among investment options at least quarterly.

C (Section 404(c) relieves a plan fiduciary from liabilities associated with losses stemming from employee investment choices. To qualify for this protection, the plan must provide at least 3 core diversified investment options, participants must have the ability to transfer assets among investment options at least quarterly, and sufficient information must be provided to participants to allow for informed decision making.)

Which of the following statements regarding a traditional IRA is true? A) Because contributions to a traditional IRA are not currently tax deductible, all qualifying withdrawals are tax free. B) Distributions before age of 59½ are subject to a 10% penalty in lieu of income taxes. C) The income and capital gains earned in the account are tax deferred until the funds are withdrawn. D) Distributions without penalty may begin after the age of 59½ and must begin by April 1 of the year before an individual turns 72.

C (The income and capital gains earned in the account are tax deferred until the funds are withdrawn. It is the Roth IRA that can have tax-free withdrawals. Distributions must begin by April 1 of the year after an individual turns 72, not before. If a distribution is taken before reaching age 59 1/2, it is subject to income tax plus a 10% penalty, not instead of (in lieu of) the taxes. If the question does not indicate an exception to the penalty, such as death or disability, there isn't one.)

Which of the following statements regarding a traditional IRA is true? A) Distributions before age of 59½ are subject to a 10% penalty in lieu of income taxes. B) Because contributions to a traditional IRA are not currently tax deductible, all qualifying withdrawals are tax free. C) The income and capital gains earned in the account are tax deferred until the funds are withdrawn. D) Distributions without penalty may begin after the age of 59½ and must begin by April 1 of the year before an individual turns 72.

C (The income and capital gains earned in the account are tax deferred until the funds are withdrawn. It is the Roth IRA that can have tax-free withdrawals. Distributions must begin by April 1 of the year after an individual turns 72, not before. If a distribution is taken before reaching age 59 1/2, it is subject to income tax plus a 10% penalty, not instead of (in lieu of) the taxes. If the question does not indicate an exception to the penalty, such as death or disability, there isn't one.)

A client of your broker-dealer accepts your recommendation and turns in a market order to purchase 600 shares of MNOP Corporation common stock. Based on the following market maker quotes, it would be expected that the firm's trader would direct the market order to A) MMD: 22.11 - 22.30, 6 x 6. B) MMB: 22.08 - 22.25, 6 x 5. C) MMC: 22.10 - 22.28, 10 x 6. D) MMA: 22.05 - 22.25, 10 x 8.

D (First, let's recognize what these numbers mean. Each of the four market makers is indicating their bid (the lower price) and their ask (the higher price). The next two numbers tell us the number of shares that quote is good for (in hundreds). A customer market order to buy should be done at the best possible (lowest) ask (offering) price. That is $22.25 (MMA and MMB), but MMB is the only firm for up to 500 shares (the 6 x 5 means bidding for 600 shares and offering 500 shares) and the client's order is for 600 shares. Therefore, it would be sent to the lowest price that is firm for at least 600 shares and that is MMA because it is willing to sell up to 800 shares at 22.25. If the question had been about a customer order to sell 600 shares, we would have selected the highest bid price (20.11) and sent the order to MMD who shows 600 shares on the bid side (the 600 on the ask side are irrelevant for a sell order).)