series 7 quick quizzes unit 3

From a chartist's (technical analyst's) viewpoint, which of the following statements is TRUE? A. Once a trendline is established, the price movement of a stock usually follows the trendline. B. More odd-lot buying than selling is bullish. C. Heavy volume in a declining market is bullish. D. Light volume in an advancing market is bullish.

A. A trendline connects the lows in an uptrend and the highs in a downtrend. Once established, trendlines are not easily halted or reversed.

A customer owns an equity income fund, an equity growth fund, and a corporate bond fund. She is looking to add a level of diversification and growth. Which of the following choices would be the most appropriate for you to recommend? A. An international stock fund B. A value managed equity growth fund C. A high-yield bond fund D. A government bond fund

A. An international stock fund will diversify the portfolio and reduce overall risk. A portfolio that includes domestic securities and international securities is more diversified than a portfolio that just includes domestic securities.

Which of the following would be inappropriate for a registered representative to present to a customer? A. Comparing an equity growth fund's performance with a government bond fund in hopes of selling the equity growth fund B. Presenting an equity income fund and a bond fund to a customer that is looking to generate income C. Presenting an asset allocation model and explaining the theory behind the different asset classes relationships D. Presenting a money market mutual fund with the understanding that this is a liquid investment

A. It would be inappropriate to compare a growth fund with a bond fund with the intention of trying to sell the growth fund. These are two very different types of funds. Comparisons of investments should be done with similar types of securities.

An ADR represents A. a U.S. security in a foreign market B. a foreign security in a domestic market C. a U.S. security in both a domestic and a foreign market D. a foreign security in both a domestic and a foreign market

B. ADR stands for American depository receipt. ADRs are receipts issued by U.S. banks. They represent ownership of a foreign security and are traded in U.S. securities markets.

Which of the following choices would be a suitable recommendation for an investor that likes a fixed dividend but also would like to take advantage of capital appreciation if the company's common stock rises? A. Cumulative preferred stock B. Convertible preferred stock C. Adjustable-rate preferred stock D. Participating preferred stock

B. Convertible preferred stock has a fixed stated dividend and can be converted to the company common stock if the price of the common stock appreciates.

All of the following are considerations in a customer profile EXCEPT A. 401(k) balance B. wanting to retire at age 65 C. annual income D. amount of mortgage on home

B. Wanting to retire at age 65 is a goal and a nonfinancial consideration. Financial investment considerations can be expressed as a sum of money (total liabilities, for example) or as a numerical cash flow (gross income of $160,000 per year, for example).

An investor that seeks income from equity securities and has a conservative risk tolerance might be interested in all of the following EXCEPT A. utility stocks B. blue-chip stocks C. technology stocks D. preferred stock

C. Technology stocks are generally growth oriented, and therefore not suitable for investors looking for income.

Which of the following is the narrowest measure of the market? A. NYSE Composite Index B. Value Line Index C. DJIA D. S&P 500

C. The narrowest measure of the market is the Dow Jones Industrial Average, which charts the performance of 30 industrial stocks.

Of the following S&P ratings shown here, below which one of them would all other S&P ratings be considered speculative? A. A B. B C. BB D. BBB

D. A rating of BBB is the lowest investment-grade rating assigned by Standard & Poor's. Any rating beneath this is considered speculative.

A retail investor opens an account at your firm but only provides minimum information and that she wants to invest for retirement in 20 years and is willing to take moderate risk. Which of the following statements best describes the responsibilities of the registered representative handling the account? A. Recommendations cannot be made because the customer refuses to provide income information, personal assets and liabilities, or how much can be invested. B. The account cannot be opened without financial and nonfinancial information. C. Only unsolicited trades can be made in this account. D. The representative is limited to what can be recommended to the customer based on the information that was provided.

D. When limited information is provided for the account, the representative will be limited to making recommendations that he believes are suitable based on the information he has.

If your client wished to purchase a preferred stock that would offer him the highest likelihood of assured income plus the opportunity to take part in the growth of the company's common stock, which of these features might he consider? I. Callable II. Convertible III. Cumulative IV. Straight

II and III The callable feature does nothing to ensure an investor income, whereas a cumulative preferred means that the common stockholder will never receive a dividend until the cumulative stockholder receives all current and prior dividends due the preferred. The only way to take part in the growth of the company's common stock would be to have an opportunity to obtain that common stock (the convertible feature).

Which of the following would be considered nonfinancial investment considerations on a customer profile? I. Total fixed assets II. Attitude toward risk III. Monthly income available for investment IV. Tax bracket

II and IV Nonfinancial investment considerations are those that cannot be expressed as a concrete sum of money or as a specific monthly or yearly (or weekly) cash flow. Attitude toward risk cannot be expressed in numbers at all, and tax bracket is a percentage of income rather than a concrete sum of money.

All of the following are privileges or benefits of stock ownership EXCEPT A. dividends B. growth C. guaranteed income D. voting rights

Although stocks often pay regular dividends, they are not guaranteed. If the board decides the company cannot afford to pay a dividend this quarter, no dividend will be paid.

If a company has the following items on their balance sheet; what is the net worth of the company? - Current assets of $1 million - Inventory of $300,000 - Fixed assets of $2 million - Liabilities of $2 million A. $5,300,000 B. $1,000,000 C. $1,300,000 D. $300,000

B. Inventory is a part of current assets. Using the standard equation for a balance sheet: assets minus liabilities equals net worth; we can take assets [current assets plus fixed assets ($3,000,000)] minus liabilities ($2,000,000) equals net worth of $1,000,000.

Which of the following would an issuer most likely call? A. High-interest bond, callable at a premium B. High-interest bond, callable at par C. Low-interest bond, callable at a premium D. Low-interest bond, callable at par

B. Issuers want to call bonds that are costly to them at as low a price as possible. A high-interest bond with a no call premium is the best combination. The issuer would be least likely to call a low-interest bond with a high call premium.

Which of the following types of risk cannot be eliminated through diversification under the modern portfolio theory? A. Interest rate risk B. Systematic risk C. Business risk D. Liquidity risk

B. Market risk, sometimes referred to as systematic risk, cannot be diversified away. The risk of investing in a single industry or sector can be diversified away by investing in several industries with returns not correlated to one another. A general downturn in the market, however, cannot be eliminated through diversification.

When filling out a customer profile, you discover that the only security this investor owns is a listed NYSE stock now valued at $100,000 that was inherited from the customer's father 10 years ago when it was valued at $40,000. Which of the following should be discussed with her? A. This stock has performed exceedingly well and, depending on her investment objectives, should not be touched. B. You understand the sentimental value of this investment, but there is a risk when all your money is tied to one security. It may make sense to diversify the money based on an asset allocation model, depending on her investment objectives. C. This stock has liquidity risk and should be sold and placed into a more liquid position. D. The stock should be combined with a bond in order to diversify her portfolio.

B. The customer is facing a risk in that she only owns one security, and if something bad happens to the company, all her money is tied to it. It would make the most sense to consider an asset allocation model based on whatever her investment objectives are. There is no liquidity risk because the stock is listed on the NYSE and is, therefore, very liquid.

Potential litigation for patent infringement would appear on a corporation's A. balance sheet as a deferred asset B. footnotes C. income statement as an expense D. statement of potential litigation

B. The footnotes to the financial statements carry information such as potential legal actions, accounting methods used (ex: FIFO or LIFO), and off-book debt.

ABC Company has authorized 1 million shares of common stock. It issued 800,000 shares 1 year ago. It then purchased 200,000 shares for its treasury. How many shares of ABC stock are outstanding? A. 200,000 B. 600,000 C. 800,000 D. 1,000,000

B. The solution requires you to know a basic formula: issued stock - treasury stock = outstanding stock 800,000 - 200,000 = 600,000 shares of common stock outstanding

If a corporation attaches warrants to a new issue of debt securities, which of the following would be a resulting benefit? A. Dilution of shareholders' equity B. Reduction of the debt securities' interest rate C. Reduction of the number of shares outstanding D. Increase in earnings per share

B. Usually, a warrant is issued along with a debt instrument, an enhancement that allows the issuer to offer a slightly lower rate of interest.

When looking at the alpha of a particular investment, you notice it is a negative number, and that indicates A. the investment lost money B. the investor took more risk than the return received C. the investment is not volatile D. a very efficient portfolio manager

B. When an investment has a negative alpha, it indicates the investment's return did not match the risk that it had. In other words, the investment should have returned 10% return based on the risk of the investment, and only generated a 7% return, the investor took more risk than the return.

The difference between current assets and current liabilities is called A. net worth B. working capital C. cash flow D. quick assets

B. Working capital (or net working capital) is, by definition, the difference between current assets and current liabilities.

A beta coefficient can best be described as all of the following EXCEPT A. a measurement of volatility B. a way to compare performance of a security against the stock market as a whole C. a way to reduce risk in a portfolio of securities D. it narrows the types of investments to present to a conservative or aggressive investor

C. Beta is a measurement tool that compares the volatility of a security versus the stock market as a whole. The lower the beta, the lower the returns (if the market goes up) and the lower the losses (if the market goes down) and vice versa.

A conservative customer is invested in a large-cap, value-managed equity fund. The stock market drops 10% due to a poor economic forecast for the country. Your customer is upset that his conservative mutual fund lost almost as much as the stock market. What risks does your customer need to understand? I. Business risk II. Market risk III. Systematic risk IV. Unsystematic risk

C. Both stocks and bonds involve some degree of market risk--the risk that investors may lose some of their principal due to price volatility in the overall market (also known as systematic risk).

All of the following would be appropriate for a conservative investor seeking income EXCEPT A. an immediate fixed annuity B. an investment-grade corporate bond fund C. a high-yield bond fund D. a utility fund

C. High-yield bond funds are below investment-grade bonds and are considered speculative in nature. They would not be appropriate for a risk averse investor.

When a technical analyst says that the market is consolidating, the trendline is moving A. upward B. downward C. sideways D. unpredictably

C. If a market is staying within a narrow price range, it is said to be consolidating.

A couple in their early 30s has been married for 4 years. Both work and have no children, so their disposable income is relatively high. They live in the suburbs and are planning to buy a condominium downtown. They need a safe place to invest the amount they have saved for about 6 months for their down payment. Which of the following mutual funds is the most suitable for these customers? A. ATF Capital Appreciation Fund B. ABC Growth & Income Fund C. LMN Cash Reserves Money Market Fund D. XYZ Investment-Grade Bond Fund

C. These customers are preparing to make a major purchase within the next few months. They require a highly liquid investment to keep their money safe for a short time. They money market fund best matches this objective.

Investors cannot diversify away which of these risks? A. Business risk B. Default risk C. Legislative risk D. Market risk

D. An investor cannot diversify away market risk. If the entire market is in a tailspin, all the investor's securities will likely decline.

If a preferred stock pays a stated dividend of 6% and the issuer calls the stock, which of the following is NOT related to the call? A. Interest rates are lower than when the stock was issued. B. The investor will be paid a little more than the par value. C. Dividends scheduled to be paid after the call date are not paid. D. If a preferred stock is going to be called, it must happen on the first available call date.

D. An issuer can exercise a call provision on the call date or any day after the call date.

Proponents of which of the following technical theories assume that small investors are usually wrong? A. Breadth-of-market theory B. Short-interest theory C. Volume-of-trading theory D. Odd-lot theory

D. Odd-lot trading typically is done by small investors. Followers of the odd-lot theory act on the belief that small investors invariably buy and sell at the wrong times.

Under SEC rules, a penny stock is defined as an unlisted, non-Nasdaq security trading at less than A. $1.00 per share only B. $2.00 per share only C. $2.50 per share only D. $5.00 per share only

D. SEC rules define penny stock as non-Nasdaq stock of less than $5 per share.

Cumulative voting rights A. benefit the large investor B. aid the corporation's best customers C. give preferred stockholders an advantage over common stockholders D. benefit the small investor

D. The ability for small investors to lump their votes together and vote as one is a benefit to them.

During an economic downturn, a fundamental analyst may be interested in what industry? A. Producers of capital goods such as washers and dryers B. Technology industry C. Steel industry D. Food industry

D. The food industry is defensive in nature. During an economic downturn, people still eat! Therefore, the food industry would be fairly stable when the economy goes south.

Which of the following items would NOT be important to a fundamental analyst when reviewing a possible investment? A. What phase the business cycle is in B. The quality of management C. The company's market share of its core business D. The stock's trading range over the last 12 months

D. The stock's trading range is not what a fundamental analyst looks at when evaluating a company. It is more interested in the company's fundamentals, such as how the current and future economy will impact the industry, quality of management, and market share.