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Which of the following would you most likely consider characteristics of a growth stock? A) High P/E and low dividend yield B) Low P/E and high dividend yield C) Low P/E and low dividend yield D) High P/E and high dividend yield

A) High P/E and low dividend yield Growth stocks generally have high P/E ratios and low (or no) dividends. Value stocks normally have low P/E ratios with higher dividend payouts.

ERISA regulation does not apply to public school district retirement plans publicly traded utility company retirement plans federal government employee retirement plans A) I, II, and III B) I only C) I and II only D) I and III only

D) I and III only ERISA rules only apply to private sector plans. Government or public sector plans are not subject to the Employees Retirement Income Security Act of 1974.

A QDRO is a judgment, decree, or order for a qualified retirement plan to pay child support, alimony, or marital property rights to a spouse, former spouse, child, or other dependent of a participant. The QDRO must contain certain specific information as stated in whose regulations? A) ERISA B) NASAA C) IRS D) DOL

IRS It is the IRS who states the QDRO must contain certain specific information, such as: the participant and each alternate payee's name and last known mailing address, and the amount or percentage of the participant's benefits to be paid to each alternate payee. This is not part of ERISA or the Department of Labor and, least of all, NASAA.

Which of the following takes place on the New York Stock Exchange? A) Buying and selling stocks on the primary market B) Buying and selling stocks on the secondary market C) Buying and selling stocks on the over-the-counter (OTC) market D) Buying and selling of Nasdaq stocks

Buying and selling stocks on the secondary market. The secondary market is the market in which securities are traded after they are issued to the public. The secondary market takes place on exchanges, such as the New York Stock Exchange (NYSE), and on the over-the-counter (OTC) market. The OTC market is the market for securities that are not traded on an exchange.

GEMCO Securities, a registered broker-dealer, has a policy of hiring unpaid interns from top business schools. GEMCO is currently the lead underwriter on a new issue and has assigned three of its interns to specific tasks. One is doing entering the data as indications of interest are received, the second is calling clients to offer to deliver their prospectus via email instead of mail, and the third is calling clients to describe the new issue and accept indications of interest. Which of the interns would need to register as agents? A) The second and third interns would be required to register. B) All of the interns would need to register. C) Only the third intern would have to register. D) Because they are not being compensated, none of the interns need to register.

C) Only the third intern would have to register. When an individual representing a broker-dealer contacts clients to obtain indications of interest for a new securities offering, that person is performing a function requiring registration as an agent. Employees of a broker-dealer, permanent or temporary, compensated or not, do not have to register if their only function is clerical or administrative. Compiling data is clerical and following up with clients to determine how they wish to receive documents for a purchase they've already made is simply an administrative task.

One of your clients purchases a European-style put option on a stock. The premium is $3 and the exercise price is $35. If the price of the underlying asset is $40 on the exercise date, the client has A) lost $200. B) made $500. C) made $200. D) lost $300.

D) lost $300. This option is out of the money and is therefore worthless. Remember, European-style options are exercisable only at expiration and a $35 put is worth zero unless the market price of the underlying asset is less than $35. As is the case with any long option position, the maximum loss is the premium paid.

A couple, ages 63 and 66, are long-time clients of your firm and are in good health. They plan to retire from gainful employment in 4 years and wish to discuss decumulation strategies. One of the important factors to consider is the time horizon for this couple. Which of the following would be the best estimate to use? A) 10 years B) 25 years C) 8 years D) 4 years

B) 25 years Decumulation is the opposite of accumulation. Instead of focusing on how to increase the assets, the focus is on how to make sure they last as long as required. Just how long is that time horizon? Until the death of the second party. Today's statistics would indicate that a couple of these ages would likely have at least one of the two live another 25 years.

A portfolio manager whose universe of stocks is those with market caps of $4 - $6 billion would most likely be graded against A) S&P 500. B) S&P 400. C) Nasdaq 100. D) Dow Jones Composite Average.

B) S&P 400. Stocks with a market capitalization between $2 billion and $10 billion are considered mid-cap stocks. The S&P 400 is the index for those.

The Uniform Prudent Investor Act identified a number of fundamental changes in the former criteria for prudent investing. Which of the following incorrectly states one of these changes? A) The trade-off between risk and return in all investing is the fiduciary's central consideration. B) The standard of prudence is applied to each investment individually. C) Prudent investing requires that fiduciaries diversify their investments. D) Delegation of trust investment and management functions is permitted, subject to safeguards.

B) The standard of prudence is applied to each investment individually.

Risk-adjusted return is calculated by A) dividing the security's price by its beta B) multiplying the return of an investment by its standard deviation C) dividing the remainder of the risk-free rate subtracted from the security's actual return by its standard deviation D) dividing the price of the stock by its standard deviation

C) dividing the remainder of the risk-free rate subtracted from the security's actual return by its standard deviation The return from a security can be adjusted for the risk associated with it by subtracting the risk-free rate from the security's actual return and then dividing that by its standard deviation, the basic measure of unsystematic risk. This is commonly known as the Sharpe ratio.

A customer is selling inherited stock. The decedent originally paid $50 per share and on the date of the decedent's death, the stock was worth $60 per share. On the day the customer sells the stock, the price per share is $62. What is the investor's cost basis in the stock? A) 50 B) 60 C) 55 D) 62

60 Explanation The IRS allows a step-up in basis for inherited stock. The customer's cost basis is the fair market value of the stock on the date that the decedent died.

A mutual fund must redeem its tendered shares within how many days after receiving a request for their redemption? A) 3 B) 7 C) 10 D) 5

7 The 7-day redemption rule is required by the Investment Company Act of 1940.

A basic difference between a Section 457 plan established on behalf of a governmental entity and one established by a private tax-exempt organization is that A) a tax exempt plan's distributions are not eligible for a favorable lump sum 10-year averaging treatment. B) a governmental plan must hold its assets in trust or custodial accounts for the benefit of individual participants C) a tax-exempt plan participant does not have to include plan distributions in taxable income D) a governmental plan cannot make a distribution before the participant attains age 70½

B) a governmental plan must hold its assets in trust or custodial accounts for the benefit of individual participants A governmental Section 457 plan must be funded—that is, it must hold plan assets in trusts or custodial accounts for the benefit of individual participants. Conversely, a tax-exempt (nongovernmental) Section 457 plan may not be funded.

Grandma has decided to give her grandson some stock that she bought many years ago. When the grandson sells the stock, how is the tax liability figured? A) Her date of purchase is used, but the cost basis is from the date of the gift. B) Her cost basis and date of purchase is used. C) Both the cost basis and holding period are determined from the date of the gift. D) Her cost basis is used, but the holding period begins on the date of the gift.

Her cost basis and date of purchase is used. When stock is given as a gift, the donee (recipient) takes over the cost basis and the holding period of the donor.

If a publicly traded corporation was going to sell a wholly-owned subsidiary, the information would be made available through the filing of a Form A) 10-Q B) 10-K C) 13-F D) 8-K

D) 8-K The Form 8-K is filed with the SEC within 4 business days of any one of a number of significant actions, including the sale of a significant asset such as a wholly-owned subsidiary.

Each of these would be considered an advantage of using a 529 plan rather than a Coverdell ESA to fund a child's future education except A) the 529 plan has no earnings limitation on the donor. B) the 529 plan allows for higher contribution levels. C) the 529 plan has no age limits. D) the 529 plan is counted at a lower percentage of assets when applying for financial aid.

D) the 529 plan is counted at a lower percentage of assets when applying for financial aid. Funds in both plans are counted as assets of parents at 5.64% if owner is a parent or dependent student, so there is no difference. The 529 plan allows for far greater contribution levels and there is no income limitation on the donor as exists with the Coverdell ESA. The funds in the ESA must be used by the time the beneficiary is 30; no such age restrictions apply to the 529 plan.

A federal covered investment adviser has decided that it is necessary to increase its fee schedule and charge commissions on securities trades. However, they are going to leave the fee structure in place for existing customers. This information must be A) disclosed promptly to the Administrator of the state where the IA maintains its principal office B) disclosed promptly only to those customers who will be affected by the change through an amended brochure C) disclosed in the summary of material changes in the annual updating amendment to the SEC D) disclosed promptly to all customers by amending the brochure

disclosed promptly only to those customers who will be affected by the change through an amended brochure Because this will only affect new clients, the brochure (or Part 2A of the ADV) must be amended to reflect this new method of operation and made available promptly to these clients and to the SEC; it cannot be part of the end-of-year amendments. The state has no cause to receive a copy of a federal covered adviser's brochure.

All of the following practices violate NASAA's Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents EXCEPT A) conducting securities transactions, with clients, that are not reflected on the books of the broker-dealer and without the knowledge and supervision of the employing broker-dealer B) effecting a transaction with no change in beneficial ownership C) recommending the purchase of a security to a majority of the clients solely on the basis of the issuer's properly published press release regarding a likely increase in earnings per a new product branding strategy D) hypothecating customer securities held in margin accounts

hypothecating customer securities held in margin accounts The normal method of financing customer margin accounts is by hypothecating their securities so there is nothing dishonest or unethical happening.

For larger accounts, a broker-dealer is least likely to waive its normal fee for A) safekeeping of funds or securities in the account B) wiring funds to the client's bank C) the annual account maintenance charge D) transferring the account to another broker-dealer

transferring the account to another broker-dealer

A company's current ratio is 0.5:1. This could be an indication A) the company may have trouble paying its bills. B) the company's current assets are twice its current liabilities. C) the company is highly leveraged. D) the company's working capital is sufficient to meet daily needs.

the company may have trouble paying its bills. The formula for current ratio is the current assets divided by the current liabilities. A 0.5:1 ratio means that the company has current liabilities that are twice its current assets. This would also mean a negative working capital (current assets minus current liabilities) and would probably mean that the company is going to have a difficult time paying its bills.

Under the Uniform Securities Act, a state-registered investment adviser whose only office was in State N would NOT have to register in State O if its only clients were A) 6 or fewer retail clients B) trust companies C) complex trusts D) individual accredited investors

trust companies A state-registered investment adviser can make use of the de minimis exemption if it has no place of business in a state and its only clients are institutions, such as bank and trust companies, investment companies, and insurance companies.

NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers would consider the adviser to be engaging in an unethical business practice if he loaned money to a client other than one A) who was in the money-lending business B) who was an immediate family member of the adviser C) borrowing under the same terms and conditions as the client could find at a commercial bank D) who was an affiliate of the adviser

who was an affiliate of the adviser

Janice is investing in stocks that are temporarily neglected by the market and often have high-dividend yields. Which of the following investment styles might she be following? A) Contrarian B) Momentum C) Growth D) Value

Value Value is the oldest style and is based on the premise that deep and rigorous analysis can identify businesses whose value is greater than the price placed on them by the market.

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 below $48 per share B) somewhat above $30 per share C) somewhat below $30 per share D) somewhat above $48 per share

A) somewhat below $48 per share 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.

One major difference between the customer identification program (CIP) and the new account opening rules of the regulatory bodies is that A) the CIP requires date of birth while the regulators only require proof of legal age B) the CIP requires a residence address for individuals while the regulatory bodies will accept a PO Box C) the CIP requires a statement of the customer's goals while the regulators only require current financial information D) the CIP only applies to individuals while the rules of the regulators apply to retail and institutional accounts

A) the CIP requires date of birth while the regulators only require proof of legal age The CIP requires the actual date of birth, not just proof of legal age. The CIP has no interest in the goals of the investor, just the identity. In both cases, a PO Box may only be used after supplying a physical residence address and both the CIP and the rules of the regulators apply to retail and institutional accounts.

ABD Corporation's income statement reports net sales of $100 million, cost of goods sold of $60 million, administrative costs of $20 million, and interest on debt of $5 million. Based on this information, ABD's gross margin is A) 15%. B) 40%. C) 35%. D) 20%.

B) 40%. Gross margin is computed by subtracting the cost of goods sold (COGS) from the net sales (or revenues) and dividing the remainder by the net sales. In this case, the computation is $100 million minus $60 million which equals $40 million and then dividing that by the $100 million resulting in a gross margin (or margin of profit) of 40%. Administrative costs and interest are not included in COGS.

During a trip to visit grandchildren, one of your clients suffers a massive heart attack and dies, intestate. Directions for handling the account could only come from A) the person named as executor of the estate B) the person appointed as administrator of the estate C) the spouse D) the person with a durable power of attorney

B) the person appointed as administrator of the estate Dying intestate means that there is no valid will. In that case, the state will appoint someone as administrator of the estate with the responsibility of handling all of the affairs of the deceased. Only when there is a will is there an executor, and a durable power of attorney is canceled upon the death of either party to the power. Only if the account were registered as JTWROS with the spouse (or if the spouse were named the executor) would the spouse have any authority.

An investment adviser representative is assuring clients of steady returns on an investment. Under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives and Federal Covered Advisers, this activity is A) acceptable if the client has been made aware of the risks B) acceptable if the security being recommended is an investment-grade bond C) prohibited because the IAR is guaranteeing a profit D) prohibited because the customer may still experience loss

C) prohibited because the IAR is guaranteeing a profit Assuring a steady rate of return is considered to be guaranteeing performance, a practice prohibited under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives and Federal Covered Advisers. Even in the case of investment-grade bonds, returns can never be "assured."

An investor invests $1,000 into the shares of the Stratford Growth and Income Fund, an open-end investment company registered under the Investment Company Act of 1940. On the purchase application, the investor checked the boxes signifying that dividends were to be paid out in cash and capital gains were to be reinvested. During year, the fund pays dividends of $20 and distributes a $250 capital gain. At the end of the year, the fund's value is $1,300. The total return to this investor was A) 25% B) 30% C) 27% D) 32%

D) 32% Total return is all distributions plus/minus appreciation/depreciation. In this question, the $1,300 includes the $250 capital gain so all we add is the $20 dividend. $320 divided by $1,000 equals 32% total return.

During the past year, the market price of Kapco common stock has increased from $47 to $50 per share. Over that period, Kapco's earnings per share have increased from $2.00 to $2.50 per share, and their dividend payout ratio has decreased from 50% to 40%. Based on this information, Kapco's P/E ratio has decreased Kapco's P/E ratio has increased an investor holding Kapco over this period would have noticed a decrease in income received an investor holding Kapco over this period would have noticed no change in income received A) I and III B) II and IV C) II and III D) I and IV

D) I and IV Kapco's P/E ratio has decreased an investor holding Kapco over this period would have noticed no change in income received At the beginning of the period, the P/E ratio was 23.5 to 1 ($47 divided by $2.). At the end of the period, the P/E ratio was 20 to 1 ($50 divided by $2.50). Initially, Kapco was paying out 50% of its $2.00 per share earnings, or $1.00 in dividends. At the end, Kapco was paying out 40% of its $2.50 per share earnings, also $1.00 in dividends.

If the yield curve is positive (sloping upward), this means that long-term interest rates are A) expected to decline B) the same as short-term rates C) lower than short-term rates D) higher than short-term rates

D) higher than short-term rates A yield curve shows the relationship between short-term and long-term interest rates. When the yield curve is positive, it slopes upward. This means that long-term interest rates are higher than short-term rates.

An advantage of being a bondholder compared with owning common stock in the same corporation is that A) common stock has priority over the bond in the event of liquidation B) there is limited liability C) the bondholder can select the optimum time to have the issuer redeem the bond D) income payments are more reliable

D) income payments are more reliable Even though bond interest is semiannual, while dividends are typically paid quarterly, the payment of interest is an obligation that comes ahead of the payment of any dividend. Companies can elect to skip or reduce their dividends, but not their interest payments.

Long-Term Financial Solutions, Inc. (LTFSI), an investment adviser registered in five states, files a Form ADV-W indicating the business is closing. It is being acquired by another federal covered adviser, Gold and Sylver Advisers, LLC. Which of the following statements is correct? A) Gold and Sylver must notify all clients of LTFSI that their advisory contracts have been assigned. B) As the successor firm, Gold and Sylver Advisers must keep copies of the LTFSI corporate charter for at least three years after LTFSI's acquisition. C) Gold and Sylver will not have to amend their Form ADV Part 1 until the filing of their annual updating amendment. D) LTFSI is responsible for ensuring that a copy of the LTFSI corporate charter is preserved for at least three years after the acquisition

LTFSI is responsible for ensuring that a copy of the LTFSI corporate charter is preserved for at least three years after the acquisition. When an investment adviser ceases to exist, either through going out of business or being succeeded by another firm (as is the case here), it is their responsibility to ensure that articles of incorporation, charters, minute books, and stock certificate books of the investment adviser and of any predecessor be preserved until at least three years after termination of the enterprise. Although it is true the contracts have been assigned to the successor firm (Gold and Sylver), the consent for that had to be obtained by LTFSI. A change of this nature requires prompt amendment to the Form ADV Part 1.

The Investment Company Act of 1940 does which of the following? A) Regulates the secondary market B) Sets rules for the registration of investment advisers C) Governs the issuance of new issues D) Prescribes procedures for the establishment of investment companies

Prescribes procedures for the establishment of investment companies The Investment Company Act of 1940 requires all investment companies to register with the SEC as such and be regulated under the act. The companies are still subject to all the other applicable securities acts. However, the Investment Company Act of 1940 provides additional regulation to ensure that investors are fully informed and fairly treated by the management of investment companies.