Series 6 - STC Final Exam 2
Based on its beta, an investment is expected to earn 4%. However, the investment actually returned 7%. As a result, the investment's alpha is:
3% positive Alpha is the amount of a security's return that's either above or below its expected return (as implied by its beta). If a security outperforms the expected return, it's considered to have a positive alpha. Conversely, if it underperforms the expected return, it's considered to have a negative alpha. With this investment providing a 7% return, but expected to have a 4% return, the alpha is a 3% positive.
Which of the following contractual features in a variable life policy requires that the cash value of the policy be available to the policyholder in the event the premium payments stop? A) A nonforfeiture provision B) A minimum cash value guarantee C) A policy loan provision D) An exchange privilege
A) A nonforfeiture provision A nonforfeiture provision in a life insurance policy requires any cash value accumulation to be available to the policyholder if the policyholder stops paying premiums for any reason. However, in a variable life policy, there is no guarantee as to what that cash value might be.
Which of the following individuals MUST sign the new account form when a partnership account is opened? A) All of the partners B) Only the partners authorized to execute trades in the account C) The registered representative executing trades in the account D) The trustee acting on behalf of the partnership
A) All of the partners When opening an account for a partnership, all partners must sign the new account form. The registered representative handling the account is not required to sign and a trustee is not representing the partnership.
XYZ Corporation has just announced that its quarterly earnings will be a bit below market expectations. Which of the following securities issued by XYZ will be most affected by this news? A) Common stock B) Preferred stock C) Commercial paper D) Long-term debentures
A) Common stock The value of a company's common stock is generally most affected by news connected to the performance of the company's business.
Under the Code of Procedure, the initial review of complaints is completed by the: A) Hearing Panel B) National Adjudicatory Council C) SEC D) Federal court
A) Hearing Panel Under the Code of Procedure, the initial review of complaints is completed by the Hearing Panel. Decisions of the Hearing Panel can be appealed to the National Adjudicatory Council, which can then be appealed to the SEC, and the final appeal can go to the Federal courts.
Which of the following statements best defines the term duration? A) It is a measure of a fixed-income security's relative interest-rate risk. B)It is a measure of a fixed income portfolio's average yield. C) It is the period before a fixed-income security will be called. D) It is the measure of volatility that compares an equity security to the S&P 500 Index.
A) It is a measure of a fixed-income security's relative interest-rate risk. Duration measures price sensitivity for fixed-income securities given changes in interest rates. For example, a bond with a 7-year duration would experience a 7 percent change in price for every one percent change in market interest rates.
A customer sends a registered representative an email with a question about the objectives of a mutual fund the customer is thinking about purchasing. The RR then sends an email reply to answer the customer's question and recommends the purchase of the fund. Which of the following statements is TRUE regarding the RR's email? A) It is considered correspondence and is subject to review by his firm. B) The email is considered official firm business only if sent through the firm's system but it is not subject to firm rules if sent from the RR's home computer. C) An email is treated like a phone conversation for regulatory purposes and is not subject to review by the firm. D) The email would be considered retail communication and is subject to review by both the firm and FINRA.
A) It is considered correspondence and is subject to review by his firm. Email to a particular client is considered correspondence and is subject to review under the broker-dealer's supervisory procedures. This is true regardless of whether it is sent from the firm or the RR's home. Some broker-dealers require a review of all correspondence, including email, while other firms employ a spot-check approach. Regardless of which system a broker-dealer uses, its RRs must comply with the firm's internal rules for correspondence when sending email. Some firms may prohibit RRs from sending email to clients. Remember, group email is considered retail communication, not correspondence. Retail communication that refers to investment companies must be reviewed by both the broker-dealer and filed with FINRA.
Which of the following is TRUE if a registered representative hears that one of his clients has lost their job? A) The RR should update the paperwork promptly after speaking with the client B) The client should be limited to submitting orders for only conservative investments C) The RR's supervisor should be notified immediately of the customer's employment situation D) The client's account should be frozen until employed
A) The RR should update the paperwork promptly after speaking with the client SRO rules require a registered representative to update his client's financial information promptly whenever a client informs him of a change in their status. Rules do not require the RR's supervisor to be notified, nor do they require the account to be frozen or limited in the types of orders submitted. The RR is still required to make only suitable recommendations in light of the client's new situation.
Which of the following factors is NOT used in determining the value of an annuity unit? A) The assumed interest rate B) The value of the separate account C) Income distributions from securities held in the separate account that are reinvested D) Capital gain distributions from securities held in the separate account that are reinvested
A) The assumed interest rate The assumed interest rate (AIR) is used to determine the subsequent payments made to the annuitant. The value of the annuity unit is determined by the value of the separate account, including all reinvested distributions.
A registered representative is opening a cash account for a customer. According to FINRA rules the representative is not required to obtain: A) The customer's Social Security number B) The names of the registered representative servicing the account C) The signature of the principal servicing the account D) Whether the client is of legal age
A) The customer's Social Security number FINRA requires the customer's name and residence address, if the customer is a of legal age, name or names of registered representatives servicing the account and the signature of the principal approving the account, when opening a cash account. FINRA does not require the customer's signature, nor does it require his or her Social Security number.
A director of BDG owns 180,000 shares of BDG stock, which were purchased in the secondary market. If the director wants to sell 17,000 shares of BDG that she has owned for nine months, which of the following statements is TRUE? A) The director is permitted to sell the shares if the trade is reported. B) The director is permitted to sell the shares only if they are held for three additional months and the trade is reported. C) The director is permitted to sell the shares and no report is required. D) The director is permitted to sell the shares only if the transaction will result in a loss.
A) The director is permitted to sell the shares if the trade is reported. An insider, as defined by the Securities Exchange Act of 1934, is a director, officer, or owner of more than 10% of the voting stock of a corporation. Immediate family members of the insider are also subject to the same limitations. An officer or director is required to register with the SEC regardless of her ownership levels in the company. The director as an insider is required to report the transaction to the SEC within two business days. Insiders are not permitted to make short-swing profits (based on ownership of six months or less in their own company's stock). Since the director owned the shares for nine months, there is no violation. Since the shares were purchased by the director in the secondary market, the shares are considered control, not restricted stock, and are not subject to the six months' holding.
Which of the following statements is TRUE concerning periodic payment variable annuities? A) The number of a client's annuity units never changes. B) The number of a client's accumulation units never changes. C) They never have a beneficiary. D) The monthly payout is fixed by the inflation index.
A) The number of a client's annuity units never changes. During the pay-in period of a variable annuity, the client is continually purchasing accumulation units. These accumulation units are then exchanged for a fixed number of annuity units when the payout period begins. The first monthly payout is determined actuarially and thereafter is based on the performance of the separate account.
Which of the following is TRUE about 457 plans? A) The plan grows on a tax-deferred basis. B) The plan grows on a tax-free basis. C) Only employees of public schools may contribute. D) Only employees of public corporations may contribute.
A) The plan grows on a tax-deferred basis. A Section 457 plan is a type of retirement plan that's used by many public sector workers. These 457 plans grow on a tax-deferred basis and are generally subject to the same contribution limits as 401(k) and 403(b) plans. Series 6 students may encounter all three types of plans on the examination. The difference between the plans is who may contribute to them. For instance, a 401(k) plan is used by for-profit employees, a 403(b) plan is used by non-profit employees, and a 457 plan is used by some local government employees.
Your firm has published an advertisement that it has begun marketing Section 529 college savings plans. All of the following must be included in the advertisement, EXCEPT: A) A statement of the risks associated with the plans B) The charges and expenses associated with the plans C) The investment objectives of the plan(s) D) The investment performance of the plan(s)
D) The investment performance of the plan(s) Under the provisions of MSRB Rule G-21, advertising regarding municipal fund securities must include a statement of the risks, charges and expenses, and investment objectives of the plan. Although performance data may be included in the advertisement, it is not mandatory. If performance data is presented, other disclosure requirements will apply.
Which of the following statements is TRUE concerning periodic payment variable annuities? A) The number of a client's annuity units change as payments are made. B) The number of a client's accumulation units never changes. C) They never have a beneficiary. D) The monthly payout fluctuates based on the performance in the separate account as compared to the assumed interest rate.
D) The monthly payout fluctuates based on the performance in the separate account as compared to the assumed interest rate. During the pay-in period of a variable annuity, the client is continually purchasing accumulation units. These accumulation units are then exchanged for a fixed number of annuity units when the payout period begins. The first monthly payout is determined actuarially and thereafter is based on the performance of the separate account as compared to the assumed interest rate.
An investment company may state in a communication that it is the best performer in its category according to a ranking entity:
Only if it is ranked first in the category
Cash trades (trades done for cash), as compared to trades done in a cash account, have a delivery date on the:
Same day as the trade date Cash trades, or trades made for cash, have a delivery date on the same day as the trade date. Be sure to distinguish a cash trade from a trade done in a cash account which generally settles regular way.
An individual's liquid net worth is equal to:
The individual's assets that are readily convertible into cash less their total liabilities Net worth and liquid net worth are found on an individual's personal balance sheet. Net worth is equal to the total assets less the total liabilities. Liquid net worth is the total assets that are readily convertible into cash less total liabilities. Liquid net worth is considered a more valuable factor in determining the suitability of a person's investment.
An individual has decided to cash out a variable annuity to which he's been contributing for several years. How is the distribution taxed?
The portion representing earnings is taxed as ordinary income, while the invested amount is considered a return of capital and is not taxed When withdrawing money from a variable annuity, the portion representing earnings is taxable as ordinary income. Thereafter, the portion that represents the contributed funds is considered a return of capital and is not taxed.
Which of the following describes switching? A) The sale of one mutual fund followed by the reinvestment of the proceeds in another mutual fund B) A change in a client's investment objectives C) The conversion of Class B shares to Class A shares after a set period D) The transfer of a customer's account from one broker-dealer to another
A) The sale of one mutual fund followed by the reinvestment of the proceeds in another mutual fund Switching refers to the sale of one mutual fund followed by the reinvestment of the proceeds in another fund. There may be very good reasons for an RR to recommend a switch to a customer, such as a change in investment objectives or poor fund performance. However, not only is a switch a taxable event, it can also result in additional sales charges. When the benefits to the RR outweigh the benefits to the customer, switching becomes a prohibited activity. RRs should be prepared to justify any switch as being in the customer's best interest.
If a corporate bond is referred to as guaranteed, it's secured by:
Another corporation Guaranteed bonds are secured by the corporation's own collateral as well as a guarantee by another corporation (which is often a parent company). Bonds that are backed by loans of other financial institutions are considered asset-backed securities (ABS).
Functions of the investment adviser include all of the following, EXCEPT: A) Providing and analyzing research on financial and economic trends B) Appointing the officers of the fund C) Timing investment decisions to take advantage of industrial trends or broad economic changes D) Implementing the appropriate diversification of the fund's portfolio
B) Appointing the officers of the fund Investment advisers are responsible for implementing a strategy that attempts to meet the fund's objectives in accordance with its fundamental investment policies. The board of directors appoints officers of the fund.
Midcap Growth is a diversified common stock fund that is sold by many broker-dealers in the United States. Midcap's distributor is the wholesaler of the fund. Its primary role is to: A) Solicit investors to buy shares at the net asset value (NAV) B) Buy shares at the NAV and market the shares to broker-dealers C) Buy shares at the NAV and hold them for investment purposes D) Consult with the board of directors regarding investment strategy
B) Buy shares at the NAV and market the shares to broker-dealers The distributor of a fund has a contractual right to buy shares at the NAV and sell them to other broker-dealers pursuant to a written agreement. The distributor and retailing broker-dealer divide the total sales charge.
A customer has mailed a check to a mutual fund to purchase some shares. The customer is expecting to receive a confirmation of the transaction. The fund may send the confirmation to the customer by any one of the following deadlines, EXCEPT: A) By the settlement date B) By the seventh calendar day after the trade date C) Within five business days of the end of the quarter, for non-money-market mutual funds D) Within five business days of the end of the month, for money-market mutual funds
B) By the seventh calendar day after the trade date The Securities Exchange Act of 1934 generally requires confirmations for securities transactions to be sent to customers by the settlement date for the trade. This is usually two business days after the transaction. However, mutual funds may use special rules as long as they inform their customers. For non-money-market mutual funds, a statement may be sent within five business days of the end of each quarter describing the activity in the account during the period. For money-market mutual funds, a similar statement may be sent within five business days of the end of the month.
A registered representative enters an order for a client. In error, the registered representative (RR) purchases shares of the wrong security. Which of the following statements is TRUE? A) The shares must be placed in the RR's error account. B) The shares must be placed in the broker-dealer's error account. C) The RR must contact the client and cancel the original transaction. D) The firm is required to report the error to the market in which the order was executed.
B) The shares must be placed in the broker-dealer's error account. All broker-dealers are required to maintain an error account. It is used by a broker-dealer if the firm or an RR executes a trade in error (e.g., the wrong security or the wrong side of the market). RRs do not have an error account. It is maintained by the firm. The firm should execute the original order immediately and maintain a record of the error. The firm is not required to notify the market where the order entered in error was executed.
For an open-end investment company, the net investment income consists of: A) All of the profits from the investment company's operations B) Dividends, interest, and net capital gains on sales of the portfolio's securities C) Only net capital gains on sales of the portfolio's securities D) Only net income from dividends and interest that is paid on securities in the fund's portfolio
D) Only net income from dividends and interest that is paid on securities in the fund's portfolio The term net investment income is defined as the amount of money that is received by an investment company from the dividends and interest that are paid on securities in the fund's portfolio after expenses have been deducted. Capital gains are not included in the calculation of net investment income.
Which of the following situations would be an example of front-running? A) An RR hears of an impending takeover and executes trades to purchase that company's stock. B) With knowledge of a large order about to be executed, an RR places an order to purchase the same stock. C) Based on a research report his company is about to release, an RR places an order to establish a position in a subject company. D) After receiving an order from a customer an RR decides to bring another broker-dealer in to assist in executing the order.
B) With knowledge of a large order about to be executed, an RR places an order to purchase the same stock. Each of these are generally considered prohibited activities. Front-running occurs when trades are executed based on the knowledge of impending large orders. Trading based on the knowledge of information not yet made public is considered insider trading, such as a potential takeover. Orders to establish positions based on information that will be published in a research report is referred to as trading ahead of research. Bringing another broker-dealer into a trade for execution is referred to as interpositioning, and unless it benefits the client the practice is prohibited.
Which of the following asset allocations would be most appropriate for a forty-five-year-old investor who is fairly tolerant of risk and who is saving for retirement in 20 years? A) 100% long-term government bond fund B) 50% intermediate-term corporate bond fund, 50% money-market funds C) 50% large-cap equity fund, 30% intermediate-term bond fund, 20% international stock fund D) 60% small-cap equity fund, 40% emerging markets equity fund
C) 50% large-cap equity fund, 30% intermediate-term bond fund, 20% international stock fund Long-term, risk tolerant investors, such as those saving for retirement, are usually looking for growth of capital as an objective. They are also usually concerned about the effects of inflation. Neither the long-term government bond fund or the intermediate-term corporate bond fund would provide much inflation protection or growth. The small cap equity fund and the emerging markets equity fund, on the other hand, is a very volatile mix and only appropriate for aggressive investors. The mix of the large-cap equity fund, the intermediate-term bond fund and the international stock fund would provide the best combination of growth and inflation protection. Notice that bonds may be appropriate for such investors when representing a small portion of the portfolio.
Which of the following statements is TRUE regarding a prime broker? A) A prime broker may execute but not clear transactions. B) A prime broker may not execute but may clear transactions. C) A prime broker may execute and clear transactions. D) A prime broker may execute and clear transactions, but may not provide securities lending services.
C) A prime broker may execute and clear transactions. A prime-brokerage arrangement involves a variety of services offered by a broker-dealer to an active trading firm, such as a hedge fund. Most prime brokers offer both execution and clearing services to these customers. There are no rules preventing a broker-dealer from acting in both capacities.
According to FINRA's Communication Rules, which of the following is NOT considered an institution? A) Broker-dealer B) Investment company C) Employee of a broker-dealer D) Registered representative of a broker-dealer
C) Employee of a broker-dealer As defined under FINRA's Communication Rules, institutional investors include banks, insurance companies, investment companies, broker-dealers and their registered representatives. However, all employees of broker-dealers are not considered institutional investors.
An RR receives a letter from a client complaining about the performance of a mutual fund that the RR's firm has recommended. The RR should: A) Send a copy to the mutual fund, since it is really a complaint about the fund B) Return the letter to the customer with the statement that the customer must provide written evidence to support the grievance C) Forward the complaint to a supervisor, who must place a copy in the complaint file D) Attempt to satisfy the customer before taking any other action
C) Forward the complaint to a supervisor, who must place a copy in the complaint file FINRA rules require customer complaints to be given to a principal. The firm is then required to keep a copy in a complaint file.
A client has opened an account and invested $1,000 in a balanced fund. The client also signed up for the fund's automatic investment feature, which will deduct $100 from her checking account each month to invest in the fund. Which of the following benefits does this feature provide? A) The earnings in her account are tax-deferred. B) She will pay no sales charges since she's not using the services of a registered representative. C) Her purchases will be dollar cost averaged. D) She can redeem her shares at any time for at least the amount she has invested.
C) Her purchases will be dollar cost averaged. Since she will be investing a fixed amount on a monthly basis, she will be dollar cost averaging. However, dollar cost averaging doesn't guarantee her against loss. Instead, it means that the average cost of the shares in her account will be less than the average of the prices at which she will be purchasing shares. This method reduces timing risk—the risk that a large single investment will be made at a disadvantageous price and/or time.
Under what circumstances will the payout from a variable annuity increase? A) If the rate of inflation exceeds the AIR B) If the performance of the separate account exceeds the rate of inflation C) If the performance of the separate account exceeds the AIR D) If the performance of the separate account for the current period exceeds the performance of the separate account for the previous period
C) If the performance of the separate account exceeds the AIR Whether the payment from a variable annuity changes depends on the relationship between the performance of the separate account and the assumed interest rate (AIR) in the contract. If the account performance exceeds the AIR, the payment will be greater than the last payment. If the account performance equals the AIR, the payment will be unchanged from the last payment. If the account performance is less than the AIR, the payment will decline from the last payment.
Which of the following statements is TRUE concerning an underwriting agreement? A) It is a signed agreement between the managing underwriters and the other syndicate members. B) It is a signed agreement between all of the underwriters and the issuer. C) It is a signed agreement between the managing underwriters and the issuer. D) It is a signed agreement between the managing underwriters and the members of the selling group.
C) It is a signed agreement between the managing underwriters and the issuer. The underwriting agreement is a signed agreement between the lead or managing underwriter(s) and the issuer. Although all of the underwriters may be named in the agreement, only the representative for the underwriters (i.e., the manager) signs the agreement. The signed agreement between the managing underwriter and the other members of the syndicate is referred to as the syndicate agreement.
Which of the following is TRUE of a Treasury bond fund? A) No less than 75% of its assets must be invested in Treasury bonds. B) It may be referred to as guaranteed and must invest no less than 75% of its assets in Treasury bonds. C) No less than 80% of its assets must be invested in Treasury bonds. D) It may be referred to as guaranteed and must invest no less than 80% of its assets in Treasury bonds.
C) No less than 80% of its assets must be invested in Treasury bonds. If a fund includes in its name a specific type of security or industry, it must invest no less than 80% of its assets in those types of securities. In addition, funds are prohibited from indicating that they have a guarantee or approval of the U.S. government.
A variable annuity contract holder dies during the accumulation period. Which of the following is TRUE regarding the tax consequences? A) All proceeds are considered a return of capital B) The growth is taxable as a capital gain to the beneficiary C) Proceeds in excess of cost are taxable as ordinary income to the beneficiary D) The growth above cost is not taxable if the beneficiary rolls them over into an IRA
C) Proceeds in excess of cost are taxable as ordinary income to the beneficiary When a variable annuity contract holder dies during the accumulation period, the proceeds in excess of cost are taxable to the beneficiary as ordinary income.
An individual works for the ABC Company. The company provides a retirement plan for their employees. The amount deposited into the plan will vary the most from period-to-period if the plan is a: A) Defined contribution pension plan B) Defined benefit pension plan C) Profit-sharing plan D) The amount cannot vary in any plan
C) Profit-sharing plan Of the choices given, contributions made into a profit-sharing plan would vary the most from year to year. This is because contributions into the plan are based on the company's profits.
The SEC, under the Securities Act of 1933, does all of the following, EXCEPT: A) Regulates IPOs B) Regulates mutual funds C) Regulates private placements D) Regulates primary distributions
C) Regulates private placements Under the Securities Act of 1933 the SEC regulates primary distributions, which includes initial public offers (IPOs), variable products, mutual funds, etc. Private placements are generally unregistered offerings not subject to '33 Act provisions.
Which of the following members of an underwriting group have no liability in a firm commitment? A) Manager B) Syndicate member C) Selling group member D) All members have a liability
C) Selling group member Selling group members don't assume financial liability; instead, they act as agents. The manager and syndicate members share in the liability and unsold securities are allocated among them.
Which of the following factors is the MOST important for a client who is concerned with the labor standards of a company in which she plans to invest? A) Age B) Investment experience C) Social values D) Discretionary income
C) Social values When a client's concerns are focused on non-financial factors such as human rights, gun control, or labor standards, an RR should consider the client's social values when making recommendations.
Your client is very concerned about the future of the economy. He is worried about the rise in corporate bankruptcies and believes that there will be a dramatic increase in both inflation and interest rates over the next several years. You would recommend: A) T-bonds B) STRIPS C) TIPS D) Blue-chip common stock
C) TIPS Treasury Inflation-Protected Securities (TIPS) are direct obligations of the U.S. government and are considered free from credit risk. They will provide the client with safety of principal and protection from inflation and rising interest rates. The principal of the bond is adjusted semiannually based on the CPI. This will not only protect the principal from inflation, but since the coupon is paid on a greater face amount, cash flow will increase. Choices (a) and (b) are not subject to credit risk, but do not provide a hedge against rising interest rates and a loss of purchasing power due to inflation. Historically, during periods of high inflation, common stock prices have not fared well.
Regarding the compensation paid to a mutual fund's investment adviser (IA), which of the following statements is TRUE? A) The IA earns a portion of the profits that are generated by the portfolio. B) The IA earns a portion of the 12b-1 fee. C) The IA is paid based on the assets under management. D) The IA is paid a percentage of the sales charges which may not exceed 25 basis points.
C) The IA is paid based on the assets under management. Mutual fund managers are compensated based on a percentage of the assets under management. This compensation may be referred to as the management or investment advisory fee. Fund managers are not compensated through the sales charges or 12b-1 fees that are collected.
Blue Sky laws are established under which of the following? A) The Securities Act of 1933 B) The Securities Exchange Act of 1934 C) The Uniform Securities Act D) The Code of Procedure
C) The Uniform Securities Act Blue Sky laws (state regulations) are established under the Uniform Securities Act (USA). The USA is a model law that individual states use as a template for their specific laws.
The prospectus for the Mainstreet Fund states that redemption requests must be received by a dealer for the fund no later than 4:00 p.m. Eastern time in order to receive the NAV calculated that day. The fund calculates its NAV once each business day as of that deadline. An RR for one of the fund's dealers receives a phone call at 4:15 p.m. Eastern time from a customer with an order to redeem the client's entire Mainstreet Fund account that day. Which of the following statements is TRUE regarding the redemption request? A) The RR may treat the request as received prior to 4:00 p.m. since it was received within 30 minutes of the deadline. B) The customer's request is considered cancelled and must be resubmitted the following business day. C) The customer's redemption request will be based on the next NAV calculated. D) The fund may process the request based on the current day's NAV as long as the pricing information h
C) The customer's redemption request will be based on the next NAV calculated. The customer would receive the next NAV calculated after a valid redemption request has been submitted. Since the request was received after the current day's deadline, the client will receive the next NAV calculated, which for this fund is at the end of the next business day.
An account that can only be opened between legally married couples is a:
Community property Community property accounts are only permitted between legally married couples. Although they are essentially the same as JTWROS, a Community Property Document must be completed and these accounts are subject to the laws of the state in which the couple resides.
All of the following may be included in investment company advertising, EXCEPT: A) An application for a prospectus B) Information that is contained in the full prospectus C) A current yield quotation D) An application to invest
D) An application to invest Under SEC Rule 482, which addresses mutual fund advertising, an application to invest may not be contained within an advertisement. The investor must receive a prospectus before investing in funds.
Your client owns a portfolio of blue-chip equity securities and would like to reduce his risk of a market downfall through the use of options. The most effective way to achieve this objective is to: A) Write covered calls B) Buy calls C) Write covered puts D) Buy puts
D) Buy puts The most effective way for the investor to achieve this objective is to buy puts. The buyer of a put pays a premium representing the price of the option. In exchange for the premium, the buyer has the right to sell stock at a preset price. This would give him protection against a downturn in the market.
All of the following would be important factors to consider when recommending the class of mutual fund shares a customer should purchase, EXCEPT: A) The investor's anticipated holding period B) The amount of money to be invested C) Whether the fund offers a letter of intent or rights of accumulation D) How much the RR will earn from the sale
D) How much the RR will earn from the sale When making recommendations to a customer, including recommendations about which mutual fund share class to buy, RRs must consider factors that affect the customer's interests, not their own.
Which of the following descriptions best characterizes an index fund? A) High portfolio turnover and relatively numerous taxable events B) Low portfolio turnover and relatively numerous taxable events C) High portfolio turnover and relatively few taxable events D) Low portfolio turnover and relatively few taxable events
D) Low portfolio turnover and relatively few taxable events Index funds mimic the index they are tracking and tend to make very few changes in the portfolio. As a result of this low turnover, there are few taxable events associated with an index fund.
An underwriter may do all of the following during the cooling-off period, EXCEPT: A) Discuss the new issue with potential purchasers B) Provide a preliminary prospectus to potential purchasers C) Record the names of potential purchasers D) Take a deposit from potential purchasers
D) Take a deposit from potential purchasers During the cooling-off period, firms that are involved in the underwriting may discuss the offering with potential purchasers, provide the red herring (preliminary prospectus) to potential purchasers, and record the names of those who expressed interest. However, they are not permitted to take deposits or sell the security.
When making a presentation on 529 plans, what information is NOT required? A) Discussing the risks and costs involved with the different types of plans B) A disclaimer stating that, prior to investing in a plan, you should read the official statement C) A disclaimer that the client should check with her home state to learn if it offers tax benefits to those clients who invest in its plan D) The name and contact information for the municipal securities principal who will approve the customer's investment in the plan
D) The name and contact information for the municipal securities principal who will approve the customer's investment in the plan Under MSRB rules, an RR is required to disclose certain information when promoting 529 plans. The RR must discuss the risks and costs involved with the different types of plans, must provide a disclaimer stating that, prior to investing in a plan, the customer should read the official statement, and must provide a disclaimer that the client should check with her home state to learn if it offers tax benefits to those who invest in its plan. There is no requirement to provide the name and contact information for the municipal securities principal who will approve the customer's investment in the plan.
Under FINRA rules, which of the following statements concerning electronic communications is TRUE? A) Text messaging is not covered due to the casual nature of the medium. B) Individual text messages are considered retail communications. C) Websites are not covered under FINRA's communications rules. D) Websites are considered retail communications.
D) Websites are considered retail communications. According to FINRA rules individual text messages are considered correspondence, not retail communications. For that reason, the text messages are subject to review and supervision. Websites that are available to retail investors are considered retail communications.
A hurricane hit the hub of the U.S. financial system and caused a significant disruption in the stock market. This is an example of:
Event risk Event risk is the risk that a large event will cause a significant decline in the market value of securities. Event risk is a form of systematic (undiversifiable) risk. Each of the other choices are forms of unsystematic (diversifiable) risk.
An investment that outperforms the market as it goes up but underperforms the market as it goes down would have a beta:
Greater than 1 Beta is a measure of a stock's or portfolio's volatility in relation to the market as a whole. The market is typically represented by the S&P 500 Index and is assigned a beta of 1. If an investment has a beta of greater than 1, it will outperform the market as it goes up and underperform the market as it goes down. Negative betas are associated with stocks or portfolios that move in an opposite direction of the market.
In order to be characterized as a diversified company, an investment company must:
Have at least 75% of its assets invested in a prescribed way In order to qualify as a diversified company, an investment company must have 75% of assets diversified so that no more than 5% is held in any one issuer and no more than 10% of a company's voting stock is owned. In the question above, 5% and 10% are reversed. There is no requirement to be fully invested at all times.
