Series 65- Mock Test 5 (wrong answers)
A 3X leveraged fund priced at $42 tracks an index that is up 2% one day and then down 3% on the next day. What should this fund be approximately priced at following these 2 volatile days? A) $41.55 B) $45.86 C) $43.18 D) $40.50
A) $41.55 B) $45.86 C) $43.18 D) $40.50 Explanation Starting with the $42 purchase price, a 2% increase to the index on day 1 equals $0.84 up (0.02 × $42 = $0.84). Given the 3X leverage, this would equate to a $2.52 increase on day one (3 × $0.84 = $2.52). At the start of day 2, the fund would be priced at $44.52 ($42 + $2.52 = $44.52). On day 2, the index falls by 3%. A 3% decrease in the fund equals $1.34 [0.03 × $44.52 ($1.3356 rounds up to 1.34)]. Again due to the 3X leverage structure of the fund, the $1.34 decrease equates to a $4.02 drop in the fund price (3 × $1.34 = $4.02). Therefore, after the 2 volatile days, the fund should be priced at approximately $40.50 D
Dan is the owner of a mutual fund that returned him a before-tax return of 15% last year. Inflation is running at an annual rate of 3%, and Dan is in a 27% marginal income tax bracket. What has been Dan's approximate inflation-adjusted after-tax return on the fund over the course of the last year (rounded to the nearest 2 decimal points)? A) 12.00% B) 8.76% C) 7.95% D) 10.95%
A) 12.00% B) 8.76% C) 7.95% D) 10.95% Explanation First, compute Dan's after-tax rate of return of 10.95% as follows: .15 × (1 − .27), or .73 = .1095. Then, compute Dan's inflation-adjusted, or real, rate of return by subtracting the 3% inflation rate from his 10.95% after-tax return. C
With the current rate of the 91-day Treasury bill at 2%, a stock paying dividends at a rate of 4% and having a total return over the measured period of 7% would have a risk premium of A) 4% B) 2% C) 9% D) 5%
A) 4% B) 2% C) 9% D) 5% Explanation The risk premium is a premium demanded for internal and external risk factors. It is the amount of total return in excess of the risk-free rate. In this case, the total return is 7% (the dividend return is included in the total) minus the 2% T-bill rate. D
Which of the following bonds is most affected by interest rate risk? A) 7.6s of '41 yielding 7.2% B) 7.5s of '34 yielding 7.2%. C) 7s of '32 yielding 7% D) 7.8s of '37 yielding 7.3%
A) 7.6s of '41 yielding 7.2% B) 7.5s of '34 yielding 7.2%. C) 7s of '32 yielding 7% D) 7.8s of '37 yielding 7.3% Explanation Interest rate risk is the decline in market price due to rising interest rates. Because there is little difference in coupon rates, the bond with the greatest time to maturity (longest duration) will experience the greatest fall in a rising interest rate market. A
A client is considering the purchase of American depositary receipts (ADRs). The client is looking to further diversify her portfolio. Which of the following is not a feature of this type of investment vehicle? A) ADRs are both liquid and marketable. B) ADRs are denominated and pay dividends in U.S. dollars. C) They are not subject to exchange rate, or currency, risk. D) Information regarding the foreign company is more easily attainable than if directly purchased.
A) ADRs are both liquid and marketable. B) ADRs are denominated and pay dividends in U.S. dollars. C) They are not subject to exchange rate, or currency, risk. D) Information regarding the foreign company is more easily attainable than if directly purchased. Explanation Even though ADRs are denominated in U.S. dollars, they are subject to exchange rate, or currency, risk. The bank furnishes information about the underlying security in English rather than the foreign language and ADRs are traded like any domestic stock C
If a client prefers mutual fund investments in companies that primarily generate capital appreciation to companies that pay a steady dividend, what type of mutual fund and associated investment objective would you recommend? A) An income fund B) A growth and income fund C) A growth fund D) An index fund
A) An income fund B) A growth and income fund C) A growth fund D) An index fund Explanation A growth mutual fund invests in stocks that are growing rapidly and stresses capital appreciation rather than income. The key is that the growth and appreciation are synonymous C
Which of the following is a discounted cash flow computation? A) Current yield B) Standard deviation C) Net present value D) Holding period return
A) Current yield B) Standard deviation C) Net present value D) Holding period return Explanation A key component of a DCF computation is using the time value of money. None of these, other than NPV, consider the time value of money C
A client is risk averse and is planning on retiring in 16 years. The client is rolling over $100,000 from his 401(k) plan, all of which is currently invested in his former employer's stock. As the client's investment adviser, which of the following would you recommend? A) Highly rated preferred stocks paying liberal dividends B) AAA-rated zero-coupon bonds maturing in 16 years C) Laddering U.S. Treasury bills D) Keeping the money in the employer's stock
A) Highly rated preferred stocks paying liberal dividends B) AAA-rated zero-coupon bonds maturing in 16 years C) Laddering U.S. Treasury bills D) Keeping the money in the employer's stock Explanation Because the assets are in a rollover IRA, the "phantom" tax on zero-coupon bonds is not an issue here. Being risk averse, the safety of AAA bonds with the guaranteed return of increased principal in 16 years makes this the most appropriate investment. The T-bills will probably not offer as much return and will be subject to continual reinvestment risk. Dividends on preferred stock are not guaranteed, even with a highly rated company, and the current tax advantage offered to dividends is wasted in an IRA. Most would agree that the worst option would be to keep the money in one single stock B
A fixed-premium variable life insurance contract offers 1a guaranteed maximum death benefit 2a guaranteed minimum death benefit 3a guaranteed cash value 4a cash value that fluctuates according to the contract's performance A) I and III B) I and IV C) II and IV D) II and III
A) I and III B) I and IV C) II and IV D) II and III Explanation A fixed-premium variable life contract offers a minimum death benefit and a variable death benefit over the minimum. Its cash value fluctuates with the performance of the separate account. C
Under the Investment Advisers Act of 1940, in which of the following cases has an investment adviser acted improperly by not making appropriate disclosures to clients? 1An adviser that requires prepayment of $1,000 in fees, 9 months in advance, has liabilities that exceed its assets and does not disclose this fact to clients. 2An adviser that has investment discretion over client accounts cannot meet its financial obligations as they come due and does not disclose this fact to clients. 3An adviser that does not require prepayment of fees and does not have discretion over accounts or custody of client securities or funds has just been found by a state court to have violated a rule issued by the SEC and does not disclose this fact to clients. A) I and III B) I, II, and III C) I and II D) II and III
A) I and III B) I, II, and III C) I and II D) II and III Explanation An adviser's financial impairment must be disclosed to clients if the adviser has discretion or has custody or requires prepayment of more than $1,200 in fees, 6 or more months in advance. Legal or disciplinary action taken against an adviser by a court or a regulatory authority within the past 10 years must be disclosed to clients in any case. Note also that by requiring prepayment of over $1,200 in fees, 6 or more months in advance, an adviser is required to include an audited balance sheet with Part 2 of Form ADV, which must be filed with the SEC and made part of the adviser's disclosure brochure D
Under SEC Release 1A-1092, which of the following has (have) met the test of providing advice or analysis concerning securities? 1A stockbroker calls a client and recommends the purchase of a certain stock. 2A lawyer recommends against purchasing shares of a mutual fund in favor of another investment. 3A publisher of an investment newsletter provides general information and recommendations concerning specific securities. A) I and III B) I, II, and III C) I only D) I and II
A) I and III B) I, II, and III C) I only D) I and II Explanation Any person who gives advice (positive or negative, specific or general) or issues reports or analyses concerning specific securities meets the criterion of providing advice. This does not mean that these examples qualify for the definition of investment adviser. They only qualify for the first criterion. For example, a lawyer may be exempt from the definition if she provides advice incidental to the profession and does not receive compensation, but may still meet the first criterion. Likewise, if the stockbroker's only compensation is commissions from securities transactions, the exclusion is in effect B
Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, requirements of advisory contracts include which of the following? 1They must be renewed on an annual basis. 2They must describe the amount of any prepaid fee that will be returned to the client in the event the contract is terminated. 3They must prohibit assignment of the contract without the client's consent. A) I, II and III B) I and II C) I and III D) II and III
A) I, II and III B) I and II C) I and III D) II and III Explanation There is no requirement that advisory contracts be renewed on an annual basis. Contracts can be written for any length agreed upon. Advisory contracts must describe the amount of any prepaid fee that will be returned to the client if the contract is terminated and must prohibit assignment without the client's consent D
One of your clients has called you to discuss an interesting investment opportunity discovered on one of the LinkedIn groups she participates in. Which of the following factors might increase the likelihood that this is a scam? 1A registration statement with the SEC is available on the website of the proposed investment 2The purchase money must be wired to an offshore account 3One of the members of the group is a principal in the company being offered 4Bonus shares are offered for recruiting friends into the deal A) I, II, III, and IV B) I and III C) II and IV D) II, III, and IV
A) I, II, III, and IV B) I and III C) II and IV D) II, III, and IV Explanation Although not foolproof, the existence of an available SEC registration statement greatly reduces the likelihood that a deal like this is a scam. The other choices are certain red flags. D
Julie owns 100 shares of CCC at $25. CCC declares a 25% stock dividend. After the ex-date, what will she own? A) II and III B) I and IV C) I and II D) II and IV
A) II and III B) I and IV C) I and II D) II and IV Explanation Remember that the ex-date is the first day on and after which, a purchaser of a stock is not entitled to a previously declared dividend (cash or stock). That means the owner of the stock on and after the ex-date (Julie) is the one who receives the cash or, in this case, the additional stock. The payment of a stock dividend causes the number of shares owned to increase while the cost per share decreases. The total value of the position will always remain unchanged. She had 100 shares at $25 per share, or $2,500, and now has 125 shares × $20 = $2,500. B
Written discretionary authorization is not required for an agent to choose which of the following order instructions? 1Security to be bought or sold 2Number of shares to be bought or sold 3Time of execution 4Price of execution A) II and IV B) I and III C) III and IV D) I and II
A) II and IV B) I and III C) III and IV D) I and II Explanation If an agent chooses price or timing of an order only, that order is not a discretionary order, and a written discretionary authorization is not required. To be discretionary, the agent must choose 1 or more of the following: the action (buy or sell), the asset (the specific security), or the amount (number of shares) C
The Uniform Securities Act invests the Administrator with many powers over the activities of agents and broker-dealers. Which of the following actions does NOT fall within the Administrator's powers? A) Issuing cease and desist orders without a hearing B) Conducting investigations of broker-dealers residing outside the Administrator's state C) Suspending an agent's registration without an opportunity for a hearing D) Issuing subpoenas to persons residing outside the Administrator's state
A) Issuing cease and desist orders without a hearing B) Conducting investigations of broker-dealers residing outside the Administrator's state C) Suspending an agent's registration without an opportunity for a hearing D) Issuing subpoenas to persons residing outside the Administrator's state Explanation Under the USA, no suspension or revocation may take place without an opportunity for a hearing. C
Which of the following characteristics best exemplifies a value stock A) Low earnings-per-share growth, high profitability B) Low price-to-book, high price-to-earnings ratio C) High earnings-per-share growth, high profitability D) Low price-to-book, low price-to-earnings ratio?
A) Low earnings-per-share growth, high profitability B) Low price-to-book, high price-to-earnings ratio C) High earnings-per-share growth, high profitability D) Low price-to-book, low price-to-earnings ratio Explanation A value investor focuses on share price in anticipation of a market correction and improving company fundamentals. Therefore, such an investor tends to select a stock featuring lower price-to-earnings and price-to-book value ratios. A growth investor focuses on high earnings-per-share, growth, and high profitability. D
To calculate the amount to be received on redemption of open-end investment company shares, which of the following would be used?A) The NAV, minus the redemption fee B) The offering price, plus the redemption fee C) The offering price, minus the redemption fee D) The NAV, plus the redemption fee
A) The NAV, minus the redemption fee B) The offering price, plus the redemption fee C) The offering price, minus the redemption fee D) The NAV, plus the redemption fee Explanation The mutual fund will redeem shares at the NAV. Redemption fees or deferred sales loads, if any, are subtracted from the proceeds sent to the investor. A
A Schedule K-1 would be received by an individual with an ownership interest in all of the following except A) a C corporation. B) an S corporation. C) an LLC. D) a partnership.
A) a C corporation. B) an S corporation. C) an LLC. D) a partnership. Explanation C corporations pay tax on their earnings; the other business types listed here flow through the income to their owners. The owner's share of income (or loss) is reported to them on the Schedule K-1. A shareholder in a C corporation who receives dividends will have that reported on a Form 1099 D
A customer invests $18,000 in a mutual fund and signs a letter of intent for $25,000 to qualify for a breakpoint. One year later, the shares are valued at $25,100, even though the customer has made no new investments. Which of the following statements is TRUE? A) The agent should remind the customer of the letter of intent that was signed 12 months ago. B) Shares held in escrow will be liquidated at the appreciated value. C) The investment no longer qualifies for a breakpoint. D) The letter of intent is considered fulfilled.
A) The agent should remind the customer of the letter of intent that was signed 12 months ago. B) Shares held in escrow will be liquidated at the appreciated value. C) The investment no longer qualifies for a breakpoint. D) The letter of intent is considered fulfilled. Explanation The letter of intent is not satisfied by the price appreciation of the shares. A letter of intent must be met with dollars invested within 13 months, so the customer needs to invest an additional $7,000 to fulfill the letter of intent. The agent should remind the customer of the intention to qualify for the reduced sales charge. The provisions of the LOI hold regardless of the price appreciation. Shares will not be liquidated until 13 months have lapsed. A
Which of the following is most likely to be the most important factor in determining whether market manipulation has occurred? A) The market in which the action took place B) The intent of the action C) The scope of the action. D) The type of security.
A) The market in which the action took place B) The intent of the action C) The scope of the action. D) The type of security. Explanation Market manipulation is considered fraud. Because fraud involves a willful or deliberate action, the intent to mislead is the important factor. Market manipulation can occur with any type of security or in any securities market. The definition of the crime is the same whether it is 100 shares or 100,000 shares B
A man divorces his spouse after 10 years of marriage and remarries. If the man is the sole provider, what part of the worker's Social Security benefits is the new spouse entitled to? A) The new spouse is entitled to splitting the benefits with the ex-spouse. B) She is entitled to the same Social Security benefits as the ex-spouse. C) She will be entitled to the same Social Security benefits as the ex-spouse after 10 years of marriage. D) The new spouse is entitled to more benefits than the ex-spouse.
A) The new spouse is entitled to splitting the benefits with the ex-spouse. B) She is entitled to the same Social Security benefits as the ex-spouse. C) She will be entitled to the same Social Security benefits as the ex-spouse after 10 years of marriage. D) The new spouse is entitled to more benefits than the ex-spouse. Explanation When an individual remarries, the new spouse is entitled to full Social Security benefits. As long as the previous marriage lasted at least 10 years, that ex-spouse (if not remarried) is also entitled to full benefits. That means it is possible for 2 people to receive full benefits at the same time B
A pension plan administrator hires an investment adviser to oversee the investment decisions of the plan. The adviser's primary responsibility is to which of the following? A) The plan sponsor B) The plan C) The adviser D) The pension plan administrator
A) The plan sponsor B) The plan C) The adviser D) The pension plan administrator Explanation The adviser's primary fiduciary responsibility is to the plan itself. By maintaining proper fiduciary responsibility to the plan, the interests of the participants of the plan are protected B
Which of the following illustrates an example of positive margin? A) The rate of return on the investment exceeds the interest cost on the borrowed money. B) The stock purchase is being paid for in full rather than by using borrowed funds. C) The investment purchased on margin is sold for a price above its original purchase price. D) The interest rate being charged on borrowings is less than the rate of inflation.
A) The rate of return on the investment exceeds the interest cost on the borrowed money. B) The stock purchase is being paid for in full rather than by using borrowed funds. C) The investment purchased on margin is sold for a price above its original purchase price. D) The interest rate being charged on borrowings is less than the rate of inflation. Explanation Positive margin means that you were successful in your use of the leverage afforded by using margin (borrowed money). That means that the investor's total return exceeds the cost of the borrowed money. It is possible to actually sell the security for a price above its original purchase price, but not more than the total of the cost plus the interest. That would result in negative margin A
An investor signed a letter of intent to purchase $50,000 worth of Sky-High Mutual Fund. At the end of 13 months, he had only invested $48,000 in the fund. Which of the following is TRUE? A) There are no additional requirements; he will receive the breakpoint. B) He has 90 days to invest the additional $2,000 for the breakpoint. C) He must sign a new letter for the $2,000 to receive the breakpoint. D) The fund will liquidate shares to meet the additional sales charge.
A) There are no additional requirements; he will receive the breakpoint. B) He has 90 days to invest the additional $2,000 for the breakpoint. C) He must sign a new letter for the $2,000 to receive the breakpoint. D) The fund will liquidate shares to meet the additional sales charge. Explanation An investor has only 13 months to meet a letter of intent commitment. Once that period of time has elapsed, the investment company is entitled to a refund of the discount it had originally given the investor. This is accomplished by liquidating a sufficient number of shares to cover the additional sales charge to be imposed. D
All the pundits are predicting bad times ahead—not only a recession but a period where prices actually fall (deflation). If they are right, the best place for your client would probably be A) U.S. Treasury securities B) common stock C) real estate D) gold
A) U.S. Treasury securities B) common stock C) real estate D) gold Explanation It is times like this that the flight to safety has investors commit their funds to U.S. government securities. Gold (and other commodities) tends to increase in price during inflationary, not deflationary, periods. Both real estate and equities tend to rise when things are good, not during recessions A
A sales assistant employed by a full service broker-dealer would be required to register as an agent when accepting orders for A) commodity futures contracts. B) gold coins. C) direct participation programs. D) fixed annuities
A) commodity futures contracts. B) gold coins. C) direct participation programs. D) fixed annuities. Explanation An individual employed by a broker-dealer who is involved in the sale of securities must register as an agent. The security here is the DPP C
All of the following statements regarding futures contracts are correct except A) completing a futures contract requires the delivery of the commodity. B) futures contracts can be written on financial assets or commodities. C) purchasing a contract for future delivery is considered taking a long position. D) a short position will increase in value if the underlying commodity or asset declines in value.
A) completing a futures contract requires the delivery of the commodity. B) futures contracts can be written on financial assets or commodities. C) purchasing a contract for future delivery is considered taking a long position. D) a short position will increase in value if the underlying commodity or asset declines in value. Explanation In almost all cases, the holder of the futures contract will purchase an offsetting contract canceling the original position or sell the contract prior to expiration. In isolated cases, delivery of the commodity may be made, but is not required. Futures contracts can be written on financial assets such as currencies and stock indexes as well as on commodities such as agricultural products or precious metals. As with anyone taking a short position, the value goes up when the price of the underlying asset declines. And, just as purchasing a stock or bond, a long position represents one of ownership A
Investment company portfolio managers are apt to classify common stocks into groups. One measurement is the product of multiplying the market price per share times the number of shares outstanding. The result is known as A) debt-to-equity ratio B) total value C) market value D) market capitalization
A) debt-to-equity ratio B) total value C) market value D) market capitalization Explanation A stock's market capitalization is determined by multiplying the price per share times the number of outstanding common shares. For example, if a company had 1 billion shares outstanding and the market price was $20 per share, the company would be said to have a market cap of $20 billion. This would put it into the category of "large-cap" stocks. D
All of the following statements regarding convertible bonds are true EXCEPT A) holders receive a higher interest rate B) holders may share in the growth of the common stock C) the issuer pays a lower interest rate D) holders have a fixed interest rate
A) holders receive a higher interest rate B) holders may share in the growth of the common stock C) the issuer pays a lower interest rate D) holders have a fixed interest rate Explanation Because of the possibility of participating in the growth of the common stock through an increase in the market price of the common, the convertible can be issued with a lower interest rate. A
The federal legislation that requires broker-dealers to verify the identity of any person opening an account is A) the Securities Exchange Act of 1934 B) the Insider Trading and Securities Fraud Enforcement Act of 1988 C) the USA PATRIOT Act of 2001 D) the Uniform Securities Act of 1956
A) the Securities Exchange Act of 1934 B) the Insider Trading and Securities Fraud Enforcement Act of 1988 C) the USA PATRIOT Act of 2001 D) the Uniform Securities Act of 1956 Explanation The USA PATRIOT Act (the full title is Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism) requires firms to obtain identifying information on each new customer, verify the identity of each new customer, maintain records relating to identity verification, and determine if any new customer appears on a list of known or suspected terrorist groups compiled by the Office of Foreign Assets Control (OFAC). This is accomplished through the customer identification program (CIP) C
A firm is registered as an investment adviser under the Investment Advisers Act of 1940. It has decided to raise its annual management fee from $1,500 to $1,800 and require that it be paid 1 year in advance instead of quarterly. The firm would A) now come under the requirement to include a balance sheet as part of its brochure B) need SEC permission to make this change C) be in violation of the law that prohibits pre-payments more than 6 months in advance D) continue doing business as before because the firm was already charging more than $1,200 per year
A) now come under the requirement to include a balance sheet as part of its brochure B) need SEC permission to make this change C) be in violation of the law that prohibits pre-payments more than 6 months in advance D) continue doing business as before because the firm was already charging more than $1,200 per year Explanation For federal covered investment advisers, a prepayment in excess of $1,200 and for periods of 6 months or more in advance (substantial prepayment) requires the adviser to submit an annual audited balance sheet as part of its ADV Part 2 (and brochure). Previously, even though the firm's fee was in excess of $1,200, because it was collected on a quarterly basis, the firm did not fall under the balance sheet rule. Had this been a state-registered IA, the answer would have been the same, even though the dollar limit is $500 rather than $1,200. That is for the reason given above—the former fee was charged quarterly and the substantial prepayment definition requires both exceeding a stated dollar amount ($500 or $1,200) and it being for 6 months or more in advance. A
Under the Uniform Securities Act, all of the following are exempt from state registration as investment advisers EXCEPT A) publishers of financial publications that are not addressed to clients' specific individual investment situations B) investment advisers with no office in the state who only advise employee benefit plans with assets of more than $1 million C) investment adviser representatives D) financial planners who provide fee-based investment advisory services to clients
A) publishers of financial publications that are not addressed to clients' specific individual investment situations B) investment advisers with no office in the state who only advise employee benefit plans with assets of more than $1 million C) investment adviser representatives D) financial planners who provide fee-based investment advisory services to clients Explanation Financial planners who provide fee-based investment advisory services to the public generally must register with their state securities Administrator, as long as their total assets under management are less than $100 million. Investment advisers with no office in the state, who only advise employee benefit plans with assets of more than $1 million, need not register with state securities Administrators. Investment adviser representatives do not register as investment advisers but as investment adviser representatives. Financial publishers who do not publish specific investment advice are exempt from state registration. D
A broker-dealer receives a written complaint from one of its customers. The most appropriate action to take is to immediately A) reply to the client in writing B) notify the Administrator C) freeze the client's account D) notify NASAA
A) reply to the client in writing B) notify the Administrator C) freeze the client's account D) notify NASAA Explanation When a broker-dealer receives a written complaint from a customer, it must document that complaint and begin an investigation as to the complaint's merits. Part of that procedure would be sending a written acknowledgment to the client that the complaint has been received. A
Automated Performance Advisers (APA), a registered investment adviser in 3 states, has spent several years and in excess of $1 million developing the software for a computerized program that APA believes will allow the model portfolios it designs for its clients to consistently outperform the market. In the first year of beta testing the program, returns have ranged from 40% to 60% above the relevant benchmarks. Because of this success, and in an effort to recoup some of the development costs, APA is now charging, in addition to their standard 25 basis points per quarter, a performance-based fee of 10% of the increase of value in a client's portfolio. In so doing, APA would be A) subject to disciplinary action by the SEC B) in violation of the Uniform Securities Act C) permitted to charge performance-based fees D) in violation of the Investment Advisers Act of 1940
A) subject to disciplinary action by the SEC B) in violation of the Uniform Securities Act C) permitted to charge performance-based fees D) in violation of the Investment Advisers Act of 1940 Explanation First of all, this is a state-registered investment adviser, so the Investment Advisers Act of 1940 and the SEC have no jurisdiction. Then, we look at this quote from the USA: "Except as may be permitted by rule or order of the Administrator, it is unlawful for any investment adviser to enter into, extend, or renew any investment advisory contract unless it provides in writing that the investment adviser shall not be compensated on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client." Even though we know that there are conditions under which performance-based compensation is permitted, unless the question specifically refers to that exception, the answer is that it is not permitted B
Steve and Haley, ages 48 and 45, respectively, invest in large-cap stocks, international stock mutual funds, and real estate. They consider themselves moderately aggressive investors. Their investment portfolio is subject to all of the following risks except A) systematic risk. B) currency risk. C) default risk. D) business risk.
A) systematic risk. B) currency risk. C) default risk. D) business risk. Explanation Their investment portfolio is subject to all of these risks except default risk. Default risk primarily applies when holding debt securities. A portfolio heavily concentrated in equity securities is going to have market (systematic) risk. Business risk is the risk that a company's managerial decisions or even factors out of its control, such as expiration of a patent, may negatively affect the value of an equity investment. By holding investments in international stock mutual funds, they are subject to exchange rate risk. C
The financial ratio that shows the relationship between the price of a company's stock and the company's net worth (stockholders' equity) is A) the price-to-book-value ratio B) the price-earnings (PE) ratio. C) the dividend discount ratio D) the price-sales ratio
A) the price-to-book-value ratio B) the price-earnings (PE) ratio. C) the dividend discount ratio D) the price-sales ratio Explanation The price-to-book-value ratio is calculated by dividing the price per share by the stockholders' equity per share. This ratio shows the relationship between a company's stock price and the company's book value A
Reticent Asset Management (RAM) is claiming an exemption from registration with the state because it is an adviser to private funds. One of the requirements to qualify for this exemption is A) there can be no more than 10 investors during any 12-month period. B) all investors must be accredited. C) private fund assets under management cannot exceed $110 million. D) all investors must be qualified clients.
A) there can be no more than 10 investors during any 12-month period. B) all investors must be accredited. C) private fund assets under management cannot exceed $110 million. D) all investors must be qualified clients. Explanation On the state level, the exemption requires that all investors meet the USA's definition of qualified client. That means the investor must have a net worth of at least $2.1 million dollars or at least $1 million in assets under management with the adviser. This is a more stringent test than that for accredited investors. In addition, accredited investor is a federal term, and this question is about state law. There is no limit placed on the number of investors (don't confuse this with the private placement exemption for registration of the security). The limit on AUM is $150 million (this is not to be confused with the AUM limits on becoming registered with the SEC). D
Under the Investment Advisers Act of 1940, which of the following are excluded from the definition of an investment adviser? A'Banks and trust companies B) Insurance companies C) Attorneys who advise on securities (only) for a fee D) Accountants who advise on securities (only) for a fee
Banks and trust companies B) Insurance companies C) Attorneys who advise on securities (only) for a fee D) Accountants who advise on securities (only) for a fee Explanation The act excludes the following from the definition: banks or trust companies; publishers of bona fide publications of general circulation (newspapers and magazines); persons advising about certain securities (U.S. government or agency issues); broker-dealers not receiving special compensation for giving advice; and persons whose advice is incidental to their profession, such as lawyers, accountants, engineers, and teachers A
A working group convened by NASAA has developed a model fee disclosure schedule to help investors better understand the costs involved in doing business with their broker-dealer. The template has broker-dealers disclose all of the following fees EXCEPT
There are 3 primary expenses involved with brokerage accounts that are not included in the fee disclosure template. Those are: 1commissions; 2markups and markdowns; and 3advisory fees for those firms that are also registered as investment advisers. C
