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Which of the following statements is NOT TRUE of hedge funds?
They are typically registered with the SEC under the Securities Act of 1933.
A 30-year-old single mother has income of $25,000 and has put money into an equity fund for her 12-year-old son's college education. She wants to balance out the risk with a small bond investment and is hoping to avoid accessing any of this money until her son turns 18. Which of the following securities is the MOST appropriate for the mother?
A government bond fund
If a client is interested in purchasing a stock that has a high P/E ratio and a low dividend payout ratio, what type of stock should an IAR recommend?
A growth stock
According to SEC Release 1092, which of the following persons is considered an investment adviser?
A pension consultant who advises several large publicly traded companies
Which of the following persons must be registered as a broker-dealer in State B?
A person with a place of business in State B, but effects securities transactions with institutional clients in State B.
According to Uniform Securities Act, which of the following is NOT considered a state?
Any Canadian province
An investor has purchased a corn futures contract at $1.20 per bushel and the contract delivery size is 5,000 bushels. If the price of corn has fallen to $1.10 per bushel, what is the client's profit or loss?
$500 loss
A portfolio contains fixed-income instruments and common stock. The portfolio's beginning value was $240,000; however, the portfolio was valued at $280,000 at the end of the second year. If interest and dividends totaled $20,000, what's the annualized yield on the portfolio?
12.50%
Eight years ago, a person invested $4,000. During the eighth year, the investment had increased to $8,800, but finished the year at $8,000. What is the compounded return on investment achieved for the eight-year period?
9%
Under the Uniform Securities Act, which of the following firms is excluded/exempt from the definition of investment adviser?
All of the above
Which of the following is a risk-adjusted rate of return?
Alpha
Which of the following provides an option customer with the most flexibility if she wants to exercise her option?
An American style option
An investment adviser's contract with its clients may contain all of the following provisions, EXCEPT:
An exculpatory provision
According to the Uniform Securities Act, all of the following are excluded from the investment adviser definition, EXCEPT:
An insurance company
An investor has owned stock for several years and has an unrealized capital gain. If he is willing to sacrifice some yield in order to protect the unrealized gain, which option strategy is the BEST?
Buying puts on the stock
Which of the following measures the leverage of a company?
Debt-to-equity ratio
An individual is licensed as an agent of a broker-dealer, an insurance agent, and an investment adviser representative. One of her clients is nearing retirement and explains that he intends to live off his investments and pension once he retires. He believes that his pension will provide the monthly income he needs to cover his basic expenses. His main investment objectives are to leave a substantial amount of assets to his grandchildren upon his death and to prevent a loss of purchasing power in the event that he lives another 20 to 30 years. The agent should NOT consider recommending a:
Fixed immediate annuity
After conducting extensive research on XYZ Company, an agent believes that the company's prospects are very positive. The agent thinks the stock could easily double in the short-term and plans on sending out an e-mail to all of his customers recommending purchase of XYZ stock. How should the agent proceed?
He should reconsider his plan, since XYZ stock may not be appropriate for all of his clients.
Which TWO of the following factors are used in a discounted cash flow (DCF) analysis? 1. Present value of future cash flows 2. Expected rate of return earned on reinvested cash flows 3. Future value of current cash flows 4. Expected risk-free rate of return over the life of the investment
I and II
An investment adviser has no place of business in State A. According to the Uniform Securities Act, in which TWO of the following situations is the firm required to register as an investment adviser in State A? 1. The firm only provides advice to accredited investors in State A. 2. The only client the firm has in State A is a pension fund. 3. Over the last 12 months, the firm has provided advice to 10 retail customers who are residents of State A. 4. The firm is registered under the Investment Company Act of 1940.
I and III
Which TWO of the following statements are TRUE regarding a time-weighted rate of return? 1. It may be used to compare the performance of two money managers. 2. It is a way of calculating an investor's internal rate of return. 3. It does not consider the inflows and outflows of cash. 4. It measures the average return that a client's investment earned.
I and III
Two friends are forming a business. They want the benefits of incorporation, but want to protect their personal assets and also avoid being taxed twice on any profits that the business generates. Which TWO structures will meet their needs? 1. An S Corporation 2. A C Corporation 3. A limited partnership 4. A limited liability company
I and IV
Which TWO of the following retirement plans typically have a zero cost basis? 1. A 401(k) 2. A Roth IRA 3. A Coverdell IRA 4. A traditional IRA
I and IV
A married couple wants to pay off their mortgage when they retire in 15 years, which will require $60,000. After receiving an inheritance of $30,000, they meet with their investment adviser representative for help in determining the lowest annual rate of return that they need to earn on the inheritance in order to use it to pay off the mortgage in 15 years. The IAR tells them the rate is 4.75%, which is referred to as the:
Internal rate of return
When comparing asset allocation strategies, passive and active strategies can be characterized in which TWO ways? 1. Some active strategies seek to restore the volatility of the portfolio to its original level if it deviates due to securities' price movements. 2. Passive strategies are based on the premise that markets are inefficient. 3. Some passive strategies seek to restore the volatility of the portfolio to its original level if it deviates due to securities' price movements. 4. Active strategies are based on the premise that markets are inefficient.
III and IV
Which of the following statements about discounted cash flow (DCF) analysis is TRUE?
If the net present value of an investment is greater than zero, it represents a good investment opportunity.
Which of the following is NOT considered an active portfolio management strategy?
Indexing
Which of the following is an advantage of investing in a hedge fund?
Investment strategies which could potentially outperform the market as a whole
Which of the following statements is TRUE regarding a client's occupation as it relates to her financial status and the suitability of recommendations?
It can influence the liquidity needs of the client's portfolio.
An issuer is seeking to raise capital through a private placement offering. The company is located in State A and does not want to incur registration expenses for the offering at either a state or federal level. To satisfy the issuer's goal, the offering:
May be offered to institutional investors in State A without any registration
A company whose stock is listed on the NYSE intends to issue additional shares in State X. The Administrator of State X:
May not require the registration of the offering in State X.
When calculating the current ratio of a corporation, all of the following are included, EXCEPT:
Net income
A client will be traveling and wants her IAR to have check-writing privileges so that he is able to pay her utility bill while she is away. Her IAR should:
Obtain full power of attorney from the client
An investment adviser intends to purchase 100,000 shares that it will place into various clients' accounts. Which of the following is an acceptable method of allocating the bunched order?
Provide clients with the average price at which the investment adviser purchased the shares
An S Corporation is similar to a partnership in that both:
Provide flow-through of losses
A nonissuer transaction is also referred to as a(n):
Secondary market transaction
An investor owns a large portfolio of stock and wants to hedge against a market downturn. Which of the following orders are the most appropriate?
Sell stop orders
The primary advantage of establishing a trust is:
Separate tax status of the trust, which is distinct from the party that establishes the trust
Which of the following choices is a disadvantage of investing in a C Corporation?
Shareholders pay tax on income that was already taxed to the company.
The Modern Portfolio Theory uses which of the following to measure volatility?
Standard deviation
An adviser is managing the portfolios of several clients who are invested in bonds. He anticipates that the economy is beginning to expand too rapidly and advises his clients to reallocate some of their holdings into money market instruments. What strategy is the adviser utilizing?
Tactical asset allocation
An IAR has been discussing the advantages of purchasing a financial plan with a potential client. During a party that they are both attending, the client mentions that she has looked over the contract and is ready to move forward with the financial plan. The client hands her signed contract and a check to the IAR. Although the IAR has not provided the client with his firm's brochure, the client states that she has reviewed it online. Regarding the disclosure document, which of the following statements is TRUE?
The IAR may not accept the contract until he has provided the client with a copy of his firm's brochure.
An investment adviser that is registered in State A has recently fired several of its portfolio managers. As a result, the firm is required to amend the registration application that was filed with the Administrator. What action must the firm take to remain in compliance with the USA?
The firm must file the amendments promptly.
An investment adviser has $57.5 million under management. Among the firm's clients is a small, in-house family of funds whose shares are currently offered exclusively to the adviser's clients. What is the firm's status for registration requirements?
The firm must register as an investment adviser with the SEC.
A mother has invested money into a 529 plan to save for her son's college expenses. If her son is awarded a full scholarship to a university, what is the mother permitted to do with the funds in the 529 plan without paying taxes or a penalty?
The funds may be given to another relative to be used for education expenses.
Which of the following situations does not constitute the assignment of an investment advisory contract requiring client approval?
The investment adviser is a partnership with three partners, one of whom dies
A client has recently won the lottery. She has the option of receiving $100,000 immediately or $150,000 spread over 15 years with monthly installment payments. Which of the following concepts would help her make the best decision?
The time value of money
In a JTWROS account, if one person dies, which of the following statements is TRUE?
With proper documentation, the assets in the account become the property of the other person.
When should a federal covered adviser (FCA) file an amendment to its registration?
Within 90 days of the end of its fiscal year
According to the Uniform Securities Act, which of the following statements is NOT misleading if it is made by an agent?
"A gift of assessable stock is technically treated as both an offer and a sale."
A married couple wants to fund IRAs to save for their retirement. The husband is 60 years old and is a retired CFO, while the wife is 55 years old and works for the federal government. What is the maximum amount that the couple may contribute?
$14,000
A bond is convertible at $50 and is selling in the market for $1,080. At what price per share must the common stock be trading to be at parity with the bond?
$54
Based on the past performance of XYZ Company, an investment adviser has determined that in a bull market there is 25% probability that XYZ stock will return 15%. In a flat market, there is 50% probability that the stock will return 4%. In a bear market, there is 25% probability that the stock will lose 20%. What is the expected return for XYZ stock?
+0.75%
A young, married couple are ready to start investing and their main objective is long-term growth. Of the following choices, the most appropriate mutual fund for the couple is one with a portfolio that contains:
40% large-cap stocks, 20% mid-cap stocks, 20% small-cap stocks, and 20% bonds
According to the Uniform Securities Act, which of the following persons is an agent?
A CEO who sells shares of his company's IPO to family, friends, and other retail investors
An investor who is in a high federal tax bracket and also subject to state and local taxes will benefit the MOST by purchasing:
A Commonwealth of Puerto Rico Water and Sewer bond
Which of the following statements is NOT TRUE concerning agency cross trades executed by investment advisers?
A client may provide verbal authorization for up to 10 days.
Which of the following statements is TRUE regarding a sports and entertainment representative?
A sports and entertainment representative who provides advice about asset allocation, but does not recommend individual investments, meets the definition of investment adviser.
Which of the following investments provides the highest real rate of return?
An investment earning 10% when inflation is 2%
Under the Uniform Securities Act, which of the following persons is considered an investment adviser representative?
An office manager of an advisory firm who supervises salespersons, but does not have her own clients
An equity-indexed annuity is suitable for which of the following clients?
An person who needs a minimum guaranteed return with the potential for a greater return than CDs offer
An investor maintains a portfolio of debt securities. She is concerned that the FRB may tighten the money supply, leading to an increase in interest rates. To measure the effect that this change will have on the value of her portfolio, which of the following choices will be the BEST in providing her with this information?
Analyzing the duration in her portfolio
Which of the following is a type of unsystematic risk?
Business risk
An industry average debt-to-equity ratio is 2.0. Stocks in the industry have following ratios: Company W: 3.5 Company X: 1.7 Company Y: 1.3 Company Z: 0.7 Which of the following statements is TRUE?
Company W is the most leveraged firm.
An agent is registered in State A and provides financial services to an older client who lives in State A. The client's son, who lives in State B, calls the agent and indicates his intention to open an account, but wants to immediately place an order to buy 1,000 shares of XYZ stock. If the agent is not currently registered in State B, what course of action should he take?
Decline the order
An investment adviser representative has discretionary authority over a client's portfolio. The client's objective is conservative growth. According to the UPIA, which of the following statements is TRUE regarding the use of equity derivatives in his portfolio?
Derivative strategies may be appropriate as part of a conservative portfolio.
An investment adviser uses an unaffiliated broker-dealer to execute transactions for its clients, despite the fact that the broker-dealer charges higher commissions. Which of the following statements is TRUE?
Directing customer transactions to a broker-dealer that charges higher commissions is acceptable if the firm provides best execution.
All of the following methods of ownership will avoid probate, EXCEPT:
Estate
A client of an agent has instructed her to buy 1,000 shares of a Nasdaq stock as close to the opening price as possible. However, at 9:00 a.m., negative news about the company is released. If the agent placed a call to inform the client of the news, but has not yet reached him, what should she do?
Execute the trade
According to the National Securities Markets Improvement Act (NSMIA), which TWO of the following federal covered securities are subject to notice filing? 1. Investment company securities 2. Securities sold under Rule 506 of Regulation D 3. Exchange listed securities 4. Securities sold to qualified purchasers
I and II
In a soft-dollar arrangement, which TWO of the following choices are benefits that would justify a broker-dealer charging a higher commission to an investment adviser? 1. Software to conduct research 2. Payments for advertising and marketing 3. Seminar attendance fees 4. Computer terminals
I and III
Which TWO of the following choices are considered derivatives? 1. Interest-rate swaps 2. Unit investment trusts (UITs) 3. Credit default swaps (CDS) 4. Mutual funds
I and III
Which TWO of the following statements are most likely considered violations of the USA's antifraud rules? 1. "Our representative's investment acumen has been verified by the state Administrator." 2. "To stay current, each of our representatives attends at least five tax planning or investment seminars per year." 3. "Each of our investment experts is Series 66-certified." 4. "Our representatives are CFP accredited."
I and III
As fiduciaries, investment adviser representatives must do which TWO of the following? 1. Engage in actions that are exclusively in their clients' best interest 2. If any conflict of interest exists, abstain from any action 3. If any conflict of interest exists, a public record must be published 4. Disclose any potential conflict of interest to their clients
I and IV
When comparing variable annuities to fixed annuities, which TWO statements are TRUE regarding the assumption of investment risk? 1. It is assumed by the investor in a variable annuity. 2. It is assumed by the insurance company in a variable annuity. 3. It is assumed by the investor in a fixed annuity. 4. It is assumed by the insurance company in a fixed annuity.
I and IV
Which TWO of the following statements regarding investment advisory contracts are TRUE? 1. Under the Uniform Securities Act, IA contract must be written 2. Under the Uniform Securities Act, IA contracts are not required to be written 3. Under the Investment Advisers Act of 1940, IA contracts must be written 4. Under the Investment Advisers Act of 1940, IA contracts are not required to be written
I and IV
An investor has set aside a large sum of money to purchase a corporation. The legal details of the acquisition should be completed within the next six months, but he is unsure of the exact date on which this will happen. If the investor decides to temporarily invest his money in Treasury bonds until he needs the funds to complete the purchase, which TWO of the following risks are the most serious for him? 1. Currency risk 2. Interest-rate risk 3. Timing risk 4. Credit risk
II and III
Which TWO of the following statements are TRUE regarding TIPS? 1. During a period of inflation, the interest rate is adjusted upward. 2. During a period of deflation, the principal is adjusted downward. 3. During a period of inflation, the principal is adjusted upward. 4. During a period of deflation, the interest rate is adjusted downward.
II and III
Which TWO of the following persons are required to register as agents according to the Uniform Securities Act? 1. The CEO of a company who sells his company's new issue of stock to its underwriter 2. A life insurance salesperson who solicits sales in separate account products 3. An outside consultant who has entered into a contract with a municipality to assist in the marketing of its debt obligations 4. A branch manager of a brokerage firm who supervises several salespersons who are engaged in the sale of securities
II and IV
Which TWO of following situations are disadvantages of portfolio rebalancing? 1. Appreciating assets are retained while depreciating assets are sold. 2. The risk-reward characterizations of the portfolio are retained. 3. There are increased tax liabilities due to the sale of appreciated assets. 4. There are increased transaction costs.
III and IV
XYZ broker-dealer is located in State A and maintains its only office there. Under the Uniform Securities Act, XYZ will NOT be considered a broker-dealer in State B in which TWO of the following situations? 1. It sells securities to an investment club that is located in State B 2. It engages in securities sales with no more than five retail investors who are residents of State B 3. It conducts business only with financial institutions in State B 4. It enters into a transaction with a resident of State A, who is temporarily visiting State B
III and IV
Regarding inverse ETFs, which of the following statements is TRUE?
Inverse ETFs use derivatives in order to move in opposition to the underlying index.
From a compliance standpoint, which of the following activities causes the greatest concern when determining if there are conflicts of interest between an advisory firm and its clients?
Investment adviser representatives are allowed to own the same securities that the firm recommends to its clients.
According to NASAA's Statement of Policy Regarding Dishonest and Unethical Business Practices, which of the following statements regarding customer accounts is TRUE?
Margin agreements must be signed promptly following the first transaction.
An investor has a portfolio comprised of large-cap, mid-cap, and international equities. To which of the following risk is the investor LEAST exposed?
Money-rate
If an investment adviser receives an advisory fee of $5,000, six months in advance, the adviser:
Must provide the client an audited balance sheet
The liabilities section of a personal balance sheet could include which of the following?
Remaining mortgage balance
Which of the following statements is TRUE regarding research reports that are prepared by others?
Research that is obtained from an external source and distributed to clients must disclose the name of the source.
In which of the following practices is an agent permitted to engage?
Stating facts to a client which relate to a market letter that is published by her firm.
An IAR intends to recommend speculative debt offerings to some of her more aggressive accounts. Since the IAR specializes in equity investments, she plans to use an outside fixed-income expert to help in the selection process. In this situation, which of the following statements is TRUE under the UPIA?
The IAR may delegate her investment decision-making authority.
An investor has an account with an investment adviser and has provided discretionary authority to his IAR. The client's objectives are income and preservation of capital. Although his account has shown a positive return, he is concerned about numerous in-and-out trades that occurred on the same day. Which of the following statements best describes this situation?
The IAR's actions are unethical.
A federal covered adviser is considering the possibility of establishing an in-house custodial program to eliminate the payment it currently makes to its custodian. Which of the following statements concerning the custodian activity is TRUE?
The adviser is permitted to establish its own program to maintain custody of client assets.
If a state registered investment adviser intends to enter into a contract with a registered investment company to manage its portfolio valued at $75 million, what is required of the adviser?
The adviser must withdraw its state registration and register at the federal level with the SEC.
An investment advisory firm has created a new contract for its advisory clients. Which of the following clauses should NOT appear in the contract?
The adviser will not be held liable for civil damages unless criminal liability is established.
An agent has opened a new account for a client and entered a market order to buy 200 shares of stock. Prior to the end of the day, the agent turned in the new account form and a copy of the order ticket for approval by his supervisor. According to the Uniform Securities Act, which of the following statements is TRUE?
The agent needed approval for the new account before executing the first trade.
An investor placed money in his Roth IRA and invested in mutual fund shares. He has consistently reinvested any distributions and purchased extra shares. Since the fund charges an 8.5% sales charge, the fund allowed for reinvestment at the NAV. When the investor withdraws money at retirement, how will the distributions be taxed?
The distributions are considered tax-free.
An investor intends to purchase mutual fund shares, but needs to determine whether she should buy Class A, B, or C shares. Which of the following considerations is NOT important when making this decision?
The experience of her agent
An investor has granted power of attorney over his account to his daughter. Whose objectives and related investment experience should be considered when making a determination of suitability?
The father's
An issuer has filed a registration statement in a state to offer securities. Which of the following choices is NOT a valid reason for the Administrator to deny its registration?
The issuer has not filed a registration statement with the SEC.
In an effort to generate new business, an investment adviser wants to publish a list of its past recommendations. According to the USA, which of the following best describes the adviser's obligations?
The list must include all recommendations that it made over a minimum one-year time frame
What's the name of the agreement in which an adviser discloses it's obligation to keep customer information confidential?
The non-disclosure agreement (NDA)
All of the following statements are TRUE regarding term life insurance, EXCEPT:
The policy matures and its cash value is paid out at the end of the term period.
A registered investment adviser is located in State X and is going out of business. Which of the follow is TRUE regarding the registration of the adviser and its IARs?
The registrations of both the IA and its IARs will become ineffective 30 days after the IA files withdrawal forms with the Administrator.
Under the Uniform Securities Act, all of the following transactions are exempt, EXCEPT:
The sale of corporate bonds to a customer in a solicited trade
A 19-year-old high school graduate who lives in State A has decided to attend college in State B. Her parents have been funding her college education through a Section 529 savings plan. Which of the following statements is TRUE concerning the tax considerations on her withdrawals for her education expenses?
They may be withdrawn without federal tax liabilities
Two agents (Agent X and Agent Y) work for the same brokerage firm that is located in State A. Agent X recently contacted a referral who currently works in State A, but maintains a primary residence in State B for tax purposes. Agent X is not registered in State B, but Agent Y is registered there. Since the account may be a multimillion dollar, actively traded account, Agent X wants to have the account serviced by Agent Y, with whom she will split the commissions. How should this be handled?
This is not permissible since Agent X is not registered in State B.
The owner of a small investment advisory practice has decided to close her firm. The adviser currently has a sizable surety bond posted with the state Administrator and the owner wants to use these funds for personal reasons. The adviser is required to maintain the bond with the Administrator for:
Three years following the firm's withdrawal date
Which of the following insurance policies allows the owner to skip her premium payments?
Universal life insurance
An investor is seeking an investment that will pay her family after she dies. The investor's income is sufficient to satisfy her living expenses and she is willing to accept a moderate degree of risk. Which of the following is the MOST suitable?
Variable life insurance
An investor has owned stock for several years and has an unrealized capital gain. If she believes that the stock's price will remain stable and wants to increase her portfolio's yield, which option strategy is the BEST?
Writing calls against the stock
