TestGeek study guide Series 65

security varies within 1 standard deviation

2/3 of the time i.e. 12% return, 5% standard deviation; stock will vary 7% to 17% 2/3 or 67% of the times

Rule of 72 in reverse = % earning rate per year

72/# of years invested

rule of 72 formula = finds the # of years for an investment to double

72/interest rate

Beta between 0 and 1:

Companies that are less volatile than the market have a beta of less than 1 but more than 0. • ie. utility companies fall in this range

10K

annual financial report

material information

any fact that could reasonably affect an investor's decision to buy, sell or hold a security. e.g., profits and losses at the company, product liability lawsuits, the loss of key clients, etc...

earnings available to common

are the remaining earnings after the preferred dividend has been paid

compound rate of return

assumes the interest earned in a given period is reinvested at the identical rate for the number of years in which it is invested

written trade confirmation

at or before the completion fo each agency cross transaction, client must be sent a written true confirmation that includes: • a statement of the nature of the transaction • the date, & if requested, the time of the transaction • the source & amount of any remuneration to be received by the IA (IAR) in connection with the transaction

EPS

current market price/ PE ratio • relates only to common stock • assumes preferred dividends were paid

alpha of +

if the alpha is positive, the stock is undervalued

prospectively

in advance

beta greater than 1

indicates a stock's price swings more wildly (i.e., more volatile) than the overall market

beta less than 1

indicates that a stock's price is less volatile than the overall market • .8 is a positive Beta,

net present value (NPV)

is the difference between the present value of cash inflows and the present value of cash outflows over a period of time. • used in capital budgeting and investment planning to analyze the profitability of a projected investment or project. • expressed in dollar amounts • + NPV is a good investment • for investments to work, NPV must be >0

dividend payout ration

measures the proportion of earnings paid to stockholders as dividends • = annual dividends per common share/earnings per share (EPS)

buy & hold clients

not suitable for a wrap fee account because they do not do enough trading to benefit from the fact that commissions are included in the program fee

alpha of 1

outperforms the portfolio return by 1%

correlation coefficient of -1

perfect negative correlation; • i.e. one security is up 4% while another declines 4%

performance guarantees

prohibited; cannot guarantee results investment & guarantee a certain return; or will buy it back etc

correlation coefficient

securities move in the same direction; ranges from -1 to +1

correlation coefficient of +1

securities that are perfectly correlated; price rises by 5% & other security price rises by 5% • .80 & above are highly coefficient

correlation coefficient of 0

securities whose prices are unrelated to each otehr

Mean (arthritic mean)

sum of the variables divided by the number of occurances i.e. 5+2+6+4= 17/4 = 4.25

Iteration

takes into consideration the time value of $$

Performance based compenstation

the advisory contract with the client can provide that investment return that is better than that of a selected index can result in a higher fee to advisor; HOWEVER, if the performance of the account is below that of the index, the fee is reduced

future value

the amount to which a current deposit will grow at a given rate of compound interest to a specific date in the future • how much is my money worth in the future

current yield

the annual dividend payout as a % of current stock price = annual dividends per common stock/market value per common stock

range

the difference between the highest and lowest scores in a distribution

If a BD forms a subsidiary to start an investment adviser, what happens to the existing clients?

the existing clients of the BD wishing to become clients of the IA must enter into a new contract for advisory services

Higher PE ratio

the greater the investor confiendence.

higher standard deviation

the greater the risk

lower standard deviation

the lower the risk

median

the middle score of a distribution • 2, 5, 8, 9 = 5+8 = 6.5 = median is 6.5

mode

the most frequently occurring score(s) in a distribution

risk free rate

the rate of return that can be earned with certainty • 91-day US Treasury Bill • T-bills have a beta of 0

what happens if the investment adviser is also registered as a broker dealer?

the requirements just described do not apply to any transaction with a customer of a broker dealer if BD is not acting as an IA in relation to the transaction. In other words, the transaction is not as a realist of the recommendation from the adviser

book value

theoretical value of a company (stated in dollars per share) in the event of liquidation; no relationship to stocks trading prcie

there is something that IA must do to maintain custody or receive substantial prepayments avoid having to do. What is it?

they do not have to notify their clients about any financial situation that might impair their ability to meet contractual commitments to clients

alpha of -1

underperforms the return by -1% • stock is overvalued

Form ADV Part 2B - Brochure Supplement

updated annually • delivered 120 days after end of fiscal year if updated • narrative form • discloses eduction of personnel including disclosing if no high school education or business background • disciplinary information • compensation & commission for sales of products etc • additional compensation (sales awards) • supervision

guaranteed security

where a party other than the issuer guarantees the payment of principal & interest (on a debt security) or dividend (on an equity security). No guarantee on perfjoamcne; gains cannot be part of the guarantee

Capital Asset Pricing Model (CAPM)

which calculates the expected return of an asset based on its own particular beta and the expected market returns. ie. Jansen's model Alpha & beta used together to analyze, compare and calculate risk

Is the client permission needed iF the majority of the stock of an Investment Advisor organization is pledged as collateral for a loan?

yes, this is considered an assignment and the Investment Advisors must issue new contracts

quick asset ratio (acid test)

• A measure of a firm's financial stability. • (current assets excluding inventory)/current liabilities. • A value greater than one is desirable. (1:1 is acceptable)

USA advisory contract terms/condition/requirements

• Advisory contract must be in writing • Fees must be competitive • performance-based compensation terms are very strict • waiving fees in the event of losses is an unethical business practice

Form ADV part 2 Narrative

• Federal ADV contains 18 itmes • State ADV contains 19 items including 1. a description of the types of advisory services provided 2. fees/compensation 3. methods of analysis, investment strategies, risk of loss 4. disciplinary information 5. how u select or recommend BD 6. Custody practices 7. investment discretion Disclosure obligation as a fiduciary full/truthful disclosure FILING through IARD (for state only)

summary of notice & consent

• IA organized as a partnership must notify clients when there is change involving a minority of the partners • IA organized as a corporation = No notification required with changes to shareholders • assignment of client contracts ONLY with client permission

Debt to Equity Ratio

• Total Debt/Total Equity • should be called debt to total capitalization ratio • total capitalization (long term debt+ equity)/ long term debt

Security's Registration

• cannot infer or imply approval of issue by any regulatory body • Disclaimer on prospectus states the security has not been approved or disapproved & any representation to the contrary is a criminal offense

beta of 0

• cash has a beta of 0. In other words, regardless of which way the market moves, the value of cash remains unchanged (given no inflation). • no risk • ie. T Bill - security of a Beta of 0

NOT included in BD fee disclosure documents

• commissions • markups/markdowns • advisory fees

decreasing working capital

• declaring cash dividends • paying off longer debt at any time • net operating losses

correlation coefficient formula

(Cov of A and B) / [(STD of A) x (STD of B)

alpha formula

(total portfolio return - risk-free rate) - (portfolio beta x [market return - risk-free rate])

Form ADV Part 2A - Appendix 1

* wrap fee brochure • must provide in lieu of standard brochure and must disclose that wrap fee may cost more than purchasing service separately • must identify whether any of its related persons is a portfolio manager in the wrap fee program if os describe the associated conflicts

Broker dealer capacity

1) Agent - Commission shown as aggregate dollar amount 2) Principal - Price includes any markup/markdown • BD must indicate their capacity on the trade confirmation, sent no later than completion of the trade (settlement date)

guaranteed bond

1. an example of a guaranteed security. 2. is a debt security which promises that, should the issuer default, its interest and principal payments will be made by a third party.

security varies within 2 standard deviations

95% of the time i.e. 12% return, 5% standard deviation; stock will vary from 2% to 22% 95% of the time

Income in Perpetuity

= desired annual income/ by the average rate of return • will determine the amount that must be invested to earn a certain $ figure for life

current ratio

=current assets/current liabilities • the higher the ratio, the more liquid the company is • gives company the ability to pay their bills • should be as high as possible

Disclosure of conflicts of interest

A corporation can enter into a transaction in which a director or officer has a conflict of interest, but the conflicting director or officer must fully disclose the conflict and abstain from voting on the proposed matter

Earnings per share (EPS)

A measure of the net income earned on each share of common stock = earnings available to common stock/# of shares outstanding

Which of the following states may be made by an issuer selling securities to the public that are registered with the Administrator? A. The Administrator has cleared this issue for sale to the public B. The Administrator has passed on the adequacy of the information provided in the prospectus C. The Administrator has approved the accuracy of the information contained in the prospectus D. The Administrator has affirmedmed the merits of the security as an invesement

A. The Administrator does not approve or disapprove of securities. Rather, the Administrator reviews the registrations for ommission of material facts & clarity of information plus makes sure all supporting documentation is included.

Bona fide error

An unintentional error such as clerical, mathematical, printing, or programming error • BD may correct • cannot be corrected by associate of the firm such payment may cancel individual misconduct

Disclosure of Capacity

BD -*confirmation must show whether the B/D acted as agent or principal (consent not required) IA - acting as principal or agent in prucahs or sale of recommended securities

NASAA Model Fee Disclosure Schedule

BD provide retail customers at account opening written notification of all service charges & fees • provide retail customers with written notification at least 30 days in advance of changes in fees • notifications can be electronic, USPS & website • disclose in chart, list, table, narrative

8K

Current report - newsworthy items 4 business days of event

in an agency cross transaction, can the IA recommend the transaction to both parties

NO! With prior written consent, the adviser can make recommendation to ONLY one side of the transaction

wrap fee program

Program where client is charged a specified fee, or fees, not directly based on transactions in a client's account. IA using wrap fee accounts DO NOT USE NORMAL BROCHURE; USE PART 2A, APPENDIX 1

10Q

Quarterly financial report

assignment

The act of transferring to another all or part of one's rights arising under a contract. • includes any direct or indirect transfer or pledge of an IA contract by the adviser or of a controlling block the adviser's outstanding voting securities

Price to Earnings Ratio (P/E)

The market value of a company's stock divided by the company's net income. • ratio of 20:1 = current market price of common share/EPS

book value per share

Total stockholders' equity / Number of common shares outstanding = (tangible assets - liabilities - par value of pfd stock)/shares of common stock outstanding • liquidating value of the company; not its intrinsic value

discounted cash flow (DCF) valuation

a model or method of valuation in which future cash flows are discounted back to a present value using the time value of $ • an investment's worth is equal to the PV of all projected future cash flows

Rule of 72

a shortcut to estimate the number of years required to double your money at a given annual rate of return.

working capital

about of liquid capital or cash • firm's liquidity • current assets - current liabilities

Beta of 1

actual market return; what the S&P's is returning

increase diversification in a portfolio

add investments with a negative correlation; • this way when S& P is down, these securities are increasing • ie. Gold, bonds

Securities Professional's registration

cannot infer or imply approval of qualifications by any regulatory body

lower PE

companies that are subject to cyclical fluctations & declining companies

completion of transaction

considered to be the day the trade settles. this is the second business day after the trade is made

present value

formal term for value today of the future cash flows of an investment discounted at a specified interest rate to determine the present worth of those future cash flows • how much is my $$ worth today

Form ADV delivery (SEC Clients)

• delivered to every client • even if agreement is oral • deliver annually within 120 days of end of fiscal • only send if material changes to existing clients • must include balance sheet if prepayment of fees of $1200 for 6 maths or more

Form ADV part 2

• disclosure document that is required to be given to clients • 3 parts: 1. Part 2A: firm brochure 2. Part 2A Appendix 1: Wrap Fee program brochure 3. Part 2B: Brochure supplement (describes certain supervised persons) Deliver to client/prospect before at time of contract If not delivered 48 hours in advance, client has 5 days to rescind

Investment Advisor disclosure of conflict of interests

• disclosure ownership in recommended securties • disclose gift or incentives associated with a product • IA notify clients if they are a representative of a BD will recommend purchase of products to receive commission • disclose if recommending products of only the BD or insurance company w whom they are associated • diclose that client may execute through other BD • disclose amount of compensation: a. the transaction is through a BD with whom the adviser is associated; b. compensation received from an issuer; c. compensation is received from the sale of non-securities products • disclose if personal trades are inconsistent with advice to client & IA benefits from client acting on recommendation

Investment Adviser disclosure/client consent

• full written disclosure as to the capacity of the adviser proposes to act • client consent (can be oral or written) is obtained before or after the transaction of the trade • BOTH must be done prior to completion of the transaction

beta -

• indicate an inverse relation to the market, is possible but highly unlikely. • Some investors argue that gold and gold stocks should have negative betas because they tend to do better when the stock market declines. • moves in opposite of the market overall • I.e. of - beta: bonds, gold, commodities, negative ETF, t bills with longer duration move opposite to market

beta

• indicates how volatile a stock's price is in comparison to the overall stock market. * beta = 1 is where the market is • how well/not well your investment is doing compared to the S&P 500

Broker Dealer common fees

• issuance of stock certificate • transferring an account • wiring funds • margin account of interest • account maintenance fees • safekeeping of funds/securities • late settlement fees • postage & handling

increasing working capital

• issuing securities (longer term debt or equity) • profits from the business operations • the sale of concurrent assets such as equipment no longer being used

standard deviation

• measurement of a portfolio's total risk •relates to systematic risk

alpha

• measures the business risk; something changed in business to impact Alpha (ie. new management; new product) • higher the alpha, the better performing the portfolio

Failure to disclose material information

• not diclosing fees & whether fees are negotiable • IA fails to disclose affiliation with BD or other securities professionals • failure of IA to disclose any financial conditions with a discretionary client ($500 USA/$1200 Fed) that will impair the IA to meet the contractual obligations to the client • fails to adequately disclose its allocation policy • any material legal action against the advisor must be disclosed to clients promptly; if in last 10 years, must be disclosed not less than 48 hours (only USA IA) before entering into the contract

Regulation Best Interest (B1)

• passed in 2019/implemented 2020 • SEC rule to help safeguard investors and standardize the conduct standards for broker-dealers and financial advisors. • that financial professionals must make investment recommendations that serve the client first and foremost. • Previously, brokers were only held to the "suitability standard." • This meant that when brokers advised their clients, they only had to recommend investments that were suitable, but not necessarily in their clients' best interest

Agency Cross Transaction

• permissible • An adviser acts as agent for both parties in a trade. • written consent prior to • one side must be unsolicited • disclosure includes: 1. receiving commission on both sides of transaction 2. potential conflict 3. provide annual statement listing transactions all fees/commissions 4. agreement can be terminated at any time 5. cannot recommend trade to both parties

BD disclosure of conflict of interests

• proprietary products • incentives from program sponsor • financial interest in recommend security (sister is CEO) • favorable research report after bringing company public

Federal & State Advisory contracts must disclose

• services to be provided • length of contract • amount of fees • formula for computing the fees • amount of fee returned in termination • whether discretion is granted • no waiver of fees for underperformance • assignment only with consent • notification to clients of changes in advisory partnership: a. only when the change is minority interest; b. if majority changes, consent needed

Federal advisory contract terms/conditions

• the contract can be written or oral • fees must be reasonable in view of the services rendered • performance-based compensation terms are very loose

Internal rate of return (IRR)

• the r in the FV & PV calculations • estimates the profitability of potential investments using a percentage value rather than a dollar amount. • uses a discount rate • the # of years to invest when determining the FV