Saturday Study Set 2 - Series 66

Which of the followings measures should be used to assess the risk-adjusted return of an active portfolio manager? A) Beta B) Theta C) Gamma D) Alpha

D) Alpha Alpha is a measure of risk-adjusted return. It is the return in excess of the compensation for risk. It is often used to assess the performance of active managers. U10LO4

When a bond's NPV is zero, it is usually an indication that A) the market is highly efficient. B) the bond is mispriced. C) the bond is a zero-coupon bond. D) the bond is highly rated.

A) the market is highly efficient. An NPV of zero indicates that there is no difference between the bond's present value and its current market price. That usually indicates a highly efficient market. U10LO1

When determining whether to make an investment in a real estate limited partnership, Bill is concerned with the discount rate that equates the net investment cash inflows to the net investment cash outflows. Which calculation is Bill using to make this prudent investment decision? A) Net present value B) Internal rate of return C) Duration D) Future value

B) Internal rate of return The internal rate of return (IRR) is the discount rate that, when applied to the cash flows of an investment, equates the net cash inflows to the net cash outflows. If the IRR calculated is greater than or equal to the investor's required rate of return, then the investor should consider making the investment, all other factors being equal. If the IRR is less than the investor's required rate of return, the investment should not be made. U10LO1

A bond's yield to maturity reflects its A) nominal return B) internal rate of return C) return based on annual interest as a percentage of current price D) taxable equivalent return

B) internal rate of return Yield to maturity reflects the internal rate of return on a bond. Internal rate of return (IRR) equates the cost of an investment to the cash flows produced by that investment. U10LO1

Julian and Jane are discussing risk-return measures. Julian states that "beta is used when looking at the performance of a fund or portfolio and refers to the extent of any outperformance against its benchmark." Jane disagrees and says that "outperformance of a fund or portfolio is actually measured by standard deviation." Which of the following statement is correct? A) Only Jane is correct. B) Both Julian and Jane are correct. C) Both are incorrect. D) Only Julian is correct.

C) Both are incorrect. Both Julian and Jane are incorrect. It is alpha, not beta, that is used when looking at the performance of a fund or portfolio. Alpha refers to the extent of any outperformance of a portfolio against its benchmark. Standard deviation is used for measuring volatility, not performance. U10LO5

Securities analysts would agree that it makes sense to purchase a fixed-income security when its net present value (NPV) is A) negative B) zero C) variable D) positive

D) positive A positive NPV means the security is available for a price below its present value—it is a good buy. With a negative NPV, the price is too high. With a zero NPV, it is accurately priced. U10LO1

According to the Investment Advisers Act of 1940, which of the following statements about agency cross transactions is NOT true? A) Advisers must provide a written disclosure of potential conflict of interest before obtaining the client's written consent to execute such a transaction. B) Investment advisers can recommend these transactions to both the buyer and the seller if both clients give written consent. C) Advisers must send statements to clients no less frequently than annually that identify the total number of these transactions during the period and the total amount of commissions received. D) These transactions are allowed if the adviser is acting in the best interest of the client with respect to obtaining the best possible price.

B) Investment advisers can recommend these transactions to both the buyer and the seller if both clients give written consent. Investment advisers cannot recommend cross transactions to both buyer and seller, even if written consent is given. U6LO1

Twelve years ago, an investor placed $2,500 into an account. The account is now worth $10,000. Using the Rule of 72, you can determine that the approximate annual return was A) 12% B) 6% C) 36% D) 400%

A) 12% Under the Rule of 72, we can determine an earnings rate by dividing 72 by the number of years it takes for money to double. In this case, the money had quadrupled. That means it has doubled twice in 12 years or, every 6 years. Dividing 72 by 6 years results in an annual return of 12%. U10LO1

Which of the following activities of an investment advisory firm would NOT require notification to and consent of the clients of the advisory firm? A) A minority partner resigning from the firm to start his own advisory firm B) The retirement of a sole proprietor investment adviser who wishes to sell the practice to another investment adviser C) An investment adviser wishing to merge with a larger national advisory firm D) The chief operating officer of an investment advisory firm wishing to pledge her majority interest in the firm to a local bank for a loan to purchase an office building that will be leased to the advisory firm

A) A minority partner resigning from the firm to start his own advisory firm Any change in the controlling interest in an advisory firm, including pledging the controlling interest, is treated as an assignment of the contract and requires notification to and consent of the clients of the investment adviser. The change in a minority interest is not considered an assignment, so only notification, but not consent, is required. U6LO4

What is the appropriate procedure to follow when a customer fails to sign the form provided by the investment adviser stating that he has received a copy of the investment adviser's brochure? A) Proceed with the account, but make a supervisory person aware of this. B) Only unsolicited orders may be accepted until the signed receipt is received. C) Don't do anything with the account until the customer's signature acknowledging receipt of the brochure is received. D) Proceed with the account; the signature is not required.

A) Proceed with the account, but make a supervisory person aware of this. Although it is true that there is no legal requirement for a client to sign acknowledging receipt of the brochure, if it is the adviser's practice, the account may proceed, but only with notice to the appropriate supervisory person. U6LO4

All of the following must be disclosed by an investment adviser EXCEPT A) an investment adviser representative in the firm was fined $1,000 by FINRA for making unsuitable recommendations B) the president of the investment adviser was found liable in a civil action involving unsuitable advice in a state where the adviser does not have an office C) a senior officer of the firm was convicted of a felony 6 years ago D) a senior officer's suspension from the securities industry

A) an investment adviser representative in the firm was fined $1,000 by FINRA for making unsuitable recommendations Legal and disciplinary action successfully brought against an investment adviser must be disclosed to customers, as well as disciplinary actions that resulted in a fine in excess of $2,500. Convictions for a misdemeanor or felony involving securities or money within the past 10 years must also be disclosed. U6LO1

A federal covered investment adviser has decided that it is necessary to increase its fee schedule and charge commissions on securities trades. However, they are going to leave the fee structure in place for existing customers. This information must be A) disclosed promptly only to those customers who will be affected by the change through an amended brochure B) disclosed promptly to the Administrator of the state where the IA maintains its principal office C) disclosed promptly to all customers by amending the brochure D) disclosed in the summary of material changes in the annual updating amendment to the SEC

A) disclosed promptly only to those customers who will be affected by the change through an amended brochure Because this will only affect new clients, the brochure (or Part 2A of the ADV) must be amended to reflect this new method of operation and made available promptly to these clients and to the SEC; it cannot be part of the end-of-year amendments. The state has no cause to receive a copy of a federal covered adviser's brochure. U6LO4

In reviewing prospectuses and registration statements, the SEC A) does not approve or disapprove of the issue B) certifies the accuracy of the disclosures made in a prospectus C) guarantees the adequacy of the disclosures made in a prospectus D) passes on the merits of a particular security covered by a registration statement

A) does not approve or disapprove of the issue The SEC requires full disclosure regarding a new issue so that investors can make informed decisions on the security. The SEC does not, however, guarantee the accuracy or adequacy of the information, nor does it approve or disapprove of the issue. U6LO2

The statistical measurement that indicates how much an investment's returns have fluctuated compared with its average return over a period of time is known as A) standard deviation B) beta C) duration D) Sharpe ratio

A) standard deviation Standard deviation is the statistic that indicates how much an investment's returns have fluctuated compared with its average returns over a given period of time. An investment with a high standard deviation tends to have a higher level of risk than an investment with a low standard deviation. U10LO5

If you were using the discounted cash flow method to determine the appropriate value of a security, you would want to purchase that security when A) the current market price is below the PV B) the current market price equals the PV C) the current market price is above the PV D) the rating of the security has just been upgraded

A) the current market price is below the PV Those who use the DCF to value a security would recommend purchasing when the current market price is below the PV—that is, when the NPV is positive. U10LO1

If a federal covered investment adviser wishes to sell his business to another advisory firm, which of the following statements is TRUE? A) The sale must be approved by each customer of the selling adviser. B) No approvals are required. C) The sale must be approved by the Administrator. D) The sale must be approved by the SEC.

B) No approvals are required. An investment adviser does not need the approval of clients to sell the business. However, technically, the sale means that the advisory contracts will be assigned and that cannot be done without client consent. In an event such as this, the clients would be given the choice of having the new firm manage their assets or taking their accounts elsewhere. U6LO4

Which of the following statements best represents a bond's present value? A) Present value is the sum of all the discounted future interest payments. B) Present value is the sum of all the discounted future payments. C) Present value is the discounted future repayment of principal. D) Present value represents the internal rate of return (IRR) of the bond.

B) Present value is the sum of all the discounted future payments. The correct answer is the standard "textbook" statement. There are two future cash flows from a bond. First is the periodic interest payments and second is the repayment of the principal at maturity. The PV of the bond is the sum of the discounted value of both. U10LO1

Active Technicians (AT) is a state-registered investment adviser. In its brochure supplement, it would include information relating to each of the following individuals EXCEPT A) those providing investment advice and having direct contact with retail clients in the state B) members of AT's board of directors who are active in the firm's business C) those exercising discretion over assets of clients in this state, even if no direct contact is involved D) those providing investment advice and having direct contact with institutional clients in the state

B) members of AT's board of directors who are active in the firm's business Unless the individual has direct contact with clients (retail or institutional) or exercises discretion, a copy of the Part 2B brochure supplement for each individual is not required. This would include officers and members of the board of directors. Of course, if any of these individuals had direct client contact or exercised discretion, a supplement for them would need to be prepared. U6LO4

If an investment adviser tells a client that a stock has doubled in the past year and, even though past performance is no assurance of future results, he is sure it will double, this statement is A) permissible if the adviser has performed due diligence on the stock B) prohibited as a likely exaggeration C) prohibited because the investment is not suitable for the client D) permissible due to the disclaimer of future performance

B) prohibited as a likely exaggeration Regardless of disclosure of the uncertainty of future performance of an investment, an investment adviser may not make potentially exaggerated claims. U6LO3

One way in which an investment adviser acting in the capacity of an agent in a transaction with a client differs from a broker-dealer performing the same task is that the investment adviser A) may not charge a commission on the transaction B) shall disclose the agency capacity before the transaction C) shall notify the Administrator of its capacity in the proposed transaction D) shall obtain client consent before completion of the transaction

B) shall disclose the agency capacity before the transaction In order to act as an agent (or principal) in a trade with an advisory client, there are 2 requirements: - The client receives full written disclosure as to the capacity in which the adviser proposes to act - Consent of the client Both of these are required before the completion of the transaction. U6LO1

Jon, an agent with Johnson-Bayer Securities, was reacting to peer pressure to use email as a prospecting tool. He decided to highlight the exciting new process for drug delivery that was covered in the new offering prospectus when explaining why he felt the issuer found the next "aspirin." He summed up the email by stating potential investors needed to act quickly to get in on the ground floor. His decision to do so fell into the category of which of the following? A) Advertising B) Fraud C) Unethical business practice D) Phishing

C) Unethical business practice NASAA considers it to be an unethical business practice to use any advertising or sales presentation in such a fashion as to be deceptive or misleading. Examples of such practices would be: - a distribution of any nonfactual data; - any material or presentation based on conjecture; - unfounded or unrealistic claims in any brochure, flyer, or display by words, pictures, or graphs; or - anything otherwise designed to supplement, detract from, supersede, or defeat the purpose or effect of any prospectus or disclosure. U6LO5

An investment advisory contract is considered assigned if an adviser formed as A) a corporation with 5 officers and adds 2 officers B) a partnership with 5 partners and adds 2 partners C) a partnership with 2 partners and adds five partners D) a corporation with 2 officers and adds 5 officers

C) a partnership with 2 partners and adds five partners If an advisory firm is formed as a partnership and there is a change in the majority of partners, this is considered to be an involuntary assignment to the new partnership. In this case, client approval is required. U6LO4

Regarding the use of testimonials in advertising, all of the following are true EXCEPT A) an agent of a broker-dealer may use a testimonial from an existing client with the approval of a designated officer of the firm B) divulging a list of the investment adviser's clients in response to a court order is not considered a testimonial C) an investment adviser representative may only use a testimonial from an existing client D) a prominent celebrity speaking publicly about his relationship with the investment adviser is considered to be giving a testimonial

C) an investment adviser representative may only use a testimonial from an existing client Testimonials are prohibited under any circumstances for investment advisers and their representatives. Agents and broker-dealers are permitted to use testimonials if they meet FINRA standards. U6LO5

In an effort to benefit from the economies of scale, Liquid Assets Management, Inc. (LAMI) and Strategic Assets Management Company (SAMCO), both registered with the Administrator as investment advisers, have merged into a new firm with the name of Strategic and Liquid Assets Management Company (SLAMCO). This would A) require notification to the clients within a reasonable period of time. B) require the filing of a new Form ADV along with the proper registration fee. C) be considered an assignment of the advisory contracts and would require consent of the clients. D) be an unethical business practice.

C) be considered an assignment of the advisory contracts and would require consent of the clients. A change of management control is deemed to be considered an assignment of the advisory contracts held by LAMI and SAMCO. In order for those contracts to be continued by SLAMCO, consent of the clients is required. It is only when a change to a minority interest in an advisory firm organized as a partnership that notification within a reasonable period of time is required. Although SLAMCO would have to register with a new FORM ADV, as a successor company, no registration fees would be due until renewal on December 31. U6LO4

The time value of money is part of the computation for A) the risk-adjusted return B) the after-tax return C) the internal rate of return D) the real rate of return

C) the internal rate of return One of the unique features of IRR is that it is a compounded rate using the time value of money. U10LO1

Beth Jamison is an agent and an IAR for Consolidated Wealth Planning, a FINRA member broker-dealer and SEC-registered investment adviser. An advisory client purchases 300 shares of RMBN and the sale is made from Consolidated's inventory. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives and Federal Covered Advisers, A) the amount of commission charged for this transaction must be clearly disclosed B) Beth must obtain consent of any advisory client whenever a sale is made as principal C) selling out of inventory to advisory clients would be considered an unethical business practice D) Beth would not be required to obtain consent for this principal transaction if it was not the subject of a recommendation

D) Beth would not be required to obtain consent for this principal transaction if it was not the subject of a recommendation When acting in the capacity of IA (or IAR), that is, when making recommendations or advising a client to purchase (or sell) a security, any transaction in which the firm is a principal requires disclosure in writing to and consent from the client prior to the completion of the trade. However, if merely accepting a client order (no advice rendered), consent is not required. U6LO1

Which of the following conditions would most likely meet compliance standards of state regulators? A) Maintaining an under-the-radar system of monitoring social media use by its agents is permissible when determining compliance with NASAA's rules. B) Only those in a supervisory role need to recognize the difference between business and nonbusiness communications. C) At a minimum, a firm that permits use of social media sites must hold biannual training as part of its continuing education obligations. D) Both supervisory personnel and agents need to understand the difference between interactive and static content.

D) Both supervisory personnel and agents need to understand the difference between interactive and static content. Before allowing associated persons to use social media for business purposes, a firm's policies and procedures must provide for personnel training and education relating to the parameters of permitted use. Both supervisory personnel and agents need to understand the difference between interactive and static content, between business and nonbusiness communications. A firm should consider requiring training in the use of social media prior to permitting use. At a minimum, a firm that permits use of social media sites must hold annual training as part of its continuing education obligations. U6LO5

Beverly has two stocks with a correlation coefficient of zero. Which of the following is correct? A) These stocks are well diversified because as one stock appreciates in value, the other decreases in value. B) These stocks are well diversified because they will move in unison. C) These stocks are not well diversified because they move in unison. D) These stocks will move independently of each other.

D) These stocks will move independently of each other. A correlation coefficient of zero means that the two stocks will move independently. They may move in the same direction, or they may not. The zero correlation coefficient indicates that there is no pattern to the relationship between their price movements. U10LO6

If an agent feels that his secretary is underpaid and decides to split his commissions on an 80%/20% basis, this practice is A) a violation in certain states B) a violation under all circumstances C) permitted if the secretary is also registered as an agent D) permitted if the secretary is also registered as an agent and the appropriate supervisory person agrees to the arrangement

D) permitted if the secretary is also registered as an agent and the appropriate supervisory person agrees to the arrangement Just as with any other individual, splitting commissions can only be done with those having the proper registration, in this case, that of an agent. Because compensation is determined and processed by the employing broker-dealer, any splitting would need the approval of the appropriate supervisor. U7LO4

Under the USA, a guaranteed security is protected by someone other than the issuer against loss of all of these EXCEPT A) interest on debt securities B) principal repayment at maturity on debt securities C) dividends on equity securities D) principal on equity issues

D) principal on equity issues Guarantees generally apply to income from the security (dividends or interest) and to payment of the principal amount at maturity. Third-party guarantees do not provide against market loss. Please note that capital gains are never included in this type of guarantee. U6LO3

In order to be in compliance with the rules, an investment adviser would have to disclose that the firm was acting in a principal capacity when A) engaging in an agency cross transaction B) the trade is being executed by an officer or partner of the firm C) directing securities transactions to an affiliated broker-dealer D) purchasing shares directly from advisory clients

D) purchasing shares directly from advisory clients There are 2 principals in every securities trade: the buyer and the seller. In this case, buying shares directly from clients who own those shares places the IA in the position of being one of the principals. This is an action that must be disclosed in writing to the client no later than completion of the transaction. In an agency cross transaction, the firm is acting as an agent—that's the reason for the term. U6LO1