Series 65 Practice Exam

Moonglow Specialties, Inc., is paying a quarterly dividend per share of $0.05. Based on a current share price of $10, the dividend yield is closest to A) 2.00%. B) 1.25%. C) 0.50%. D) 20.00%.

A Dividend yield = annual dividend per share ÷ share price. If the annual dividend per share is $0.20 and the share price is $10.00, then the yield is $0.20 ÷ $10.00, which is 2%. This may also be referred to as the current yield.

Many businesses choose to use a date other than December 31 to close out their financial year for accounting purposes. When this is done, it is said that the entity is reporting on A) a fiscal-year basis. B) a calendar-year basis. C) an alternative-year basis. D) a nontraditional basis.

A Fiscal-year accounting uses a date other than December 31 as its year-end.

Which of the following statements regarding ADRs are true? I. They are issued by large domestic commercial banks. II. They are issued by foreign banks. III. They facilitate U.S. trading in foreign securities. IV. They facilitate a foreign investor who wants to trade U.S. securities. A) I and III B) II and IV C) II and III D) I and IV

A ADRs are issued by large domestic commercial banks to facilitate U.S. investors who want to trade in foreign securities.

Components of a company's net worth would include all of these except A) operating income. B) fixed assets. C) inventory. D) goodwill.

A Net worth is all of the company's assets minus its liabilities as found on the balance sheet. Operating income is found on the income statement and is neither an asset nor a liability.

Which of the following is a method for determining the internal rate of return by portfolio managers without the influence of additional investor deposits or withdrawals to or from the portfolio? A) Dollar-weighted return B) Dollar cost averaging C) Time-weighted return D) Discounted cash flow

C Time-weighted returns are used to evaluate the performance of portfolio managers separate from the influence of additional investor deposits or withdrawals. Dollar-weighted return is more commonly used for evaluating investor performance.

All of the following statements about the price-earnings (P/E) ratio are true except A) it is computed by dividing the current market price of the common stock by the earnings per share B) a company's P/E ratio may also be called its multiple C) young, fast-growing companies generally have higher P/E ratios than mature, slower-growth companies D) a company's stock will have a relatively high P/E ratio if investors feel the company's earnings will grow slowly

D A company's P/E ratio, also called its multiple, may indicate investors' expectations about the company's earnings potential. A higher P/E ratio generally indicates that investors have high expectations for the company's future growth. Young, fast-growing companies generally have higher P/E ratios than mature companies.

Market timing is normally associated with which of the following portfolio management styles? A) Tactical asset allocation B) Strategic asset allocation C) Passive management D) Modern portfolio theory

A Tactical asset allocation, which attempts to capitalize on short-term market swings, is a market timing strategy.

An investment of $5,000 made 16 years ago is now worth $20,000. Using the Rule of 72, the approximate compounded annual rate of return is A) 18%. B) 9.0%. C) 25%. D) 4.5%.

B This investment has quadrupled in 16 years. Using the Rule of 72, we know how to compute the rate of return when an investment doubles. This one has doubled every 8 years. Dividing 72 by 8 years gives us an approximate rate of 9%.

Regional Financial Services, LLC, is registered as an investment adviser in States A, B, C, and D. They have just filed an application for registration in State E. Registration of this investment adviser in State E automatically confers registration as an IAR in State E on A) an employee who will be soliciting clients for the adviser in State E. B) officers, partners, and directors of the firm who will be functioning in State E as IARs. C) any employee who is functioning as an IAR in State A, B, C, or D. D) clerical employees handling back-office operations

B Under the Uniform Securities Act, registration of an investment adviser in a state automatically constitutes registration of any investment adviser representative who is a partner, officer, or director, or a person occupying a similar status or performing similar functions.

A registered broker-dealer would not be able to open an account for A) two unrelated individuals. B) the CEO of a company whose stock is NYSE-traded. C) a person deemed mentally incompetent. D) the estate of a deceased individual.

C A broker-dealer can only open an account with a legal person. Those deemed mentally incompetent are not persons under the law. Deceased individuals are not persons either, but their estate is so an account may be opened in the name of the estate. Although the CEO's account would have to be monitored for any hint of insider trading, one's position in a listed company is not an impediment to opening a brokerage account. There is no legal requirement that the owners of a joint account be related; friends are fine as are business partners.

If your clients, spouses both age 50, are interested in long-term growth and are willing to accept a moderate amount of risk, you should recommend A) a municipal bond fund B) a money market fund C) a large-cap stock fund D) an equity/income fund

C A mutual fund investing in large-cap stocks (see Glossary of Terms) has relatively moderate risk with likely growth potential.

Your customer redeemed 200 of her 500 Kapco common shares without designating which shares were redeemed. Which of the following methods does the IRS use to determine which shares she redeemed? A) Wash sale rules B) LIFO C) FIFO D) Identified shares

C When a customer does not choose a method, the IRS uses FIFO (first-in, first-out). This will likely result in shares with the lowest cost basis being redeemed first, which creates a greater taxable gain.

Which of the following is considered the most accurate method of measuring GDP? A) Actual dollars B) As a function of GNP C) Eurodollars D) Constant dollars

D Constant dollars are mathematically adjusted to remove the effects of inflation, so when economists compare the gross domestic product of one period with that of another, they measure economic activity rather than inflation.

When a broker-dealer acts in the capacity of a principal in a trade, the firm has acted A) for the benefit of the client B) as an agent C) in an unethical manner D) as a contra party to the trade

D In every trade, there are 2 principals—the buyer and the seller. If the broker-dealer is one of the principals (either buyer or seller), the firm is the contra party to the other side of the trade.

A company's working capital equals its A) fixed assets minus its fixed liabilities B) cash flow minus its retained earnings C) current liabilities minus its current assets D) current assets minus its current liabilities

D Working capital is a measure of how well a company can meet its current obligations. It is the amount that is left free and clear if all current debts are paid off. Working capital is calculated by subtracting current liabilities from current assets.

Which of the following best describes the economic phase in which unemployment increases and businesses operate at their lowest capacity levels? A) Peak B) Trough C) Contraction D) Expansion

B A trough in a business cycle occurs at the end of a contraction phase when businesses are operating at their lowest capacity levels.

Investment advisers who preach the benefits of strategic asset allocation do so because they believe A) active management of a portfolio offers tactical benefits B) the market is perfectly efficient because stock prices reflect all available information C) the market is basically inefficient and there is a strategy that can beat it D) over the long run, strategic management will eventually outperform the market

B The primary difference between strategic and tactical asset allocation comes down to the belief by those following the strategic style that it is not possible, over a long period of time, to beat the market.

A business organized as a sole proprietorship wishes to open an advisory account. When preparing an investment policy statement, the IA would have to consider the objectives of A) the stockholders B) the partners C) the sole proprietor D) the members

C A sole proprietorship only has one owner. Therefore, the account would focus on the needs of that individual.

One of your customers has a scheduled premium variable life insurance policy purchased 10 years ago. The initial face value was $1 million and the annual premium is $1,200. A few years ago, with the cash value of the policy at $30,000, the customer borrowed $20,000 for a home improvement project. Of that, $10,000 has been repaid, and the current cash value is $45,000. With the current death benefit showing as $1.1 million, the customer's death would provide the beneficiary with A) $1,115,000. B) $1,100,000. C) $1,090,000. D) $1,000,000.

C The death benefit is the current amount ($1.1 million) less any indebtedness. The balance remaining from the $20,000 loan is $10,000, and that will be paid from the proceeds of the policy. That leaves the beneficiary (or beneficiaries) with the remainder of $1,090,000.

When a nonspouse inherits an IRA, the beneficiary can choose from all of the following options except A) withdrawing the funds over a 10-year period following the death of the owner B) withdrawing all of the funds immediately C) opening a separate inherited IRA in the name of the deceased FBO the beneficiary D) keeping the money in the deceased's IRA

D It is only a beneficiary who is the spouse of the deceased who may continue that IRA.

Which of the following pairs of assets provides the greatest level of diversification? A) Assets 5 and 6, with a correlation coefficient of -0.42 B) Assets 7 and 8, with a correlation coefficient of +0.37 C) Assets 3 and 4, with a correlation coefficient of 0.0 D) Assets 1 and 2, with a correlation coefficient of -0.78

D The greatest level of diversification will occur when the correlation coefficient is closest to -1.0. Therefore, Assets 1 and 2 offer the greatest level of diversification.

An investor who chooses to use preferred stock as an income source instead of bonds would potentially incur which of the following risks? I. Loss of principal can occur. II. Price volatility of preferred stock is closely related to interest rates. III. Preferred stock cannot be traded as readily as bonds. IV. If the stock is callable, the client's income can be suddenly lowered. A) I, II, and IV B) III and IV C) I and II D) I, II, III, and IV

A Because bonds have seniority over any equity security, there is a greater risk of loss of principal with preferred stock than with bonds. The price volatility of preferred stocks, like bonds, is impacted by interest rate changes. Unlike bonds, however, preferred stock does not have a maturity date. This means that preferred shares may never return to their par value, as bonds do at maturity date. Because the preferred stock may have a callable feature, the company can redeem its shares anytime after the call protection period (if any) is over. This usually happens when interest rates have declined, so the client whose stock was called will not be able to reinvest the proceeds at the same rate and could, therefore, suffer an unexpected drop in income. Preferred shares, particularly those listed on the exchanges, are generally easier to trade than corporate bonds (and certainly no worse).

When constructing a portfolio, one of the goals is to increase diversification. Which of the following pairs offers the most diversification? A) U.S. equity securities and foreign equity securities B) Corporate debentures/convertible bonds C) Large-cap stock/blue-chip stock D) Municipal GO bonds and long-term U.S. Treasury bonds

A Diversification is generally accomplished by adding securities that don't have a high degree of correlation. Large-cap and blue-chip are essentially the same thing. Most convertible bonds are debentures. Only in the case of domestic and international stocks will we find a low correlation.

If an investment adviser is registered in another state and has no place of business within an Administrator's state, the adviser is exempt from registration under the Uniform Securities Act if A) most of the adviser's customers are municipalities. B) the adviser has no more than 14 customers within the state during the year. C) most of the adviser's clients are accredited investors. D) the adviser has no more than 5 clients who are residents of the state during the preceding 12 months.

D If an investment adviser (IA) has no more than five clients who are residents of the state during the preceding 12 months, the IA does not have to register with the state. This is the de minimis exemption; IAs with no place of business in the state must register if they have had more than five noninstitutional clients in the state during the preceding 12-month period.

If the Consumer Price Index (CPI) is up and consumer demand is also up, the economy is likely in which stage of the business cycle? A) Peak to contraction B) Expansion to peak C) Contraction to trough D) Recovery to trough

B As prices trend higher and consumer demand increases, the economy is moving from expansion to a peak. As demand continues to increase, assuming supply remains constant, upward pressure will be put on prices through the expansion to the peak.

One type of alternative investment considered to be a pooled investment vehicle is the exchange-traded note. Exchange-traded notes (ETNs) are which of these? I. Unsecured debt securities II. Unsecured equity securities III. Issued by financial institutions, such as banks IV. Insured by the FDIC A) II and IV B) I and III C) I and IV D) II and III

B Exchange-traded notes are unsecured debt securities issued by financial institutions, such as banks. Their prices can be impacted by changes in the credit rating of the issuer, and they are not insured by the FDIC.

Which type of contract obligates both parties to act? I. Forward contract II. Futures contract III. Options contract IV. Warrant A) I and IV B) I and II C) II and III D) I, II, and III

B It is only in the case of forward and futures contracts that both parties are obligated to fulfill the terms of the contract. Only the seller of an options contract is obligated, and in the case of a warrant, it is the issuer of the warrant who is obligated to deliver the underlying shares if the owner exercises.

Use the following chart to answer this question Equity 100% 35% 20% 0% Fixed income 0% 65% 80% 100% High return 45.4% 34.2% 31.3% 28.7% Low return -7.4% 5.5% 8.2% 6.5% Avg. return 18.8% 19.2% 16.5% 14.2% Std. dev. 12.25 10.95 10.02 10.46 Which of these portfolio allocations would you expect to show the least volatility over the next year? A) 100%/0% B) 20%/80% C) 35%/65% D) 0%/100%

B This imposing-looking question should take 10 seconds to do. When the question is dealing with volatility, look for the standard deviation. The portfolio with the lowest (the 20/80 at 10.02) is the least volatile, the one with the highest (100/0 at 12.25) is the most volatile.

It would be considered an unethical and dishonest business practice for an agent registered with a broker-dealer to A) effect a securities transaction not recorded on the books of the broker-dealer after having received written authorization from the firm to do so. B) promise to provide a service that the agent is capable of performing. C) attempt to convince a client that a specific mutual fund is a suitable investment for that client. D) purchase a stock for her own account knowing that a large institutional buy order is about to be processed for that same stock.

D Purchasing a security in advance of an expected block transaction is the wrongful practice known as front running. There is nothing wrong with trying to sell to a client by convincing him that you are recommending a suitable investment. Likewise, promising to deliver services that you are able to deliver is not unethical. Off-the-books transactions are a problem unless, as in this case, prior written authorization has been received from the broker-dealer.

One of your clients currently holds a long position in DEF common stock. Which of the following types of orders is designed to offer the client protection against loss? A) Buy stop B) Buy limit C) Sell limit D) Sell stop

D The risk to a long stock position is to the downside. The stock can, at least theoretically, fall to zero. To protect against a decline in the stock's price beyond the point the investor is willing to lose, it is wise to enter a sell stop order at that price. If the stock should fall to that price, the order is triggered, a market order is entered, and the stock is sold. This is why stop orders are usually referred to as stop loss orders; they keep you from losing any more money.

Under state law, the registration of an agent of a broker-dealer is in effect until A) withdrawn by the agent or revoked by the Administrator. B) the anniversary of initial registration. C) the last day of his employer's fiscal year. D) December 31, unless renewed.

D Under state law, registrations for broker-dealers, agents, investment advisers, and investment adviser representatives expire on December 31 of each year, unless renewed.

Which of the following is a factor that must be considered when constructing a portfolio? A) Category of investment service required B) Performance measurement C) Verification of the client's identity D) Client's risk tolerance

D While forming a portfolio or investment policy statement (IPS), gauging a client's risk tolerance is the key task.

Which of the following types of life insurance has premiums that increase each time the policy is renewed, and no cash value buildup? A) Universal life B) Ordinary whole life C) Term D) Variable life

C A term policy provides life insurance only with no savings element. Upon renewal, the rates are higher as you age.

Which of the following is required to effectuate annual renewal of the registration of an investment adviser representative affiliated with a federal covered adviser? A) Form U4 B) Renewal notice to the SEC C) State licensing fee D) Consent to service of process

C All investment adviser representatives are registered with the states, not the SEC. Renewal requires the payment of the annual renewal registration or licensing fee. The consent to service of process is a permanent document submitted with the initial application for registration.

An advantage of structuring a business operation as an S corporation rather than a C corporation would be A) the C corporation is limited to a maximum of 100 shareholders while no such limit exists for the S corporation. B) limited liability. C) avoiding double taxation. D) simplicity when raising capital through a public offering.

C Because an S corporation is taxed like a partnership, all earnings (or losses) flow directly through to the shareholders. This avoids the double taxation inherent in receiving a share of the profits (through dividends) from a C corporation. It is the S corporation that is limited to 100 shareholders. That is why it is not suitable for raising capital through a public offering. The shareholders of both S and C corporations enjoy the benefit of limited liability.

The long party to a put option contract has A) the obligation to sell the underlying asset. B) the right to buy the underlying asset. C) the right to sell the underlying asset. D) the obligation to buy the underlying asset.

C Being long a put option means owning the option. Owners have rights, while sellers have obligations. A put option gives the owner the right to sell the underlying asset at the exercise price. The seller of the put option is obliged to take delivery and pay the exercise price if the buyer exercises the option.

Which of the following best describes the liquidation order when a company files for bankruptcy? I. Common stockholders II. Debenture holders III. Preferred stockholders IV. Secured creditors A) IV, II, III, I B) IV, III, II, I C) III, IV, II, I D) I, II, III, IV

A Secured creditors, including secured bondholders, have the first claim on assets. They are followed by general creditors, including debenture holders. The final claim is that of stockholders (equity), with preferred coming ahead of common.

Under the Investment Advisers Act of 1940, which of the following criteria are considered in determining whether a person is in the business of rendering investment advice? I. The person regularly gives advice on securities. II. The person derives his earnings from executing transactions on recommended securities. III. The person receives compensation from rendering advice on securities. A) I and III B) I, II, and III C) I and II D) II and III

A To be in the business of rendering investment advice, a person must regularly provide advice about securities and must be compensated for giving such advice. Those whose earnings are based on securities transactions are broker-dealers and/or agents.

In the event that a filing with the state securities Administrator is found to have material misstatements or omissions, a correcting amendment must be filed A) with a new consent to service of process. B) promptly. C) within seven business days of the discovery. D) with the Administrator and the SEC fraud division within five business days of the discovery.

B If a filing with the Administrator is found to have material misstatements or omissions, an amendment must be filed promptly with the office of the Administrator.

One of your clients currently holds a short position in DEF common stock. Which of the following types of orders is designed to offer the client protection against loss? A) Sell stop B) Buy stop C) Sell limit D) Buy limit

B The risk to a short seller is to the upside (there is, at least theoretically, no limit as to how high the stock's price can go). To protect against an increase to the stock's price beyond the point the investor is willing to lose, it is wise to enter a buy stop order at that price. If the stock should reach that price, the order is triggered, a market order is entered, and the short position is closed out. This is why stop orders are usually referred to as stop loss orders; they keep you from losing any more money.

A woman wants to buy from an agent who is not registered in her state. She decides to use a friend's address in the state in which the agent is licensed. This action is A) acceptable as long as she has her friend's permission to use the address B) not acceptable because there are no circumstances under which you are permitted to use someone else's address as yours C) acceptable because the agent can do business only with those who have a residence address in those states in which he is registered D) not acceptable because the other party does not know you are using the address

B Use of a fictitious home address is not only a red flag, it is illegal under the federal customer identification program (CIP).

When an agent transfers employment from a broker-dealer registered with the SEC to a broker-dealer registered solely in this state, A) only the agent and the state-registered broker-dealer must notify the Administrator. B) only the agent must notify the Administrator promptly. C) the agent, the former broker-dealer, and the current broker-dealer must all notify the Administrator. D) only the agent and the SEC-registered broker-dealer must notify the Administrator promptly.

C When an agent transfers employment from any broker-dealer to any other broker-dealer, the agent and both broker-dealers must notify the state securities Administrator.

When deciding on the suitability of a particular investment, that client's need for liquidity is A) only significant if the individual is planning on retirement B) only important if the client has no other liquid investments C) not a significant consideration D) an important consideration when determining the suitability of an investment

D Liquidity is extremely important when determining suitability for a client.

If an investor bought stock on one exchange and sold it at a higher price on another exchange, this practice constitutes A) a violation of the Uniform Securities Act B) an offense punishable by three years in the county jail C) a violation under both the Uniform Securities Act and federal law D) a perfectly acceptable market arbitrage

D This common practice is perfectly acceptable. Arbitrage is the practice of buying on one exchange and selling on another to take advantage of market disparities.

Under the 1940 Investment Company Act, an investment company may take all of the following forms except A) an open-end investment company. B) a limited partnership with partners as passive investors. C) a unit investment trust. D) a closed-end investment company.

B An investment company is not a limited partnership. Investment companies are organized as open-end companies (mutual funds), closed-end companies, unit investment trusts, or face-amount certificate companies.

An investor is in a low tax bracket and wishes to invest a moderate sum in an investment that will provide some protection from inflation. Which of the following should you recommend? A) Money market mutual fund B) Ginnie Mae fund C) Mid-cap common stock mutual fund D) Municipal unit investment trust

C Mid-cap stocks (see Glossary of Terms) have historically provided good hedges against inflation making them appropriate for an investor seeking long-term growth and inflation protection. There are several key words here to remember for the exam. Whenever you see "low tax bracket," the answer cannot be a municipal bond. Likewise, whenever you see "inflation protection," the answer will be common stock (unless a TIPS is given as a choice).

One of your clients has named you as the trustee for a trust he has established. The beneficiary of the trust approaches you with a request for a disbursement that is contrary to the provisions of the trust document. In accordance with the provisions of the Uniform Prudent Investor Act, you should A) do nothing. B) contact the grantor. C) follow the terms of the trust. D) follow the wishes of the beneficiary.

C Trust law requires that the trustee act in accordance with the terms of the trust document at all times.

An investment adviser must meet the net worth requirements of the Administrator. When doing the computation, which of the following assets would be included? I. A sofa in the reception area II. The value of the copyright on an investment manual authored by the investment adviser III. The reputation of the investment adviser IV. Patents held by the investment adviser on a stock-tracking software program A) I only B) II, III, and IV C) I, II, and III D) IV only

A For purposes of this rule, the term net worth means an excess of assets over liabilities. But net worth does not include the following as assets: goodwill, franchise rights, patents, copyrights, marketing rights, and all other assets of intangible nature; home, home furnishings, automobile(s), and any other personal items not readily marketable in the case of an individual; advances or loans to stockholders and officers in the case of a corporation; and advances or loans to partners in the case of a partnership. So, what's the deal with the sofa? Because the choice specifically says that it is in the reception area, we must assume that it is not a "home" furnishing; rather, it's one in the office, and those are not excluded assets.

After diligently studying the Kaplan course, Greg completed the series of exams for the CERTIFIED FINANCIAL PLANNER™ (CFP®) designation. Now, Greg would like to expand his horizons by becoming a registered investment adviser. In order to do so, Greg would have to do all of the following except A) pass the Series 65 examination. B) pay a filing fee. C) provide a consent to service of process. D) submit Form ADV.

A There are several professional qualifications that qualify for a waiver of the examination. CFP® is one of them (the others are listed in the introduction to the License Exam Manual).

How quickly must a broker-dealer notify the Administrator if material information relating to that broker-dealer's registration should change? A) Within 24 hours B) Promptly C) No later than the time of license renewal D) Within days

B If the information contained in any document filed with the Administrator is or becomes inaccurate or incomplete in any material respect, the registrant must file a correcting amendment promptly.

Which of the following would have the effect of increasing a company's cash flow? A) Increasing inventory B) Issuance of a bond C) Extending credit to good customers D) Reducing sales

B One of the ways to increase cash flow is through financing. When a company issues a bond, it receives cash but does not have to pay the money back until maturity—a number of years in the future. Extending credit means waiting a longer period to receive the cash from sales. Increasing inventory means spending money for raw material and waiting for it to be sold. The company would want to increase sales to bring in more cash, not decrease them.

Which of the following is not an annuity purchase option? A) Single premium deferred annuity B) Periodic payment immediate annuity C) Single premium immediate annuity D) Periodic payment deferred annuity

B With an immediate annuity, payout begins immediately (generally within 30-60 days). As such, the concept of making purchases while receiving payout is illogical and is, therefore, not permitted as an option.

All of the following statements regarding asset allocation done by or on behalf of an investor are true except A) the process is concerned with the relationship among the returns of different assets B) it is the process of dividing investable assets into different asset classes C) individual security selection is far more important than the asset allocation decision D) the process is concerned with the risk associated with different assets

C Studies have shown the asset allocation decision is the primary contributor to effective long-term portfolio management. Individual security selection is far less important in meeting investor objectives.

Regarding convertible debentures, one characteristic of which your clients should be aware of is that A) it is generally best to convert when the common stock is selling below its parity price. B) the conversion feature protects against an early call. C) they trade in line with the issuer's common stock once the conversion price is reached. D) they generally pay a higher interest rate than nonconvertible debentures.

C The lower volatility of a convertible debenture stems from the fact that it has fixed interest payments and will be redeemed at maturity as any other bond or debenture would. No such guarantees apply to common stock.

NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents prohibits excessive activity in the account of a client for the purpose of generating commissions. This activity, frequently called churning, would likely be excused A) when the account has outperformed the S&P 500 Index B) when the agent has been granted discretionary authority C) if the investor is considered an accredited investor under SEC Rule 501 D) under no circumstances

D Churning, the practice of excessive activity in a client's account for the purpose of generating commissions, is never an excusable practice.

The gross domestic product (GDP) for the United States is composed of A) the sum of all goods and services, imports, and foreign investments. B) the balance of payments. C) the national debt. D) the sum of all consumer goods, capital goods, and services produced in the United States and net exports to other countries.

D The GDP is comprised of all consumer goods, capital goods, services produced in the United States, and net U.S. exports (exports minus imports).

The goal of modern portfolio theory (MPT) is to construct the most efficient portfolio. An efficient portfolio is one that offers A) the lowest Sharpe ratio B) the most return for the most risk C) the highest correlation coefficient D) the least risk for a given amount of return

D Under MPT, an efficient portfolio is one that manages risk to provide the optimum return. That is, for any given amount of return, the portfolio achieves that return with the lowest possible risk. Conversely, it can be stated that you receive the highest possible return with the lowest possible risk. Analysts using MPT are seeking a high Sharpe ratio.

An IAR is viewing the balance sheet of a corporation. Included in the computation of the company's working capital are all of the following except A) total par value of the convertible bonds it has issued B) cash C) accounts receivable D) marketable securities of other companies

A The working capital of a corporation is equal to its current assets minus its current liabilities (a current liability is payable within 12 months). Because all bonds, convertible or not, issued by the corporation are long-term liabilities, they are not included in the working capital computation. Accounts receivable, marketable securities, and cash are short-term assets included in the calculation of working capital.

If an individual leaves her current employer and takes a new job, which of the following cannot be done with the assets in her 401(k) plan? A) Roll them over into the new employer's 401(k) plan. B) Roll them over into a variable life insurance policy. C) Keep them in the plan. D) Roll them over into a traditional IRA.

B Qualified distributions from a 401(k) plan cannot be rolled over into a a life insurance policy, variable or not.

Your married customers are both 42 years old, have 2 children ages 14 and 12, and have spent the past 10 years accumulating money to provide for their children's education. Their oldest child will enter college in 4 years, and the customers are very cautious investors. If they need a safe investment that provides regular income to help them meet tuition payments, which of the following mutual funds is the most suitable for these customers? A) ATF Overseas Opportunities Fund B) LMN Investment-Grade Bond Fund C) ABC Stock Index Fund D) RST Balanced Fund

B These clients cannot afford a downturn in the stock market between now and the time they want to send their children to college. An investment-grade bond fund will provide the income and safety required for accumulating additional funds for college expenses.

A state-registered investment adviser suddenly incurs a liability that materially affects its net worth, causing it to drop below the required minimum. Which of the following statements is true? A) The ​investment adviser is not required to file​ ​an amendment to its registration with the Administrator. B) The ​investment adviser ​must increase its surety bond to make up the deficiency. C) The​ ​investment adviser must notify the Administrator​ by the close of business on the following business day​. D) The investment adviser must notify the Administrator promptly.

C Although most notifications involving emergency-type situations require prompt notification, when an investment adviser's net worth is below the requirement, the NASAA Model Rule is a bit different. Unless otherwise exempted, as a condition of the right to transact business in the state, every investment adviser registered with the state shall, by the close of business on the next business day, notify the Administrator if such investment adviser's net worth is less than the minimum required. After transmitting such notice, each investment adviser shall file by the close of business on the next business day after that a report with the Administrator of its financial condition.

If the goal of a business is to raise substantial amounts of capital, it will probably be organized as A) an S corporation. B) an LLC. C) a C corporation. D) a general partnership.

C Because of the nature of the entity and its ability to issue common and preferred stock as well as debt instruments, C corporations are the appropriate business structure for a business seeking to raise a lot of capital.

If a customer would like to open a custodial UGMA or UTMA account for his nephew, a minor, the uncle can A) be custodian for the account only if he is also the minor's legal guardian B) open the account provided the proper trust arrangements are filed first C) open the account, but he needs a legal document evidencing the nephew's parents' prior approval of the account D) open the account and name himself custodian

D The donor may name himself the custodian of an UGMA or UTMA account. No documentation of custodial status is required to open an UGMA account, and the custodian is not required to be the minor's legal guardian.

An agent follows the recommendations of another agent in the office with an impressive performance record, and based on the security the successful agent recommends, the representative recommends it to all his clients. According to NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, this activity is prohibited A) because it tends to induce excessive trading in the security. B) as long as he discloses the source of the recommendation. C) because he failed to determine suitability for his clients and the reasonableness of the recommendations. D) because the other agent's recommendations are confidential.

C An agent should never recommend the purchase of a security without reasonable grounds, and the agent does not have enough information to justify these recommendations. The agent is also guilty of recommending security transactions without regard for each client's individual financial situation or investment objectives; the same security cannot be suitable for every client. This violation is known as a blanket recommendation.

When dealing with suitable recommendations to clients, it is important to distinguish between investment objectives and investment constraints. Which of the following would be an investment objective rather than a constraint? A) ESG investing B) Current income C) Tax considerations D) Need for liquidity

B The objective is the route you wish to take. The constraints are what might keep you from getting there. The client who has current income as an objective needs to consider the potential obstacles (constraints) in the way. ESG (environmental, social, and corporate governance) represent attitudes. The investor's personal attitude towards certain industries may limit the universe of potential investments. The same is true when the need for liquidity is high. Taxes are another potential roadblock to overcome.

Damon is an agent with ABC Investment Planning, a registered broker-dealer and investment adviser. Under what circumstances would Damon not have to obtain client consent when ABC Investment Planning is acting in a principal capacity? A) Never B) When the client has given ABC blanket permission to engage in this type of transaction C) When the trade that is made is unrelated to the advisory relationship D) Only if the client terminates the advisory relationship

C Under normal circumstances, when acting in an advisory capacity, client consent must be obtained no later than completion of the trade. However, in a case like this, where the transaction is strictly based on the broker-dealer relationship rather than on the advisory one, no consent is necessary. Blanket permission is never permitted for this type of transaction. Do not confuse this with the prospective consent given for agency cross transactions, which is a different relationship.

Your client is 75 years old and has $100,000 to invest. He enjoys a relatively high income and is not concerned with immediate liquidity, although he is risk averse. The most suitable asset allocation strategies listed below would be A) a 50% municipal bond fund, 50% large-cap common stock fund B) a 50% municipal bond fund, 40% government bond fund, 10% money market fund C) a 50% municipal bond fund, 40% money market fund, 10% large-cap common stock fund D) a 50% municipal bond fund, 40% government bond fund, 10% large-cap common stock fund

D The allocation of 50% municipal bond fund, 40% government bond fund, and 10% large-cap common stock is appropriate for a high-income person of age 75 who is not concerned with liquidity. The 10% large-cap fund provides some inflation protection with very moderate downside risk.

An elderly client explains to you that he is risk averse and wishes to find an investment that will provide him with preservation of capital. Which of the following might you recommend? A) Bank-insured CDs B) Long-term U.S. government bonds C) Variable annuities D) An index fund

A Preservation of capital is almost always a sign that the client needs CDs. Sure, the U.S. government bonds will pay back the principal when due, but with long-term maturities, there will be plenty of interest rate risk that could affect the client if he needs the capital prior to maturity.

Under the USA, which of the following is considered a sale or an offer to sell? I. The gift of assessable common stock II. The gift of nonassessable stock III. The sale of a warrant to purchase stock A) I and III B) I, II, and III C) III only D) I and II

A The gift of assessable stock (a rarity) is considered both an offer and a sale under the USA because the recipient could be assessed in the event of company bankruptcy. The sale of a warrant is legally no different from the sale of the stock.

Under which of the following circumstances would the Administrator of this state not have jurisdiction? A) A letter offering a security for sale was sent to a client in this state from an agent in another state. B) A radio broadcast advertising a security was made from a neighboring state. C) A mass mailing offering a security for sale was made in this state. D) A television broadcast advertising a security for sale was made from this state.

B Radio or TV broadcasts made from outside the state do not come under the Administrator's jurisdiction. The letter sent from out of state does because the offer is being made in this state.

Which of the following securities is most suitable for an investment adviser representative to recommend to a 26-year-old customer opening an IRA? A) Municipal bond fund shares B) Put options C) Growth stock mutual fund D) Term insurance contract

C Growth stocks provide potentially long-term returns suitable for a retirement account. An individual opening a new IRA won't have sufficient funds to properly diversify other than by purchasing shares of an investment company. IRA distributions are 100% taxable, which makes the investment in tax-exempt securities unsuitable. Insurance is not permitted in an IRA account, and speculative options are inappropriate.

Adnan is an investment adviser representative associated with a state-registered investment adviser. He is registered in several states. To be in compliance with the Uniform Securities Act, Adnan A) must meet the financial requirements of the state in which the investment adviser's principal office is located. B) must meet the financial requirements of all of the states in which he does business. C) must meet the financial requirements of the state with the most stringent requirements. D) has no financial requirements with regard to a minimum net worth.

D There are no financial requirements placed on IARs, only the IA. Investment advisers must meet the financial requirements of the state where the firm's principal office is located.

Generally, an inverted yield curve is caused by A) investors buying long-term bonds and selling short-term bonds. B) investors buying short-term bonds and selling long-term bonds. C) declining interest rates. D) rising interest rates.

A First of all, what is an inverted yield curve? That is what we get when the yields on short-term debt are higher than the yields on long-term debt. Next, what happens to make the yield of a bond go up? When the price of the bond falls, the yield rises. Conversely, when the price of a bond rises, the yield falls. Finally, what causes the price of a security, any security, to go up or go down? Supply and demand in the marketplace. That is, when there are more buyers than sellers, that demand pushes the price up. Likewise, if there are more sellers than buyers, the price will go down. That's the basic economics of supply and demand. When investor demand is for long-term bonds, the price of those bonds will rise, causing the yields to fall. And, when investors are selling short-term bonds, that selling pressure causes the price to drop and the yields to increase. That is what has happened in this question: more demand for the long-term, resulting in higher prices and lower yields, and more supply for the short-term, resulting in lower prices and higher yields.

Which of the following statements are true about both an individual Roth IRA and a Roth 401(k) plan? I. Contributions are made with after-tax dollars. II. One must have AGI below a certain level in order to maintain either Roth. III. If all the conditions are met, withdrawals are tax free. IV. There are no RMDs at age 73. A) I and III B) III and IV C) II and IV D) I and II

A In any Roth plan, contributions are made with after-tax dollars, and assuming all conditions are met, withdrawals are tax-free. However, unlike the individual Roth IRA, there are no earnings restrictions on participants in a Roth 401(k) plan and RMDs must begin at age 73.

It would be correct to state that an inverse ETF A) utilizes derivatives to achieve its objectives. B) moves in tandem with the index being tracked. C) is suitable for sophisticated investors with a long time horizon. D) is a form of private equity fund.

A Inverse, or short, ETFs move in the opposite direction of the index being tracked. To achieve their goals, various types of derivatives are used. This type of ETF is used only for short-term investments, rarely as long as a single month. These are registered investment companies, not private.

Which of the following practices are not prohibited by the Uniform Securities Act? I. Borrowing money from a customer without the customer's written permission II. Failing to determine the suitability of an investment for a customer III. Offering rescission IV. Telling a customer that past history of an investment is not indicative of future results A) III and IV B) II and III C) I and II D) II and IV

A Offering rescission and explaining that past performance is not necessarily a predictor of the future are permissible actions under the USA.

Although generally prohibited, there are conditions under which a state-registered investment adviser is permitted to charge performance-based fees. Which of the following meets the necessary criteria? A) Charging a performance-based fee to an elderly client whose net worth, excluding the equity in the principal residence, is $2.3 million, with only $150,000 under the adviser's management B) Charging a performance-based fee to an aggressive entrepreneur whose net worth, excluding the equity in the principal residence, is $1.8 million and who has $500,000 under the adviser's management C) Charging a performance-based fee to an individual with a qualifying net worth in excess of $10 million without describing that there is an incentive for the adviser to take greater risks D) Charging a performance-based fee to an individual who meets the definition of an accredited investor

A Performance fees may be charged, regardless of the client's age, to anyone with a qualifying net worth in excess of $2.2 million or with at least $1.1 million under management with the firm. This client with $2.3 million, exclusive of the equity in the principal residence, in net worth meets the qualification. An individual reaches accredited investor status with a qualifying net worth of at least $1 million, not enough to qualify. Additionally, one way in which the states differ from federal law is the requirement to disclose the incentive to take greater risks.

To be in compliance with the Securities Act of 1933, the sale of which of the following securities would require delivery of a prospectus? I. Primary offering of a closed-end investment company registered under the Investment Company Act of 1940 II. Primary offering of 5-year U.S. Treasury notes sold to an individual investor III. Private placement sold under the provisions of Regulation D IV. Sale of shares of an open-end investment company whose first public offering was 23 years ago A) II and III B) I and IV C) I and II D) III and IV

B Any primary offering, unless the security is exempt, requires timely delivery of a prospectus. Treasury notes and private placements are exempt.

A broker-dealer publishes a list of securities it approves for inclusion in IRAs. This means A) the broker-dealer has consulted with the regulatory bodies and has received approval from them to recommend these securities for IRAs. B) the broker-dealer has evaluated these securities and believes they would be suitable for inclusion for retirement planning. C) the broker-dealer has committed an unethical business practice because use of the word approved is prohibited. D) an agent for the broker-dealer can place these in clients' IRAs knowing that the suitability requirements have been met.

B Approved is an odd word in this industry. It can never be used with reference to any regulator commenting on the status of a security or an individual. However, a broker-dealer creating an approved list of securities is not unethical or prohibited as long as it is clear that it is the broker-dealer and not any regulator granting the approval. Even though the firm has listed these securities as suitable for IRAs, that does not relieve the individual agent of verifying the suitability for each client for whom they are recommended.

Which of the following factors would be considered by an investor who uses fundamental analysis to value a company's stock? I. The company's financial condition, as revealed by its income statement and balance sheet II. General economic conditions, such as employment levels and changes in interest rates IV. Charts showing past movements in stock prices and trading volumes A) II and III B) I and II C) I, II, and III D) I and III

B Fundamental analysis attempts to value stock by examining general economic conditions and the company's financial condition and growth prospects. Technical analysis, on the other hand, tries to identify trends and predict changes in the market. Charts showing past price movements and trading volumes would be used in technical analysis but not in fundamental analysis.

ABC Securities, a registered broker-dealer, has a wholly owned subsidiary, ABC Real Estate Ventures. ABC Real Estate Ventures is in the business of structuring limited partnership offerings designed to afford qualified investors an opportunity to earn income from commercial property. If an agent representing ABC Securities were to recommend one of these programs to a qualified client, A) a sale could not take place without a review by the firm's compliance officer. B) disclosure of the potential conflict of interest must be made. C) it would be necessary to obtain consent of the agent's supervisor. D) the agent would be engaging in an unethical business practice.

B One of the more common cases of a conflict of interest is when a broker-dealer (or one of its agents) recommends a security issued by an entity affiliated with the firm. As long as disclosure of the relationship is made, there are no problems. Compliance officers do not review every transaction—they look for the red flags.

Which of the following statements about dividends on common stock is not true? A) Only those who are owners of the stock on the record date will receive dividends. B) Dividends represent a pro rata distribution of corporate profits to shareholders. C) Corporations are contractually obligated to pay dividends to their shareholders each year. D) Dividends may be paid in cash, property, or stock.

C Dividends are the share of a corporation's profits that the corporation pays to shareholders as owners of the corporation. Dividends are not paid to shareholders automatically, and shareholders have no contractual right to receive dividends. Instead, dividends must be declared by the corporation's board of directors. The board of directors may elect to pay a dividend in cash, property, or stock.

Which of the following does not violate the ethical requirements of the Investment Advisers Act of 1940? B) An IA intends to implement a financial plan using only products available through a broker-dealer with whom she is associated, but she does not make this intention known to the client. C) An IA tells clients that the time is right to convert shares of a money market fund to shares of a growth stock mutual fund family. Without telling clients, he makes a similar conversion for his own account. D) An IA's financial plan uses products available through a number of different broker-dealers. In implementing a portion of the plan, the IA intends to act as an agent of a broker-dealer with whom he is associated, but he does not make this intention known to his client.

C Making personal investments consistent with recommendations to clients is not a violation of the Investment Advisers Act of 1940. Release of IA-1092 does not impose an obligation on an investment adviser representative to disclose this fact to clients. The investment adviser representative is obligated to disclose any plans to act as an agent of a broker-dealer with whom the individual is associated. An investment adviser representative must disclose to clients that the investment advice rendered is outside the scope of employment with the broker-dealer, if that is the case. Finally, if the investment adviser representative only offers that broker-dealer's products, that fact must be disclosed.

Mary is a bowling buddy of Susan, a covered investment adviser. Mary refers Amanda, a wealthy widow, to Susan; after a very pleasant meeting, Amanda places $15 million under management with Susan. If Susan were to give Mary a cash payment for the referral, A) only Mary would have to make disclosure to Amanda. B) Susan would have to obtain Mary's permission first. C) it would be permitted if Susan made the proper disclosures. D) both Susan and Mary would have to disclose the cash payment to Amanda.

C Referrals from unaffiliated third parties are considered endorsements under the SEC's investment adviser marketing rule. Disclosures of any potential conflicts of interest must be made, and if there is any compensation paid for the endorsement, it must be noted as well. If the amount of the compensation, cash or non-cash, exceeds $1,000 over the preceding 12 months, a written agreement between the investment adviser and the endorser must be in effect.

Options are a popular tool for reducing investment risk. Which risk is hedged when a corporation buys call options on its own common stock? A) Inflation risk B) Business risk C) Market risk D) Currency risk

C The company is hedging against a future increase in the company's stock. But isn't hedging designed to protect against loss? Yes, and here the loss is the higher price a company will have to pay for its stock in the open market. Many companies engage in stock buy-back programs. If the company knows it will be executing a buy-back in, let's say, six months, it can buy call options with an exercise price close to today's market price. Then, if the price of the stock is higher in six months, the company can exercise the call options to buy at the lower price. Business risk means the company's fortunes will decline because of bad business decisions. The call option won't be of any help there. Unless we're talking about a non-domestic company (and the question would have to state that), there is no currency or exchange rate risk. Inflation risk is tied to fixed income investments, not common stock.

All of the following are advantages of mutual fund investments except A) the ability to invest almost any amount whenever desired. B) exchange privileges within a family of funds managed by the same management company. C) investors retain personal control over the investments in the fund's portfolio. D) the ability to qualify for reduced sales loads based on accumulation of investment within the fund.

C The control of the investment is given over to the investment manager. Exchange privileges, the ability to invest any amount at any time, and reduced sales loads are all considered advantages.

An agent is assisting a prospective client in opening an account. The individual refuses to provide his net worth and annual income. The agent should A) seek permission to consult with the client's fiduciary team, including accountants and attorneys, to obtain the financial information. B) refuse to open the account. C) proceed with opening the account but limit recommendations to conservative investments. D) in the absence of company policy to the contrary, open the account but limit transactions to unsolicited orders.

D An agent must attempt to obtain client financial information. The broker-dealer, through its principals, may decide whether to accept business from a client refusing to provide financial information. In the absence of financial information, neither the firm nor the agent has the means to determine client suitability. Thus, the firm may only accept unsolicited orders from this client.

One of your clients calls to tell you that they overheard someone at work talking about investing in NFTs. What do those initials stand for? A) Neuroplastic functional training B) No free ticket C) Nutrition and food technology D) Nonfungible tokens

D Nonfungible tokens (NFTs) are digital assets that reside as code on a blockchain. The owner of an NFT buys ownership of that particular bit of alphanumeric code associated with whatever has been tokenized. NFTs can be digital representations of artwork, a video, music, or even a tweet. They are not cryptocurrency but are usually paid for with that currency. Each NFT is unique, a one of a kind, making the tokens nonfungible. That means investors can't exchange one NFT for another just like it as they can with dollars or publicly traded securities. Artwork is a good example of something produced as an NFT; the digital copy owned by the investor is the only copy.

Which of the following statements concerning hedge funds are true? I. Purchasers of hedge funds are generally required to be accredited investors. II. Short sales by the fund are not allowed. III. It is not uncommon for there to be a lock-up period that may last for as long one year or even longer. IV. It would be unusual for the fund managers to have an ownership interest in the fund. A) II and IV B) II and III C) I and IV D) I and III

D Purchasers of hedge funds are usually required to be accredited investors. Hedge funds often have high liquidity risk due to the lock-up provision, which can restrict an investor's ability to liquidate the position. An advantage of hedge funds is their ability to sell securities short during bear markets, adopt risky arbitrage strategies, and otherwise take direct steps to maximize returns in both up and down markets. In almost all cases, the fund managers have a significant ownership position in the fund, or as the phrase goes, they have "skin in the game."

Which of the following actions by an investment adviser representative (IAR) would be an unethical practice under the Uniform Securities Act? A) Failing to enter a sell order for a security when its price is falling, when the representative has discretionary authority B) Recommending securities that result in negative returns in the customer's account C) Splitting compensation with a sales assistant who is registered as an IAR with the same firm D) Indicating in an advisory contract that, in order to maximize account performance, it will sometimes be necessary to waive compliance with certain provisions of the Uniform Securities Act or of the Investment Advisers Act of 1940

D The Model Rule is very clear that waivers of this type are never permitted—you just can't waive compliance with the laws. Investment adviser representatives' securities recommendations that result in losses are not a violation of the Uniform Securities Act. Splitting compensation with a fellow licensed employee is not a violation of the Uniform Securities Act. An adviser representative with discretionary authority is not under an obligation to sell a security simply because it is declining in price.

Under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, it would be considered a prohibited practice for a broker-dealer to A) have a history of repeatedly delaying the delivery of securities to its customers. B) inform customers that past performance is no guarantee of future results. C) maintain an office in the state but fail to register with the Administrator. D) fail to maintain the required net capital.

A Broker-dealers are obligated to make prompt delivery of securities to their clients. Failing to maintain the required net capital and failing to register are violations of the law, not prohibited business practices.

If a woman owns 9% of the common shares of XYZ and her spouse owns 2% and wishes to sell his shares, which of these is true? I. He is considered an affiliate. II. He is not considered an affiliate. III. He must file a Form 144 to sell. IV. He does not have to file a Form 144 to sell. A) I and III B) II and III C) I and IV D) II and IV

A If a married couple (either individually or jointly) owns a combined total of 10% or more of a corporation's voting shares, they are considered affiliates and are subject to the requirements of SEC Rule 144. For exam purposes, assume spouses share the same residence.

The alternative minimum tax (AMT) is assessed against A) high annual income earners and disallows some deductions and exemptions used to calculate adjusted gross income. B) low annual income earners and allows special deductions for them to be taken. C) all self-employed individuals. D) high annual income earners and gives them special deductions to take that lower income earners do not get.

A The alternative minimum tax (AMT) is assessed against high annual income earners. When calculating adjusted gross income (AGI), some deductions and exemptions are disallowed, resulting in a higher taxable AGI. In the real world, it is not only those with high incomes that are caught by the AMT, but the exam is not likely to go that deep.

An investment manager is looking at 10 possible stocks to include in a client's portfolio. In order to create the most efficient portfolio, the manager must A) find the combination of stocks that produces a portfolio with the maximum expected rate of return at a given level of risk. B) include only the stocks that have the lowest volatility at a given expected rate of return. C) include only the stocks that have the highest volatility at a given expected rate of return. D) include all 10 stocks in the portfolio in equal amounts.

A The most efficient portfolio will be the one that lies on the efficient frontier. It will offer the highest expected return at a given level of risk compared to all other possible portfolios.

Publicly traded corporations are generally required to have an annual independent audit of their financial records. What is the highest opinion offered under GAAP? A) Adverse opinion B) Unqualified opinion C) Disclaimer of opinion D) Qualified opinion

B An unqualified or "clean" opinion is the best type of report a business can get. The term qualified means that the auditor has some reservations about the information contained in the financial statements. An adverse opinion means the auditor is not willing to vouch for the accuracy of the information. Note: This question deals with material not covered in your LEM, but it relates to recent rule changes and/or student feedback.

Under the Securities Exchange Act of 1934, which of the following would not be grounds for disqualification of a broker-dealer's registration? A) Conviction of misappropriation of client funds B) Being sued by a client C) Prohibition by court order from practicing as an investment adviser D) Violating a securities act

B Being sued by a client is not grounds for disqualification. Items that would disqualify a registration include being currently under suspension, revocation, or injunction by any court, regulatory authority or SRO, domestic or foreign; currently employing a person statutorily disqualified; having been convicted in the past 10 years of a felony or a securities or financially related crime; or falsifying an application for registration.

DERP Corporation's 5% convertible debentures maturing in 2030 are currently selling for 120. The conversion price is $40. One would expect the DERP common stock to be selling A) somewhat above $30 per share. B) somewhat above $48 per share. C) somewhat below $48 per share. D) somewhat below $30 per share.

C The first step here is to compute the parity price. A conversion price of $40 means the debenture is convertible into 25 shares of the common stock (par of $1,000 divided by $40 = 25 shares). With a current market price of $1,200, the parity price of the stock would be $48. Because convertible securities generally sell at a slight premium over their parity price, the stock should have a current market value a bit less than $48 per share.

Three sisters are interested in forming a business together. They have three initial concerns I. maximizing their benefits from the fact that the business is not expected to earn money for at least the first two years; II. making sure that the business will be able to continue in the event that one or two of the sisters dies; and III. minimizing their personal liability for the obligations of the business. On the basis of the sister's concerns, which form of business is appropriate for the situation? A) C corporation. B) General partnership. C) LLC. D) Limited partnership.

C The limited liability company (LLC) will allow losses to flow through to the sisters, continue in the event one or two sisters should die, and have the same type of liability protection as offered by a C corporation.

Jim Cantore is a 45-year-old client with a $1.5 million portfolio that is heavily weighted toward equities. Cantore will continue working for the next 20 years and has a substantial retirement portfolio through his current employer. Cantore's three children are now nearing college age and will all attend premiere universities in the U.S. which each cost $50,000 per year to attend. All college expenses will be paid out of Cantore's portfolio. Cantore should B) rebalance his portfolio toward large-cap common stocks and international securities because education costs are highly correlated with the returns to these securities. C) rebalance his portfolio toward high quality, intermediate-term debt instruments to service the expected liquidity needs of his portfolio. D) not rebalance his portfolio because his children should all pay their own way through school.

C The liquidity needs of sending his children to school should take precedence over his retirement needs, which are already well funded. Although the equities have liquidity, the potential market risk makes it wise to diversify such that the portfolio becomes less sensitive to market swings.

Which of the following sell transactions is not subject to the holding period restriction specified in SEC Rule 144? A) Unregistered stock acquired by a nonaffiliate under an investment letter B) Unregistered stock acquired by a corporate affiliate in a stock option program C) Stock acquired by a corporate affiliate in a private placement D) Stock acquired on the NYSE by a corporate affiliate

D The holding period rule applies only to unregistered stock, which may or may not be control stock. Unregistered stock results from either private placements or the exercise of a corporate stock option. Because this question asked which securities were not subject to the Rule 144 holding period, only stock acquired on the NYSE by a corporate affiliate is the correct answer. However, the affiliated person is subject to volume restrictions.