Practice Test (Official)
Prudent Asset Construction Enterprises (PACE) has offices in states X, Y, and Z. On their last annual updating amendment, they reported AUM of $218 million. In which of the following instances would PACE be receiving a substantial prepayment of fees? A) $1,600, paid one year in advance B) $600, paid six or months in advance C) $1,600, paid at the first of each quarter D) $10,000, paid monthly
A) $1,600, paid one year in advance First of all, this is an SEC registered IA, so we have to go by the federal numbers. Those are more than $1,200, six or more months in advance. The $600 would have been substantial if PACE was state-registered. Although the other two choices are above $1,200, they are not prepaid for at least six months.
A U.S. Treasury bond's price has moved from 96.18 to 96.22. An investor's account holding 10 of these bonds would show an increase of A) $12.50 B) $4.00 C) $.40 D) $1.25
A) $12.50 U.S. Treasury bonds are quoted in 32nds, where the difference between 96.22 and 96.18 represents an increase of 4/32nds per bond. That is one-eighth, or $1.25, times 10 bonds, or $12.50
*John Jones purchased 100 shares of DEF common stock at a price of $25 per share on August 4, 2016. On December 1, 2017, with the stock selling for $29 per share, he gifted the stock to his daughter. She subsequently sold the stock nine months later for $32 per share. Her tax consequence is A) $700 long-term capital gain B) $700 short-term capital gain C) $300 short-term capital gain D) $300 long-term capital gain
A) $700 long-term capital gain Securities acquired as a gift carry the donor's cost basis and date of purchase. In this case, the cost is $25 and the holding period began in 2016. So, the sale is long term and the profit is $7 per share
While reviewing the financial statements of the ABC Corporation, you notice that the company has $5 million in cash on hand and $6 million in inventory. If the current assets total $15 million, the total assets are $22 million, and the current liabilities are $6 million, the quick asset ratio is A) 1.5:1 B) 2.33:1 C) 3.0:1 D) 2.66:1
A) 1.5:1 The quick asset ratio is CA minus inventory divided by the CL. In this question, it is $15 million - $6 million = $9 million / $6 million = 1.5:1.
*When a market maker publishes a quote, what prices will be shown? Bid Market Offer Spread A) I and III B) II and IV C) I and II D) III and IV
A) I and III Bid Offer
An advisory client is interested in learning more about municipal bonds. It would be correct to state that I. general obligation bonds are usually, but not always, safer than revenue bonds II. interest received on municipal bonds is generally free of both federal and state income taxes III. municipal bonds are usually suitable for investors in higher tax brackets IV. the coupon yield on AAA-rated municipal bonds will generally be slightly higher than that of AAA-rated corporate bonds with a comparable maturity A) I and III B) II and IV C) III and IV D) I and II
A) I and III I. general obligation bonds are usually, but not always, safer than revenue bonds III. municipal bonds are usually suitable for investors in higher tax brackets
Which of the following forms of joint ownership is most often used for real estate? A) Tenancy by the entirety B) Tenants in common C) Joint tenants with right of survivorship D) Totten trust
A) Tenancy by the entirety Tenancy by the entirety is most commonly used for ownership of real property (real estate).
Under the provisions of Regulation S-P, a person who has an investment advisory contract with a registered investment adviser is known as A) a customer B) a cohort C) a client D) a consumer
A) a customer Regulation S-P uses two terms: customer and consumer. The customer is one with an ongoing relationship, such as would be the case with an advisory contract. A consumer is basically a one-shot deal.
*To assist broker-dealers with compliance, NASAA prepared a fee disclosure template. Based on the template, all of the following broker-dealer charges would be disclosed except A) brokerage commissions. B) account maintenance fees. C) account transfer fees. D) fees for issuance of stock certificates.
A) brokerage commissions.
The term alternative investment would least likely apply to A) closed-end funds (CEFs) B) leveraged ETFs C) inverse ETFs D) exchange-traded notes (ETNs)
A) closed-end funds (CEFs) Although there are closed-end funds that invest in alternative investments, those are in the minority. The other choices are all clearly labeled as alternatives.
*The weak form of the efficient market hypothesis A) implies that technical analysis is not worthwhile. B) reinforces the value of technical analysis. C) implies that fundamental analysis is not worthwhile. D) implies that inside traders cannot earn superior risk-adjusted returns.
A) implies that technical analysis is not worthwhile. The weak form implies that information contained in historical stock prices is fully incorporated into current stock prices; therefore, technical analysis (the study of historical prices and volume) is not worthwhile in predicting future prices. This form neither refutes fundamental analysis nor implies that traders using insider information cannot earn superior profits.
One respect in which advertising by investment advisers differs from that of broker-dealers is that A) investment adviser advertising is regulated by federal law while advertising by broker-dealers is regulated by FINRA. B) investment advisers are permitted to refer to charting systems in their advertisements, while broker-dealers cannot. C) investment advisers are permitted to conduct seminars, while broker-dealers cannot. D) investment advisers are not permitted to use the internet, while broker-dealers can.
A) investment adviser advertising is regulated by federal law while advertising by broker-dealers is regulated by FINRA. When it comes to investment advisers, state-registered or federal covered, any advertisement which does not comply with the SEC's Investment Adviser Marketing Rule as found in the Investment Advisers Act of 1940 (federal law) would be prohibited. On the other hand, broker-dealers must comply with FINRA's rule on communication with the public as well as the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents.
KAPCO, Inc. has 100,000,000 shares of $1 par common stock outstanding. If the current market price of the KAPCO common stock is $33 per share, KAPCO would be considered a A) mid-cap stock B) small-cap stock C) large-cap stock D) micro-cap stock
A) mid-cap stock Doing the arithmetic, we see that the market capitalization of KAPCO common stock is $3.3 billion. Stocks with a market cap in the range of $2 - $10 billion are considered mid-cap.
When an investment adviser representative terminates employment with a federal covered investment adviser and immediately accepts employment performing the same functions with a different federal covered investment adviser in the state where the individual resides A) only the investment adviser representative must notify the Administrator promptly B) the investment adviser representative and the employing adviser must notify the Administrator promptly C) only the terminating investment adviser must notify the Administrator. D) the investment adviser representative and each of the federal covered advisers must notify the Administrator promptly
A) only the investment adviser representative must notify the Administrator promptly If you are working for a registered investment adviser within a specific state, that state securities administrator wants to know who you are. The problem becomes a question of who is responsible for notifying the State Securities Administrator of your employment. A federal registered investment adviser is exempt from registration at the state level, and therefore, has very little contact with the state. If you go to work for a federal registered investment adviser, it becomes your duty to notify the State Securities Administrator that you are working there, as well as when you terminate.
Investors seeking current income would benefit from A) selling call options B) buying U.S. Treasury STRIPS C) buying periodic payment variable annuities D) buying LEAPS
A) selling call options When an investor sells an option, put, or call, the premium is received, generating immediate income. LEAPS are long-term options and, like all long options positions, do not generate any income. A periodic payment variable annuity will not begin any payout until the end of the deferral period.
An investor concerned about liquidity would be least likely to invest in A) stock subject to Rule 144 B) ADRs C) cumulative preferred stock D) common stock listed on the New York Stock Exchange
A) stock subject to Rule 144 Stock subject to Rule 144 is stock that cannot be immediately resold.
One of your customers purchased a TIPS bond three years ago. The bond's nominal yield is 4% and inflation has averaged 6% over the holding period. The interest payment at the end of the three years would be closest to A) $47.76 B) $23.88 C) $33.78 D) $21.60
B) $23.88
A technical analyst who has been charting the common stock of Kloud Information Storage Systems (KISS) would most likely sell KISS stock short when the market price of the stock is A) just below the resistance level. B) below the support level. C) just above the support level. D) above the resistance level.
B) below the support level. The support level of a stock is the historic repeating bottom. That is, whenever the stock gets that low, it brings out the buyers and pushes the price up. However, when a stock breaks through the support level, it is usually an indication that the support has dried up and there is going to be further decline. That is good for the short-seller.
The Uniform Securities Act provides for civil penalties in the event of illegal activities of broker-dealers and their agents. Under the act, a purchaser would NOT be entitled to claim: A) court costs B) attorney's fees C) the original consideration paid for the security or the current market value, whichever is greater D) interest at the state's legal rate less any income received on the security
C) the original consideration paid for the security or the current market value, whichever is greater In the event of a civil judgment, the purchaser is able to claim for a return of the original investment, not current market, plus interest at the state's legal rate. This interest is reduced, however, by any income received on that security. In addition, the broker-dealer or agent is liable for courts costs and attorney's fees.
When discussing the suitability of investing in direct participation programs, particular attention should be focused on which risks? Legislative Liquidity Market Purchasing power A) I and II B) III and IV C) I and IV D) II and III
I and II Legislative Liquidity Two of the major risks faced by DPP investors are the lack of liquidity and the possibility of legislative change.
Ways in which a Section 529 plan differs from a Coverdell ESA include I. tax-free distributions when the funds are used for qualifying educational expenses. II. higher contribution limits III. no earnings limitations IV. contributions that may be made by someone other than a parent or legal guardian
II and III II. higher contribution limits III. no earnings limitations
One of the differences between state and federal law involving an investment adviser maintaining custody of customer funds and/or securities relates to the handling of client checks made payable to third parties such as broker-dealers. Which of the following properly expresses that difference? A) Under federal law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to the third party within three business days of receipt. B) Under state law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to the third party within 24 hours of receipt. C) Under state law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to the third party within three business days of receipt. D) Under federal law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to the third party within 24 hours of receipt.
Under state law, receipt of a check payable to an unrelated third party is considered to be custody unless forwarded to the third party within three business days of receipt.
Your client notices that the listing for the CDL $100 par common stock in the Wall Street Journal indicates that the current yield of the stock is 4%. If the last trade was at $40 per share, more than likely, CDL is paying quarterly dividends of A) $1.60 B) $.40 C) $1.00 D) $4.00
B) $.40 The par value of the common stock is irrelevant to this question. In order for a stock selling at $40 to have a current yield of 4%, the annual dividend must be $1.60. Because common stock dividends are typically paid quarterly, more than likely, the quarterly dividend is $.40 per share.
*Early in the year, an investor purchased 100 shares of KAP common stock at a price of $60 per share. Just prior to the end of the year, after receiving three quarterly dividends of $1, the investor liquidated all of the KAP at a price of $59 per share. If the Consumer Price Index (CPI) increased by 3%, the investor's total return over the holding period was A) .33% B) 3.33% C) 5% D) 2%
B) 3.33%
With regard to the NASAA Model Brochure Rule Requirements for Investment Advisers, which of the following are not exempt from the delivery requirements of that rule? A) An adviser whose only clients are closed-end investment companies B) An adviser who deals with qualified clients only C) An adviser whose only clients are exchange-traded funds D) An adviser who only provides impersonal advisory services at an annual charge of less than $500
B) An adviser who deals with qualified clients only
*An index annuity has no cap on gains, but guarantees a minimum return of 3.35% with an 80% participation rate. If the index increases by 15%, what is the rate of return to the investor? A) 18.35% B) 15% C) 12% D) 2.68% Explanation
C) 12% If the annuity contract calls for an 80% participation rate with no cap, then the investor will receive 80% of the performance of the index. In this case, 80% of a 15% return is 12%.
*As specified in the Dodd-Frank Act of 2010, which of the following would NOT qualify for the private fund exemption? A) A non-U.S. based investment adviser with no place of business in the United States and less than $25 million in assets under management belonging to U.S. clients B) An investment adviser who limits its advisory services to private funds with less than $150 million in assets under management in the United States C) An investment adviser who limits its advisory services to insurance companies D) An investment adviser who limits its advisory services to venture capital funds
C) An investment adviser who limits its advisory services to insurance companies
*With regard to nonqualified stock options (NSO) and incentive stock options (ISO), which of the following statements is incorrect? A) A tax deduction for the employer is generally only available with NSOs. B) Board of director approval is required for both NSOs and ISOs. C) Capital gain treatment is only available with NSOs. D) AMT is only an issue for those exercising ISOs.
C) Capital gain treatment is only available with NSOs. It is only the ISO where the employee can possibly receive capital gain treatment
A corporation with a 6%, $25 par cumulative preferred paid $.50 to preferred stockholders last year. This year, the company wants to pay common dividends. How much must it pay each preferred share? A) $11.50 B) $0.50 C) $1.50 D) $2.50
D) $2.50 A 6% cumulative preferred stock with a $25 par value would pay an annual dividend of $1.50 ($25 × 6%). Cumulative preferred requires all dividends that have previously been skipped be paid before any dividends paid to common stock. The $.50 that was paid last year left $1 in dividends in arrears. Therefore, this year requires that a $2.50 dividend be paid to the preferred shareholders before any common dividend paid to common shareholders.
*An investor purchased a 2x leveraged ETF at a price of $100 per share. On the first day, the index was up 10%. On the next day, it was down 10%. The investor's share value is now A) $101. B) $100. C) $99. D) $96.
D) $96. On the first day, the value increased by twice the 10% the ETF gained (20% × 100 = 20). That makes the share value $120. On the second day, the value decreased by twice the 10% the ETF lost, (20% × 120 = 24). That makes the current value $96.
*In order to comply with the safe harbor requirements of Section 404(c) of ERISA, the trustee of a 401(k) plan must offer plan participants at least three different investment alternatives ensure that plan participants are insulated from control over their portfolios allow plan participants to change their investment options no less frequently than quarterly permit immediate vesting of employer contributions. A) II and III B) I and III C) I and IV D) II and IV
B) I and III offer plan participants at least three different investment alternatives allow plan participants to change their investment options no less frequently than quarterly
In order to come under the SEC's requirement to file a Form 13F, an institutional manager must have discretion over A) an equity portfolio of at least $50 million in 13(f) securities B) an equity portfolio of at least $100 million in 13(f) securities C) an equity portfolio of at least $100 million D) more than 10% of the outstanding voting securities of a reporting company
B) an equity portfolio of at least $100 million in 13(f) securities Form 13F must be filed by institutional money managers with at least $100 million in 13(f) equity securities under discretionary management.
Current market interest rates are 6%. Using the discounted cash flow method of valuation, you would expect to arrive at the highest valuation for which of the following? A) Zero-coupon bond maturing in 11 years B) 5% coupon maturing in 20 years C) 7% coupon maturing in 9 years D) 10% coupon maturing in 10 years
D) 10% coupon maturing in 10 years The discounted cash flow method considers the future expected free cash flow (the interest payments plus the eventual return of the principal) and discounting it to arrive at a present value. In its simplest iteration, this is nothing more than taking all the money you are scheduled to receive over a given future period and adjusting that for the time value of money. In general, bonds with higher coupons will have the greatest value because they will clearly produce the most cash flow, and zero-coupon bonds will produce the lowest because they have no cash flow other than the return of the face value at maturity.
*What is the term generally given by analysts to the number generated by the addition of a company's annual depreciation expense to its net income? A) Book value per share B) Dividend payout ratio C) Working capital D) Cash flow
D) Cash flow
One of the usual practices of the fiduciary handling a qualified retirement plan is providing a written document that sets forth the objectives and constraints on a managed portfolio. This document is called A) the management agreement B) the statement of fiduciary responsibility C) the investment policy statement D) the legal opinion
C) the investment policy statement
*A state-registered investment adviser maintaining custody of customer funds and securities discovers that its net worth is $32,000. Which of the following steps would NOT be required? A) Reporting to the Administrator the number of client accounts being served by the investment adviser B) Filing a financial report with the Administrator by the close of business on the next business day following notice C) Notifying the Administrator of the deficiency by the close of business on the next business day D) Returning the customer funds and securities within three business days of the discovery
D) Returning the customer funds and securities within three business days of the discovery
*A client with a bearish outlook on a particular stock would be able to benefit from taking which of the following actions? A) Entering a sell limit order B) Entering a market order to sell C) Buying the stock on margin D) Selling the stock short
D) Selling the stock short Selling short is a technique used by investors who are of the opinion that the market price of a stock is going to fall.
Section 15 of the Investment Company Act of 1940 spells out many of the specific requirements for the contract between a management investment company and its investment manager. Among those requirements is that A) unless a specific exemption applies, the fund may not engage in margin trading B) no contract may be terminated with more than 60 days' written notice C) the contract should be in writing D) the initial contract is for a maximum of one year and then may be renewed on either an annual or biannual basis
no contract may be terminated with more than 60 days' written notice Contracts between funds and their advisers may not be terminated with more than 60 days' written notice, and these contracts must—not should—be in writing. The initial contract is for a two-year period and then renewed on an annual basis. Whether or not the fund can trade on margin is not a function of the management contract.
Which of the following clients of a federal covered investment adviser are NOT exempt from the delivery requirements of the brochure rule? A) An employee benefit plan with assets of at least $5 million B) An individual investor purchasing the IA's newsletter with an annual subscription price of $410 C) An open-end investment company with less than $25 million in assets D) A closed-end investment company traded on the New York Stock Exchange
A) An employee benefit plan with assets of at least $5 million The only exemptions from the IA brochure rule are registered investment companies (both open and closed-end) and impersonal advice costing less than $500 per year.
Initial and renewal contracts between investment advisers and their clients must be in writing when the contract is under the jurisdiction of the Securities Exchange Act of 1934 the Investment Company Act of 1940 the Investment Advisers Act of 1940 the Uniform Securities Act A) II and IV B) I and III C) I, II, and III D) II, III, and IV
A) II and IV the Investment Company Act of 1940 the Uniform Securities Act
One would not normally place convertible bonds in the portfolio of an investor A) seeking to maximize current income B) who is bullish on the future for a specific issuer's common stock C) seeking a position senior to that of common stock D) seeking capital gains
A) seeking to maximize current income A conversion feature is a benefit to the bondholder. It allows the bondholder a choice to either continue holding the debt represented by the bond or to convert the bond into shares of common stock of the underlying issuer. Everything that is done in the securities industry has to be a win-win situation. The win for the bondholder in this instance is the ability to take advantage of the capital appreciation potential the common stock may offer, and the win for the issuer is that by offering something extra to the bond purchaser, the bond purchaser is willing to accept a lower interest rate on the bond (as compared to a nonconvertible bond), and therefore, giving the issuer a lower cost of capital.
*Low risk tolerance and high liquidity needs are typical characteristics of which type of institutional investor? A) Foundations B) Banks C) Trusts D) Defined benefit pension plans
B) Banks
*An investor is concerned that interest rates will be volatile over the next few years. Which of the following would eliminate interest rate risk? A) TIPS B) Insured bank CDs C) Zero-coupon bonds D) Cumulative preferred stock
B) Insured bank CDs Any negotiable instrument that has a yield component will be subject to interest rate risk. The insured bank CD cannot be traded and, therefore, will not be affected by changes in market interest rates. TIPS protect against inflation, and zero-coupon bonds have the greatest interest rate risk.
*Which of the following statements regarding REITs are correct? Equity REITs offer possible income and capital appreciation. Investors receive interest and principal payments periodically. In order to receive favorable tax benefits, the REIT must pay out at least 90% of its taxable income in the form of dividends. Interests in REITs offer the benefit of flow through of income or loss. A) II and IV B) II and III C) I and III D) I and IV
C) I and III Equity REITs offer possible income and capital appreciation. In order to receive favorable tax benefits, the REIT must pay out at least 90% of its taxable income in the form of dividends.
What is the term generally given by analysts to the number generated by the addition of a company's annual depreciation expense to its net income? A) Book value per share B) Dividend payout ratio C) Working capital D) Cash flow
D) Cash flow
Which of the following classes of mutual fund shares would be appropriate for an investor who doesn't mind paying some sales charges on a purchase, but wants to minimize operating expenses over a long-term holding period? A) No-load shares B) Class C shares C) Class B shares D) Class A shares
D) Class A shares Class A shares have a front-end load, but their operating expense ratio is usually lower than that of any other class. Because the question states that the investor is willing to pay a sales charge, no-load shares is an inappropriate choice.
What is the tax equivalent yield of a 7% municipal bond to an investor in the 35% federal income tax bracket? A) 4.55% B) 9.45% C) 20% D) 10.77%
D) 10.77% The computation for tax equivalent yield is found by dividing the municipal bond's coupon rate (7%) by (100% - tax bracket) or (100% - 35%). When dividing 7% by.65, the result is closest to 10.77%. In other words, an investor would have to receive a taxable return in excess of 10.77% to put more money in the pocket than owning this 7% municipal bond.
What is the current yield on ABC common stock selling for $60 per share with a semiannual dividend of $.75 per share? A) 7.50% B) 5% C) 1.25% D) 2.50%
D) 2.50% The formula for current yield is annual current dividend divided by current market value. The trick with this question is that you are given a semiannual dividend as information. You must multiply the dividend by 2 to find the annual dividend. Therefore, $ .75 × 2 = $1.50 annual dividend. $1.50 / $60 = 2.50%
In order to make a quantitative evaluation using the present value computation, which of the following is NOT needed? A) Time period involved B) Account value at the end of the period C) Anticipated rate of return of the portfolio D) Account value at the beginning of the period
D) Account value at the beginning of the period Present value is calculated to determine the amount required now to have a specified value at some time in the future. It is what we are looking for so we don't have it now.
LMN, Inc., is preparing to report its net income for the past year. An increase in which of the following would NOT cause a decrease in the reported net income? A) Corporate income tax rate B) Allowance for bad debts C) Year-end bonuses to employees D) Cash dividends
D) Cash dividends Cash dividends are paid out of the company's net income, so an increase or decrease will not impact that net income. Net income is a calculation determined by current operations, so an increase in the amount set aside as an allowance for bad debts will reduce operating income. Because net income is always after taxes, raising the company's income tax rate will obviously decrease the net income of the corporation. One of the major expenses for most corporations is labor so any increase, whether in the form of raises or bonuses, will decrease the net income.
*A client's portfolio consists of holdings in long-term U.S. Treasury bonds and Treasury notes. Of least concern to this investor would be A) purchasing power risk B) market risk C) credit risk D) interest rate risk
C) credit risk Securities issued by the U.S. Treasury are, at least for exam purposes, free of default or credit risk, but, as with all fixed-income securities, are subject to interest rate risk and inflation or purchasing power risk. Any marketable security is subject to market risk.
Looking at the balance sheet, a corporation builds its capital structure with all of the following except A) long-term debt. B) capital stock. C) retained earnings. D) cash.
D) cash. A corporation's capital structure consists of its long-term debt plus shareholders' equity.
*When comparing futures and forwards, it would be correct to state that A) forwards are more likely to be closed out prior to expiration B) forwards are exchange-listed, while futures are not C) futures are considered securities, while forwards are not D) futures are more commonly used by speculators than forwards
D) futures are more commonly used by speculators than forwards
*A broker-dealer having no place of business in a state is not required to be registered in that state if the broker-dealer A) is registered in the state where its principal office is located B) is a member of the New York Stock Exchange C) is a federal covered broker-dealer D) limits its clientele to employee benefit plans with assets of at least $1 million
D) limits its clientele to employee benefit plans with assets of at least $1 million
*Which of the following risks would most likely be minimized through portfolio diversification? A) Purchasing power risk B) Market risk C) Interest rate risk D) Credit risk
D) Credit risk Only those risks that are unsystematic can benefit from diversification.
Your client has a long position in a security that has had considerable appreciation since the date of purchase. The client is concerned that speculation that the company's CEO may retire could have negative implications for the stock. Wishing to protect those unrealized gains, which of the following orders would be appropriate? A) Buy stop B) Sell stop C) Sell limit D) Buy limit
B) Sell stop Sell stop orders are frequently referred to as stop loss orders and are used either when a security is purchased to offer downside protection or, as in this case, to preserve a gain that has not yet been realized. Buy stops are used to protect against loss or preserve the gain on a short position.
Once reaching the age of 72, required minimum distributions must be taken for retired individuals who were participants in all of the following EXCEPT A) traditional IRAs B) Keogh plans C) Roth IRAs D) SEP IRAs
C) Roth IRAs The Roth IRA is the only one of these where there are no required minimum distributions once reaching age 72. If still employed by the sponsor of a qualified plan, RMDs are not required from that plan, but the question would have to state that.
When a fundamental analyst views a corporation's balance sheet, it reveals the issuer's A) profitability B) productivity C) owner's equity D) dividend payout ratio
C) owner's equity The balance sheet reflects the difference between the company's assets and liabilities. This is the owner's or shareholder's equity. Profits are on the income statement.
*Arguably, determining a client's risk tolerance is the most critical step before making any recommendations. Methods of doing that would include knowing all of the following EXCEPT A) how much of a loss the client can tolerate emotionally B) the investment time horizon—short-term or long-term C) the name of other firms where the client has or has had an account D) the client's prior investment experience
C) the name of other firms where the client has or has had an account
A significant difference between opening an account for a trust and an account for an estate is A) banks can be named as trustees for a trust, but not as an executor B) the standard of prudent investing applies to trusts, but not to executors C) only the estate has beneficiaries D) the trust account will generally be active for a much longer period of time
D) the trust account will generally be active for a much longer period of time Trusts can be set up to run for many years; the executor's job is over once the estate has been settled.
Most states have replaced the Uniform Gifts to Minors Act (UGMA) with the Uniform Transfers to Minors Act (UTMA). One of the major advantages of UTMA is A) better tax benefits B) reduced fiduciary exposure to the custodian C) greater flexibility in the choice of investments D) the beneficiary has access to the account at an earlier age
C) greater flexibility in the choice of investments While UGMA only permits gifts of cash and securities, other property, such as real estate and limited partnership interests, may be held in UTMA accounts. Taxation is the same, as is the fiduciary liability of the custodian. In most cases, the beneficiary has access to a UTMA account at a later age than was the case with UGMA.
*The technical market theory that measures the breadth of the market is A) the short interest B) the odd-lot C) the advance/decline D) the support/resistance
C) the advance/decline
*Each of the following would be exempt from the definition of an agent under the Uniform Securities Act EXCEPT A) Florence, an employee of the First Fidelity Trust Company, who buys and sells securities to meet the needs of her trust clients B) Beatrice, who was appointed by the other members of her investment club to make the portfolio decisions for the next quarter C) Katrina, the administrator of the Widget Spinners Corporation pension plan, who is paid for making investment decisions for the portfolio D) Violet, an employee of the Widget Spinners Corporation, who is paid a commission on sales of the company stock to fellow employees
D) Violet, an employee of the Widget Spinners Corporation, who is paid a commission on sales of the company stock to fellow employees
*With regard to an SEC-registered investment adviser employing the services of a promoter to solicit on its behalf, it would be correct to state that A) referral fees may be paid only if the promoter is also registered with the SEC. B) cash referral fees may be paid pursuant to a written or oral agreement to which the investment adviser is a party. C) delivery of the solicitor's brochure must take place within five days after the entry into the advisory contract. D) the investment adviser may not compensate a solicitor who is subject to a statutory disqualification.
D) the investment adviser may not compensate a solicitor who is subject to a statutory disqualification.
Which of the following activities might result in a positive yield curve in the bond market? A) Investors buying long-term bonds and selling short-term bonds B) Investors buying short-term bonds and selling long-term bonds C) A parallel upward shift in interest rates D) A parallel downward shift in interest rates
B) Investors buying short-term bonds and selling long-term bonds A positive yield curve is the normal condition and occurs when long-term rates are higher than short-term rates. Buying short-term bonds tends to drive their prices up and their yields down, while selling long-term bonds has the opposite effect.
*Under which of the following asset allocation programs is it most likely that commission expense will have a significant impact on portfolio performance? A) Buy and hold B) Tactical C) Strategic D) Rebalancing
B) Tactical Tactical asset allocation, also known as active asset allocation, attempts to time the market. As such, there is a relatively high amount of in and out trading, causing commission expense to be a significant factor.
*During your initial interview with a potential advisory client, you obtain the following information: He is 58, she is 56, and they both plan to continue working until she reaches 65 and is eligible for Medicare. As you begin to develop a plan for this couple, you would probably project their time horizon as A) 16 years B) approximately 30 years C) 9 years D) 7 years
B) approximately 30 years An investor's time horizon is the length of time the planned investment strategy is designed to serve. In the case of a couple looking ahead to retirement, the time horizon is their life expectancy.
A support level is the price range at which a technical analyst would expect the A) demand for a stock to remain constant B) demand for a stock to increase substantially C) supply of a stock to increase substantially D) demand for a stock to decrease substantially
B) demand for a stock to increase substantially Support and resistance levels. Most stock prices remain relatively stable and fluctuate up and down from their true value. The lower limit to these fluctuations is called a support level - the price range where a stock appears cheap and attracts buyers. The upper limit is called a resistance level - the price range where a stock appears expensive and initiates selling.
An investor would be entitled to a breakpoint on quantity purchases made together with all of the following accounts EXCEPT A) his wife's personal account B) shares of that fund held in his 401(k) that were purchased with employer-matching funds C) his brother with whom he regularly shares investment ideas D) a custodian account under UTMA for his child
C) his brother with whom he regularly shares investment ideas The breakpoints allow for combinations from a number of family accounts, but they have to be spouse or dependent children, not brothers
Both state-registered and federal covered investment advisers have brochure delivery requirements. One significant difference between the two is that A) state-registered advisers must deliver the brochure within 90 days of the end of their fiscal year while covered advisers have 120 days. B) federal covered advisers are exempt from the brochure delivery requirements to investment company clients while state-registered advisers are not. C) state-registered advisers who do not deliver the brochure at least 48 hours prior to contract signing must offer a 5-day penalty free withdrawal. D) state-registered advisers who do not deliver the brochure at least five days prior to contract signing must offer a 48 hour penalty free withdrawal.
C) state-registered advisers who do not deliver the brochure at least 48 hours prior to contract signing must offer a 5-day penalty free withdrawal.
One of the purposes of filing the annual updating amendment to the Form ADV Part 1A is to A) provide updated information on those associated persons who are in charge of giving investment advice B) ensure that full disclosure has been made in the adviser's brochure C) verify that the investment adviser still qualifies for SEC registration D) disclose the amount and location of securities or funds of clients that are being held by the adviser or a qualified custodian
C) verify that the investment adviser still qualifies for SEC registration In order to maintain SEC registration, an investment adviser must maintain assets under management of no less than $90 million. The annual updating amendment is used to disclose this information.
All of the following would decrease the U.S. balance of payments deficit EXCEPT A) an increase in exports of domestic goods from the U.S. B) a decrease in imports of foreign goods into the U.S. C) a decrease in dividend payments by U.S. companies to foreign investors D) a decrease in purchases of U.S. securities by foreign investors
D) a decrease in purchases of U.S. securities by foreign investors Anything that will bring foreign money to the U.S. will decrease the balance of payments. Foreign investors pulling their money out of the U.S. or investing less in the U.S. will increase the deficit.
*If the executor of an estate containing a substantial stock portfolio is of the opinion that the economy is about to enter a down cycle, estate taxes could be reduced by A) reallocating the assets to less risky securities B) asking for an extension to file the return C) liquidating the portfolio in advance of the market downturn D) using the alternative valuation date
D) using the alternative valuation date
*Which of the following items does NOT fall within the Section 28(e) safe harbor? A) Proprietary research reports analyzing the performance of a specific industry B) Research reports prepared by a third party other than the broker-dealer C) Software used to simplify the investment adviser's preparation of its tax returns D) Software used to analyze client's portfolios
C) Software used to simplify the investment adviser's preparation of its tax returns Research reports, whether prepared by the firm or by a third party, fall within the safe harbor provisions of Section 28(e). Software used to analyze securities is also permissible since that benefits the client. Tax preparation software benefits the adviser, but not the client.
The discounted rate that equates a bond's cash flow to its current price is known as the bond's A) coupon rate B) duration C) current yield D) yield to maturity
D) yield to maturity The yield to maturity of a bond considers the accretion of any discount or amortization of any premium as well as the annual coupon rate, taking into consideration the time value of money. The yield to maturity of a bond considers the accretion of any discount or amortization of any premium as well as the annual coupon rate, taking into consideration the time value of money.
A portfolio manager looking to create alpha would most likely use which of the following? A) Indexing B) Buy and hold C) Strategic asset allocation D) Tactical asset allocation
D) Tactical asset allocation Alpha is the extent to which a portfolio outperforms its expected returns. Expected returns are based on the systematic risk of the portfolio (its beta). In order to exceed those returns, one must generally construct a portfolio that deviates from the market allocations. With tactical asset allocation, the manager either overweights or underweights the portfolio allocations based on near-term expectations of returns on those assets classes. The other choices are all basically the same, with little or no attempt to time the market's ups and downs.
The issuance of new common stock will affect which of the following balance sheet items? I. Total assets II. Current liabilities III. Retained earnings IV. Net worth A) II and IV B) II and III C) I and III D) I and IV
A) I and IV I. Total assets IV. Net worth
A support level is the price range at which a technical analyst would expect the A) demand for a stock to remain constant B) demand for a stock to increase substantially C) supply of a stock to increase substantially D) demand for a stock to decrease substantially
B) demand for a stock to increase substantially This question is about comparing support and resistance levels. Most stock prices remain relatively stable and fluctuate up and down within a narrow range. The lower limit to these fluctuations is called a support level - the price point where a stock appears cheap and attracts buyers. The upper limit is called a resistance level - the price point where a stock appears expensive and initiates selling. Generally, a support level will develop after a stock has experienced a steady decline from a higher price level. Technicians believe that, at some price below the recent peak, other investors will buy who did not buy prior to the first price increase and have been waiting for a small reversal to get into the stock. When the price reaches this support level, demand surges and price and volume begin to increase again.
An investment adviser representative is required to make disclosure to the client when I. the IAR, in preparing a recommendation, uses research provided by a third party with whom II. the IAR is not affiliated III. the IAR recommends a specific insurance policy for the client's overall financial plan, where a commission will be received on that sale IV. transactions recommended to a specific client are inconsistent with those for other clients with objectives that are similar to that particular client transactions recommended to the client are inconsistent with those for the IAR's own account A) I, II, and III B) I and III C) II, III, and IV D) II and IV
D) II and IV II. the IAR recommends a specific insurance policy for the client's overall financial plan, where a commission will be received on that sale IV. transactions recommended to the client are inconsistent with those for the IAR's own account
The head of marketing for a regional broker-dealer spots an article in the local newspaper that is an excellent presentation of an investment strategy the firm recommends. If the firm posts a link to the article on its website, it would be known as A) plagiarizing. B) endorsement. C) adoption. D) entanglement.
C) adoption. Adoption is the use of content or a link that is solely the creation of someone else; your firm is just using it. Entanglement is when the firm had a role in the creation of the material.
Which of the following would offer your client check-writing privileges and FDIC insurance coverage? A) Negotiable CD B) GIC C) Government securities money market fund D) DDA
D) DDA DDA stands for demand deposit account, most commonly, a bank checking account. It, like all other bank accounts, carries FDIC insurance. GICs offer neither. Money market funds offer check-writing, but no FDIC coverage; negotiable CDs offer FDIC coverage, but no check-writing.
Which of the following bonds would most likely be exposed to the greatest amount of interest rate risk? A) ABC 5s of 2050 B) DEF 6s of 2051 C) GHI 7s of 2052 D) JKL 4s of 2022
A) ABC 5s of 2050 The bond with the longest duration is generally going to have the greatest exposure to interest rate risk. Because there is very little difference between maturity dates of 2050 through 2052, the bond with the lowest coupon will have the longest duration. The 4s of 2022 have a relatively short duration, even though their coupon is low.
In which of the following instances would an investment adviser representative be exempt from the anti-fraud rules of the Uniform Securities Act? A) Since the IAR understands how nervous a particular client is, he never admits a loss in the account to that client. B) The IAR makes a presentation at a seminar where the only topic discussed is fixed annuities. C) The IAR is also an agent of a broker-dealer and, in that capacity, makes a recommendation to a nonadvisory client. D) In an effort to avoid possible conflicts of interest, the IAR only does personal trades through an account set up with a fictitious name.
B) The IAR makes a presentation at a seminar where the only topic discussed is fixed annuities. Since fixed annuities are not securities, a presentation dealing solely with that topic is not covered under the anti-fraud statutes of the USA.
