66 Final #2 - Part 2

The maximum annual contribution to a Coverdell Education Savings Account is: A. $2,000 B. $2,500 C. $3,000 D. $4,000

A. $2,000

A NASDAQ stock is quoted at $34 Bid / $35 Ask. A trader that places a buy order will most likely be filled at: A. $35 B. $34 1/2 C. $34 D. $33 1/2

A. $35

Under NASAA recordkeeping rules for investment advisers, a communication to a client must be retained if it is circulated to MORE than: A. 1 person B. 5 persons C. 10 persons D. 35 persons

A. 1 person

A customer invests $1,000 over a 10 year time horizon. At the end of 10 years, the investment is worth $4,000. The compounded annual rate of return is approximately: A. 15% B. 30% C. 150% D. 300%

A. 15% Another (simpler) way of approximating the answer is to use the Rule of 72, which calculates how many years it takes for an investment value to double. If $1,000 is invested today, it must double to $2,000 in value and then double again to $4,000 in value within 10 years. 72 / 10 years = 7.2% yield for the investment value to double from $1,000 to $2,000. Since this amount doubles again to $4,000 within that time frame, double 7.2% = 14.40% (approximate) yield. There is only 1 choice offered that is even close to this result, 15% which is Choice A.

Which of the following would be defined as "being in the business" of giving investment advice? A. A market timing service that does not recommend securities but which gives customers "buy" and "sell" signals on heavily traded ETFs based on technical factors B. A newsletter that discusses in general terms, the advisability of investing in securities, as part of a broad discussion of the future direction of the U.S. economy C. A lecturer that is hired to give an annual talk to the employees of an investment adviser, where the merits of specific Blue Chip stocks are discussed D. A consultant, who, on a rare and isolated basis, prepares reports or analyses on asset allocation across various asset classes

A. A market timing service that does not recommend securities but which gives customers "buy" and "sell" signals on heavily traded ETFs based on technical factors

Equity options are: A. American Style B. European Style C. Eastern Style D. Western Style

A. American Style

Under the NASAA Statement of Policy on unethical practices, which of the following orders may be accepted in a customer's account without a written trading authorization from that customer? A. An order entered by the customer B. An order entered by an immediate family member of the customer C. An order entered by the customer's investment adviser D. An order entered by the customer's accountant

A. An order entered by the customer

Regarding inspection powers, the State Administrator: I can visit and conduct a walk-in audit of broker-dealer offices intra-State if it is in the public interest or for the protection of investors II can visit and conduct a walk-in audit of broker-dealer offices inter-State if it is in the public interest or for the protection of investors III can neither visit nor conduct a walk-in audit of broker-dealer offices intra-State IV can neither visit nor conduct a walk-in audit of broker-dealer offices inter-State if it is in the public interest or for the protection of investors A. I and II B. III and IV C. I and IV D. II and III

A. I and II

The sale of a new issue of securities by a State chartered bank is: I exempt from registration with the SEC II subject to registration with the SEC III exempt from registration in the State IV subject to registration with the State A. I and III B. I and IV C. II and III D. II and IV

A. I and III

Which information is required to be on an order ticket prior to entry of the order? I Customer name or account number II Customer address III Customer social security number IV Registered representative name or number A. I and IV B. II and III C. I, II, III D. I, II, III, IV

A. I and IV

Exchange rate risk exists when making an investment in a: A. foreign security when the U.S. dollar strengthens B. foreign security when the U.S. dollar weakens C. U.S. security when the U.S. dollar strengthens D. U.S. security when the U.S. dollar weakens

A. foreign security when the U.S. dollar strengthens

Under the Uniform Securities Act, all of the following statements are true regarding an agent's license EXCEPT: A. once an application is filed, it is effective immediately B. the license is valid through December 31st of that year C. if the broker-dealer's license is revoked, the agent's license is revoked D. if the agent withdraws his or her registration, the withdrawal becomes effective in 30 days

A. once an application is filed, it is effective immediately

An investment adviser has a customer who has established a bypass trust. The appropriate investments in the trust would be growth stocks if the 2nd party is a(n): A. surviving spouse that is much younger than the 1st party B. surviving spouse that is much older than the 1st party C. heir that is given no power to control trust assets D. natural person who has no history of medical problems

A. surviving spouse that is much younger than the 1st party

An individual who is 25 years from retirement has $500,000 to invest today. He is risk tolerant and is looking to withdraw $80,000 per year once he retires. Which asset allocation is BEST for this client? A. 25% Stocks / 25% Bonds / 25% REITs / 25% Money Markets B. 50% Stocks / 40% Bonds/ 10% Cash C. 100% Bonds D. 100% Stocks

B. 50% Stocks / 40% Bonds/ 10% Cash We are not given the age of this customer, but since he or she is 25 years from retirement, we can guess that the customer is around 40-50 years old. Based on the rule of thumb that "100% minus the customer's age" should be allocated to stocks for growth, a stock allocation of 40-50% is about right.

Under Rule 147, intrastate offerings cannot be resold out of state for how long after the sale date? A. 3 months B. 6 months C. 9 months D. 12 months

B. 6 months

When is an Investment Adviser obligated to deliver an updated Brochure to an existing client? A. Annually, within 120 days of fiscal year end B. Annually, within 120 days of fiscal year end, if there are material changes C. Semi-annually, within 65 days of the fiscal mid-year date and 120 days of fiscal year end D. Semi-annually, within 65 days of the fiscal mid-year date and 120 days of fiscal year end, if there are material changes

B. Annually, within 120 days of fiscal year end, if there are material changes

Which of the following investments trades in the market independent of NAV? A. Mutual fund B. Closed-end fund C. Variable annuity D. Hedge fund

B. Closed-end fund

Which of the following MUST notify the Administrator if an agent of a broker-dealer is terminated? I Agent II Ex-employer III FINRA IV SEC A. II only B. I and II only C. I, II, III D. I, II, III, IV

B. I and II only

Which of the following can an agent choose in a customer transaction without a written power of attorney? I Security II Size III Price IV Time A. I and II B. III and IV C. I, II, III D. I, II, III, IV

B. III and IV

An agent often assists his elderly clients by underlining pertinent information in the prospectus when making mutual fund presentations. The clients, who are mainly novice investors, appreciate this. Which statement is TRUE about this situation? A. The agent may mark the prospectus for novice investors in an effort to help them understand the investment B. The agent violated the Uniform Securities Act by marking the prospectus C. The agent can only mark the prospectus with his supervisor's approval D. The agent may highlight sections of the prospectus only in response to a client request

B. The agent violated the Uniform Securities Act by marking the prospectus

A bank issuer's ETN has been downgraded by Moody's from Aaa to Aa. The price of the ETN rose 2% after the downgrade was announced. What should the registered representative tell the client? A. The bank downgrade does not matter because the price of the ETN rose by 2% B. The bank downgrade can affect the marketability of the ETN C. The bank downgrade is not meaningful because the ETN is still rated investment grade D. The bank downgrade does not matter because the ETN can be redeemed at par at maturity

B. The bank downgrade can affect the marketability of the ETN

A closely-held corporation has a defined benefit plan for its officers and employees. Due to a stock market decline, the plan is underfunded and the corporation does not have enough cash to make its minimum pension contribution. To meet the shortfall, the President of the corporation wants to donate a valuable oil painting to the plan. This action is: A. permitted because art is a permitted investment under ERISA B. a prohibited transaction between the plan and a party-in-interest C. permitted because the plan is not permitted to be underfunded under ERISA D. a prohibited transaction under ERISA's vesting requirements

B. a prohibited transaction between the plan and a party-in-interest

Portfolio Total Return A 5% B 8% C 12% D 7% If the "mean" of the 4 portfolio returns is calculated as 8%, this is: A. geometric mean B. arithmetic mean C. moving average mean D. weighted mean

B. arithmetic mean The arithmetic mean is the simple "average"

An analyst evaluates individual companies within an industry focusing on the company's business model, management, product line, growth prospects and historical performance, to accumulate information that will be used to make recommendations of investments to be included in customer portfolios. This is an example of: A. top-down investment strategy B. bottom-up investment strategy C. macro investment strategy D. micro investment strategy

B. bottom-up investment strategy A "bottom-up" investor evaluates individual companies within an industry focusing on the company's business model, management, product line, growth prospects and historical performance, to decide from the "bottom up" which are the best investments. In contrast, a "top-down" investor first looks at the market sectors that he or she thinks are likely to outperform the overall market, and then focuses on the specific sector, and then the companies in that sector, to find the best "picks."

A business would be formed as an LLC primarily because of the: A. ease of formation B. characteristic of limited liability C. benefit of lower tax rates D. characteristic of limited life

B. characteristic of limited liability

The person named as the executor over an estate would be found in the: A. affidavit of domicile B. letters testamentary C. proof of domicile D. certificate of incumbency

B. letters testamentary

An employer would set up a defined benefit plan for 15 or more employees in order to: A. diversify plan assets B. maximize plan participation C. permit employees to choose specific investments D. shift investment risk to employees

B. maximize plan participation

Buy and hold is an appropriate strategy when investing in: A. common stocks B. mutual funds C. corporate bonds D. preferred stocks

B. mutual funds

If a broker-dealer is registered in a State, the State Administrator would NOT be permitted to: A. require the broker-dealer to post a surety bond with the State B. require the broker-dealer to maintain a greater net capital amount than required under Federal law C. require the broker-dealer to file advertising with the State Administrator D. require the officers of the broker-dealer to pass a licensing exam, even if they do not deal with customers

B. require the broker-dealer to maintain a greater net capital amount than required under Federal law

Using the CAPM approach to making an investment decision, an investor will: A. estimate the risk of a particular stock based on the standard deviation of the investment's expected returns and calculate the required rate of return necessary to make that investment B. use the risk-free rate of return as the baseline return and add to it an estimated risk premium based on the beta coefficient of that investment to find the expected return of that investment C. add the annual cash flows from the investment and divide them by the number of years the investment will be held to find the average annual return and then divide this by the cash investment outlay to find the investment's rate of return D. calculate the non-systematic risk of an investment and deduct it from the expected rate of return to find the risk-adjusted rate of return of the investment

B. use the risk-free rate of return as the baseline return and add to it an estimated risk premium based on the beta coefficient of that investment to find the expected return of that investment

An investor buys 1,000 shares of ABCD stock at $50 per share. At the end of the 1st year, ABCD has increased to $60 per share. At the end of the 2nd year, ABCD has increased to $75 per share. At the end of the 3rd year, ABCD has decreased to $70 per share. Assuming that the customer is in the 15% tax bracket for dividends and long-term capital gains, if the customer liquidates the position at the end of year 3, the after-tax annualized rate of return is: A. 8.10% B. 9.53% C. 11.33% D. 13.33%

C. 11.33% This investment has increased from $50 in value to $70 in value over 3 years. The $20 gain will be taxed at 15%; so 85% of the gain is kept after tax. .85 x $20 = $17 after-tax gain / 3 year holding period = $5.66 annualized after-tax gain / $50 original investment = 11.33% annualized rate of return.

In which of the following situations has there been NO violation of NASAA rules? A. An agent omits mentioning a material fact necessary to make a presentation about a security not misleading, but the customer decides not to buy the security B. An agent misstates a material fact to a customer when recommending a security, and the customer buys that security and enjoys a profit C. An agent makes a recommendation to a customer, disclosing all relevant information about the issue known to that agent and the customer buys that security and suffers a loss D. Any of the above

C. An agent makes a recommendation to a customer, disclosing all relevant information about the issue known to that agent and the customer buys that security and suffers a loss

As the economy and the stock market fluctuate, which of the following can the holder of a fixed annuity expect to occur during the payout years? A. Benefits will fluctuate according to the return the separate account earns B. Benefits may increase during periods of declining economic growth and a declining stock market C. Benefits will not fluctuate over time D. Benefits may decrease during periods of declining economic growth and a declining stock market

C. Benefits will not fluctuate over time

An investment adviser is looking to offer advisory services to new clients. Which statement is TRUE regarding delivery of the Brochure and Brochure Supplement? A. Only the Brochure is required to be delivered to a new customer at, or prior to, entering into an advisory contract B. Only the Brochure Supplement is required to be delivered to a new customer at, or prior to, entering into an advisory contract C. Both the Brochure and the Brochure Supplement are required to be delivered to a new customer at, or prior to, entering into an advisory contract D. Neither the Brochure nor the Brochure Supplement are required to be delivered to a new customer at, or prior to, entering into an advisory contract

C. Both the Brochure and the Brochure Supplement are required to be delivered to a new customer at, or prior to, entering into an advisory contract

Under the Investment Advisers Act of 1940, which of the following are defined as "investment advisers"? I A firm that prepares research reports about the NYSE market II A firm that solely prepares research reports about the municipal securities market III A firm that prepares asset allocation reports covering securities, real estate, commodity and insurance investments IV A firm that prepares reports on the outlook for the U.S. economy A. I and IV only B. II and III only C. I, II, III D. I, II, III, IV

C. I, II, III

Which statements are TRUE regarding structured products? I A "structured product" is a derivative security that is "structured" to have the characteristics of a debt, but give the higher returns typically associated with "equity" securities II Structured products give a rate of return linked to an equity index such as the Standard and Poor's 500 index III Structured products have a fixed maturity at par in around 7 years based on an embedded option in the security IV Structured products are standardized and liquid instruments A. I and II only B. III and IV C. I, II, III D. I, II, III, IV

C. I, II, III

An agent of a broker-dealer may: I charge a fee for investment advice in addition to any commission charged if a recommendation performs well II not charge a fee for investment advice in addition to any commission charged if a recommendation performs well III charge for clerical services where the charge is not based on performance IV not charge for clerical services A. I and III B. I and IV C. II and III D. II and IV

C. II and III

Federal covered securities are exempt from: I SEC registration II State registration III SEC anti-fraud statutes IV State anti-fraud statutes A. I and II only B. III and IV only C. II only D. I, II, III, IV

C. II only

All of the following accounts avoid probate upon death of an owner EXCEPT: A. Totten trust B. JTWROS C. Individual D. Payable on Death

C. Individual

Which annuity payout option usually results in the largest periodic payment? A. Unit Refund Annuity B. Joint and Last Survivor Annuity C. Life Annuity D. Life Annuity-Period Certain

C. Life Annuity

An investor buys a $25,000, 8% corporate bond maturing in 2042 for $30,000. The bond is callable starting in the year 2017. What is the most appropriate measure for calculating yield? A. Total Return B. Current Yield C. Yield to Call D. Yield to Maturity

C. Yield to Call

States are permitted to require registration of: A. investment advisers managing assets of $100,000,000 or more B. investment advisers to investment companies registered under the Investment Company Act of 1940 C. investment adviser representatives with a place of business in the state D. investment adviser representatives that do not have a place of business in the state

C. investment adviser representatives with a place of business in the state

What position can an investor take to hedge a short stock position? A. long put B. short put C. long call D. short call

C. long call

A retiree who receives fixed annuity payments is subjecting him or herself to: A. market risk B. liquidity risk C. purchasing power risk D. regulatory risk

C. purchasing power risk

An agent of a broker-dealer is solicited by the general partner of an oil and gas income program being offered as a private placement only to accredited investors. The general partner explains that for each customer that the agent brings to the general partner, he will pay a finder's fee of 10% of the amount invested. The agent gets 20 copies of a full-color brochure from the general partner and distributes them to his largest customers for their consideration. Based on this information, you should be LEAST concerned about: A. a potential violation of Regulation D B. whether the investment is defined as a security C. the track record of the general partner D. the information disclosed in the brochure

C. the track record of the general partner

The risk that a portfolio's return will underperform the benchmark return is called the: A. duration shift B. standard deviation C. tracking error D. correlation coefficient

C. tracking error

A customer has made an investment that pays $20 of interest during its first year and that has appreciated by $250, for a year-end value of $1,300. The customer's total return is: A. 1.91% B. 2.38% C. 23.80% D. 25.71%

D. 25.71% The Original Investment Amount is not given here (trick!) but it must be $1,050, since the investment has appreciated during the year by $250 to a year-end value of $1,300. The Total Return is $20 interest + $250 capital gain / $1,050 investment amount = $270 / $1,050 = 25.71%.

The independent auditor's annual report of verification of customer funds held in custody by an investment adviser, as required by the Investment Advisers Act of 1940, is filed with the SEC on: A. Form ADV Part I B. Form ADV Part 2 C. Form ADV-W D. Form ADV-E

D. Form ADV-E

Which of the following are items that should be considered in determining the amount of funding needed to provide for higher education expenses? I Tuition cost II Housing cost III Anticipated inflation rate A. I only B. III only C. I and II D. I, II, III

D. I, II, III

Under the Securities Act of 1933, omissions or misstatements of material fact in a registration statement can be considered to be fraudulent for the: I Officers of the issuer II Lawyers for the issuer III Accountants for the issuer IV Board of Directors of the issuer A. I and IV only B. II and III only C. I, II, III D. I, II, III, IV

D. I, II, III, IV

Which of the following statements are TRUE regarding the use of index funds as investment vehicles for asset classes? I The use of index funds increases market risk II The use of index funds reduces market risk III Index funds are narrowly diversified IV Index funds are broadly diversified A. I and III B. I and IV C. II and III D. II and IV

D. II and IV

When the price of a bond increases, which of the following statements regarding yields are TRUE? I Yield to call increases II Yield to call decreases III Yield to maturity increases IV Yield to maturity decreases A. I and III B. I and IV C. II and III D. II and IV

D. II and IV When the price of a bond increases, yield to maturity drops. Similarly, because the bond is more expensive, yield to call will also fall.

All of the following would be included in the evaluation of the amount an investor would pay for a viatical or life settlement EXCEPT: A. Life expectancy of the viator B. Amount of discount from policy tax amount C. Availability of investors D. Tax consequence to the viator of selling the policy

D. Tax consequence to the viator of selling the policy

A broker-dealer is attempting to increase its commission brokerage business by offering "free office space" in its Park Avenue office building to hedge funds in return for the hedge fund sending its trades through that broker-dealer. Which statement is TRUE? A. This is an unethical practice because broker-dealers cannot offer "free services" B. This is an unethical practice because investment advisers are not permitted to accept "free" services C. This is a legal usage of soft dollar compensation D. This is an unethical practice unless it is disclosed on the Form ADV filing with the Administrator

D. This is an unethical practice unless it is disclosed on the Form ADV filing with the Administrator

An individual who represents an issuer in selling securities of that issuer to the issuer's employees; and who does not earn a commission for this work; is defined under the Uniform Securities Act as a(n): A. agent B. broker-dealer C. issuer D. none of the above

D. none of the above

A Registered Investment Adviser publishes a web-based newsletter. He is approached by a marketing firm for a list of the RIA's customers. The marketing firm is not going to pay for the customer list, but has agreed to give the RIA computer equipment that will be used in publishing the RIA's newsletter. This action is: A. permitted because it directly benefits the RIA's customers B. permitted because the SEC permits the payment of "soft dollars" C. prohibited because the computer equipment qualifies for accelerated depreciation deductions under IRS rules D. prohibited because the RIA did not get written permission from each client to release their information

D. prohibited because the RIA did not get written permission from each client to release their information

A customer buys 100 shares of ABC stock at $56 and buys 1 ABC Oct 55 Put @ 3.50 on the same day. The maximum potential gain is: A. $5,150 B. $5,850 C. $5,950 D. unlimited

D. unlimited