Suitability
A customer, age 40, is concerned that the inflation rate is ready to explode, and wishes to invest funds to protect against the consequences of such an event. The BEST asset allocation mix to recommend to this customer is:
100% MM Instruments
What portfolio construction is most appropriate for a retired doctor who is age 75?
25% common stock / 75% bonds
A 25-year old man receives $50,000 and wants to retire at age 65 with an income of $1,500 per month from his investment portfolio. The adviser should invest:
25% in bonds and 75% in stocks
What portfolio construction is most appropriate for a retired school teacher who is age 60?
40% common stock / 60% bonds
A customer is in the highest tax bracket and will possibly be subject to the AMT. Which of the following is the BEST investment recommendation? A. 5.40% Municipal bond that is not subject to the AMT B. 5.60% Municipal bond that is subject to the AMT C. 6.00% Treasury bond with a long expiration D. 6.00% Corporate bond mutual fund
5.40% Municipal bond that is not subject to the AMT
A 60-year old man is looking to create a portfolio that will provide current income and preservation of capital. Which of the following portfolios would be the BEST recommendation to the client?
A 60-year old man is looking to create a portfolio that will provide current income and preservation of capital. Which of the following portfolios would be the BEST recommendation to the client?
A younger female customer, in the highest tax bracket, already has a substantial investment portfolio that is invested in a balance of quality stocks and bonds. She wants an investment that will provide rapid asset growth and is willing to assume risk. The BEST recommendation would be:
A. Emerging markets fund
The portfolio management technique that uses a performance benchmark such as a market index that any investments must match is called:
A. passive management
A 25-year old client with a low risk tolerance wishes to invest in bonds. The client has invested in equities before, but has no experience investing in bonds. The BEST recommendation would be:
AA-rated short-term bonds
The portfolio management technique that uses a market index as a performance benchmark that the asset manager must exceed is called
Active Management
A 30-year old customer who has two young children wishes to make an investment that will provide for their college tuition. Which would be the BEST recommendation? A. Make yearly payments into a variable annuity separate account with a growth objective B. Purchase Treasury STRIPS yearly in custodian accounts for the children Purchase income bonds yearly in custodian accounts for the children D. Establish IRA accounts for the children and purchase zero-coupon obligations yearly
B. Purchase Treasury STRIPS yearly in custodian accounts for the children
The use of multiple asset classes when constructing a portfolio reduces: A. regulatory (legislative) risk B. market (capital) risk C. interest rate risk D. purchasing power risk
B. market (capital) risk
All of the following are bond portfolio construction methods designed to reduce interest rate risk EXCEPT: Ladder Bullet Barbell Balloon
Balloon
A 65-year old widow that is in a low tax bracket and that has a low risk tolerance wishes to make an investment that will provide income. Which is the BEST recommendation?
Bank certificates of deposit
Which bond portfolio where all investment is made up front would be MOST negatively affected by a sharp rise in interest rates?
Barbell
Which bond portfolio construction is based on a phase-in of purchases in installments over time?
Bullet
ABC stock is currently trading at an all-time high price of $150 per share. Your client contacts you about the stock, stating that he believes that the stock is ripe for a sell off after its next quarterly news announcement. He has $10,000 to use for a trade, but does not want to lose more than this amount. The BEST recommendation to the client is to:
Buy ABC Puts
A wealthy, sophisticated investor with a high risk tolerance has just turned extremely bullish on the market. To profit from this, the BEST recommendation to the client would be to:
Buy Leveraged ETF's
A customer calls her registered representative and says the following: "I'm looking for a safe investment for $100,000 that I have, that will give me a moderate level of income. I have 2 children, ages 12 and 13, and I will need to use these monies to pay for their college education, starting in 5 years." All of the following recommendations would be suitable EXCEPT: A . Treasury bond mutual fund B. Treasury bonds with 5, 6, 7, 8, and 9 year maturities C. GNMA pass-through certificates with 5, 6, 7, 8, and 9 year maturities D. FNMA debentures with 5, 6, 7, 8, and 9 year maturities
C. GNMA pass-through certificates with 5, 6, 7, 8, and 9 year maturities
A 65-year old man is retired and living on social security. He is married and his wife does not work. The client has inherited a small amount of money that he wishes to invest. What should you recommend as an investment?
CD's
A customer, age 69, has never invested in securities. She is retired with no dependents, living on a fixed pension of $35,000 per year. She has a savings account with $160,000 and her home is fully paid. She desires to supplement her retirement income, assuming minimal risk. The BEST recommendation would be for the customer to invest $100,000 of her cash savings into a(n):
CMO planned amortization class tranche
A customer in a low tax bracket has just inherited $10,000 and is looking for an investment that will provide current income and liquidity. The BEST recommendation is a:
Corporate Bond ETF
A client with young children wants to invest $1,500 a year to pay for their ongoing educational expenses. Which recommendation would give the customer tax-free growth and tax-free distributions if these distributions are used to pay for educational expenses?
Coverdell ESA
Customers A, B, C and D have their portfolio assets allocated as follows: A B C D Money Markets 15% 5% 5% 0% Treasury Bonds 40% 10% 20% 20% Speculative Bonds 10% 30% 10% 30% Blue Chip Equities 15% 15% 20% 10% Small Cap. Equities 10% 10% 30% 5% Emerging Markets 10% 20% 10% 30% REITs 0% 10% 5% 5% Which customer's portfolio is MOST susceptible to political risk? A. Customer A B. Customer B C. Customer C D. Customer D
Customer D
A customer holds a large portfolio of corporate bonds. The customer is worried about capital risk. Which diversification strategy would be least effective to minimize capital risk for this customer? A. Diversification among differing issuers in differing states B. Diversification among differing industries C. Diversification among differing maturities D. Diversification among differing coupon rates
Diversification among differing coupon rates
A customer who earns $80,000 per year is 35 years old, married to a non-working spouse, has a 5-year-old child, has no retirement savings and does not have a will. This customer receives $250,000 in a single stock as an inheritance from her deceased aunt. What is the first thing that the customer should do?
Diversify the stock position, because it should not be in a single stock holding
Diversification among multiple asset classes reduces the: I market risk of the portfolio II marketability risk of the portfolio III standard deviation of portfolio returns
I and III only I market risk of the portfolio III standard deviation of portfolio returns
A customer has a $1,000,000 portfolio that is invested in the following: $250,000 Large Cap Growth Stocks $250,000 Large Cap Defensive Stocks $250,000 U.S. Government Bonds $250,000 Investment Grade Corporate Bonds During a period of economic expansion, the securities which will enjoy the greatest price appreciation are likely to be the: I Large Cap Growth Stocks II Large Cap Defensive Stocks III U.S. Government Bonds IV Investment Grade Corporate Bond
I and IV
A customer has the following investment mix: 25% Growth Stocks 25% Defensive Stocks 25% High Quality Corporate Bonds 25% Speculative Stocks During a period of economic expansion, the best performing asset classes are likely to be: I Growth Stocks II Defensive Stocks III High Quality Corporate Bonds IV Speculative Stocks
I and IV
Which statements are TRUE? I Strategic portfolio management is the determination of the asset allocation percentages among different asset classes in the portfolio II Strategic portfolio management is the determination of the permitted variance within each asset allocation percentage assigned to a specific asset class III Tactical portfolio management is the determination of the asset allocation percentages among different asset classes in the portfolio IV Tactical portfolio management is the determination of the permitted variance within each asset allocation percentage assigned to a specific asset class
I and IV I Strategic portfolio management is the determination of the asset allocation percentages among different asset classes in the portfolio IV Tactical portfolio management is the determination of the permitted variance within each asset allocation percentage assigned to a specific asset class
A young couple wishes to save $50,000 as the down payment on a new house that they plan to purchase in the next 6 months. Which of the following are suitable investment vehicles to recommend to the couple? I Money market funds II Bank certificates of deposit III Blue chip stocks IV Commercial paper
I, II and IV I Money market funds II Bank certificates of deposit III Commercial Paper
A customer account holds the following: 20% U.S. Stock Fund 20% International Stock Fund 40% Emerging Markets Stock Fund 20% Investment Grade Corporate Bonds Which asset classes are subject to currency risk (exchange rate risk)? I U.S. Stock Fund II International Stock Fund III Emerging Market Stock Fund IV Investment Grade Corporate Bonds
II and III
A customer has a $1,000,000 portfolio that is invested in the following: $250,000 Large Cap Growth Stocks $250,000 Large Cap Defensive Stocks $250,000 U.S. Government Bonds $250,000 Investment Grade Corporate Bonds During a period of economic recession, the securities which will depreciate the least are likely to be the: I Large Cap Growth Stocks II Large Cap Defensive Stocks III U.S. Government Bonds IV Investment Grade Corporate Bonds
II and III
If a portfolio manager's market sentiment is bearish, then which of the following are appropriate actions? I Cash positions will be decreased II Cash positions will be increased III Investments in stock positions will be decreased IV Investments in stock positions will be increased
II and III
Which statements are TRUE about asset classes and investment time horizons? I Equity investments are the better choice for short term time horizons II Interest bearing investments are the better choice for short term time horizons III Equity investments are the better choice for long term time horizons IV Interest bearing investments are the better choice for long term time horizons
II and III II Interest bearing investments are the better choice for short term time horizons III Equity investments are the better choice for long term time horizons
A customer has a $4,000,000 portfolio that is invested in the following: $1,000,000 Blue Chip Stocks $1,000,000 Technology Stocks $1,000,000 Long Term Investment Grade Bonds $1,000,000 High Yield Bonds If the economy enters into a recession, the securities which will suffer the greatest price decline are likely to be the: I Blue Chip Stocks II Technology Stocks III Investment Grade Bonds IV High Yield Bonds
II and IV
A 67-year old woman has heavily invested her portfolio in growth securities. She realizes that as she approaches retirement, she needs to reallocate her portfolio for more income. However, she does not want to give up the growth objective. What would be the best investment recommendation for the funds that she will reallocate away from growth securities in her portfolio?
Income stocks and blue-chip stocks
An older female customer, in the lowest tax bracket, wants an investment that will provide asset growth for retirement. The best recommendation would be:
Index fund
Which bond portfolio where all investment is made up front would be LEAST negatively affected by a sharp rise in interest rates?
Ladder
A trader maintains a position in a small capitalization stock that has low trading volume. The trader has a high level of which of the following risks?
Liquidity Risk
An investor believes that interest rates will be flat or falling into the future; and that prices may deflate. The MOST appropriate investment is:
Long term US Government Bonds
A 60-year old customer has a 401(k) account with your firm that has $280,000, mainly invested in growth mutual funds. The customer has an elderly widowed aunt who has died, and her estate attorney has contacted him, notifying him that he has been left $100,000 as an inheritance. The customer is single and has an annual income of $100,000 per year. He wants to use the inheritance to buy a retirement home, which he expects to do in 7 years. Over this investment time horizon, the general expectation is that interest rates will rise. The best recommendation to the customer is to invest the $100,000 in:
MM Instruments
An investor believes that interest rates will be rising in the future. The MOST appropriate investment is:
MM Instruments
Defensive stocks included in a portfolio's construction will minimize exposure to:
Market Risk
All of the following are suitable investments for an Individual Retirement Account EXCEPT:
Municipal Bonds
An IRA is allocated in large cap stocks, TIPS, foreign stocks and municipal bonds. When reviewing this portfolio, you should be MOST concerned about the:
Municipal bond holding
A customer account holds the following: 20% U.S. Stock Fund 20% International Stock Fund 40% Emerging Markets Stock Fund 20% Investment Grade Corporate Bonds This portfolio is MOST susceptible to:
Political Risk
A customer has a $1,000,000 portfolio that is invested in the following: $200,000 Blue Chip Stocks $200,000 Technology Stocks $200,000 Long Term Investment Grade Bonds $200,000 High Yield Bonds $200,000 REITs The portfolio is LEAST susceptible to:
Political Risk
Which bond recommendation is most suitable for a customer who wishes to avoid credit risk?
Pre-refunded bond
An 85-year old risk averse investor is not happy about the minimal return she is earning on her current investments. She is stressed about having enough income because her cost of living has been increasing by more than 10% annually. Her current portfolio composition consists of: 40% Money Market Fund 50% Bonds 10% Equities What changes should you suggest to her portfolio?
Reduce the Money Market Fund allocation by 30% (to 10%) and put the released funds in AAA-rated corporate bonds
A 57-year old customer, earning $85,000 per year, is currently employed as an outside salesman. He enjoys his work so much that he has no intention of retiring until at least age 75. He wants to put extra money away for his retirement at that time and can make contributions of about $5,000 per year. He does not want to be forced to take distributions starting at age 70 1/2. The BEST type of retirement plan for this individual is a:
Roth IRA
A customer, age 25, is looking to invest in securities with the objective of growth to protect against the effect of long term inflation on his portfolio's value. The customer believes that active asset management, along with its higher fees, is not worthwhile. Which recommendation is MOST suitable for this customer?
S&P 500 Index Fund
A growth investor would consider a company's:
Stock Price Appreciation Rate
The setting of specific goals for an investment plan to be created for a customer is known as
Strategic asset management
The target allocation for a specific asset class has been set at 20% of total assets under an asset allocation scheme. The manager is permitted to reduce this percentage to 15%; and can increase it to 25%; as he or she sees fit. If this action is taken by the manager, this is termed:
Tactical Asset Management
The overall economic performance of developing countries is expected to outpace that of the United States over the coming years. A customer that wishes to profit from this should receive which recommendation and accompanying risk disclosures
The customer should be recommended an emerging markets fund, as long as the customer is willing to assume political risk and exchange rate risk
A 60-year old customer desires an investment that will provide for retirement income when she reaches age 65. The customer is able to invest $1,000 per month over that time period. Which of the following recommendations is most suitable?
The purchase of a variable annuity contract
A customer has just received a $100,000 inheritance and wants to know what to do with the money until he decides how to use it. He thinks that he will make his decisions on what to do with the funds within 3 months. The BEST recommendation is for the customer to buy:
Treasury Bills
An investor has $50,000 that she wishes to invest for her child's college expenses, which the child starts next year. The most suitable recommendation to the client is to invest the funds in:
Treasury Bills
A customer has a term loan that is maturing in 3 years in the amount of $100,000. The customer has the cash now, and wants to know the best investment to make for the 3 years until the loan payment is due. The BEST recommendation is to buy:
Treasury notes maturing in 3 years
A registered representative has a client who is an exceptionally intelligent doctor of medicine. The doctor does most of his own investment research and makes many of his own investment decisions. The doctor is married, but his wife is not involved in the investment planning or decision-making process. When constructing a portfolio for this client, the registered representative should:
balance the portfolio in a manner that addresses the doctor's investment strategy and that customizes the strategy to meet the needs of the spouse
An 85-year old retired client has living expenses of $15,000 per year. His portfolio is currently allocated: 50% Money Market Fund 40% Treasuries Yielding 1.20% 10% Equities The customer is complaining that he is not earning enough from his portfolio to meet monthly living expenses. The BEST recommendation to the customer is to
liquidate half of the money market fund and invest it in 5 year corporate debentures yielding 2.70%
Growth Investors:
make their investment decision based upon the market performance of the security
A retired married customer, age 73, has a portfolio that is invested in Blue Chip stocks and Treasury bonds that provides current income. The customer is concerned that he is paying a very high Federal and State combined income tax rate. An appropriate recommendation for this customer would be to diversify part of his portfolio into an investment in:
municipal bonds
When a manager liquidates securities out of one asset class and invests the proceeds in another asset class to maintain the desired asset allocation percentages as market prices move, the manager is:
rebalancing the portfolio
A customer owns 1,000 shares of XYZZ stock, purchased at $40 per share. The stock is now at $45, and the customer has become extremely bearish on the company. The client asks her representative for an "aggressive recommendation." The client should be told to
sell 1,000 shares of XYZZ and buy 10 XYZZ Put Contracts
A customer owns 1,000 shares of XYZZ stock, purchased at $40 per share. The stock is now at $45, and the customer has become neutral on the stock, but believes that the stock still has good long term growth potential. The client asks her representative for a "conservative recommendation" that will give her a positive portfolio return. The client should be told to:
sell 10 XYZZ 45 Call Contracts
A retired customer that has a portfolio of blue chip stocks is looking to supplement his retirement income. An appropriate recommendation would be to:
sell covered calls
A wealthy, sophisticated investor with a high risk tolerance has just turned extremely bullish on the market. To profit from this, the BEST recommendation to the client would be to:
sell leveraged inverse ETFs
A constant ratio investment plan requires:
that the same percentage amount be kept invested in equities
The investment strategy that involves paying a lower price for a security based on the expectation that the market is mispricing the issue is:
value investing
Tactical portfolio management is the selection of the
variation permitted in target asset allocation for each asset class selected for investment
