Chapter 9: Questions - SIE Exam
A registered representative is NOT permitted to exercise discretion as it relates to which of the following investments? - Mutual funds - DPPs - REITs - Leveraged ETFs
Answer - DPP Registered representatives are not permitted to exercise discretion over DPP investments for their clients.
All of the following statements concerning hedge funds are TRUE, EXCEPT the funds: - May engage in short selling - Must register under the Investment Company Act of 1940 if offered to U.S. residents - May borrow funds in an attempt to boost returns - May concentrate assets in a few positions
Answer - Must register under the Investment Company Act of 1940 if offered to U.S. residents Hedge funds are investments that resemble mutual funds, but are typically only offered to wealthy investors. Hedge funds often employ aggressive financial strategies such as short selling, the use of leverage (borrowed funds), and placing large bets on individual companies or sectors of the market. These funds are not generally required to register with the SEC due to the accredited status of their investors.
A customer who has consistently invested in mutual funds is considering a first-time investment in a hedge fund. When comparing mutual funds to hedge funds, which of the following statements is NOT TRUE? - Mutual funds are subject to more regulatory oversight than hedge funds. - Hedge funds often use a higher degree of leverage than mutual funds. - Mutual funds pool investors' money and manage the portfolio, whereas hedge funds manage each investor's assets separately. - Mutual funds may be suitable for many customers, whereas hedge funds are generally suitable for sophisticated, wealthy investors only.
Answer - Mutual funds pool investors' money and manage the portfolio, whereas hedge funds manage each investor's assets separately. Both mutual funds and hedge funds pool investors' money to manage the assets. Unlike mutual funds, hedge funds are often exempt from regulatory oversight, use leverage, and employ aggressive financial strategies such as short selling and placing large bets on individual companies or sectors of the market. Hedge funds typically have high minimum investment requirements that make them suitable only for professional and wealthy investors.
Which of the following is NOT a benefit of investing in a real estate investment trust (REIT)? - Stable dividend income - Liquidity - Passive losses - Diversification
Answer - Passive losses Unlike DPPs, real estate investment trusts (REITs) do not generate passive losses. REITs offer investors stable dividends based on the income being produced by owning a diversified portfolio of properties and/or mortgages. Most REITs trade on an exchange and offer investors liquidity. Since investors typically purchase REITs for their high dividend yield, if interest rates increase, the value of their shares will usually decrease as other newly issued income-earning securities become more attractive.
If a REIT generates at least 75% of its income from rents or mortgage interest, and pays out at least 90% of its income to the shareholders, for tax purposes the income distributed by the REIT will be taxable to: - The REIT and not the shareholders - The shareholders and not the REIT - Both the shareholders and the REIT - Neither the shareholders nor the REIT
Answer - Shareholders and not the reit To qualify as a REIT, it must receive no more than 25% of its revenue from subsidiary (non-real estate) activities and must be structured and established as a trust. Also, the REIT must distribute a minimum of 90% of its income. Shareholders are responsible for paying taxes on the income distributed by the REIT. This income is treated as a nonqualifying dividend for tax purposes.
Which of the following statements is TRUE concerning exchange-traded funds (ETFs)? - The securities may be used by individuals to pursue a market timing strategy - The purchase price is based on a net asset value, plus any applicable sales charges - The securities are priced once a day based on the close of trading - Transactions in these securities must be executed in a cash account
Answer - The securities may be used by individuals to pursue a market timing strategy Exchange-traded funds (ETFs) represent a basket of securities. ETFs are structured to track an index of securities such as the Nasdaq 100, Standard and Poor's 500, or the Dow Jones Industrial Average. Shares are issued and then trade in the secondary market, much like closed-end investment company shares. Shares are purchased and sold on an exchange and may be purchased on margin and sold short. The price of an ETF is based on market sentiment (supply and demand) are changes throughout the trading session. An index fund (a type of mutual fund that also mirrors an index of securities) is priced only once a day, typically at 4:00 p.m. Individuals that pursue a market timing strategy are frequent users of ETFs. Market timers are active investors who trade frequently based up economic trends, technical factors, and corporate information.
Which of the following statements concerning ETFs is TRUE? - These funds are priced once per day. - These funds' values may fluctuate throughout the trading day. - Managers of these funds tend to trade individual portfolio positions frequently. - These funds tend to have very high portfolio turnover.
Answer - These funds' values may fluctuate throughout the trading day. Exchange-traded funds (ETFs) are investments that resemble unit investment trusts (UITs). A fixed portfolio is constructed either to track a specific index (such as the S&P 500) or a given market segment (such as gold or semiconductors). An ETF's portfolio typically remains constant unless there is a change to the underlying index or one of the individual investments within the fund is affected by a corporate action such as a sale or spin-off. ETFs are normally listed on NASDAQ or a traditional exchange and may fluctuate in price throughout the day as a regular stock would. They have a bid and ask as opposed to the NAV and POP found in mutual funds investments. Commissions are paid when trading ETFs as opposed to sales charges when purchasing mutual funds.
Which of the following descriptions characterizes leveraged exchange-traded funds (ETFs)? - They are designed to deliver the same performance as an index or other benchmark - They are designed to deliver a multiple of the performance of an index or other benchmark - They are designed to deliver the opposite of the performance of an index or other benchmark - They are designed to deliver a multiple of the opposite performance of an index or other benchmark
Answer - They are designed to deliver a multiple of the performance of an index or other benchmark A leveraged ETF is designed to deliver a multiple of the performance of an index or other benchmark. For example, a 3X leveraged ETF based on the DJIA seeks to deliver three times the performance of that index. So, if the DJIA rises or falls by 1%, a leveraged ETF would increase or decrease by 3% before fees and expenses. The other choices include a regular ETF which equals the performance, an inverse ETF which seeks to deliver the opposite of what it is tracking, and a leveraged inverse ETF designed to deliver a multiple of the opposite direction.
The person who distributes interest in a DPP is referred to as the: - Distributor - Syndicator - Managing partner - Limited partner
Answer - syndicator A syndicator (underwriter) is the person that distributes interests in a direct participation program (DPP).
Regarding ETFs, which of the following statements is TRUE? - ETFs are considered hedge funds by the SEC. - ETFs may only hold equity positions. - ETFs grow tax-deferred. - Typically, ETFs may be sold short.
Answer - typically, etf's may be sold short Exchange-traded funds (ETFs) are investments that resemble UITs. These products may be sold short, may be purchased on margin, and may invest in either equity or debt instruments. A fixed portfolio is typically constructed to either track a specific index (e.g., the Wilshire 5000) or a given market segment (e.g., airlines or medical companies). An ETF's portfolio typically remains constant unless there is a change to the underlying index or in one of the individual investments within the fund. Since ETFs are not hedge funds, there is no requirement for the investors to be accredited.