Final # 7
For the year 2017, the maximum annual contribution to an Individual Retirement Account for a single person is: A. 100% of income or $5,500, whichever is less B. 100% of income or $5,500, whichever is greater C. 100% of income or $11,000, whichever is less D. 100% of income or $11,000, whichever is greater
A. 100% of income or $5,500, whichever is less For the year 2017, the maximum permitted contribution to an IRA is 100% of income or $5,500, whichever is less. If a person earns $1,000 per year, then the maximum permitted contribution would be only $1,000. (Of course, it is highly doubtful that this person would make a contribution, since he or she would probably prefer to eat instead!). Contributions are based on earned income only - dividend or interest income cannot be used as the basis for making a contribution.
A customer has won $1,000,000 in a lottery. The customer has the choice of taking $1,000,000 today or $65,000 per year for the next 20 years. To evaluate the best option, the customer would use: A. Net Present Value B. Total Return C. Rule of 72 D. Expected Rate of Return
A. Net Present Value This person has the choice of taking $1,000,000 now or can take $65,000 a year for the next 20 years. To find the best choice, each $65,000 payment over each of the next 20 years must be discounted back to today's net present value, using the risk-free interest rate as the discount factor. If the net present value of these payments is more than $1,000,000, then the 20 payments of $65,000 would be the better choice.
What type of employee benefit plan would be given to executives of a corporation as an enticement to stay with the company for a long time period? A. 457 plan B. Deferred compensation plan C. Salary reduction plan D. Tax deferred annuity
B. Deferred compensation plan Deferred compensation plans can be established by corporate employers, allowing top-level employees who are high earners to defer taking all of their income, reducing current tax liability. The deferred amount is specified in the agreement between the company and the executive, is recorded on the company's books and earns a rate of return tied to a benchmark index, like the S&P 500 Index. When the employee retires, the deferred compensation amount plus growth is paid out as specified in the agreement and is taxable. Such plans are discriminatory, because they are only offered to high-earning top level employees, so these plans are not subject to ERISA. In contrast, a 457 plan is an additional salary reduction compensation plan offered to executives of governmental and not-for-profit employers. 457 Plans cannot be adopted by for-profit employers.
What represents business risk? A. The risk that a company presents fraudulent financial statements B. The risk of buying a single stock C. The risk of investing in an enterprise that does not have a government backing D. The risk is making an investment commitment when prices are peaking
B. The risk of buying a single stock Business risk is simply making an investment in a business that runs into problems, such as falling sales, bad management, bad market environment, bad product line, that cause business results to deteriorate. On this one, we are down to a 50/50 choice - either Choice A or Choice B. Since business risk really does not take "fraud" into account. Choice B is the best answer. As more stocks are added to a portfolio, diversification reduces business risk. A single stock portfolio will have a high level of business risk.
A Federal Covered Adviser discovers a material error in its Form ADV. When must Form ADV be amended with the State to correct the error? A. Never B. Within 5 business days C. Within 30 calendar days D. On the SEC filing anniversary
C. Within 30 calendar days
The time horizon to be used when constructing a portfolio for a person who will retire in a few years is the: A. time remaining until retirement B. expected time till the person cannot care for him or herself C. expected lifetime of that person D. expected lifetime of that person's beneficiaries
C. expected lifetime of that person If a portfolio is being constructed to fund a person's retirement in a number of years, it must be able to provide retirement income to that person for his or her lifetime. This is the appropriate time horizon.
An IAR discusses a trading strategy with one of her clients, who tells the IAR to sell her ABC stock position whenever you see an opportunity. After this conversation, the client leaves the IAR's office for a vacation. Two days later, the IAR sees that ABC stock has risen in price and believes that this is an opportune time to sell the position. The IAR should: A. not place the order and try and contact the client B. place the trade and notify the client in writing within 2 business days C. place the trade and get written discretionary authority from the customer within 10 business days D. get approval from his or her direct manager before placing the trade
C. place the trade and get written discretionary authority from the customer within 10 business days Unlike the rule for broker-dealers written by FINRA, where a written power of attorney is required prior to exercising discretion, the NASAA rule for investment advisers is that verbal discretion can be exercised, as long as the written power of attorney is obtained from the customer within 10 business days.
An investment adviser representative would be denied registration for all of the following reasons EXCEPT the IAR: A. is insolvent B. failed to pay registration filing fees C. was convicted of a securities misdemeanor 11 years ago D. is not affiliated with an investment adviser
C. was convicted of a securities misdemeanor 11 years ago Registration can be denied to those convicted of misdemeanors involving the securities business; or any felony; occurring within the past 10 years. After 10 years have elapsed, that person can re-enter the business. If the representative is insolvent; does not pay filing fees; or is not affiliated with an investment adviser; registration will be denied.
What formula finds the "expected return" of an investment? A. Beta B. Duration C. Sharpe Ratio D. CAPM
D. CAPM
Which of the following are defined as a "State" under the Uniform Securities Act? I Hawaii II Puerto Rico III Virgin Islands IV District of Columbia
D. I, II, III, IV State" is defined under the Act to be any state, territory, possession of the United States, the District of Columbia, and Puerto Rico.
For an individual to be an accredited investor that person must?
have an annual income of 200k per year or 300k for a married couple. Or have a net worth of $1M.
NASAA rules require that State-registered advisers keep, in their principal office, records of:
•customer purchases and sales; and •customer securities positions (account statements). The rule requires that the records be kept for 5 years, with the prior 2 years immediately accessible.
Under IA-1092, to be considered to be "in the business," the rendering of investment advice must be: A. a regular activity of the adviser B. the principal activity of the adviser C. the sole activity of the adviser D. a non-recurring activity of the adviser
A. a regular activity of the adviser To be "in the business" of giving investment advice, this must be a "regular activity" of the firm; not the sole activity or the principal activity.
Which statements are TRUE about the filing of the annual surprise audit results with the Administrator by investment advisers? I Only advisers that take custody must be audited II All advisers must be audited III Audit results must be filed with the Administrator within 60 days of completion of the audit IV Audit results must be filed with the Administrator within 120 days of completion of the audit
B. I and IV The NASAA custody rule requires that each adviser that takes custody be audited on a "surprise" basis annually, so the actual date of the audit is only known to the CPA. There is no audit requirement for advisers that do not take custody. After the CPA shows up for the audit and completes the examination, a copy of the auditor's report and financial statements must be filed with the Administrator within 120 days of completion.
Under the provisions of the Uniform Prudent Investor Act, a trust: A. can only invest in securities that are included on that State's "Legal List" B. can customize its investments based on suitability as determined by the needs of the beneficiaries C. must determine that each individual investment is prudent D. gives the trustee complete discretion as to which investments are suitable
B. can customize its investments based on suitability as determined by the needs of the beneficiaries
Fixed income portfolios are subject to which of the following risks? I Credit risk II Purchasing power risk III Opportunity cost IV Interest rate risk
D. I, II, III, IV Fixed income portfolios are subject to all of the risks listed. Credit risk is the risk that the issuer will default. Purchasing power risk is the risk of inflation, which will erode the value of the fixed income security. Opportunity cost is the risk that rates rise, and the existing investment yields less than current market rates. Interest rate risk is the risk that if interest rates rise, the price of the fixed income security will fall.
An investment adviser is a private fund adviser that is not required to register with the SEC. All of the following would be permitted investors in order to retain its exempt pool status EXCEPT: A. an individual who is an accredited investor under Regulation D B. an individual who has at least $5 million of assets available for investment C. an hedge fund with at least $25 million of assets under management D. a trust with at least $5 million of assets available for investment
A. an individual who is an accredited investor under Regulation D A "private fund" is defined as one that would require registration with the SEC as an investment company, but it is not required to do so because either:•it does not publicly offer its securities and has 100 or fewer beneficial owners of its securities (this is the typical structure for a hedge fund); or •it does not publicly offer its securities and only limits its owners to qualified purchasers. To be a "qualified purchaser" is tougher than being an accredited investor under Regulation D. A qualified purchaser is an individual or trust with at least $5 million of assets available for investment; or an investment manager or company with at least $25 million of assets available for investment.
Royalties received from an oil and gas program are: A. partnership income B. passive income C. earned income D. portfolio income
B. passive income Income received from partnership investments is characterized under the tax code as passive income. Passive losses can only be offset against other passive income - they cannot be offset against earned income or portfolio income.
A customer has been making purchases of mutual fund shares using dollar cost averaging. He has made the following purchases: Month Investment # of Shares 1 $80 40 2 $80 20 3 $80 10 4 $80 8 5 $80 4 The customer will break even if the NAV of the fund is: A. $4.00 B. $4.65 C. $4.88 D. $5.25
C. $4.88 A total of 82 shares (40+20+10+8+4) were purchased for a total money outlay of $400 (5 purchases of $80 each). Thus, the average cost per share is $400/82 = $4.88 per share. The customer will break even if the shares are redeemed for this price.
In March, an investment adviser wishes to increase its annual management fee from 1% of assets annually to 1.25% of assets annually, starting the following July 1st. In order to do this: I the investment adviser must amend the Form ADV filed with the State immediately II the investment adviser must amend the Form ADV filed with the State within 30 days III the adviser's customers must approve of the change by July 1st IV the adviser's customers are not required to approve the change
C. II and III Any changes to an advisory contract are a material change that must be filed as a Form ADV update with the State within 30 days. In addition, since this is a contract between the customer and the investment adviser, both parties must agree to any changes.
customer who is retired wants to select an investment that is marketable, and that provides the highest rate of return. The BEST choice would be to recommend: A. Treasury Bills B. Treasury Notes C. Investment Grade Preferred Stock D. Certificates of Deposit
C. Investment Grade Preferred Stock Certificates of Deposit are non-negotiable - they are non-marketable, so this does not meet the client's needs. Preferred stock is marketable, and Treasury securities are extremely marketable, so any of these meet this requirement. However, investment grade preferred stock issued by a top-shelf corporation will provide a higher investment return than ultra-safe Treasury securities, making this the best choice.
Payments received by the owner of a tax qualified variable annuity are: A. 100% taxable as investment income B. only taxable to the extent of earnings above the holder's cost basis C. only taxable to the extent of the holder's cost basis D. non-taxable
A. 100% taxable as investment income Funds paid into "tax qualified" retirement plans were never subject to tax, since the contribution amount was deductible from income at the time it was made. Earnings build up tax deferred in the plan. When distributions are taken, since all of the dollars in the plan were never taxed, all of the distribution is taxable. Funds paid into "non-tax qualified" retirement plans are not tax deductible. Any earnings build up tax deferred. When distributions are taken, the portion that represents the return of original after tax investment is not taxed, while the portion that represents the tax deferred earnings buildup is taxable.
Which of the following would be an unethical practice under the Uniform Securities Act? A. Telling a customer that the price of a security is $25 per share if the broker-dealer is the sole market maker in the stock B. Telling a customer that the price of a security is $25 per share if the source of the quote is the NASDAQ system C. Telling a customer that the price of a security is $25 per share if this is the P.O.P. of the issue in a syndicate distribution D. Telling a customer that the price of a security is $25 per share if the source of the quote is the NYSE
A. Telling a customer that the price of a security is 25 per share if the broker dealer is the sole market maker in the stock. If a broker-dealer is the sole market maker in a stock, then there is no true independent market - the price is whatever the broker-dealer says it is! In such a case, the rule is that the price is "contemporaneous cost" - meaning the last price at which the broker actually bought the stock! On the other hand, the last price reported from the NYSE or NASDAQ is a true market price and can be quoted. Finally, all prospectus offerings are fixed price sales made at the P.O.P. - Public Offering Price, with the price stated in the prospectus. Quoting this price is just fine!
A married couple that is in the maximum tax bracket has 1 child, age 13. The couple is looking to start a 529 plan to fund the child's college education beginning 5 years from now. To calculate the amount of money needed to pay for college, all of the following are needed EXCEPT: A. parent's income B. current cost of tuition C. assumed rate of return D. expected inflation rate
A. parent's income In this example, we need to determine the capital needed, 5 years from now to pay college tuition. To do so, we would take the current cost of tuition and inflate it over the next 5 years by the expected rate of inflation. Then we need to take this future dollar amount and discount it back by our assumed investment return, to get the dollar amount that must to be invested today to fund this capital need.
A Registered Investment Adviser is a director of a private corporation. The corporation goes public, and the adviser wants to recommend the purchase of the stock to his clients. All of the following statements regarding this action are true EXCEPT this action is: A. permitted without restriction since the company is trading publicly B. permitted as long as the existence of the control relationship is disclosed in writing in the RIA's disclosure document C. a potential violation of the insider trading rules D. a potential violation of the conflict of interest rules
A. permitted without restriction since the company is trading publicly
A portfolio constructed by a manager has the following rate of return probabilities for the coming year: Rate of Return Probability 15% 40% 8% 30% -2% 30% What is the expected rate of return for this portfolio? A. 7.00% B. 7.80% C. 8.33% D. 9.00%
B. 7.80% To find the expected rate of return, each possible rate of return is multiplied by its probability; and then they are added up. Multiply the ror by the probability and then add them all up.
Which of the following is NOT an accredited investor under Regulation D? A. An individual with a $3 million net worth B. An individual with $2 million in securities C. An employee benefit plan with $7 million to invest D. A couple that has $400,000 per year of annual income
B. An individual with $2 million in securities This question is not immediately obvious! An individual with $2 million of securities does not mean that he or she has a net worth of $1,000,000 (the minimum requirement to be accredited). He or she may have a margin loan against the securities, with the loan amount in excess of $1,000,000! As long as a couple earns at least $300,000 per year, they are accredited. Employee benefit plans and trusts that have over $5,000,000 under management, also are accredited investors under Regulation D.
Which of the following are needed to determine tax filing status? I Marital status on the last day of the year II Nationality III Residency IV Cost of home upkeep
B. I and IV
Monte Carlo simulation: A. is used to determine the expected value of an investment's return based on the probability of a specific result occurring B. establishes a frequency distribution of investment returns over a range of different conditions C. predicts the variability of return that can occur relative to the mean or median return D. establishes the asset allocation percentages applied to each asset class based upon an investor's objectives, risk tolerance, and time horizon
B. establishes a frequency distribution of investment returns over a range of different conditions Monte Carlo simulation is a computer simulation methodology that is used to determine the most probable outcome of an investment decision. Instead of using a formula, this method assesses the outcome of the investment's return under an extremely broad range of varying conditions, creating thousands of computer calculated scenarios to converge on the most probable outcome. Thus, it creates a frequency distribution of investment returns, with the most likely result being the investment returns that are generated with the greatest frequency.
The sale of a new issue of bonds by an insurance company is: I exempt from registration with the SEC II subject to registration with the SEC III exempt from registration in the State IV subject to registration with the State
C. II and III The Securities Act of 1933 exempts insurance company "products" from registration with the SEC - meaning insurance policies and fixed annuities. However, if an insurance company sells its own securities to the public (e.g., common stock, preferred stock or bonds), these are non-exempt securities that must be registered with the SEC and sold with a prospectus. However, insurance company securities are exempt from State registration requirements, because insurance companies are already regulated at the State level by each State Insurance Commission.
An investment adviser representative has solicited a new client over the phone to purchase advisory services, but no sale results and she takes no further action. The IAR knows this individual, who she has met at her kid's school PTA meetings. The IAR has no more interaction with the potential client, but at the next PTA meeting, the potential client tells the IAR that she has thought about it and is ready to sign the agreement right there. The IAR has a contract form in her briefcase, but does not have the brochure. Which statement is TRUE? A. The investment adviser representative can have the customer sign the contract as long as the brochure is delivered within 48 hours B. The investment adviser representative can have the customer sign the contract as long as the brochure is delivered within 5 business days C. The investment adviser representative cannot have the customer sign the contract unless a brochure is delivered at the same time D. The investment adviser representative can have the customer sign the contract as long as she does not cash the check until the brochure is delivered
C. The investment adviser representative cannot have the customer sign the contract unless a brochure is delivered at the same time The Brochure Rule under the Investment Advisers Act of 1940 requires that the brochure be given to customers at, or prior to, entering into a contract to provide advisory services. The customer must be given the brochure first, not after the fact.
An index fund manager is expected to generate a return that: A. is lower than that of the benchmark index B. matches the benchmark index C. exceeds the benchmark index D. at a minimum, pays for the expenses of selling the fund
C. exceeds the benchmark index This is an interesting question. While investors expect an index fund to generate a yield that matches the chosen index, in reality, the fund manager must exceed this return because of the expenses associated with managing the fund. Assume that the Standard and Poor's 500 index rises by 10% in a year and that an S&P 500 index fund has an expense ratio of .25% (primarily management fees). Thus, the manager of the fund must have a gain of 10.25% in the fund to yield 10% to investors after expenses are deducted. The way that the manager can do this is to sell covered calls to generate extra income against positions held in the portfolio; and the manager can slightly alter the weighting of stocks in the portfolio to those that he or she believes will outperform the overall index over the coming time period.
The Administrator is authorized to do all of the following EXCEPT: A. revoke the registration of all agents associated with a broker-dealer when the broker-dealer's registration is revoked B. subpoena the books and records of a broker-dealer after a suspension order is issued C. suspend a registration pending a hearing without stating a reason for the suspension D. obtain an injunction against any person suspected of violating the Act
C. suspend a registration pending a hearing without stating a reason for the suspension The Administrator cannot suspend a registration pending a hearing unless a reason for the suspension is stated. The Administrator can revoke the registration of all agents associated with a broker-dealer if the broker-dealer's registration is revoked. This must happen because an agent must be affiliated with a broker-dealer to be registered. The Administrator can subpoena books and records; and can obtain an injunction in court against any person suspected of violating the Act.
A customer wishes to open an account to help pay for her 15-year old son's college education expenses. She is concerned that the son may not be "college material" and wants to be able to take the funds back if he does not attend college. She could do this with all of the following account types EXCEPT: A. Totten Trust B. 529 Plan C. Coverdell ESA D. Custodian Account
D. Custodian Account When funds are donated to a custodian account under UGMA or UTMA, the gift is irrevocable. On the other hand, any funds in a Totten trust can be taken out at any time without tax due; and any funds in a 529 Plan or Coverdell ESA can be taken out by the donor - however tax must be paid on funds that represent untaxed dollars, as well as a 10% penalty tax.
Under the Investment Advisers Act of 1940, an investment adviser's advertising: I can show past performance as long as it is not deliberately selective in which clients' results are shown II cannot use specific client names when showing performance unless the client approves III must make reference to market conditions during the period shown IV must have a disclaimer stating that past performance does not predict future results A. I and II only B. III and IV only C. II, III, IV D. I, II, III, IV
D. I, II, III, IV Under the Investment Advisers Act of 1940, advertisements by advisers can show past performance, as long as the adviser is not deliberately selective in which clients' results are shown. In addition, market conditions during that period must be disclosed (e.g., "This was a period when the market was generally rising."); and the disclaimer that past performance does not predict future results must be displayed. Specific customer names cannot be used in advertising unless the customer consents. Testimonials are prohibited in advertising.
A registered representative recommends a stock that is not registered in the State that should have been registered in the State. The representative has told his clients that it is a good investment that should be profitable in the near term. The representative: A. has not willfully violated the Uniform Securities Act but the action is still fraudulent and subjects the registered representative to criminal prosecution B. is subject to imprisonment and a fine C. has willfully violated the Uniform Securities Act and is guilty of a fraudulent act D. has not committed a felony or a fraudulent act because he did not know the security should have been registered
D. has not committed a felony or a fraudulent act because he did not know the security should have been registered Nowhere in the question does it state that the representative "knew" that the security should have been registered in the State. It appears that the recommendation of an unregistered non-exempt security to the clients in the State was unintentional, so the agent is only subject to civil liability. This means that the customer can get his or her money back with interest.
Under the Investment Advisers Act of 1940, an investment adviser's advertising: I can show past performance as long as it is not deliberately selective in which clients' results are shown II cannot use specific client names when showing performance unless the client approves III must make reference to market conditions during the period shown IV must have a disclaimer stating that past performance does not predict future results
I,II,III,IV Under the Investment Advisers Act of 1940, advertisements by advisers can show past performance, as long as the adviser is not deliberately selective in which clients' results are shown. In addition, market conditions during that period must be disclosed (e.g., "This was a period when the market was generally rising."); and the disclaimer that past performance does not predict future results must be displayed. Specific customer names cannot be used in advertising unless the customer consents. Testimonials are prohibited in advertising.
Not, Not, May
customer wishes to buy securities being sold in a bank location, the sales representative must comply with the "Not-Not-May" Rule. The salesperson must inform the customer verbally and in writing (this is done by giving the customer a written brochure) that: •Securities are NOT FDIC insured; •Securities are NOT bank deposits; and •Securities are subject to investment risk and MAY lose value. In addition, the representative must attempt to get the customer to sign a statement that he or she understands this.
