Checkpoints

On December 13, an investor buys 6 ABC Feb. 60 calls at 2.25 each, when ABC is trading at 59.50 per share. If the calls expire unexercised, how much money will the investor lose? A) $6,000 B) $810 C) $225 D) $1,350

$1,350 Buyers of options lose premiums if the options expire unexercised. The most this investor can lose is the number of contracts (6) multiplied by the amount of the premium (2.25). This investor's maximum loss is $1,350.

To be designated as an accredited investor under Regulation D, a married couple investing in a joint account must have income of at least A) $500,000 B) $200,000 C) $100,000 D) $300,000

$300,000 To be accredited, a couple must have at least $300,000 in annual income. For individuals, the income threshold is $200,000.

A customer writes 2 ABC July 15 puts at 2 when ABC is 14. If the contracts are closed at a premium of 4 when ABC is 13, the customer has a A) $400 loss B) $200 loss C) $200 gain D) $400 gain

$400 loss The investor receives $400 in premiums (2 × $200) and pays $800 to close out the options (2 × $400), resulting in a net loss of $400 ($800 − $400).

A customer is short a DMF 50 call for which he received a premium of 4. Seven months later, the call was exercised when the current market for DMF was 56. Under the Internal Revenue Code, what were the proceeds of his sale? A) $5,600 B) $4,600 C) $5,000 D) $5,400

$5,400 He wrote a call and received a premium of 4. He later sold the security at $50, which made his total receipts for the stock $54. Proceeds in this case refer to the total amount he took in (a $400 premium plus $5,000 upon the sale).

If an investor buys 1 KLP Oct. 95 put at 6.50, what is the investor's maximum potential gain? A) $9,500 B) $10,150 C) $9,650 D) $8,850

$8,850 The maximum gain on a long put is calculated by subtracting the premium from the strike price (95 − 6.50 = 88.50 per share). One contract represents 100 shares, so the buyer's maximum gain is $8,850 if the stock declines to 0. Because put buyers are bearish, they will make money if the stock falls below the breakeven point of 88.50.

Under FINRA rules, the carrying member, after receiving account transfer instructions from the receiving member must validate the positions in the account within how many business days of receipt? A) 1 day B) 7 days C) 5 days D) 4 days

1 day Within 1 business day following receipt of the transfer initiation form (TIF), the carrying firm must validate the positions in the account and within 3 business days following validation, the carrying firm must complete the transfer of the account.

Commercial paper is defined as a money market security if its maturity does not exceed how many days? A) 270 days B) 90 days C) 30 days D) 13 months

270 days For commercial paper to be defined as a money market security, the maturity cannot exceed 270 days.

A customer establishes the following positions: Buy 100 ABC at 28 Buy 1 ABC Dec. 25 put at 2 What is the breakeven point? A) 30 B) 27 C) 23 D) 26

30 The breakeven point is where an investor neither makes nor loses money. In this hedged position, the buyer must recover the cost of the stock and the premium paid to break even (28 + 2 = 30).

You are reviewing an investor's balance sheet. Which of the following items would be found on a balance sheet and help you determine the client's net worth? 401(k) balance Credit card balance Monthly income Electric bill A) II and III B) I and II C) I and IV D) III and IV

401(k) balance Credit card balance The balance sheet reflects a person's net worth by comparing assets and liabilities. A 401(k) balance is an asset and credit card debt is a liability. Income and monthly bills such as the electric bill are found on the income statement.

Your client sells 1 naked MAV Oct. 40 call at 2 when the market price of MAV is $41. What must MAV be selling at for the client to break even? A) 43 B) 38 C) 40 D) 42

42 The breakeven point for a call is the strike price plus the premium. The breakeven point is the same for both the buyer and writer.

ABC Company has issued $20,000,000 of convertible bonds with a coupon of 5% and a current market value of 120. The conversion price is $40. If all the bonds are converted, how many additional shares of common stock will ABC have outstanding? A) 400,000 B) 500,000 C) 600,000 D) 1,000,000

500,000 Each bond will convert to 25 shares of common stock ($1,000/$40). 20,000 bonds were issued ($20,000,000/$1,000). Therefore, 500,000 additional shares (20,000 x 25) will be outstanding if all the bonds are converted.

On November 4, a customer writes an S&P 100 Jan. 785 put at 6. The maximum potential gain on this position is A) 100 B) 300 C) unlimited D) 600

600 The potential gain on a short option is the premium received on the transaction.

A customer establishes the following positions: Buy 100 ABC for 63 Write 1 ABC Jan 70 call for 1 What is the customer's maximum gain? A) 800 B) 700 C) 600 D) Unlimited

800 Maximum gain on the covered call position occurs when the stock's market value rises. The short call is exercised when the stock is above 70, so the stock bought for 63 will be sold for 70—a profit of $7 per share. In addition, the customer receives the premium of $1, so the total profit is $800 ($700 + $100).

A customer wrote 10 KLM Jun. 80 calls for a premium of 4.75 at a time when the market value of KLM was 81.75. What is his gain or loss if he now closes out his positions at 2.12? A) A $2,630 gain B) A $4,750 loss C) A $2,630 loss D) A $4,750 gain

A $2,630 gain If the customer sold at 4.75 and purchased at 2.12, the customer nets 2.63, which is multiplied by 100 to yield a $263 gain per contract: 10 × $263 = $2,630 total gain.

Which of the following would be defined as a research report? A) A notice that the rating for a bond has been downgraded by Moody's B) A written opinion that the economy is poised for recovery C) A technical analysis that indicates the demand for steel is increasing based on the trading volume and price of the steel industry D) A document that states the banking industry is ready for recovery but ABC Bank will not participate in the recovery and if owned, investors should hold the security

A document that states the banking industry is ready for recovery but ABC Bank will not participate in the recovery and if owned, investors should hold the security Holding a security is a recommendation for ABC Bank, and therefore, falls within the definition of a research report.

Under the conduit theory of taxation, which of the following statements are TRUE? A fund is not taxed on earnings it distributes if it distributes at least 90% of its net investment income. Investors are not taxed on earnings they reinvest. A fund is only taxed on interest income. Investors are taxed on earnings they receive in cash. A) III and IV B) I and IV C) II and III D) I and II

A fund is not taxed on earnings it distributes if it distributes at least 90% of its net investment income. Investors are taxed on earnings they receive in cash. By qualifying as a regulated investment company (the conduit, or pipeline, tax theory), the fund is liable only for taxes on retained income if it distributes at least 90% of its net investment income to shareholders. Investors will pay taxes on distributed income whether received in cash or reinvested.

Which of the following forms of written communication must a principal approve before use? A) A letter to a customer confirming an annual account review appointment B) An interoffice memorandum C) A letter sent this month to 50 prospective customers offering advice about a stock D) A preliminary prospectus

A letter sent this month to 50 prospective customers offering advice about a stock Letters sent to more than 25 retail investors within any 30-calendar-day period are considered retail communication and must be approved by a principal before use. Letters sent to fewer than 26 retail investors within a 30 calendar-day period are considered correspondence, which does not need prior approval, but it is subject to subsequent review.

All of the following securities would be suitable investments for a traditional IRA EXCEPT A) A corporate bonds B) Blue chip common stocks C) AAA municipal bonds D) AAA U.S. government agency bonds

AAA municipal bonds Municipal bonds, which generate tax-free interest income, are unsuitable for retirement plans. One loses the federally tax-free income at distribution.

A sophisticated client has expressed an interest in becoming more aggressive with their investment strategy. Her current portfolio consists of $50,000 cash $200,000 in retirement accounts $100,000 in various individual stocks in different industries $100,000 in a balance fund She is willing to invest $25,000 for a minimum of 7 to 10 years and accepts that the investment can and will fluctuate in value over time. Which of the following investments would be the most appropriate? A) MNO High-yield bond fund B) DEF Asset allocation fund C) ABC Capital Appreciation Small-cap fund D) XYZ Value Equity fund

ABC Capital Appreciation Small-cap fund For someone that is willing to take the risk and invest for the long haul, a small or mid-cap growth fund would be appropriate.

A fund seeks maximum capital appreciation by investing in common stocks of companies located outside the United States. The management selects well-established companies that are listed on their national stock exchanges and that have demonstrated high earnings potential. This information describes which of the following mutual funds? A) ABC Stock Index Fund B) ATF Biotechnology Fund C) ATF Overseas Opportunities Fund D) ATF Capital Appreciation Fund

ATF Overseas Opportunities Fund Foreign funds, which may also be called international funds, invest in common stocks of companies located outside the United States.

Your customer, age 60, is retired and living at home with a fully-paid-off mortgage. Her portfolio contains growth stocks and high-quality bonds, and she is a long-time investor and comfortable with moderate risk. Her objective is a moderate level of current income to supplement her corporate pension plan distributions and the earnings from her IRA. How are the distributions taxed from her IRA? A) All taxable distributions from a (traditional) IRA are taxed as ordinary income. B) If a security is sold for more than it was purchased for, the distribution of the profit is taxed as a capital gain. C) The distribution is taxed as either ordinary income or capital gains, depending on the source of the distribution. D) If the IRA has been owned for more than one year, the distributions are long term capital gains.

All taxable distributions from a (traditional) IRA are taxed as ordinary income. All taxable distributions from a retirement account, including IRAs are taxed as ordinary income, not capital gains.

A complete customer profile includes both financial and nonfinancial investment considerations. Which of the following is considered financial investment information? A) Being risk averse B) Saving for a retirement home C) Wanting to retire at age 65 D) Amount of discretionary income

Amount of discretionary income Discretionary income involves a concrete sum of money and cash flow and, thus, is financial information. The other choices involve goals and risk and do not represent items on a balance sheet or income statement and, thus, are nonfinancial considerations.

A customer purchased 100 shares of stock and told her registered representative that she is nervous about the stock going down and losing a great deal of money. Which of the following strategies would give the customer the most protection if the stock falls in value? A) Buy a call contract B) Buy a put contract C) Sell a put contract D) Sell a call contract

Buy a put contract Buying a put option contract on the stock provides a hedge (for protection). If the stock were to fall below the strike price, the customer, in this case, would be able to exercise the put option and sell the 100 shares at the strike price, closing her position and limiting her losses.

A customer believes ABC's stock price will rise, but does not currently have the money to buy 100 shares. How could the customer use options to profit from a rise in the stock's price? Buy calls Write calls Buy puts Write puts A) I and III B) I and IV C) II and III D) II and IV

Buy calls Write puts Buying calls and writing puts are bullish strategies.

If an investor purchases 500 shares of an aggressive growth stock, which strategy would limit his downside risk? A) Writing 5 puts on the stock B) Writing 5 straddles C) Buying 5 puts on the stock D) Buying 5 calls on the stock

Buying 5 puts on the stock A put gives the investor the right to sell stock at a set price (the strike price) for a period of time, and protects against losses below the strike price. Buying calls can protect a short stock position. If the customer is long stock, the purchase of calls on that security increases leverage and risk. Writing a put creates the obligation to buy more stock at the strike price, which increases downside risk.

Liquidity ratios measure the solvency of a firm or the firm's ability to meet short-term financial obligations. Which of the following is a liquidity ratio? A) Gross profit divided by net sales. B) Current assets divided by current liabilities. C) Dividend divided by earnings per share. D) Net income divided by average total equity.

Current assets divided by current liabilities. Current assets divided by current liabilities is the current ratio, a ratio that measures the liquidity of a firm. Gross profit divided by net sales is a profitability ratio that measures the gross profitability of the firm's business operations, not its liquidity. Net income divided by average total equity is the return on stockholders' equity which measures the efficiency of common shareholders' investment or equity in the firm. Dividend amount divided by earnings per share is the dividend payout ratio which measures how much of a company's earnings are distributed to common stockholders.

An investor has unexpectedly received $30,000 from an old debt he had written off. This money will come in handy for a business venture planned for 3 years from now. Meanwhile, he would like to generate some income on the money with as little risk and as little expense as possible. Which of the following recommendations is likely to be the most suitable for this customer? A) Class A shares of the MNO High-Yield Bond Fund B) Class C shares of the ABC Investment-Grade Bond Fund C) Class B shares of the XYZ Growth Fund D) Class B shares of the ABC Investment-Grade Bond Fund

Class C shares of the ABC Investment-Grade Bond Fund The customer wants income with as little risk as possible, so our answer must be one of the choices that offer an investment-grade bond fund. Of those offered, Class C shares would be best, because the customer would pay no front-end sales charge and no CDSC after a short time, probably one year. He will pay somewhat higher 12b-1 fees than with Class A shares, but this will amount to only a fraction of 1% per year, and only for the 3 years of his investment.

Which of the following must be registered as investment companies under the Investment Company Act of 1940? Closed-end investment companies. Separate accounts of insurance companies offering variable products. Variable annuity contracts. Variable life insurance policies. A) II and III B) I and II C) I and IV D) III and IV

Closed-end investment companies. Separate accounts of insurance companies offering variable products. Under the Investment Company Act of 1940, face amount certificate companies, unit investment trusts, open- and closed-end management companies, and separate accounts of insurance companies used to fund variable annuity and variable life contracts, must register with the SEC as investment companies. Note that the separate account is registered as an investment company, not the variable contract.

A customer is very concerned about investments that may not keep pace with inflation. He asks about what securities would have the least exposure to inflation risk. Which of the following would be the best answer? A) Fixed annuity B) Cash C) Preferred stock D) Common stock

Common stock The returns on common stock have historically outperformed inflation, making them less vulnerable to loss of purchasing power among the choices presented. Cash is a store of present purchasing power that inflation will erode. Fixed-annuities have more exposure to inflation than common stock because their payments are fixed in nominal dollars. Preferred stock has the same exposure to inflation risk as do all fixed income instruments.

Under the rules on communication with the public, review of which of the following by a principal may take place either before or after distribution? A) Advertising in the newspaper B) Independently prepared reprints C) Seminar scripts D) Correspondence to 25 or fewer retail investors within any 30-calendar-day period

Correspondence to 25 or fewer retail investors within any 30-calendar-day period A principal may review correspondence before or after its distribution as long as it is limited to no more than 25 retail investors during any 30-calendar-day period. The other choices require principal approval rather than just review before first use.

Your customer has contributed $1,000 annually into her Roth IRA for 7 years. Which of the following statements concerning her Roth IRA distributions is TRUE? A) The distributions are taxed as capital gains. B) The distributions are taxed as ordinary income. C) Your customer will pay ordinary income taxes on the part of the distribution that represents earnings. D) Your customer will not be taxed on the distributions if she is over the age of 59½ and the money has been held in the account for 5 years beginning with the first tax year for which a contribution was made to any Roth IRA established for the individual.

Your customer will not be taxed on the distributions if she is over the age of 59½ and the money has been held in the account for 5 years beginning with the first tax year for which a contribution was made to any Roth IRA established for the individual. Distributions from Roth IRAs made after age 59½ are tax-free if the money was in the account for 5 years beginning with the first tax year for which a contribution was made to any Roth IRA established for the individual. Contributions to Roth IRAs are made with after-tax dollars.

Each of the following is a characteristic of money market funds EXCEPT A) offered without a sales load B) portfolio of short-term debt instruments C) a NAV of $1.00 per share D) a beta of 1.00

a beta of 1.00 A beta of 1.00 means that a security (or portfolio) has the same price volatility as the overall market. That is certainly not the case with money market fund shares. Money market mutual funds invest in a portfolio of short-term debt instruments such as T-bills, commercial paper, and bankers acceptances. They are offered without a sales load or charge. The principal objective of the fund is to maintain a stable NAV ($1 per share).

All of the following statements about variable annuities are true EXCEPT A) the number of annuity units becomes fixed when the contract is annuitized B) the rate of return is determined by the underlying portfolio's value C) such an annuity is designed to combat inflation risk D) a minimum rate of return is guaranteed

a minimum rate of return is guaranteed The return on a variable annuity is not guaranteed; it is determined by the underlying portfolio's value. Variable annuities are designed to combat inflation risk. The number of annuity units becomes fixed when the contract is annuitized; it is the value of each unit that fluctuates.

One of the ways in which U.S. government agency issues differ from those offered directly by the U.S. Treasury is that A) agency issues frequently trade on the NYSE while Treasuries never do B) agency issues are taxable on the federal level while Treasury issues are not C) agency issues are more likely to be issued in larger amounts D) agency issues typically carry higher returns than Treasury issue because of the lack of direct government backing

agency issues typically carry higher returns than Treasury issue because of the lack of direct government backing Agencies, with only a very few exceptions, GNMA being one, do not carry the direct backing of the U.S. Treasury. While they are quite safe, that lack of direct backing causes their yields to be somewhat higher. Agencies are never traded on the stock exchanges and their float is almost always smaller than Treasuries. Both are taxable on the federal level.

The ABC Corporation would like to raise capital via a Regulation D private placement. Regulation D is the private placement exemption from registering with the SEC. Rule 506(c) of the Regulation states that advertising is A) allowed if selling to a maximum of 35 accredited investors. B) allowed if selling to a maximum of 35 nonaccredited investors. C) allowed if the offering is limited solely to accredited investors. D) never allowed under any provision of Regulation D

allowed if the offering is limited solely to accredited investors. Rule 506(c) of Regulation D permits advertising of a private placement as long as the offering is limited to accredited investors only. There is no maximum number of accredited investors permitted under Rule 506(c). Rule 506(b) has a maximum limit of 35 nonaccredited investors in order for the registration exemption to apply, but advertising is never permitted under that rule, regardless of the number.

A limited partnership brought to market through a private placement may be sold to all of the following EXCEPT A) an unlimited number of unaccredited investors B) 35 unaccredited investors C) an unlimited number of accredited investors D) an investor with over $1 million net worth

an unlimited number of unaccredited investors The primary sale of a limited partnership through a private placement is covered by Regulation D. Sales of the issue may be made to 35 individuals, which need not meet any financial standards. If, however, sales are made to more than 35 individuals, any other purchasers must meet certain standards of financial accreditation, known as accredited investors. An accredited investor would include an investor with $1 million or more in net worth not including net equity in a primary residence, or an individual who has earnings of $200,000 in the current year and $200,000 in the previous 2 years, or is an officer or insider of the offering. Also, any large financial institution, such as a bank, an insurance company, a savings and loan, etc., would be considered an accredited investor.

Under FINRA rules, customers who are approved to trade options must receive a copy of the OCC Disclosure Booklet A) within 15 days of account approval B) at the time of or before the mailing of the confirmation representing the first options trade C) at the time of or before the mailing of the next monthly statement D) at the time of or before account approval

at the time of or before account approval All customers who are approved by the ROP to trade options must receive a copy of the OCC Disclosure Booklet at or before the time the account is approved to trade options.

A client writes 1 Dec. 45 put and buys 1 Dec. 60 put. This is a bull spread bear spread debit spread credit spread A) I and III B) II and IV C) I and IV D) II and III

bear spread debit spread

A customer establishes the following positions: Long 1 ABC Jun. 25 call at 2 Long 1 ABC Jun. 25 put at 2 At expiration, the position is profitable if the stock price is above 21 below 21 above 29 below 29 A) I and IV B) II and IV C) II and III D) I and III

below 21 above 29 The investor purchased a long straddle (both a call and put with the same strike prices and expiration months). While straddle investors are uncertain about the direction of the market, long straddles require substantial price movement (volatility) for profit because the two premiums paid must be recovered. In this example the breakeven of the call is found by adding the total premiums of 4 to the call strike price of 25 (25 + 4 = 29). The breakeven of the put is found by subtracting the total premiums of 4 from the put strike price of 25 (25 − 4 = 21). The market must either move up by 4 (total premiums paid) or down by 4 to be at breakeven. For profit, the market must be above or below the breakeven points.

A corporation has determined that if it were to go bankrupt, common stockholders would receive $8.47 per share. This calculation is known as A) retained earnings B) debt-to-equity ratio C) net asset value D) book value per share

book value per share The liquidating value of the company is its book value, the book value per share is what the common stockholders would receive.

A client buys 1 Jul. 50 call and writes 1 Jul. 60 call. This is a bull spread bear spread debit spread credit spread A) II and IV B) I and IV C) II and III D) I and III

bull spread debit spread This is a call debit spread, and bulls buy calls. The 50 call is worth more because it has a lower strike price. Long the lower call is bullish; short the lower call is bearish.

A technology fund manager concerned about a downturn in the value of his portfolio would hedge by A) buying narrow-based index puts B) buying broad-based index puts C) selling broad-based index calls D) selling narrow-based index calls

buying narrow-based index puts The portfolio consists of sector-specific securities, so broad-based index puts such as the OEX would not be appropriate. Instead, the manager should buy narrow-based index puts (for example, indices on technology and electronics).

If an investor wishes to open a cash account in her name only and allow her spouse to make trading decisions as well as withdraw cash and securities, she must instruct her broker-dealer to open a A) cash account with full power of attorney B) margin account C) cash account D) cash account with limited power of attorney

cash account with full power of attorney For a person other than the account owner to be able to withdraw assets, a full power of attorney is required. A limited power of attorney allows someone other than the account owner to trade in the account, but not to withdraw assets.

A method of analyzing limited partnerships by identifying the sources of revenues and expenses is known as A) liquidity analysis B) technical analysis C) cash flow analysis D) capital analysis

cash flow analysis Cash flow analysis compares income (revenues) to expenses.

Limited partners in a real estate partnership have all of the following rights EXCEPT the right to A) decide which properties the partnership purchases B) receive their pro rata share of income or loss C) monitor the partnership on an ongoing basis D) sue the general partner for violating the partnership agreement

decide which properties the partnership purchases The limited partners have the right to inspect partnership records and to sue a general partner who acts outside the partnership agreement. The general partner normally sets his own compensation in the original agreement and makes all management decisions relative to the partnership's interests.

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

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

A customer asks your advice regarding a deferred compensation plan at work. You state that A) deferred compensation plans may be somewhat risky because the employee covered by the plan has no right to plan benefits if the business fails B) deferred compensation plans usually benefit younger employees because the money in the plan has more time to grow prior to retirement C) if he sits on the board of directors and is also an employee of the company, he is not eligible for the plan D) if the business fails, the employee is considered a secured bondholder in terms of liquidation priority and getting paid back

deferred compensation plans may be somewhat risky because the employee covered by the plan has no right to plan benefits if the business fails If the business fails, the employee can lose everything they put in the plan. The participant will become a general creditor of the company and will be on the same level as unsecured bondholders in the liquidation priority.

Advantages of owning a real estate DPP program include all of the following EXCEPT A) depletion B) depreciation C) cash flow D) appreciation

depletion It is impossible to deplete (use up) real estate; depletion only applies to natural resources, such as oil or gas.

On exercise of the option, the holder of a long call will realize a profit if the price of the underlying stock A) falls below the exercise price minus the premium paid B) falls below the exercise price C) exceeds the exercise price plus the premium paid D) exceeds the exercise price

exceeds the exercise price plus the premium paid To profit on a long call, the market price must exceed the strike price plus the premium paid (the breakeven point).

An 18-year-old, unmarried high school student sought a safe investment for a $30,000 bequest until after she graduated from college. Her intent was to use the funds for the down payment on a house after graduation. Her agent recommended she choose a variable annuity as a safe haven for the funds. This recommendation is unsuitable because A) an 18-year-old can't own a variable annuity B) the investment grows tax-deferred C) her situation exposes her to surrender charges and early withdrawal penalties D) withdrawal of her cost-basis is tax-free

her situation exposes her to surrender charges and early withdrawal penalties . The funds are not liquid due to the surrender fees, and there is also a 10% penalty on withdrawals before age 59½.

The Securities and Exchange Commission regulates all of the following EXCEPT A) investment adviser and client relationships B) initial public stock offerings C) intrastate securities offerings D) the secondary market

intrastate securities offerings The Securities and Exchange Commission was created by the Securities Exchange Act of 1934 as a federal commission with the power to enforce the Securities Act of 1933 and all subsequent federal securities acts. If a security is being offered in only a single state, however, it need not register with the SEC but, according to Rule 147, only in the one state (intrastate) where it is being offered.

All of the following are exempt securities EXCEPT A) bankers' acceptances B) municipal bond funds C) T-bills D) commercial paper

municipal bond funds While municipal bonds are an exempt security, bond funds are not; they are investment company securities which must be registered with the SEC prior to public sale.

To comply with the regulations regarding customer identification programs, the minimum identifying information that must be obtained from each customer before opening an account includes name verbal assurance that the customer is of legal age a street address, unless the primary mailing address is a post office box located in the state of residence a taxpayer identification number A) I and IV B) III and IV C) II and III D) I and II

name a taxpayer identification number Mere verbal assurance that the customer is of legal age is not sufficient; the actual date of birth must be obtained. A post office box is never acceptable without a physical address. In addition, the identity of the person opening the account must be verified through documentation such as an unexpired drivers license or passport.

Your clients, an elderly retired couple on a small fixed monthly income, want to write uncovered (naked) calls in their joint account to generate income. For this account this option strategy would most likely be deemed A) suitable due to its minimal risk characteristics B) suitable, as this would be considered a standard strategy recommended to all retired customers to add income to their accounts C) not suitable because this strategy cannot be used in a joint account D) not suitable, as this is a speculative strategy with unlimited loss potential

not suitable, as this is a speculative strategy with unlimited loss potential Writing naked calls has an unlimited loss potential and is considered a speculative option strategy. While it can be employed in any investment account (single or joint) to generate income, its speculative nature and unlimited loss potential would make it unsuitable for retired persons currently on a small fixed monthly income.

Your client wishes to invest $50,000 into shares of the ACE Mutual Fund. This morning's financial news indicated that the POP for ACE was $10.86 while the NAV was $10 per share. The client's order is placed at 2:00 pm eastern time. On the basis of this information, you could confirm to the client a purchase of A) more than 4,604.052 shares, but fewer than 5,000 shares B) 4,604.052 shares C) 5,000 shares D) nothing yet, as you must wait for the POP to be computed based on the day's close

nothing yet, as you must wait for the POP to be computed based on the day's close Mutual funds use forward pricing, so we never know what we'll be paying per share (if purchasing) or receiving per share (if redeeming) until the next calculated price.

All of the following are common to both DPPs and REITs EXCEPT A) pass-through of losses B) centralized management C) pass-through of income D) capital gains distributions

pass-through of losses Both DPPs and REITS are professionally managed pools that pass through income and capital gains distributions to participants. REITS, unlike DPPs, do not pass through losses.

A stock selling for $62 is expected to decline temporarily in price, but the long-term trend is favorable. To take advantage of the temporary decline and generate income, the stockholder should A) sell a put B) sell a call C) buy a call D) buy a put

sell a call The sale of a call allows the investor to collect premiums. Because he owns the stock, the option is covered and no margin is required. Alternatively, the investor could buy a put to move more in-the-money as the stock price falls temporarily. He could later liquidate the put at a profit, but buying a put would not generate income.

When a customer, who is at least 59½, withdraws money from a traditional IRA that has been funded totally with deductible contributions A) the entire amount withdrawn is subject to taxation at ordinary income tax rates B) the withdrawal causes the entire IRA balance to be subject to taxation at ordinary income tax rates C) unless qualifying for an exception, the entire amount withdrawn is subject to taxation at ordinary income tax rates with an additional 10% penalty D) the basis is taxed as ordinary income, the gains are taxed at the capital gains rate

the entire amount withdrawn is subject to taxation at ordinary income tax rates All withdrawals from a traditional IRA that has been funded with pre-tax contributions are subject to taxation at ordinary income tax rates. There is no penalty once the account holder has reached age 59½.

A customer asks for sales literature for a money market mutual fund. Upon receiving the literature she notices A) the fund is an appropriate addition for investors seeking capital appreciation B) the fund stipulates that future results will be substantially the same as the past performance listed in the 1-, 5-, and 10-year returns C) the fund's current yield is insured by the Federal Deposit Insurance Corporation D) the fund seeks to maintain a stable price but that the fund can lose money

the fund seeks to maintain a stable price but that the fund can lose money Sales literature for money market mutual funds must include the fact that it is possible to lose money when investing in the fund.

A generic ad for an investment company placed by a broker-dealer would contain A) the name of the broker-dealer placing the ad, but not the name of the investment company B) the name of the investment company, but not the name of the broker-dealer C) both the name of the investment company and the broker-dealer D) neither the name of the investment company nor the broker-dealer

the name of the broker-dealer placing the ad, but not the name of the investment company Generic advertising of investment companies presents a nonspecific introduction to investment company shares. A specific fund or investment company is not mentioned in generic advertising, but the broker-dealer who is placing the ad must be named.

Perhaps the most important thing to understand when a business is organized as a sole proprietorship is that A) the owner is liable for all the debts of the business B) all losses are taxed to the sole proprietorship C) this type of business mode is best for raising large amounts of money D) all profits are taxed at business level which will likely lower overall taxes

the owner is liable for all the debts of the business The most important characteristic to understand as a sole proprietor is that you are responsible if the business liquidates, and therefore, you could lose everything.

An individual is deciding between a flexible premium variable life contract and a scheduled premium variable life contract. If she is concerned about maintaining a minimum death benefit for estate liquidity needs, she should choose A) the flexible premium policy because the contract's face amount cannot be less than a predetermined percentage of cash value B) the scheduled premium policy because earnings do not affect the contract's face amount C) the scheduled premium policy because the contract is issued with a minimum guaranteed face amount D) the flexible premium policy because earnings of the contract directly affect the face value of the policy and earnings can never be negative

the scheduled premium policy because the contract is issued with a minimum guaranteed face amount A scheduled premium variable life contract is issued with a guaranteed minimum death benefit. If the individual is concerned about having the minimum guarantee, you should recommend the scheduled contract.

If a customer writes 1 uncovered in-the-money put, the maximum loss to the customer is A) 100% of the premium B) unlimited C) the strike price minus the premium multiplied by 100 shares D) the strike price plus the premium multiplied by 100 shares

the strike price minus the premium multiplied by 100 shares If the stock becomes worthless, the investor will be forced to buy the stock at the strike price, but still keeps the premium received when the option was written. Essentially, maximum loss is breakeven multiplied by 100 shares.

The primary difference between an underwriting syndicate member and a selling group member in a firm commitment underwriting is that A) the securities offered by each differs within the offering B) the syndicate assumes liability for unsold shares; the selling group does not C) the size of a syndicate member firm will always be larger than a selling group member firm D) the price per share paid by the public (POP) is more if purchasing new shares from a selling group member

the syndicate assumes liability for unsold shares; the selling group does not The underwriting syndicate makes a financial commitment in a firm underwriting to bring a new issue to market and to take liability for unsold shares. A member of a selling group only agrees to provide a sales service for a certain number of shares in exchange for a commission on shares it sells. It has no responsibility for any unsold shares. The securities offered are identical and the public offering price is the same. Both large and small firms can be either syndicate members or selling group members.

In a direct participation program (DPP) limited partnership, the general partner has A) unlimited liability and an active role B) limited liability and a passive role C) unlimited liability and a passive role D) limited liability and an active role

unlimited liability and an active role In a direct participation program (DPP) limited partnership, the general partner is the active partner managing the business who assumes unlimited liability.

A fundamental analyst researching a stock is concerned with all of the following EXCEPT A) the stock's market price as a multiple of the company's earnings B) volume of shares traded C) management efficiency D) capitalization ratio

volume of shares traded A fundamental analyst is concerned with the economic climate, the inflation rate, how an industry is performing, a company's historical earnings trends, how it is capitalized, and its product lines, management, and financial statement ratios, such as the P/E ratio. A technical analyst is concerned with trading volumes or market trends and prices.

Under which of the following terms does the underwriter act in a dealer capacity? A) Syndicate B) Firm commitment C) Best efforts D) Selling group

Firm commitment The firm commitment is the most commonly used type of underwriting contract. Under its terms the underwriter commits to buy the securities from the issuer, and as such is acting in a dealer capacity.

If an investment representative hosts an investment seminar and intends to discuss general investment concepts and a specific mutual fund for which he has performance charts, which of the following are TRUE? He may discuss the investment returns of the mutual fund in general, provided he does not use a specific time frame. He may discuss the investment returns of the mutual fund using a specific time frame. He must disclose all material facts regarding the mutual fund to the audience. He may emphasize the positive aspects of the mutual fund and refer prospective investors to the prospectus for further details. A) I and III B) I and IV C) II and IV D) II and III

He may discuss the investment returns of the mutual fund using a specific time frame. He must disclose all material facts regarding the mutual fund to the audience. He may discuss the investment returns of the mutual fund as long as he uses a specific time frame. When discussing an investment, he must disclose all material facts pertaining to the investment, both negative and positive.

What might happen if a limited partner begins making business decisions for the partnership? A) He ascends to general partnership status as a reward for his decision making contribution. B) He may be removed from the partnership completely. C) He might jeopardize his limited liability status. D) There would be no effect because of the partnership democracy.

He might jeopardize his limited liability status. If a limited partner has control over the partnership operation (i.e., he makes partnership decisions), he could be judged a general partner and, thus, have unlimited liability.

A customer who seeks to supplement his retirement income and has a high risk tolerance would find which of the following securities most suitable? A) Investment-grade bond funds B) Municipal GOs C) High-yield bond funds D) Treasury STRIPS

High-yield bond funds High-yield bonds yield more than investment-grade bonds. Since the client has a high risk tolerance, these bonds are more appropriate than investment-grade bonds that yield less.

Which of the following statements regarding ADRs is NOT TRUE? A) ADRs make it easy to own a foreign security. B) Dividends are received in U.S. dollars. C) Key risks to identify include currency and political risks. D) Holders generally have voting rights.

Holders generally have voting rights. American depositary receipts, (ADRs) are designed to facilitate the trading of foreign securities for U.S based investors. ADRs with few exceptions, do not have voting rights, The holder of an ADR does not hold the shares of the underlying foreign security but instead holds a receipt for those shares. ADRs are U.S. securities traded in U.S. markets in U.S. dollars, with dividends received in U.S. dollars as well. There is both currency and political risk associated with ADRs.

In a strong bull market, which of the following positions utilizing leverage has the potential for the highest percentage gain? A) Writing puts B) Holding calls C) Selling short D) Holding stocks

Holding calls Both a long call and a long stock position are profitable in a rising market. However, because options use leverage, the profit relative to the money invested is larger with option positions. A put writer also profits in a rising market, but only by the amount of the premium. A short seller loses money if the stock rises.

Which of the following would be used to protect against systematic risk? A) Currency options B) Interest rate option C) Stock options D) Index options

Index options Systematic risk is the market risk applied to the value of an entire portfolio instead of just one stock. Therefore, an investor would use index options to protect against systematic risk.

A customer with low net worth contacts you and wants to purchase penny stocks. Although the customer is willing to speculate you feel that penny stocks are not appropriate for this person. What would be your responsibility at this point? A) Your only responsibility at this point is to place the order. B) Because the customer came to you with the trade, it is best to agree and mark the ticket as speculative. C) Refuse the trade and explain to the customer your reasons why. D) Inform the customer that in your opinion this is a trade that is not suitable.

Inform the customer that in your opinion this is a trade that is not suitable. As a registered representative you have a responsibility to inform the customer of your opinion. If the customer persists, mark the trade as unsolicited and place the order.

If TCB is trading at 43 and the TCB Apr. 40 call is trading at 4, what are the intrinsic value and the time value of the call premium? A) Intrinsic value 1; time value 3 B) Intrinsic value 4; time value 0 C) Intrinsic value 3; time value 4 D) Intrinsic value 3; time value 1

Intrinsic value 3; time value 1 The option is in-the-money by 3 points because the strike price is 40 and the market price is 43. This sets a minimum premium of $3 per share. Because the actual premium is 4, the balance of 1 represents time value.

Which of the following is a bull spread? A) Long July 30 put, short July 35 put B) Short August 40 call, short August 40 put C) Long May 40 put, short May 35 put D) Long August 30 call, short August 25 call

Long July 30 put, short July 35 put A debit call spread is bullish and a credit put spread is bullish. Long July 30 put, short July 35 put is the only bullish position in the answer choices. Short August 40 call, short August 40 put is a short straddle, not a spread, and the remaining two positions are bearish; long August 30 call, short August 25 call and long May 40 put, short May 35 put.

A unit investment trust has 90% of its portfolio invested in high-grade bonds with an average maturity of almost 25 years. If the industry consensus were that long-term interest rates were about to increase sharply, which of the following actions would most likely be taken? A) Liquidate and begin to move into cash or cash equivalents B) Switch to short-term bonds C) Ladder the maturities D) No action would be taken

No action would be taken One of the key distinctions of a UIT is its lack of management. Once the portfolio has been created, it is fixed until maturity, in the case of debt securities, or until some predetermined liquidation point, in the case of an equity trust.

SEC regulations for securities issued by investment companies prohibit which of the following? Closed-end funds from issuing preferred stock. Open-end funds from issuing preferred stock. Closed-end funds from issuing bonds. Open-end funds from issuing bonds. A) I and III B) II and IV C) II and III D) I and IV

Open-end funds from issuing preferred stock. Open-end funds from issuing bonds. Closed-end funds may issue more than one class of security, including debt issues and preferred stock. Open-end funds may issue only one class of security: redeemable, voting common stock; they may not issue senior securities.

In discussing a direct participation program with your customer, she notes investment characteristics that are important to her and some that are not. For a DPP to be considered suitable for the customer, rank the following items in order of those that should be most important to least important. Tax write-offs Liquidity and marketability Potential for economic gain SEC approval A) III, IV, II, I B) I, II, III, IV C) III, I, II, IV D) II, III, IV, I

Potential for economic gain Tax write-offs Liquidity and marketability SEC approval In the eyes of the IRS, a program's economic viability should be the most important aspect of the investment for a limited partner and the first priority in the assessment of the DPP. While the IRS considers programs designed solely to generate tax benefits abusive, they do allow for some in terms of writing off passive income and allowable tax credits so these factors would be the next concern for an investor. Because there is a very limited secondary market for DPPs, liquidity and marketability should be a low priority, and because there is no SEC approval of any investment, it would be of no concern.

TCB wants to offer $75 million worth of common stock in its home state. It will not register at the federal level. What type of registration will TCB use to register with the state? A) Qualification B) Regulation D C) Coordination D) Notice

Qualification If the registration is just with one state, the registration will be done through qualification. Qualification means that the state will collect all the information and decide whether or not to clear the offering for sale in the state.

Which of the following exemption provisions of the Act of 1933 may not be used for an initial offering of securities? A) Regulation A B) Regulation D C) Rule 144 D) Rule 147

Rule 144 Rule 144 does not pertain to primary offerings; it affects secondary market transactions in restricted or control securities. Rule 144 does not pertain to primary offerings; it affects secondary market transactions in restricted or control securities.

From first to last, which of the following sequences reflects the priority of payments made when a limited partnership is liquidated? General partners Limited partners General creditors Secured creditors A) I, II, III, IV B) I, IV, III, II C) IV, III, I, II D) IV, III, II, I

Secured creditors General creditors Limited partners General partners

Which of the following is the form of portfolio management that rotates between sectors based on changes to the business cycle? A) Segment rotation B) Strategic portfolio management C) Cyclical rotation D) Tactical portfolio management

Segment rotation Segment rotation, more commonly known as sector rotation, involves altering portfolio composition based on which sectors are poised to outperform as the business cycle is changing phases.

If your customer invests in a variable annuity and chooses to annuitize at age 65, which of the following statements are TRUE? She will receive the annuity's entire value in a lump-sum payment. She may choose to receive monthly payments for the rest of her life. The accumulation unit's value is used to calculate the total value of the account. The annuity unit's value represents a guaranteed return. A) II and IV B) I and IV C) II and III D) I and III

She may choose to receive monthly payments for the rest of her life. The accumulation unit's value is used to calculate the total value of the account. When a variable contract is annuitized (distributed in regular payments, not as a lump sum), the number of accumulation units is multiplied by the unit value to arrive at the account's current value. An annuity factor is taken from the annuity table, which considers, for example, the investor's sex and age. This factor is used to establish the dollar amount of the first annuity payment. Future annuity payments will vary according to the separate account's performance.

Which of the following positions subject an investor to unlimited risk? Short naked call Short naked put Long put Short sale of stock A) I and II B) II and III C) I and IV D) I and III

Short naked call Short sale of stock Short stock and short naked calls subject an investor to unlimited risk because there is no limit on how high a stock's price might rise. Risk is limited for the other positions.

In a volatile market, which of the following option strategies carries the most risk? A) Short straddle B) Credit spread C) Long straddle D) Debit spread

Short straddle To establish a short straddle, the investor sells a call and a put; the short call carries unlimited loss potential.

On a single day, a customer purchases 15 TPL Sep. 50 puts at 6 and 15 TPL Sep. 50 calls at 1. If the price of TPL is $45 per share and the customer has no other security positions, what is this position called? A) Spread B) Straddle C) Combination D) Covered

Straddle A long straddle is the purchase of a call and a put on the same stock with the same strike price and expiration.

A registered representative calls a dealer for a quote an is given the following quote; Bid Ask 2.0 1.5 What type of security did the registered representative ask for? A) T-notes B) Municipal note C) CMO D) T-bills

T-bills This represents a quote for a T-bill. The quote represents a percentage discount from 100%. It is easy to identify because it looks like the bid price is greater than the ask price. This is the only quote you will see on the Series 7 that looks like this. But if you take 2% from 100%, that is 98%, and if you take 1.5% from 100%, that is $985. Therefore the quote is Bid $980 and the ask is $985. For your exam it is only important to identify the quote as a T-bill quote, not do the calculation.

The owner of an IRA, age 45, has contributed $10,000 into the account and the IRA is now worth $20,000. The owner is going to convert the entire $20,000 into a Roth IRA. What are the tax consequences of this conversion? A) $10,000 will be taxable as ordinary income, and $10,000 will be taxed as a capital gain, in addition, there will be a $2,000 tax penalty for early withdraw. B) $10,000 will be taxable as ordinary income and $10,000 will be taxed as a capital gain. C) The $20,000 is taxable as ordinary income but there is a $2,000 tax penalty for early withdraw. D) The $20,000 is taxable as ordinary income in the year of the conversion.

The $20,000 is taxable as ordinary income in the year of the conversion. Answer A. When converting from a (traditional) IRA to a Roth IRA, the distribution is all taxed as ordinary income in the year of the conversion. There is no 10% tax penalty if the conversion is done prior to age 59 1/2.

In July, a customer invested $10,000 in the ABC Mutual Fund. In December of the same year, ABC announced a long-term capital gains distribution. In May of the next year, the customer decided to redeem his shares for a capital gain. How are both of the capital gains treated for tax purposes? The capital gain distribution is treated as long term. The capital gain from redemption is treated as long term. The capital gain from redemption is treated as short term. The capital gain distribution is treated as short term. A) I and II B) II and IV C) III and IV D) I and III

The capital gain distribution is treated as long term. The capital gain from redemption is treated as short term. When long-term capital gains are distributed, the length of time an investor has owned the fund is not relevant; it's still a long-term distribution. However, redemption of shares follows the normal holding period rules. Therefore, when this customer sold shares 10 months (July to May) after the purchase, the gain, like any other gain from a holding period that does not exceed 12 months, is short term.

Which of the following statements describing Section 529 plans is TRUE? A) The maximum annual contribution varies from state to state. B) The fees associated with them are generally the same from state to state. C) Most state college savings plans require either the owner or the beneficiary of the plan to be a state resident. D) They can only be opened for children under the age of 18.

The maximum annual contribution varies from state to state. The features of Section 529 plans, including their contribution limits and fees, vary widely from state to state. Section 529 plans have no age limits as to participation; they are open to both children and adults who plan to attend college or graduate school. For college savings plans, there is no state residency requirement for either owners or beneficiaries of Section 529 plans.

If two customers are tenants in common in a joint account, which of the following statements are TRUE of this arrangement? If one of the tenants dies, the survivor will automatically assume full ownership. They need not make equal investments in the account. They need not have equal interests in the property in the account. If one of the tenants dies, the account need not be frozen. A) II and III B) I and III C) I and IV D) II and IV

They need not make equal investments in the account. They need not have equal interests in the property in the account. Under tenants in common, the tenants may make unequal investments in the account and may own a disproportionate interest in the property in the account. If one of the tenants dies, their assets are passed to their estate, not to the surviving joint tenant. The account must be frozen until this is carried out.

One of your existing clients wishes to open a new account in the name of his spouse and enter orders on her behalf. A) The agent could be liable if the stock declines in value. B) This practice is ordinary and acceptable. C) This action is prohibited unless the spouse signs a trading authorization. D) This action is prohibited unless the customer signs a trading authorization on behalf of his spouse.

This action is prohibited unless the spouse signs a trading authorization. Effecting transactions without specific written authority from the beneficial owner of the account is prohibited. This customer cannot sign trading authorization on behalf of his spouse. The spouse must sign the authorization.

A registered representative places an ad in her church newsletter promoting her services as an expert retirement planner. Does this advertisement need to be pre-approved by a principal? A) Yes, but only if the newsletter is mailed as opposed to handed out on church property. B) No, the church is a non-profit organization, and as such, the ad is exempt from pre-approval requirements. C) Yes, the ad will be defined as retail communication requiring pre-approval of a principal. D) No, because the ad only promotes a service, not a specific product.

Yes, the ad will be defined as retail communication requiring pre-approval of a principal. Although it isn't specified that the ad will be received by more than 25 retail investors during a 30-day period, the best answer is the ad will be defined as retail communication requiring pre-approval of a principal. How retail communication is delivered in this question is not relevant (mailed as opposed to handed out); whether promoting a service or product, either would need pre-approval, and the fact that the ad is placed in a church newsletter provides no exemption from pre-approval requirements.

Which of the following statements best describes a hedge fund? A) A closed-end investment company employing leverage through the use of debt and preferred stock financing B) An investment company, registered under the Investment Company Act of 1940, that charges higher than usual management fees and employs sophisticated investment techniques in an attempt to provide level returns during periods of market uncertainty C) A private and unregistered investment pool that accepts investor's money and employs sophisticated hedging and arbitrage techniques using long and short positions, leverage and derivatives, and investments in many markets D) An investment pool, generally unregistered, that, through the use of sophisticated market tools, offers investors returns that generally exceed those available elsewhere

A private and unregistered investment pool that accepts investor's money and employs sophisticated hedging and arbitrage techniques using long and short positions, leverage and derivatives, and investments in many markets As of the date of this course, hedge funds are not registered with the SEC (their managers generally are) and are invariably sold in private offerings, usually under Regulation D of the Securities Act of 1933. Hedging and arbitrage techniques using long and short positions, leverage and derivatives, and investments in many markets are some of the primary techniques used by these funds.

A prospect is heavily invested in the common stock of an employer's company, ABC, relative to other investments. The stock has performed well over the last 15 years and the prospect is very happy with the investment. After reviewing financial and nonfinancial criteria, you have determined that A) owning too much ABC stock has increased credit risk to an unacceptable level B) selling a portion of ABC and using the proceeds to purchase mutual funds will reduce his nonsystematic risk C) he should begin to liquidate the ABC stock using the FIFO accounting method D) because ABC has performed well over a 15-year period, keep the stock but sell it if inside information indicates a fall in value is eminent

selling a portion of ABC and using the proceeds to purchase mutual funds will reduce his nonsystematic risk This prospect is exposed to a significant amount of business (nonsystematic) risk as indicated by the large investment in ABC common stock. Business risk can be reduced by diversifying the portfolio; and therefore, recommending the sale of a portion of the ABC stock and using the proceeds to purchase mutual funds is suitable. There will be tax considerations but the use of FIFO accounting will likely expose the prospect to higher capital gains taxes than other accounting methods and may not be the best approach to liquidation.

All of the following option contracts are in-the-money when XYZ is 54 EXCEPT A) long XYZ 50 call B) short XYZ 45 call C) long XYZ 60 put D) short XYZ 50 put

short XYZ 50 put Call options are in-the-money whenever the market price is greater than the strike price. Put options are in-the-money whenever the market price is lower than the strike price.

If an investor establishes a call spread, and buys the lower exercise price and sells the higher exercise price at a net debit, he anticipates that the A) price of the underlying stock will not change B) spread will widen C) exercise prices will change D) spread will narrow

spread will widen Debit spreads are profitable when both sides are exercised or the spread widens between the premiums. Credit spreads are profitable when both sides expire or the spread narrows between the premiums.

In an account opened by two individuals as joint tenants with rights of survivorship, all of the following are true EXCEPT A) stock certificates may be delivered in the name of either party B) mail may be directed to the joint owner agreed upon by both parties to the account C) orders may be entered by either party D) in the event of death, the other party assumes full ownership of the account

stock certificates may be delivered in the name of either party In a JTWROS account, each party has an equal, undivided interest in the account. Upon the death of one party in a two-party account, the other party assumes full ownership of the account. Orders may be entered by either party, and mail may be directed to either party. However, disbursements of cash or securities must be in the name of all parties to the account.

In portfolio theory, the alpha of a security or a portfolio is A) a measure of the variance in returns of a portfolio divided by its average return B) the difference in the expected return of the portfolio, given the portfolio's beta, and the actual return the portfolio achieved C) the risk of the portfolio associated with the factors that affect all risky assets D) a measurement of a portfolio's performance versus a standard benchmark such as the S&P 500

the difference in the expected return of the portfolio, given the portfolio's beta, and the actual return the portfolio achieved Alpha is the difference in the expected return of the portfolio, given the portfolio's beta and the actual return the portfolio achieved. The higher the alpha, the better the portfolio has done in achieving excess or abnormal returns. The risk of the portfolio associated with the factors that affect all risky assets is systematic risk.