Time Crunch final misses

One way for an accredited investor with an aggressive stance to reduce the overall risk in his portfolio is by A) purchasing U.S. Treasury bills B) purchasing a hedge fund C) purchasing insured bank CDs D) selling uncovered calls

B (Although the T-bills and the CDs will reduce the overall risk, they are not the best answer because the question is dealing with an aggressive investor. One of the reasons HNW clients buy these funds is for the diversification offered by adding an asset subclass to their portfolios.)

As enumerated in the USA, exempt securities would include those issued by all of these EXCEPT A) a sovereign foreign government with which the United States maintains diplomatic relations B) a promissory note that evidences an obligation to pay cash within 9 months after the date of issuance, is issued in denominations of at least $50,000, and receives a rating in one of the 3 highest rating categories from a nationally recognized statistical rating organization C) a corporation based in Toronto, Ontario, whose common stock trades on the Toronto Stock Exchange D) any credit union organized and supervised under the laws of this state

C (Although securities issued by the Canadian government or any political subdivision are exempt, those issued by Canadian corporations would only be exempt if trading on U.S. exchanges as federal covered securities.)

Which of the following is not correct regarding the capital asset pricing model (CAPM)? A) The stock risk premium is the inducement necessary to entice the individual to invest in a particular stock. B) The market risk premium is the incentive required for the individual to invest in the securities market. C) CAPM only considers the systematic risk. D) CAPM uses standard deviation as a measure of market risk

D (CAPM accounts for the impact of systematic risk (as measured by beta) only and does not take into consideration unsystematic risk, which is assumed to have been diversified away.)

By investing in a REIT, you are provided all of the following except A) flow-through tax treatment of income. B) ownership of real property without management responsibilities. C) flow-through tax treatment of operating losses. D) diversification of real estate investment capital.

C (REITs do not offer flow-through of losses to investors. It is important to remember that the portion of the REIT's income that is distributed flows through; losses do not flow through. Although there are investments offering flow-through of both income and loss, such as DPPs, REITs are not one of them. Two of the benefits of investing in REITs are the professional management and the diversified real estate portfolio.)

A grantor retained annuity trust is a planning tool designed to pass assets to beneficiaries (usually children) in a way to minimize A) estate taxes. B) property taxes. C) excise taxes. D) income taxes.

A (A GRAT is an estate planning tool designed to pass assets to beneficiaries (usually children) in a way to minimize gift and/or estate taxes. Because incidents of ownership remain with the grantor, all income is taxed to the grantor.)

An investment adviser representative is required to make disclosure to the client when I. the IAR, in preparing a recommendation, uses research provided by a third party with whom the IAR is not affiliated II. the IAR recommends a specific insurance policy for the client's overall financial plan, where a commission will be received on that sale III. transactions recommended to a specific client are inconsistent with those for other clients with objectives that are identical to that particular client IV. transactions recommended to the client are inconsistent with those for the IAR's own account A) I and III B) II and IV C) II, III, and IV D) I, II, and III

B (An investment adviser must provide full disclosure to his client if there would be even a hint of conflict of interest. This will include the case where a recommended product will generate a commission or other source of income to the adviser, as well as full disclosure, if a recommendation is not consistent with the adviser's own activity in his own account. The adviser can use any source of information to create his own analysis, disclosure of source only being required if the adviser uses the product of a third party as the presentation to the client. It would be unusual that all clients with the same objectives would purchase or have recommended for purchase the same securities.)

Which of the following are exempt securities under the Uniform Securities Act? I. Common stock, not listed on any regulated exchange, purchased by an open-end investment company registered under the Investment Company Act of 1940 II. Preferred stock issued by an insurance company authorized to do business in this state III. Municipal bonds issued by Toronto, Ontario IV. Private placements A) II, III, and IV B) II and III C) I and III D) I and II

B (Common stock not listed on any regulated exchange and purchased by an open-end investment company is an exempt transaction, but that common stock is not an exempt security. Securities issued by insurance companies, and Canadian municipal securities are exempt from registration under the USA. Any security that represents an interest in, or debt of, or is guaranteed by an insurance company organized under the laws of any state and authorized to business in this state is exempt. Qualifying private placements are exempt transactions, not exempt securities.)

Abel Kane is an agent for Garden City Securities, a broker-dealer registered with the SEC and all 50 states. It would be considered an unethical or dishonest business practice for Kane to I. fail to make prompt delivery of certificates when requested by the customer II. fail to obtain written authorization for a discretionary account prior to the first trade in that account III. accept an order from a client's spouse without written trading authorization prior to receiving the order IV. share commissions with another agent registered with Garden City Securities A) I, II, and III B) II and III C) III and IV D) I and IV

B (This question is tricky. The key here is that agents have no responsibility for delivering customer securities. That is an obligation of the broker-dealer.)

Under the Uniform Securities Act, the Administrator has the authority to I. issue stop orders II. approve new issues III. review standard registration forms A) II and III B) I and III C) I, II, and III D) I and II

B (During the cooling-off period, the Administrator reviews registration statements and may issue stop orders. The Administrator does not approve securities; she only clears them for distribution to the public.)

Under ERISA, all of the following retirement plans must set standards for vesting, eligibility, and funding EXCEPT A) Keogh plans B) profit-sharing plans C) deferred compensation plans D) corporate pension plans

C (Deferred compensation plans are not qualified plans and may be discriminatory. Keogh, profit-sharing, and corporate pension plans must meet set standards for vesting, eligibility, and funding under ERISA.)

A fiduciary of an ERISA plan is preparing an investment policy statement. Included would probably be I.specific security selection II. methods of performance measurement III. determination for meeting future cash flow needs IV. the Summary Plan Description A) I, II, and III B) II and IV C) II and III D) III and IV

C (The IPS will include methods of performance measurement (if it is meeting objectives) and a way to determine how future cash flow needs will be met (based on expected numbers of retirees). It will not include the specific securities to be purchased, but will include the types that may be placed in the portfolio. The Summary Plan Description (SPD) is a Department of Labor (DOL)-required document that gives employees a summary of the plan and its features. It has nothing to do with determining how the money is invested.)

One of your clients approaches you about setting up a trust. If your client assumes the role of grantor, what additional roles may be taken? A) Beneficiary B) As the grantor, no other roles may be taken C) Trustee D) Trustee and beneficiary Explanation

D (Under trust law, the grantor of a trust, sometimes referred to as the settlor, may also be the beneficiary and the trustee.)

All of the following would be reasons for an employer to choose a nonqualified plan over a qualified plan except A) the nonqualified plan is not subject to ERISA reporting and disclosure requirements. B) the nonqualified plan can discriminate in favor of highly-compensated employees. C) the nonqualified plan provides greater flexibility. D) the nonqualified plan provides an immediate income tax deduction for the employer.

D (The answer is the nonqualified plan provides an immediate income tax deduction for the employer. Nonqualified plans do not provide a tax deduction to the employer until the employee receives the economic benefit as income at some point in the future. They are, however, more flexible because they do not have to comply with ERISA reporting and non-discrimination requirements.)

Which of the following would NOT be considered evidence of custody of a client's funds or securities? A) The investment adviser has discretionary authority over the client's account. B) The adviser writes checks on the client's account to pay for client's securities. C) The client makes a partial purchase, and the broker-dealer holds the securities until full payment is made. D) Client funds and securities are kept at a qualified custodian.

A ("Custody" means possession (even temporary possession) of a client's funds or securities. It includes authority over a client's bank account for any type of disbursement, but does not include the acceptance by the adviser of prepaid advisory fees or discretionary authority.)

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) in the event of death, the decedent's interest in the account goes to the other party C) mail may be sent to either party (with the permission of each party) D) orders may be given by either 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.)

A bond with a par value of $1,000 and a nominal yield of 6% paid semiannually is currently selling for $1,300. The bond matures in 25 years and is callable in 15 years at $1,080. In the computation of the bond's yield to call, which of these would be a factor? A) Present value of $1,080 B) 50 payment periods C) Interest payments of $30 D) Future value of $1,300

C (The YTC computation involves knowing the amount of interest payments to be received, the length of time to the call, the current price, and the call price. With a 15-year call, there are only 30 semiannual interest payment periods, not 50. The present value is $1,300 and the future value is $1,080; the reverse of the numbers indicated in the answer choices.)

The capital asset pricing model (CAPM) is an investment theory that serves as a model for A) pricing securities based on their unsystematic risk B) measuring the correlation between a security and the overall market C) pricing securities based on their systematic risk D) pricing securities based on their total risk

C (Under the CAPM, securities are priced based on their systematic risk only, because this risk cannot be eliminated through diversification. The expected return of a security or portfolio is calculated by adding the rate on a risk-free security to a risk premium multiplied by the asset's systematic risk.)

One of the most significant risks taken by bond investors is interest rate risk. All of these steps could be used to mitigate the effects of this risk EXCEPT A) holding bonds to maturity B) buying bonds with short-term maturities C) laddering the portfolio D) buying bonds of highest quality

D (Quality has no substantial impact on interest rate risk. When interest rates rise, all bonds fall in price. However, those that are closer to their maturity date are impacted less (they have a shorter duration). If one can hold the bonds until maturity, there is no interest rate risk because, regardless of the prevailing market, you receive par value. One very effective way to lessen this risk is to ladder the maturities. That means that the portfolio is spread among a series of maturities, some near, some mid-term, and some long-term.)

When compared to mutual funds, which of the following statements regarding hedge funds is least accurate? Hedge funds A) tend to be more diversified in order to hedge risk. B) are generally only appropriate for qualified investors. C) use derivatives to a greater extent. D) can take both long and short positions.

A (Hedge funds portfolios are more concentrated (i.e., less diversified), so that individual positions provide a significant contribution to the portfolio's return. In most cases, only accredited investors may invest in hedge funds. A major difference between hedge funds and mutual funds is the ability of the hedge fund to take short positions and one way the hedge fund obtains greater leverage is through the use of derivatives.)

All of the following statements regarding investment companies are correct except A) an exchange-traded fund is an investment that can be bought and sold throughout the trading day. B) an open-end investment company is categorized as open end because it is limited in the number of shares that are sold. C) a unit investment trust is a type of investment company whose units are redeemable at NAV by the trust's sponsor. D) a closed-end investment company is a type of company whose shares trade in the same manner as publicly-traded stocks in the secondary market.

B (An investment company is categorized as open-end because it is not limited in the number of shares sold. ETFs and CEFs (closed-end funds) trade in the secondary markets like any stock. UITs are redeemable at NAV by the trust's sponsor.)

Which of the following hedge funds characteristics is least accurate? A) They require large entry-level investment amounts. B) They are heavily regulated by capital market authorities. C) Most can borrow funds and use derivatives. D) Their investment style is generally aimed at producing "absolute" returns.

B (Hedge funds are unregulated collective investment vehicles. This means they cannot be generally marketed to private individuals because they are considered too risky for the less financially-sophisticated investor. The initial outlay is usually quite high. Financial leverage and derivatives are a common practice with hedge funds. By hedging, the portfolio manager attempts to produce returns in both up and down markets.)

An Administrator may initiate a suspension or revocation proceeding against a broker-dealer registered in his state I. up to 2 years after a broker-dealer voluntarily withdraws its registration II. when an agent of the broker-dealer is convicted of a felony violation of the Securities Exchange Act of 1934 III. upon discovery that the broker-dealer's license had been suspended in another state IV. upon discovery of new facts unknown to the Administrator at the time of the broker-dealer's initial registration A) I and II B) III and IV C) II, III, and IV D) I, II, III, and IV

B (The Administrator maintains jurisdiction over a license that has been withdrawn for a period of 1 year after the effective date of the withdrawal. An action against an agent of the broker-dealer does not allow the regulatory authority to also go after the broker-dealer. It is only when the question states that the individual is an executive or other supervisory person of the firm that action against the firm may commence unless that agent is a supervisor of the broker-dealer or part of the ruling indicated that there was a failure to supervise. The broker-dealer must disclose all suspensions by other regulatory agencies, including other states, to the state Administrator of its own state. A broker-dealer must also provide full disclosure of all relevant facts to the state Administrator concerning its registration.)

A registered investment adviser, in his financial planning practice, recommends and sells proprietary products offered through a broker-dealer affiliated with his investment advisory firm. All of the following statements are true except A) this practice is ethical if full disclosure is made to all clients B) the adviser must state that the client may be subject to certain limitations because of this arrangement C) the adviser must receive a signed statement from the customer that authorizes this practice before collecting any payment D) the adviser may collect fees for investment advice and commissions for executing trades

C (In order for the investment adviser to sell securities products through any broker-dealer, affiliated or not, registration as an agent is required. Whenever an IA acts in an agency capacity with an advisory client, disclosure of the capacity and consent of the client must be received not later than completion of the trade. Please note that the consent does not have to be in writing. There are cases, such as agency cross transactions, where prior written consent of the client is needed. One of the limitations that must be disclosed is that dealing solely with proprietary products limits the universe of available recommendations.)

When an investment adviser chooses to use a promoter to solicit new business, the Investment Advisers Act of 1940 requires all of the following conditions except A) either the solicitor or the adviser must disclose to the customer any additional costs of providing advisory services due to solicitor involvement B) the solicitor must not be subject to disciplinary actions involving finance or dishonesty C) the solicitor must register with the SEC as an investment adviser D) the promoter and investment adviser must enter into a written agreement if the compensation exceeds $1,000 over a 12-month period.

C (There must be a written agreement between a solicitor and an adviser if the compensation exceeds the de minimis amount. The solicitor is required to provide the customer with a copy of the adviser's brochure. The adviser or the solicitor must disclose any additional costs that the customer will pay due to the use of the solicitor. The solicitor cannot be subject to disciplinary actions involving finance or dishonesty. Although the investment adviser must be registered, there is no requirement for a solicitor to register with the SEC.)

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 II D) I and III

D (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.)

Under the Uniform Securities Act, which of the following statements regarding the employment of investment adviser representatives by a state-registered investment adviser is (are) true? I. The investment adviser must notify the Administrator whenever an investment adviser representative is terminated. II. An investment adviser is not required to notify the Administrator when an investment adviser representative begins employment. III. The registration of an investment adviser representative is effective only as long as the individual is employed by a registered investment adviser. A) I, II, and III B) III only C) I only D) I and III

D (Whenever an individual begins or ends association as an IAR with a state-registered investment adviser, the IA must notify the Administrator. An IAR's registration is only valid while employed by a registered investment adviser.)