66 Full Questions

C) 7% Explanation The expected return on an equity investment is the risk-free (for example, T-bill) rate of return added to the equity risk premium (3% + 4% = 7%). U23LO2

If the return on Treasury bills is 3% and the equity risk premium is 4%, the expected equity returns should be A) 1% B) 12% C) 7% D) 4%

A) Section 529 plans Explanation A Section 529 plan for each as beneficiary would be most appropriate, largely because the others wouldn't work. The parent certainly isn't a minor so UTMA is out and that makes the Coverdell ESA a non-option because contributions can't be made after the 18th birthday. Variable annuities are retirement vehicles and, with their generally high surrender charges, would not be a suitable recommendation with a three-year time horizon. U24LO7

One of your clients has made plans to get an advanced degree by enrolling in the local community college in three years. At the same time, her child expects to be entering veterinary school. What would you recommend as the most appropriate tool to accumulate funds for both of them? A) Section 529 plans B) Variable annuities C) UTMA accounts D) Coverdell ESAs

C) Section 529 plans Explanation Technically, Section 529 plans are known as municipal fund securities. As such, the rules of the MSRB require delivery of an official statement, sometimes called an offering circular but never referred to as a prospectus. Retirement plans are not included in the definition and an indenture is a document specifying the legal obligations of the bond issuer and rights of the bondholders. It is some¬times called the deed of trust, and although it details information about a security, it is not, in itself, a security. U24LO7

The term security would include which of the following? A) Indentures B) Coverdell ERAs C) Section 529 plans D) 403(b) plans

B) I, II, and III Explanation An individual can generate income from running a sole proprietorship or being a shareholder in an S corporation (the exam will possibly use the obsolete term, Subchapter S). Of course, taxable income can be generated by investments in the form of dividends, interest and capital gains. The assumption here must be that the death benefits are from a life insurance policy because those, unlike the death benefit from an annuity, are not subject to income tax. U21LO2

There are many sources of taxable income to an individual. Included might be money received from which of the following? Sole proprietorship Subchapter S corporation Investments Life insurance death benefit A) I and II B) I, II, and III C) I, II, III, and IV D) II and III

B) 8.85% Explanation Multiplying the weight of each asset by its expected return, then summing, produces: Probable return = 0.40(12) + 0.35(8) + 0.25(5) =8.85%. U23LO2

What is the probable return of this portfolio? A) 9.55% B) 8.85% C) 9.05% D) 8.33%

A) overconfident Explanation The behavioral finance bias of overconfidence refers to the observation that experienced (and even some "rookie") investors tend to overestimate their ability and the accuracy of the information available to them. U19LO3

A client excitedly calls his investment adviser with the news that he is now going to handle his own investments. "I just read some great investment books and now I know what to do." Based on the study of behavioral finance, it would appear that this individual is A) overconfident. B) following the herd. C) conservative. D) anchored.

D) quarterly Explanation An investment adviser in possession of customer assets must send a statement to the customer at least every three months. The statement must list the securities and funds held by the adviser and their location, and it must show all transactions in the account since the last statement date. U7LO2

An investment adviser with custody of customer funds and securities must send the customer a statement of account activity no less frequently than A) monthly B) with every transaction C) annually D) quarterly

A) 3.5% Explanation The only return (as far as yield is concerned) is the $500 of dividends. Remember, nonqualifying dividends do not "qualify" for the 15% rate. Subtracting 30% for taxes leaves $350 which, when divided by the $10,000 initial cost, is an after-tax yield of 3.5%. If the question had asked about total return, then the $500 unrealized profit would have been included, although there would have been no tax on it. U23LO2

An investment is made of $10,000. At the end of the year, $500 in nonqualifying dividends has been received and the value of the investment is $10,500. If the investor is in the 30% tax bracket, the after-tax yield is A) 3.5% B) 8.5% C) 5.0% D) 6.5%

A) 5% Explanation The quarterly dividend is $0.50, so the annual dividend is $2; $2 ÷ $40 market price = 5% current yield. U23LO1

GHI currently has earnings of $4 and pays a $0.50 quarterly dividend. If GHI's market price is $40, the current yield is A) 5% B) 10% C) 15% D) 1.25%

C) Efficient pricing Explanation Alternative assets are most often characterized by inefficient pricing, providing potential abnormal returns or alpha returns. That is the prime reason for their popularity, especially with institutional investors. U17LO3

The alternative asset investments class is least associated with which of the following characteristics? A) Illiquidity B) Diversification C) Efficient pricing D) Nonnormal returns

A) interest rate changes Explanation Because rising interest rates cause the prices of all bonds to decline, interest rate changes are the major risk factor for bonds. The bond market sometimes moves in the opposite direction to the stock market (negative correlation). U11LO1

The major risk for highly rated corporate bonds is A) interest rate changes B) tax law changes C) liquidity D) stock market volatility

A) to the U.S. Court of Appeals serving the district where the order was issued within 60 days of its issuance Explanation The revocation or suspension of an investment adviser's registration under the Investment Advisers Act of 1940 may be appealed to the Court of Appeals for the appropriate U.S. district within 60 days of the revocation or suspension order. Advisers covered under federal legislation do not make appeals to state securities Administrators. The National Securities Markets Improvement Act of 1996 (NSMIA) eliminates dual regulation of investment advisers. FINRA does not have regulatory authority over the registration of federal covered investment advisers. U5LO4

The revocation or suspension of a federal covered investment adviser's registration under the Investment Advisers Act of 1940 may be appealed A) to the U.S. Court of Appeals serving the district where the order was issued within 60 days of its issuance B) to the United States Supreme Court because the Investment Advisers Act of 1940 is federal legislation, unlike the Uniform Securities Act, which is a model for state securities legislation C) through arbitration with the Financial Industry Regulatory Authority (FINRA) D) by petition to the appropriate state securities Administrator

C) Federal covered securities must be registered with the states Explanation Federal covered securities are not required to be registered with the states, but issuers of federal covered securities may be required to pay fees to the states (notice filing). Private placements (Regulation D) and investment companies both describe types of federal covered securities. U4LO3

Under the Uniform Securities Act, which of the following statements about federal covered securities is NOT true? A) The issuer of a federal covered security may be required to pay fees to the states. B) Federal covered securities include securities sold under Regulation D of the Securities Act of 1933. C) Federal covered securities must be registered with the states. D) A security issued by an investment company registered under the Investment Company Act of 1940 is a federal covered security.

C) I, II, and IV Explanation As long as a broker-dealer does not have an office in the state, it is possible to qualify for exclusion from the definition. The primary requirement for the exclusion is that the broker-dealer confine trading to financial institutions or other broker-dealers. Unlike with investment advisers, there is no de minimis exemption for broker-dealers. Trust companies are excluded from the definition of broker-dealer. U3LO2

Which of the following persons are excluded from the definition of, or exempt from registration as, a broker-dealer under the Uniform Securities Act? A broker-dealer with no office in the state that effects trades exclusively with other broker-dealers in the state A trust company with an office in the state that deals with the general public A broker-dealer with no office in the state that has no more than 5 retail clients resident in the state within the past year A broker-dealer with no office in the state that effects securities trades exclusively with trust companies or other broker-dealers A) III and IV B) I and II C) I, II, and IV D) I, II, III, and IV

B) ETFs Explanation ETFs are investment companies (exchange-traded funds) and are not included in the definition of derivative. U16LO4

Which of the following would NOT be considered a derivative? A) Warrants B) ETFs C) Options D) Forwards

D) I, II, III, and IV Explanation A realized capital gain on a security may be offset by a capital loss realized from the sale of any type of security, including municipal bonds, equities, corporate bonds, or REITs. U21LO3

f a client has realized a capital gain from the sale of a municipal bond, to reduce tax liability, the capital gain can be offset against a capital loss in GOs equity securities corporate bonds REITs A) II and III B) I only C) I and II D) I, II, III, and IV

A) 5% Explanation The quarterly dividend is $0.50, so the annual dividend is $2.00; $2 ÷ $40 (market price) = 5% annual yield (current yield). U23LO1

A company currently has earnings of $4 and pays a $0.50 quarterly dividend. If the market price is $40, what is the current yield? A) 5% B) 15% C) 1.25% D) 10%

A) final salary Explanation The final salary at retirement and the length of service at the employer are most commonly used to calculate the total benefit to be paid to the employee in the defined benefit pension plan. U24LO2

In general, in a defined benefit plan, the pension to be received upon retirement is based on the number of years of service and the individual's A) final salary. B) agreed salary. C) life expectancy. D) current salary.

A) II and IV Explanation The model is made up of two separate components. One component is known as the stock risk premium and is the part of the model reflected by the following formula: (market return − the risk-free return) × beta of the stock. The other component is the market risk premium and is the part of the model reflected by the following formula: (market return − risk-free return). The stock risk premium is the inducement necessary to entice the individual to invest in a particular stock, whereas the market risk premium is the incentive required for the individual to invest in the securities market in general. U20LO8

Two of the major factors involved in the capital asset pricing model (CAPM) are interest rates stock risk premium tax rates market risk premium A) II and IV B) I and III C) II and III D) I and II

D) II and III Explanation A money purchase pension plan is a defined contribution plan established by the employer, thereby making the contributions mandatory. Employee participation by making voluntary contributions to the plan is optional. Employees who contribute to the plan usually contribute a percentage of their income. U24LO2

Which of the following concerning a money purchase pension plan are TRUE? All employees must contribute to the plan. Voluntary employee contributions are optional. Employer contributions are required. Employer contributions are optional. A) I and IV B) I and III C) II and IV D) II and III

C) Qualifying distributions are received free of income tax if a holding period and age requirement is met. Explanation A Roth IRA distribution is tax free if the distribution is made on or after the owner attains age 59½ (or other specified events), and a 5-year holding period requirement is met. The contribution limits are aggregated with that of a traditional IRA regardless of age; however, there are AGI limits with a Roth IRA but none with a traditional IRA. U24LO1

Which of the following statements describes an advantage of a Roth IRA over a traditional IRA? A) The required minimum distribution date rules do not apply if the distribution is made in the form of an annuity. B) There are no annual contribution limits once an individual attains age 59½. C) Qualifying distributions are received free of income tax if a holding period and age requirement is met. D) The AGI limits for contributions are the same as those for traditional deductible IRA contributions.

B) 10.50% Explanation Total return is the sum of all payments ($50) plus the capital gains ($50) divided by the cost ($950). In this case, $50 + $50 ÷ $950 = 0.10526 or 10.5%. U23LO2

What is the total return on a bond that cost an investor $950, was sold for $1,000, and paid $50 in interest payments? A) 5% B) 10.50% C) The return cannot be determined from the information supplied D) 10%

B) purchasing power risk Explanation Unsystematic risk, also known as diversifiable risk, affects only a particular company, country, or sector and its securities. Purchasing power risk is an example of systematic risk that affects the certainty of returns associated with any investment—most particularly, fixed income. Political and financial risk would be considered unsystematic and there is no formal classification known as tenure risk, although some mutual funds whose advisers have a short tenure, might be considered to have that kind of risk. If that were to be considered, it would still be an unsystematic risk. U11LO2

All of the following are examples of unsystematic risk EXCEPT A) financial risk B) purchasing power risk C) tenure risk D) political risk

B) $59.50

An investor buys 5 put contracts with a strike price of $55 per share. The current price of the underlying stock is $60 and the option premium is $7. The commission schedule is shown as follows: Using the information above, what is the total commission cost based for this trade? A) $199.50 B) $59.50 C) $39.90 D) $297.50

A) Silver Explanation Silver is a precious metal and its price is not influenced by the weather. Crops, such as wheat and oranges, certainly are and livestock is affected as well. U17LO6

Which of the following commodities is least likely to be affected by the weather? A) Silver B) Wheat C) Orange juice D) Pork bellies

B) Corporation Explanation The corporation (always assume C corporation unless it says different on the test) offers limited liability to its shareholders, but there is no flow-through of income or loss. LLCs and limited partnerships offer both and the sole proprietorship has unlimited liability. U18LO3

A feature of which of the following business entities is limited liability but no flow-through of earnings or losses? A) LLC B) Corporation C) Sole proprietorship D) Limited partnership

C) $4,000 Explanation Contribution amounts to the traditional and Roth IRA must be aggregated for purposes of determining a total amount. In addition, because Harry is over age 50, he is permitted a $1,000 catch-up contribution. Currently, his total allowable contribution is $7,000; Harry can contribute an additional $4,000 to the Roth IRA. U24LO1

Harry, age 52, is an unmarried individual currently earning $55,000 per year. He consults you about the possibility of establishing both a traditional IRA and a Roth IRA this year and making contributions to each. You have determined that Harry should make a $3,000 contribution to the traditional IRA for this year. What amount, if any, can Harry also contribute to the Roth IRA? A) $3,000 B) $0 C) $4,000 D) $2,500

D) regulatory risk Explanation Regulatory risk represents actions of government regulators that limit activities of businesses or add to their costs. The FDA's refusal to approve a new drug as quickly as it used to presents regulatory risk to the holder of the company's securities. U11LO2

If a pharmaceutical manufacturer's stock declines because the federal Food and Drug Administration has doubled the period of time required for clinical trials before any new drug may be released for public sale, this is an example of A) inflation risk B) beta risk C) business risk D) regulatory risk

C) tax preference items Explanation The proper term is "tax preference items." Those would include the following: Deductions taken for accelerated (but not straight-line) depreciation; Excess intangible drilling costs; Capital gains on incentive stock options; and Otherwise tax-exempt interest from specified private activity bonds. U21LO4

The alternative minimum tax is designed to ensure that certain high-income taxpayers do not avoid all income tax. This is done by adding back to the taxpayer's ordinary income, items such as accelerated depreciation and excess intangible drilling costs. The term used to describe these items used to arrive at the taxpayer's alternative minimum taxable income (AMTI) is A) AMT taxable items. B) tax preferred items. C) tax preference items. D) Form 6251 items.

D) issue a warrant for the arrest of a suspected violator Explanation A difference between the Uniform Securities Act and the Securities Act of 1933 is who enforces them. The Uniform Securities Act is enforced by the state Administrators, while the federal acts are enforced by the SEC. In complying with its enforcement responsibilities, the Administrator may make, amend, and rescind rules; issue cease and desist orders; administer oaths; conduct investigations; take evidence; and subpoena witnesses, books, and records. The Administrator may also seek temporary or permanent injunction from the courts, file civil suits, and refer evidence to the attorney general for criminal prosecution, but cannot issue an arrest warrant. We like to remind students that the Administrator does not "wear a badge." U5LO2

To enforce the Uniform Securities Act, the Administrator may do all of the following EXCEPT A) issue cease and desist orders B) refer evidence to the attorney general for possible criminal prosecution C) conduct formal investigations D) issue a warrant for the arrest of a suspected violator

A) I and II Explanation An adviser who has custody must submit to an annual surprise audit by an independent accountant and include an audited balance sheet with Part 2A of Form ADV, which must be filed with the Administrator and also forms the basis of the information that must be contained in the disclosure brochure. Other requirements include segregation of client securities, deposit of client funds into separate bank accounts, written notification to clients of the location of their property, and quarterly (not monthly) reports to clients on their accounts. U7LO2

Under the NASAA Model Rule on Custody Requirements for Investment Advisers, an adviser who has custody of client securities or funds must submit to a surprise audit of client accounts by an independent accountant each year provide an audited balance sheet to the Administrator each year and include a balance sheet with his disclosure statement (brochure) to all prospective clients send monthly statements to clients on the status of their accounts A) I and II B) II and III C) I, II, and III D) I and III

B) the employer may make unlimited contributions, which generate unlimited tax deductions for the business Explanation Contributions are deductible by the employer but are not unlimited because contributions to a 401(k) are subject to a number of limits. Tax deferral on plan earnings is advantageous to employees. The owner of the business may participate in the plan. U24LO2

All of the following are advantages of a 401(k) plan EXCEPT A) employees and the business may reduce current taxes B) the employer may make unlimited contributions, which generate unlimited tax deductions for the business C) the owner of the business may participate in the plan D) tax deferral on the plan earnings is advantageous to employees

B) an investment constraint Explanation Investment constraints are limitations on the ability to make use of particular investments. They can be liquidity, time horizon, tax concerns, legal and regulatory factors, and unique circumstances (ethical objectives or social responsibility considerations). The easiest way to determine if it is a constraint or a capital need is if a dollar amount is stated. When a specific sum is mentioned, it is a capital need. The IAR might use a present value computation to determine the amount to be deposited,, and this may be part of the client's IPS, but neither of those answers the question posed. U19LO5

An investment adviser representative meets with a couple who explains that they wish to be able to pay for their daughter's college education. The IAR is told that the child will be starting school in 5 years. This 5-year time period would be considered A) a capital need B) an investment constraint C) the present value needed D) an investment policy statement (IPS)

B) purchasing shares directly from advisory clients Explanation There are 2 principals in every securities trade: the buyer and the seller. In this case, buying shares directly from clients who own those shares places the IA in the position of being one of the principals. This is an action that must be disclosed in writing to the client no later than completion of the transaction. In an agency cross transaction, the firm is acting as an agent—that's the reason for the term. U6LO1

In order to be in compliance with the rules, an investment adviser would have to disclose that the firm was acting in a principal capacity when A) the trade is being executed by an officer or partner of the firm B) purchasing shares directly from advisory clients C) directing securities transactions to an affiliated broker-dealer D) engaging in an agency cross transaction

D) Maintain the current allocation if, while acting in the capacity of trustee, he believes it aligns with the goal of the trust Explanation In almost every trust question, the correct answer will be that the trustee (fiduciary) has to follow the terms of the trust and meet the trust's goals and objectives. U24LO5

What is the proper course of action for the fiduciary of a trust that has a portfolio made up of 10% cash and 90% stock of one company that has recently experienced a 40% market gain? A) Increase the cash position to 25% by taking some of the profits off the table B) Begin diversifying the equity portfolio C) Use the cash to acquire more shares of the stock D) Maintain the current allocation if, while acting in the capacity of trustee, he believes it aligns with the goal of the trust

C) Large-cap Explanation When you see market cap, there are 4 levels tested on the exam: large-cap is those with a market cap in excess of $10 billion; mid-cap is the $2 billion to $10 billion range; small-cap is $300 million to $2 billion; and micro-cap is $50 million to $300 million. This manager may be focusing on "blue chip" stocks, but that is not an investment style. Are large-cap stocks conservative? In many cases, yes, but that is not a management style. It is critical on the exam that you choose the answer best fitting the question. U20LO6

What investment style is employed by a portfolio manager whose list of eligible securities includes only those with a market capitalization in excess of $20 billion? A) Indexing B) Conservative C) Large-cap D) Blue chip

B) Money market fund, intermediate-term government bond fund, large-cap stock index fund Explanation The trustee of a 401(k) would be able to reduce her ERISA fiduciary exposure and meet the safe harbor provisions of 404(c) if the plan offered a broad index fund, a medium term government bond fund, and a cash equivalent fund. It isn't the number of funds that counts; it is the different asset classes available. In general, a municipal bond fund (or municipal bonds themselves) would be an inappropriate investment for a tax-qualified plan. U24LO5

A 401(k) offering which of the following choices would be most likely to be in compliance with Section 404(c) of ERISA? A) Small-cap fund, large-cap stock ETF, money market fund B) Money market fund, intermediate-term government bond fund, large-cap stock index fund C) Long-term bond fund, large-cap stock index fund, foreign equity fund D) Money market fund, intermediate-term municipal bond fund, large-cap stock index fund

C) a C corporation Explanation C corporations pay tax on their earnings; the other business types listed here flow through the income to their owners. The owner's share of income (or loss) is reported to them on the Schedule K-1. A shareholder in a C corporation who receives dividends will have that reported on a Form 1099. U21LO6

A Schedule K-1 would be received by an individual with an ownership interest in all of the following except A) an LLC. B) a partnership. C) a C corporation. D) an S corporation.

A) a tax credit on the investor's U.S. tax return Explanation An investor receives a credit for taxes withheld on investments by countries with which the United States has diplomatic relations; the tax credit directly decreases the investor's American tax liability. U21LO2

A U.S. citizen owns stock in a Canadian company and receives dividends. The Canadian government withholds 15% of the dividends as a tax. As a result, the investor reports A) a tax credit on the investor's U.S. tax return B) a nonrecoverable loss on the investor's U.S. tax return C) a tax credit on the investor's Canadian tax return D) a reduction in the investor's ordinary income

D) Margin Explanation All customers opening margin accounts must receive a risk disclosure document describing the risks associated with trading on margin (e.g., a customer could lose more than the initial investment, or the firm could sell out securities in the account to meet a maintenance call without providing prior notice to the customer). This document must also be provided to customers on an annual basis. U22LO1

A broker-dealer must provide a risk disclosure document to a customer before opening which of the following accounts? A) Joint B) Custodial C) Wrap fee D) Margin

B) a deceased person Explanation Broker-dealers can only open accounts for those who are persons, as defined in the Uniform Securities Act. There are three nonpersons: minors, deceased persons, and those declared mentally incompetent. Remember, the term "person" is very broad and includes political subdivisions such as cities and states. Even though the deceased individual is not a person, that individual's estate is. U18LO1

A broker-dealer would not be able to open an account for A) a city. B) a deceased person C) a trust. D) the estate of a deceased person.

B) supply and demand for the shares Explanation Closed-end investment company shares are traded in the same manner as any other corporate stock. That is, the price received when selling or the price paid when buying, is determined by supply and demand and has no direct relation to the net asset value. If this question was asking about an open-end investment company, the choice would be the next computed NAV, not offering price (that is the price when the investor is buying, not selling). U14LO3

A client owning shares of a closed-end investment company entering an order to liquidate the position would receive a price based on A) the previous net asset value per share. B) supply and demand for the shares. C) the next computed net asset value per share. D) the offering price computed after the order is received.

C) the present value Explanation This is a present value computation where the future value, time period, and earnings rate are known. U10LO1

A client who wishes to have $50,000 available to help fund a 3-year-old child's college education in 15 years estimates that if the portfolio can earn 7%, a deposit of $18,122.30 will be required today. This deposit is referred to as A) the future value B) the internal rate of return C) the present value D) the net present value

D) notice filing Explanation Regardless of where shares of this closed-end investment company trade, like all investment companies registered under the Investment Company Act of 1940, it is a federal covered security. The company is basically exempt from state registration and is only required to follow a procedure known as notice filing. U4LO3

A closed-end investment company is registered under the Investment Company Act of 1940. Its shares trade on the Nasdaq Stock Market. To qualify their shares for sale in the state, they would probably use A) supplementation B) qualification C) coordination D) notice filing

A) increased diversification Explanation As a different subclass of equity investment that is not generally correlated with traditional investments, institutional investors adding hedge funds to their portfolio increase the overall diversification. Hedge funds have higher, not lower, expenses and ERISA compliance is only relevant to qualified retirement plans, not college endowment funds. U14LO6

A college endowment fund might consider investing a portion of its portfolio into hedge funds to obtain the benefit of A) increased diversification. B) lower expenses. C) compliance with ERISA. D) high correlation to traditional investments.

B) LMN Cash Reserves Money Market Fund Explanation These customers are preparing to make a major purchase within the next few months, so they require a highly liquid investment to keep their money safe for a short amount of time. The money market fund best matches this objective. U19LO6

A couple in their early 30s has been married for 4 years, their disposable income is relatively high, and they are planning to buy a condominium. If they need a safe place to invest their down payment for about 6 months, which of the following mutual funds is the most suitable for these customers? A) XYZ Investment-Grade Bond Fund B) LMN Cash Reserves Money Market Fund C) ABC Growth & Income Fund D) ATF Capital Appreciation Fund

A) The spouse would own all the shares Explanation In a JTWROS account, securities pass to the surviving owner. The account does not have to be frozen but can continue to enter orders. U18LO2

A customer and his spouse own shares in the ABC Fund as joint tenants with rights of survivorship. If the customer dies, what happens to the shares in the account? A) The spouse would own all the shares. B) Ownership of the shares must be determined by probate court. C) The account would be frozen until the estate was settled. D) Half the shares would belong to the spouse, and the remaining half would be distributed to the customer's estate.

C) $6,000.00 Explanation Payments into a nonqualified deferred annuity are made with after-tax money; taxes must only be paid on the earnings of $6,000. U15LO5

A customer has invested a total of $10,000 in a nonqualified deferred annuity through a payroll deduction plan offered by the school system where he works. The annuity contract is currently valued at $16,000, and he plans to retire. On what amount will the customer be taxed if he chooses a lump-sum withdrawal? A) $16,000.00 B) He will not owe taxes because the annuity was nonqualified. C) $6,000.00 D) $10,000.00

A) a long hedge Explanation The concern is that the price will go up. Just as with options, when we are concerned that the price of something will go up, we go long that item. With options, it would be a long call; with futures it is simply hedging by going long (buying) the soybean futures. The soybean farmer who would be concerned about a decline in the price would go short soybean futures. U16LO4

A manufacturer of soybean oil is concerned that the price of soybeans will increase over the next 6 months. The best strategy to employ would probably be A) a long hedge. B) a short hedge. C) a trimmed hedge. D) a neutral hedge.

D) a unit investment trust. Explanation Unit investment trusts are registered investment companies with a fixed portfolio. That is, at the time of organization, the portfolio is purchased and, because there is no ongoing management company, there are basically no changes made. U14LO7

A registered investment company whose portfolio consists of equity securities and the portfolio does not change in response to market conditions is probably A) a passively-managed mutual fund. B) a closed-end investment company. C) an ETN. D) a unit investment trust.

D) an intermediate-term, high-grade corporate bond fund Explanation In all of these cases, liquidity should not be a problem because mutual funds have a 7 day redemption requirement. However, interest rate risk increases as the maturities lengthen, so the intermediate-term portfolio offers that benefit, albeit at a slight reduction in income. The high-grade corporate bonds will offer a greater return with slightly more risk than the government bonds. If the question had said the investor wished to minimize risk, then the government bond fund would have been a better selection. U19LO6

A retired person seeking to maximize income with reasonable safety and liquidity should most likely consider investing in A) a long-term government bond fund B) an intermediate-term government bond fund C) a large-cap growth fund D) an intermediate-term, high-grade corporate bond fund

A) Stock high return: +5%; low return: −1%; Standard Deviation: 3.6% Explanation The higher the standard deviation, the higher the volatility and the higher the risk. So, the lower the standard deviation, the lower the volatility and the lower the risk. U10LO5

A senior citizen had the following scenarios presented to him by his IAR. Which one had the lowest volatility? A) Stock high return: +5%; low return: −1%; Standard Deviation: 3.6% B) Stock high return: +18%; low return: −4%; Standard Deviation: 8% C) Stock high return: +12%; low return: −2%; Standard Deviation: 5.5% D) Stock high return: +9%; low return: −2%; Standard Deviation: 4.9%

C) 40%. Explanation 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. U10LO7

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)20%. B)15%. C)40%. D)35%.

D) control over the account passes to the student/beneficiary once withdrawals commence Explanation One of the advantages of QTPs (qualified tuition ​programs, better known as Section 529 plans) is that the owner-contributor ​is always in control of the program. Without a change in beneficiary, plan "rollovers" are limited to once per 12-month period. U24LO6

All of the following statements concerning qualified tuition programs for educational funding are correct EXCEPT A) unless there is a change in beneficiary, assets in the QTP may be moved from the plan of one state to the plan of another as frequently as once per 12 months B) prepaid tuition plans are plans where prepayment of college tuition is allowed at current prices for enrollment in the future C) a college savings plan is a type of QTP where the owner of the account contributes cash to the account so that the contributions can grow tax deferred D) control over the account passes to the student/beneficiary once withdrawals commence

D) it may redeem its own shares Explanation A closed-end investment company does not redeem its own shares. The term "mutual fund" refers to an open-end management investment company that issues redeemable shares. Although there is a category of closed-end funds that do redeem their shares, (interval funds), those do not trade in the secondary markets like the NYSE. U14LO2

All of the following statements regarding a closed-end investment company whose shares are listed on the NYSE are true except A) it differs from a mutual fund B) it sells at the market price based on supply and demand C) it is a type of management company D) it may redeem its own shares

D) better than anticipated results in the separate account could lead to a reduction in annual premium Explanation Scheduled (fixed) premium variable life premiums are fixed. It is universal life that has flexible premiums. U15LO7

All of the following statements regarding scheduled premium variable life insurance are correct EXCEPT A) the policyowner has the right to change the selection of subaccounts B) once selected, the policyowner may change payment modes C) premiums are determined based on age and sex of the insured D) better than anticipated results in the separate account could lead to a reduction in annual premium

D) educational background Explanation A customer's educational background is not required to open a new account. In the case of an account opened in the name of a business, the business address and tax identification number are required. U18LO2

All the following information must be obtained from new individual customers EXCEPT A) Social Security number B) physical address C) date of birth D) educational background

C) the information in the summary plan document specified by the Department of Labor Explanation Under the rules of the Department of Labor (DOL), one of the most important documents that participants are entitled to receive automatically when becoming a participant of an ERISA-covered retirement plan, is a summary of the plan, called the Summary Plan Description or SPD. The plan administrator is legally obligated to provide to participants, free of charge, the SPD. The Summary Plan Description is an important document that tells participants what the plan provides and how it operates. It provides information on when an employee can begin to participate in the plan, how service and benefits are calculated, when benefits become vested, when and in what form benefits are paid, and how to file a claim for benefits. However, it has nothing to do with the investment policies that will be followed by the plan's advisers. That information, such as what is shown in the other choices, is found in the IPS. U24LO5

Although there is no specific rule requiring it, most qualified plans have an investment policy statement. For those plans that do have an IPS, it would include all of the following information EXCEPT A) how the plan measures investment performance B) investment parameters to be followed by the portfolio managers C) the information in the summary plan document specified by the Department of Labor D) the schedule for future needs of the plan

B) II, III, and IV Explanation Unlike C corporations, there is a limit placed on the number of shareholders in an S corporation. At the time of this printing, that maximum is 100, none of whom may be a nonresident alien (C corps have no residency restrictions). The primary practical difference is the fact that S corporation earnings (and losses) flow through to the shareholders, whereas C corporation earnings are only received by shareholders when dividends are paid. U18LO3

Among the differences between C corporations and S corporations is the liability assumed by the shareholders the number of allowable shareholders the tax treatment of the corporation's earnings residency requirements of shareholders A) I, II, III, and IV B) II, III, and IV C) II and III D) I and IV

D) employees who leave the company prior to retirement would not receive benefits Explanation Deferred compensation plans are usually structured so that if the employee leaves prior to retirement or is terminated with cause, benefits are forfeited. These plans are discriminatory and there is no current tax saving, hence the term "deferred." As nonqualified plans, they do not have to comply with ERISA. U24LO3

Among the reasons why a corporation might choose to utilize a deferred compensation plan for retirement planning would be A) compliance with ERISA B) the plans are nondiscriminatory C) current tax savings on money contributed to fund the plan D) employees who leave the company prior to retirement would not receive benefits

A) because he failed to determine suitability for his clients and the reasonableness of the recommendations Explanation 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 to each client's individual financial situation or investment objectives; the same security cannot be suitable for every client. This violation is known as blanket recommendation. U7LO4

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 he failed to determine suitability for his clients and the reasonableness of the recommendations B) as long as he discloses the source of the recommendation C) because it tends to induce excessive trading in the security D) because the other agent's recommendations are confidential

A) should pack her bags for the trip; she earned it Explanation The annuity recommended by the agent is offering an incentive. The agent is clearly disclosing that fact to the client and, if the client goes ahead and makes the purchase, it is with full knowledge of the potential conflict of interest. The question states that the agent considers this annuity, along with others, to be suitable. U6LO1

An agent is discussing an equity index annuity purchase with a client. The agent explains that there are several that she feels are equally suitable for the client, but one of the companies is offering a trip for 2 to Las Vegas for reaching certain sales goals. She continues by stating that this sale will put her over the goal and win her the trip. If the client purchases that annuity, the agent A) should pack her bags for the trip; she earned it B) should only sell what is suitable for the client based on all available information C) will probably be disciplined for failure to disclose the potential conflict of interest D) should pack her bags and leave the firm before the compliance department learns of her actions

B) the dividend discount model Explanation There are two widely accepted forms of common stock price projection using dividends—the dividend discount model and the dividend growth model. U12LO6

An analytical tool used to project the current value of a common stock using projected future dividends is A) the price-to-earnings ratio B) the dividend discount model C) the dividend payout ratio D) the future value computation

D) Discretionary Explanation If the agent has the ability to make the decision with respect to the specific security, even though the client specified the action (buy) and the quantity ($20,000), discretionary authorization is required. U7LO2

An agent receives an order from a client to purchase $20,000 worth of stock in whatever company looks good. In what type of account could the agent accept this type of order? A) Custodial account managed by an administrator for the client's deceased cousin B) Margin C) Cash D) Discretionary

B) 30 Explanation The right of rescission under the Uniform Securities Act allows the customer 30 days to respond to a rescission letter from a broker-dealer offering to buy back securities sold illegally. If the customer does not accept or reject the offer, the customer waives his right to bring court action against the adviser for the improper sale. U5LO3

An agent unintentionally sells nonexempt securities that have not been registered. Under the Uniform Securities Act, the broker-dealer may write a letter and offer to buy back the security plus interest, minus any income received. The client gives up the right against the firm to bring action in court if he does not respond within how many days of receipt of the letter? A) 20 B) 30 C) 60 D) 15

D) 15.20% Explanation The probable return is computed by taking the probabilities and adding them together. It looks like this: 40% x 10% = 4% 40% x 12.5% = 5% 20% x 31% = 6.2% all of which total 15.2% probable return. U23LO2

An analyst estimates that a stock has a 40% chance of earning 10%, a 40% chance of earning 12.5%, and a 20% chance of earning 31%. What is the probable return of this stock? A) 7.58% B) 13.00% C) 14.17% D) 15.20%

A) when the client also maintains an account at an affiliated broker-dealer Explanation The adviser may disclose client information with the client's consent, the consent of a joint account holder, or if the disclosure is required by law. Having an account at an affiliated broker-dealer is irrelevant. It is unethical conduct for an investment adviser to disclose the identity, business affairs, or investments of a client to any third party. The adviser has a fiduciary responsibility to respect the confidential nature of the relationship. U7LO5

An investment adviser may release confidential information about a client in all of the following instances EXCEPT A) when the client also maintains an account at an affiliated broker-dealer B) when the law requires such release C) with the client's consent D) with the consent of the client's spouse who is a signatory to the advisory contract

D) Decline the client, recognizing that you cannot effectively determine suitability in the absence of financial information Explanation An investment adviser cannot perform effectively for a client who refuses to provide information necessary for determining the suitability of investments or a portfolio. Unlike the broker-dealer, who may act merely as order filler, the investment adviser has a fiduciary responsibility and is obligated to determine suitability. U7LO4

An investment adviser new to the business is engaged by an elderly client who, on the grounds of privacy, refuses to disclose his annual income or net worth. The client merely asks the adviser to establish and manage a $50,000 portfolio. If the client brings a cashier's check for $50,000 to the initial meeting, which choice below reflects the best action on the part of the adviser? A) Accept the client but acknowledge in writing the client's refusal to provide financial information B) Accept the client but only allocate his funds to money market type securities C) Decline the client because he is difficult to work with D) Decline the client, recognizing that you cannot effectively determine suitability in the absence of financial information

B) risk Explanation Risk is the key consideration in an IRA or other retirement plan. These accounts seek to preserve capital first and then to achieve a reasonable rate of return. U24LO5

An investment adviser representative recommending investments for an IRA should give primary consideration to A) liquidity B) risk C) maximum current income D) the beneficiary's tax status

D) a partnership with 2 partners and adds five partners Explanation If an advisory firm is formed as a partnership and there is a change in the majority of partners, this is considered to be an involuntary assignment to the new partnership. In this case, client approval is required. U6LO4

An investment advisory contract is considered assigned if an adviser formed as A) a partnership with 5 partners and adds 2 partners B) a corporation with 2 officers and adds 5 officers C) a corporation with 5 officers and adds 2 officers D) a partnership with 2 partners and adds five partners

C) the fund shares will increase in value Explanation A reverse, or inverse, fund will move in the opposite direction of the underlying index. If it were leveraged, then it could move at a rate of 2x or 3x, but nothing in the question mentioned leverage. U17LO3

An investor owns a reverse ETF. If the underlying index should decrease in value, A) the fund shares will increase by a factor of 2 B) the fund shares will also decrease in value C) the fund shares will increase in value D) there is no correlation between the fund and the value of the index

C) 12.33%. Explanation Total return combines income and gains. In this question, the total income for the two-year holding period is $440 ($.55 per quarter = $2.20 per year x 100 shares). The sale is at $63 which is a $3 per share gain. That makes the total return $440 + $300 which equals $740. Dividing that by the original $6,000 cost results in a total return of 12.33%. U23LO2

An investor purchases 100 shares of Shilaf Baby Products, Inc. (SBPI) at $60 per share. SBPI pays quarterly dividends of $.55. One year after the purchase, SBPI is at $66 per share, and after the second year, its market price is $63 per share. If the investor were to close out the position at this time, the total return would be A) 8.67%. B) 6.83%. C) 12.33%. D) 17.33%.

A) $178 Explanation A premium of 85 cents per share means each contract has a cost of $85. There are two of them making that $170. Adding the $8 commission brings the total to $178. U16LO5

An investor purchases two PMJ Dec 16 calls at $.85. If the commission charge is $8, the total cost is A) $178. B) $328. C) $93. D) $188.

A) Represent mature, well-established companies Explanation Micro-cap stocks generally represent younger, less-established companies than large-cap stocks. As a result, micro-cap stocks sometimes have a great potential for growth. At the same time, though, they may be subject to greater business risk than stocks in more mature companies. In addition, their shares are often thinly traded, so they can have fairly low liquidity. U20LO6

As a rule, which of the following is NOT a characteristic of micro-cap stocks? A) Represent mature, well-established companies B) Have lower liquidity because they are thinly traded C) Are typically subject to higher business risk than large-cap stocks D) Sometimes have great potential for growth

B) S&P 500 Explanation The index most commonly used to analyze the beta of an individual security or portfolio is the S&P 500. Companies (portfolios) with a beta of 1.0 would be expected to move in tandem with the market, while companies with a beta greater than 1.0 would be more volatile than the market as a whole. Companies with a beta less than 1.0 should show a rate of change less than that of the market as a whole. U10LO4

Beta is most frequently measured against which of the following? A) Nasdaq Composite Index B) S&P 500 C) Dow Jones Industrial Average D) S&P 100

C) I and III Explanation Conviction of a principal officer of a broker-dealer could be a cause for suspension or revocation of that broker-dealer's registration. Insolvency is another cause, but the USA does not have any requirements relating to the number of employees of a broker-dealer. U5LO2

Causes listed in the Uniform Securities Act that could lead to the revocation of the registration of a broker-dealer would include the conviction of a principal officer for a securities-related crime the firm had no employees the firm was unable to meet its obligations as they came due A) I, II, and III B) I and II C) I and III D) II and III

A) A trust having 4 minor children as beneficiaries with total trust assets of $5 million Explanation Regardless of the assets involved, a trust account, unless one for an employee benefit plan with at least $1 million in assets, is considered a retail rather than institutional client. Once the investment adviser goes over the de minimis limit of 5, registration with the state is required. Regardless of the assets involved, institutional clients, such as insurance companies, banks and government instrumentalities, do not count toward the de minimis limit. U1LO5

Create A Large Legacy (CALL), Inc., is a state-registered investment adviser with offices in States X, Y, and Z. CALL currently does not have a place of business in State W, but does have 5 retail clients who are residents there. Opening an account for which of the following prospective clients domiciled in State W would now require CALL to register in State W? A) A trust having 4 minor children as beneficiaries with total trust assets of $5 million B) An insurance company account with an opening balance of $750,000 C) A county in State W desiring advice on investment over $250,000 of surplus funds D) A small community bank depositing $500,000

C) II and III Explanation Interest rates in general have risen since the issuance of the 4% bonds, so the bond's price will be discounted to produce a higher current yield on the bonds. Remember that as interest rates go up, the price of outstanding debt securities goes down. U13LO10

Currently, a company issues 5% Aaa/AAA debentures at par. Two years ago, the corporation issued 4% AAA-rated debentures at par. Which of the following statements regarding the outstanding 4% issue are TRUE? The dollar price per bond will be higher than par. The dollar price per bond will be lower than par. The current yield on the issue will be higher than the coupon. The current yield on the issue will be lower than the coupon. A) II and IV B) I and III C) II and III D) I and IV

C) Purchase put options on LMN stock Explanation The best way to protect a long stock position against a potential substantial loss is to purchase put options on that stock. This is generally referred to as a protective put or portfolio insurance. Assuming the strike price is the same as the current market, the holding is fully protected and the investor's loss on the option is limited to the amount of the premium paid for the puts. Writing calls on LMN also offers protection against loss, but that protection is limited to the premium received on the calls. This question refers to substantial loss, and the puts are the only way to protect against that. Once the client decides what she wants to do with the stock, she may decide to diversify into an index fund, but that does not answer the immediate need expressed in the question. U20LO12

Due to an inheritance, one of your clients now owns a large position in LMN stock. She is concerned that the stock may decline in the coming months while she is deciding what to do with the investment. What type of investment strategy could she employ to protect the stock from substantial downside risk? A)Purchase call options on LMN stock B)Diversify into an index fund C)Purchase put options on LMN stock D)Write call options on LMN stock

B) A margin account in the name of Mary Beth Simmons Explanation The term covered account does not apply to institutional customers, such as banks, pension funds, and investment companies. U7LO7

For purposes of safeguarding customer information, which of the following would be considered a covered account? A) An account in the name of the State of X employee pension fund B) A margin account in the name of Mary Beth Simmons C) A margin account in the name of the Interglobal Hedge Fund D) An account in the name of the Wells Morgan Bank

C) Sales-to-earnings ratio Explanation Of the four choices given, the sales-to-earnings ratio is the only one not discussed in the License Exam Manual. Why not? Because we know there will always be a question or two on the real exam that was not covered in our material. It is important that students use good test-taking skills to correctly answer those questions. It would seem logical that a question about profitability would relate to earnings. That would reduce the choices to two from four. The price-to-earnings (P/E) ratio reveals the relationship between the market price of the company's stock and its earnings, but it doesn't tell us anything about the degree of profitability of the enterprise. If we know that the P/E ratio compares the price to the earnings, then it makes sense that the sales-to-earnings ratio compares the net sales of the business with its earnings. Companies with a higher percentage of earnings from each dollar of sales are more profitable. For example, Company A and Company B both reported $100 million in net sales for the year. The net income (earnings) of Company A was $20 million and Company B was $8 million. We can see that each dollar of sales generated $0.20 of profit for Company A and only $0.08 of profit for Company B. Or, we could say that it takes $5 of Company A sales to generate $1 of profit ($100 ÷ 20) while it takes $12.50 of Company B sales ($100 ÷ 8) to earn that same $1 of profit. U10LO7

Fundamental analysts give significant credence to financial ratios. Which of the following tends to give an indication of the profitability of the enterprise? A) Price-to-earnings ratio B) Current ratio C) Sales-to-earnings ratio D) Debt-to-equity ratio

C) 2 Explanation Any question asking about the risk-adjusted return is going to be referring to the Sharpe ratio. This is shown as a simple number and is calculated by subtracting the risk-free rate (91-day T-bill) from the actual return and dividing that remainder by the standard deviation. In this example, 14% − 4% = 10% divided by 5 = 2. U23LO2

Given the following information, calculate the risk-adjusted return. 91-day T-bill rate: 4% Actual return: 14% Beta = 1.4 CPI: 3% Standard deviation: 5.0 A) 5 B) 10 C) 2 D) 11

A) may be transferred into another Coverdell ESA for Harry's 25 year-old cousin, Julia Explanation Funds that are not used for qualified education expenses may be withdrawn, but the earnings are subject to income tax plus a 10% tax penalty. To avoid this, the IRS permits the funds to be transferred into another Coverdell ESA for someone related to the first beneficiary (Harry), who is under 30 years of age. In the case of the Section 529 plan, the transferee has no age limitations. Related parties include immediate family members of the original beneficiary, parents, cousins, aunts and uncles, and even in-laws. If funds remain unused in the Coverdell ESA, they must be distributed to the named beneficiary on the account by 30 days after the child's 30th birthday, not the 21st. By statute, there is no age limit for the Section 529 plan, but some states set a time limit for distribution of unused funds. In either case, there would be the tax and penalty. U24LO6

Harry Thomas has turned 19 and decided that he is going to join the Marines and postpone going to college. If Harry decides to stay in the military, the unused funds contributed to his Coverdell ESA A) may be transferred into another Coverdell ESA for Harry's 25 year-old cousin, Julia B) must remain in the plan until Harry's 30th birthday C) must be returned to the donor with tax plus a 10% penalty on the earnings D) must be distributed to Harry no later than 30 days after his 21st birthday

B) identical amounts of contributions are allowed Explanation IRAs and Keogh plans do not have identical contribution amounts; IRAs allow a maximum of $6,000 per individual or $12,000 per couple per year (with a catch-up of $1,000 for each individual aged 50 or older), whereas Keogh plans allow substantially more. Both IRAs and Keoghs allow tax-deferred growth until the individual withdraws the funds. IRAs and Keoghs have premature distribution penalties before age 59½. Once the participant reaches 70½, required minimum distributions must be made or a 50% tax penalty will be assessed. U24LO2

IRAs and Keogh plans are similar in the following ways EXCEPT A) deferral of taxes B) identical amounts of contributions are allowed C) there is a 50% tax penalty for insufficient distributions D) distributions without penalty can begin as early as age 59½

B) January 29, 2018 Explanation The annual updating amendment to Form ADV must be filed within 90 days of the adviser's fiscal-year end. U1LO5

If a federal covered adviser's fiscal year ends on October 31, 2017, it must file its annual updating amendment to its Form ADV no later than A) December 31, 2017 B) January 29, 2018 C) February 28, 2018 D) March 30, 2018

D) Interest on a private purpose municipal bond Explanation The interest received on private purpose municipal bonds is considered a tax preference item for the AMT. The interest on GO bonds and income received on corporate securities are never considered preference items under the AMT. 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. U21LO4

If a high-income taxpayer is subject to AMT, which of the following preference items must be added to adjusted gross income to calculate his tax liability? A) Interest on a general obligation municipal bond B) Dividends paid on preferred stock C) Distributions from a corporate bond mutual fund D) Interest on a private purpose municipal bond

D) −20.5 and +37.9% Explanation A security with a normal distribution has a 95% probability of falling within 2 standard deviations of its anticipated return. In this case, that would be −20.5% and +37.9%, which is computed by calculating return movements of 29.2% (14.6 × 2) in either direction. U10LO5

If a security has an anticipated return of 8.7% and a standard deviation of 14.6%, you would expect the returns to have a 95% probability (assuming a normal distribution) of falling between A) 0 and 37.9% B) −5.9 and +23.3% C) 8.7 and 23.3% D) −20.5 and +37.9%

C) Prices increase on heavy volume Explanation Technicians watch volume changes along with price movements as an indicator of changes in supply and demand. A price increase on heavy volume relative to the stock's normal trading volume is interpreted as an indication of bullish activity. U12LO6

If a technician believed in the importance of volume, which of the following would indicate bullish sentiment? A)Prices increase on light volume. B)Prices decrease on light volume. C)Prices increase on heavy volume. D)Prices decrease on heavy volume.

C) permitted if the secretary is also registered as an agent and the appropriate supervisory person agrees to the arrangement Explanation Just as with any other individual, splitting commissions can only be done with those having the proper registration, in this case, that of an agent. Because compensation is determined and processed by the employing broker-dealer, any splitting would need the approval of the appropriate supervisor. U7LO4

If an agent feels that his secretary is underpaid and decides to split his commissions on an 80%/20% basis, this practice is A) a violation in certain states B) permitted if the secretary is also registered as an agent C) permitted if the secretary is also registered as an agent and the appropriate supervisory person agrees to the arrangement D) a violation under all circumstances

D) null and void Explanation The USA explicitly states that no provision of the act may be waived, whether the client consents to the waiver or not. U6LO4

If an agent has secured a signed statement from a customer that waives the customer's right to sue for a transaction in violation of the USA, the agreement is A) legal but only in a criminal case B) legal but only in a civil case C) legal D) null and void

D) recommend the client consult with a qualified attorney Explanation Presuming the adviser is not a licensed attorney, he should recommend the client see a qualified attorney. However, it is ethical to discuss the nature of a charitable trust with the client. U18LO4

If an investment adviser's client wishes to save current income taxes by placing certain investments in a charitable trust, ethically, the investment adviser should A) refuse to discuss the trust with the client because the adviser is not an attorney B) help the client draft the appropriate documents following a discussion of the advantages of the arrangement C) urge the client to consult with an attorney who pays a referral fee to the investment adviser D) recommend the client consult with a qualified attorney

B) a perfectly acceptable market arbitrage Explanation 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. U7LO5

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) a perfectly acceptable market arbitrage C) a violation under both the Uniform Securities Act and federal law D) an offense punishable by three years in the county jail

C) find the arithmetic mean Explanation Unless something else is specified, whenever the mean return is referenced, it is always the arithmetic mean (the simple average). U10LO2

If an investor wished to compute the mean return of her portfolio, she is going to A) compute using straight-line averaging B) compute the standard deviation C) find the arithmetic mean D) find the median

A) a minimum cash value Explanation In a variable life insurance policy, a minimum death benefit is guaranteed, but no cash value is guaranteed. There is a contract exchange privilege during the first 24 months allowing the conversion of the variable policy to a comparable form of permanent insurance and the 75% cash value loan minimum applies after the 3rd year of coverage. U15LO7

In a scheduled premium variable life insurance policy, all of the following are guaranteed EXCEPT A) a minimum cash value B) a minimum death benefit C) the ability to borrow at least 75% of the cash value after the policy has been in force at least 3 years D) the right to exchange the policy for a permanent form of insurance, regardless of health, within the first 24 months

B) the beta of the security Explanation The real rate of return is the actual return less the inflation rate as measured by the CPI. U23LO2

In order to compute the real rate of return for a security, it would be necessary to know all the following EXCEPT A) the purchase price B) the beta of the security C) the CPI D) the annual dividend

A) the stock's beta Explanation The real rate of return on a stock is another way of asking for the inflation-adjusted return. That means the total return, which includes dividends plus any capital gain (or less any capital loss) minus the inflation rate as determined by the CPI. Beta has nothing to do with computing rate of return. U23LO2

In order to compute the real rate of return on a specific stock, all of the following information is required EXCEPT A) the stock's beta. B) capital gain or loss. C) the change to the CPI. D) any dividends paid.

B) they must be employees of the broker-dealer Explanation Unregistered personnel may be paid a bonus as long as it is not directly related to any specific sales activity. U3LO4

It has been a great year at Capital Funding, Inc., an SEC-registered broker-dealer that is also registered in 22 states. The company decides to share its good fortune with employees by paying a year-end bonus equal to 31% of annual salary. In order for clerical personnel to receive this bonus, A) they must be licensed as investment adviser representatives B) they must be employees of the broker-dealer C) they must be licensed as agents D) the bonus must be sales related

C) unethical because Treasury bills may not be appropriate for all the adviser's clients Explanation It is unlikely that Treasury bills, however conservative, are suitable for all clients. An adviser must always keep in mind each client's personal investment needs, risk tolerance, and investment objectives when trading the clients' securities. Blanket recommendations are not ethical. U7LO4

In response to high stock market volatility, if an investment adviser has all clients immediately sell their equity holdings and reallocate the proceeds to Treasury bills, under the Uniform Securities Act, this is A) unethical because the adviser may receive commissions when his customers sell their stock B) ethical because the adviser is responsive to current market conditions C) unethical because Treasury bills may not be appropriate for all the adviser's clients D) ethical because the adviser is recommending a lower-risk investment

C) I and III Explanation As unsecured obligations, their safety is only as good as the financial strength of the issuer, and because these tend to be one-of-a-kind products, they do not have liquidity. A particular hazard of investing in these is that there is a low level of pricing transparency; another concern is that the returns are generally not fully realized until the maturity date. U17LO3

In search of higher returns, many investors have turned to structured products. Your clients need to be aware that these are complex instruments and have which of the following characteristics? Credit or default risk because they are unsecured obligations of the issuing institution High price transparency Limited or no liquidity High initial returns that diminish over time A) II and IV B) I and IV C) I and III D) II and III

D) an investment of money in a common enterprise with the expectation of profit from the managerial efforts of others Explanation In the Howey decision, the U.S. Supreme Court held that a security must represent an investment of money in a common enterprise with the expectation of profit from the managerial efforts of others. U4LO1

In the Howey decision, the U.S. Supreme Court held that in order for an investment contract to be considered a security, it must represent A) debt in a publicly traded corporation whose managers are engaged in commercial activity B) personal interest in a business C) an investment of money in a common enterprise with the expectation of profit from the efforts of the investor D) an investment of money in a common enterprise with the expectation of profit from the managerial efforts of others

B) leveraged ETFs Explanation ETFs, whether leveraged or not, are investment companies and are not included in the definition of derivative. U16LO4

Included in the definition of derivative would be all of the following EXCEPT A) futures B) leveraged ETFs C) rights D) options

D) disclose the tax consequences of a recommended investment Explanation Whenever a recommendation is made to an advisory client, it is incumbent on the IA or IAR to make disclosure of the tax effects of that investment to the client. IAs are not to provide tax advice unless specifically qualified to do so and may recommend legal advisers who are or are not affiliated with the firm. There is no reason why an IA cannot recommend an affiliated broker-dealer, as long as disclosure of the relationship is made. U7LO1

Included in the fiduciary relationship between an investment adviser and client is the responsibility to A) provide tax advice as an integral part of the client relationship B) recommend only nonaffiliated broker-dealers for execution of portfolio transactions C) recommend only nonaffiliated attorneys to clients seeking legal advice D) disclose the tax consequences of a recommended investment

D) as a percentage of its market value Explanation Current yield for any security is always computed on the basis of the current market value. U13LO10

The current yield of a callable bond selling at a premium is calculated A) as a percentage of its par value B) as a percentage of its call price C) to its maturity date D) as a percentage of its market value

A) A former corporate employee who decides to become self-employed may not rollover any distributions from a qualified corporate plan into a rollover IRA if he has created a Keogh Plan Explanation Rollovers are permitted into an IRA regardless of any plans maintained. Tax-deductible contributions are not allowed unless there is potentially taxable income against which to deduct. Anyone with earned income may have an IRA, regardless of participation in another qualified plan, and the Keogh Plan contribution limits are much higher than those for an IRA. U24LO2

Keogh Plans are qualified plans intended for those with self-employment income and owner-employees of unincorporated businesses or professional practices filing a Form 1040 Schedule C with the IRS. Which of the following statements relating to Keogh Plans is NOT true? A) A former corporate employee who decides to become self-employed may not rollover any distributions from a qualified corporate plan into a rollover IRA if he has created a Keogh Plan. B) A participant in a Keogh Plan may also maintain an IRA. C) The maximum allowable contribution to a Keogh Plan is substantially higher than that for an IRA. D) Owner-employee businesses and professional practices must show a gross profit in order to qualify for a tax-deductible contribution.

B) He will offset $1,000 ordinary income this year Explanation Only $3,000 of last year's loss can be deducted against that year's income. Therefore, the losses carried forward from the previous year are the remaining $2,000. These losses are netted against the gain of $1,000 for a net loss of $1,000. That loss can be used to offset $1,000 of ordinary income. There are now no longer any losses to carry forward. U21LO3

Last year, an investor had a $5,000 loss after netting all realized capital gains and losses. This year the investor has a $1,000 capital gain. After netting his gains and losses, what will be his tax situation this year? A) There will be no tax consequences. B) He will offset $1,000 ordinary income this year. C) He will have a $1,000 gain. D) He will have a $1,000 loss to carry over to the next year.

B) States A and D Explanation In the Investment Advisers Act of 1940, it states that "no law of any State requiring the registration, licensing, or qualification as an investment adviser or supervised person of an investment adviser shall apply to any person that is registered under section 203 as an investment adviser, or that is a supervised person of such person, except that a State may license, register, or otherwise qualify any investment adviser representative who has a place of business located within that State." Therefore, when employed by a covered adviser, the only time that state registration is required is when the individual functioning as an IAR has a place of business in the state. Had this been an IAR with a state-registered adviser, registration in all of the states would have been required (the de minimis would not cover State D because there is a place of business there). U2LO3

Long Range Planning (LRP) is a covered investment adviser doing business in all 50 states. Fred Fergus is an IAR with LRP and splits his time between an office in State A and State D. Fred has retail clients as follows: 16 clients in State A 12 clients in State B 6 clients in State C 4 clients in State D Fred would have to register as an IAR in A) States A and C B) States A and D C) States A, B, and C D) States B and C

D) Portfolio 2 Explanation Based on their risk tolerance and time horizon, Portfolio 2 would be the best choice. This portfolio consists of 80% stocks and 20% bonds with 10% allocated to international stocks. Portfolio 1 consists of 60% high-yield bonds, which is not appropriate for their goal. Portfolio 3 is too conservative with 40% of the allocation in U.S. government securities and money market securities. Portfolio 4 is too heavily weighted toward bonds. U19LO6

Lucy and Rick, ages 52 and 47, respectively, are concerned that they will not have enough money to retire comfortably at Lucy's age 70. Lucy was recently promoted to district manager of an inventory control company. Along with the promotion, they have an additional $400 per month they would like to invest into a new retirement investment portfolio. They consider themselves aggressive risk takers with a long-term time horizon. Based on their profile, which of the following portfolios should the firm recommend to Lucy and Rick for investment? Portfolio 1—20% Balanced Fund, 60% High-Yield Bond Fund, 10% Emerging Markets Fund, 10% International Stock Fund Portfolio 2—70% S&P 500 Index Fund, 20% Corporate Bond Fund, 10% International Stock Fund Portfolio 3—60% Russell 2000 Index Fund, 30% U.S. Government Securities Fund, 10% Money Market Fund Portfolio 4—20% S&P 500 Index Fund, 40% Corporate Bond Fund, 40% Municipal Bond Fund A) Portfolio 4 B) Portfolio 1 C) Portfolio 3 D) Portfolio 2

A) the SEC Explanation With $175 million in AUM, MidWest is a federal covered adviser. As such, all financial requirements, bonding, recordkeeping, and so forth requirements are those of the SEC, not any of the states. U1LO5

MidWest Advisory Services has $175 million in assets under management and has offices in 10 Midwest states. Regarding recordkeeping requirements, MidWest must meet those of A) the SEC B) the state with the most stringent financial requirements C) the state in which its principal office is located D) each state in which it has a place of business

D) 2.00%. Explanation 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. U10LO7

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) 1.25%. B) 0.50%. C) 20.00%. D) 2.00%.

B) are rarely exercised while forwards generally are Explanation In the vast majority of the cases, futures contracts are closed out prior to expiration. That is one reason they are more popular with speculators than forwards. Because forwards are generally delivered, they are the preferred tool by producers and it is futures which are standardized and CFTC regulates, not forwards. U16LO4

Nonsecurities derivatives include futures and forwards. Among the differences between futures and forwards is that futures contracts A) are preferred to forwards by producers. B) are rarely exercised while forwards generally are. C) are not regulated by the CFTC while forwards are. D) are nonstandardized while forwards are.

D) to bring the portfolio mix back to the original asset allocation percentages Explanation The concept of rebalancing a portfolio is just that—bring it back in balance to the original asset allocation percentages. If we were 70% equity, 30% debt, and the equities now were 80% of the portfolio, we would sell enough equity and buy enough debt to get back to the 70/30 relationship. U20LO4

One feature employed by portfolio managers using a passive style is rebalancing. The purpose of this technique is A) making sure the client's account is profitable B) to ensure that the client's account is being properly reviewed C) to follow a constant dollar plan D) to bring the portfolio mix back to the original asset allocation percentages

B) I and II Explanation Because there is no standardization for forward contracts, they are considered to be illiquid. Because there is no entity backing up the contract (as the OCC does with listed options), a seller must always be concerned about the ability of the buyer to pay. Although the market price probably will change, the delivery price is always agreed upon at the time of the contract, as is the method, location, and time of delivery. U16LO5

One of your advisory clients indicates that he would like to sell forward contracts in soybeans. It would be wise to warn the client that he will be facing the following risks: Liquidity Creditworthiness of the buyer Lack of assurance that the delivery price will remain stable The location for the delivery may change A) I and IV B) I and II C) II and III D) III and IV

B) Sell stop Explanation 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. U22LO6

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) Sell limit B) Sell stop C) Buy limit D) Buy stop

B) Withdrawals prior to age 59½ may be subject to the 10% penalty Explanation The simple explanation is QDROs only apply to qualified plans and, therefore, if ex-spouse withdraws funds prior to age 59½ (unless due to one of the allowable exceptions), the 10% tax penalty applies. When there is a divorce and an IRA is split, the ex-spouse now has an IRA in his or her name with no mention of the previous owner. There is technically no distribution so there is nothing to rollover. U24LO4

One of your clients has just completed a divorce. Under the terms of a QDRO, half of the client's traditional IRA now belongs to the ex-spouse. Which of the following statements is correct? A) The name of the former spouse must appear on the ex-spouse's IRA. B) Withdrawals prior to age 59½ may be subject to the 10% penalty. C) The ex-spouse has 60 days to rollover the distribution. D) The ex-spouse will be required to take RMDs based on the life expectancy of the former spouse.

B) Bond with the 10-year call Explanation As interest rates fall, the investor benefits from having the highest interest rate for as long as possible. The price change will not be the same for both bonds. The greater the call protection, the more likely a bond will appreciate if rates fall. That additional call protection in essence lengthens the duration of the bond and, as we know, the longer the duration, the greater sensitivity to interest rate changes. In this case, with declining rates, bond prices will rise. U13LO11

One of your clients owns 2 different 6% corporate bonds maturing in 15 years. The first bond is callable in 5 years, while the second has 10 years of call protection. If interest rates begin to fall, which bond is likely to show a greater change in price? A) Bond with the 5-year call B) Bond with the 10-year call C) Both will decrease by the same amount D) Both will increase by the same amount

B) I only Explanation Under Section 202(a) of the Uniform Securities Act, registration of an investment adviser 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. This only applies to those individuals who are listed on the firm's Form ADV Part 1, so we're limited to officers, partners, directors, or anyone else doing that type of job, regardless of what this IA has chosen to use as the title. U2LO3

Registration of an investment adviser automatically confers registration on officers, partners, and directors of the firm who are functioning as IARs any employee who is functioning as an IAR clerical employees handling back-office operations an employee who will be soliciting clients for the adviser A) I, II, III, and IV B) I only C) I and III D) I, II, and III

D) Client's Facebook page Explanation There are a number of ways to gather information about your client's financial resources, but it is highly unlikely that a social media page would be one of them. U19LO1

Rendering investment advice requires knowing certain information about your client. Which of these would be the least reliable source of that information? A) Your firm's confidential planning questionnaire B) Client's income tax returns C) Face-to-face meeting with the client D) Client's Facebook page

A) I, II, III, and IV Explanation All of these are included in the filing requirements, even the prospectus. U4LO3

Section 403 of the USA Act states that the Administrator may, by rule or order, require the filing of any sales and advertising literature addressed or intended for distribution to prospective investors, including clients or prospective clients of an investment adviser unless the security or transaction is exempted by Section 402 or is a federal covered security. This would include any circulars form letters investment adviser's website prospectus A) I, II, III, and IV B) I and II C) III and IV D) I, II, and III

C) because Sharon has no place of business in State X, she does not have to register as an IAR in State X. Explanation The key is that Sharon is an IAR for a covered IA. When that is the case, the IAR is only required to register in states where she (the IAR) maintains a place of business. Sharon does not have a place of business in State X so no registration is required there. The fact that the client is a bank is of no relevance nor is the location of her employer's principal office. U2LO2

Sharon Smith is an investment adviser representative with Highwater Advisers, a federal covered investment adviser with its principal office in State X. Sharon provides advisory services to a bank located in State X, a state in which she has no place of business. Under current regulations, A) because Highwater's principal office is in State X, Sharon would be required to register as an IAR in State X. B) because Sharon's client is a bank, she does not have to register as an IAR in State X. C) because Sharon has no place of business in State X, she does not have to register as an IAR in State X. D) because Sharon has a client in State X, registration as an IAR would be required in State X.

D) universal life insurance policies issued by insurance companies authorized to do business in the state. Explanation Universal life insurance policies are not exempt securities for one simple reason—they are not securities. Each of the other choices is included in the USA's listing of exempt securities. U4LO3

The Uniform Securities Act lists a number of securities that are exempt from both the registration and the advertising filing requirement of the Act. Included in that list would be all of the following except A) common stock issued by the Bailey Brothers Building and Loan, organized under the laws of New York State and authorized to do business in this state. B) securities issued by the XYZ Industrial Loan Association organized and supervised under the laws of this state. C) securities issued by the Podunk and Western Railroad, a regulated common carrier. D) universal life insurance policies issued by insurance companies authorized to do business in the state.

C) implies that technical analysis is not worthwhile

The weak form of the efficient market hypothesis A) implies that fundamental analysis is not worthwhile. B) implies that inside traders cannot earn superior risk-adjusted returns. C) implies that technical analysis is not worthwhile. D) reinforces the value of technical analysis.

C) not be permitted to contact your clients until it was ascertained that the report was general public knowledge Explanation A firm's internal research may be considered inside information. Clients may be contacted as soon as the IAR has access to the report. U7LO5

The head of research for your firm has just prepared a very positive report on DEF Industries, Inc. The report will be placed on the firm's website later today, and copies will be mailed to clients for whom the security is deemed appropriate. Tonight, this analyst will be appearing on CNBC and will be describing why he has issued this strong buy recommendation. As an investment adviser representative, you would A) be permitted to contact your clients with this recommendation right now B) be required to send your clients to the firm's website before making comments regarding this security C) not be permitted to contact your clients until it was ascertained that the report was general public knowledge D) be permitted to contact your clients with this recommendation tomorrow

D) Account number, execution price, time of order entry, time of execution or cancellation, and terms and conditions of the order Explanation This is one of those questions where the best way to find the answer is by determining what is NOT correct. Customer name and/or address would never be on an order ticket and that knocks out three of the choices. The account number (not name), the execution price (once the order is completed), the time of entry and execution (or cancellation if it is a day order that is not executed), and the terms and conditions (limit, market, stop, etc.) are all on the order ticket. U22LO6

The procedure for entering an order to purchase a security for the account of a customer is to complete an order ticket. Which of the following would be found on an order ticket? A) Customer name, execution price, time of order entry, and time of execution or cancellation B) Account number, customer address, time of order entry, and terms and conditions of the order C) Customer name, customer address, execution price, and time of execution or cancellation D) Account number, execution price, time of order entry, time of execution or cancellation, and terms and conditions of the order

C) Warrants Explanation A derivative has its value based upon some underlying asset. The value of a warrant is based on the value of the security into which it is exchangeable. U16LO3

The term derivative would apply to which of the following? A) DPPs B) UITs C) Warrants D) REITs

A) be registered as a representative of an investment adviser and have passed the appropriate NASAA exam for IARs Explanation To transact business in a state as an investment adviser representative, a person must be registered as a representative of an investment adviser and have passed either the NASAA Series 65 or Series 66 exam. One is not considered a registered investment adviser representative as a result of passing the Series 6 or 7 registered representative exam, or by virtue of employment with a bank. U2LO3

To transact business in a state as an investment adviser representative, a person must A)be registered as a representative of an investment adviser and have passed the appropriate NASAA exam for IARs B)be registered as an agent of a brokerage house and have passed the appropriate NASAA exam for IARs C)be employed by a commercial bank located in the state D)have passed the agent's exam and taken no other exams

D) may be considered unreasonable if it is not competitive with fees charged by other advisers for essentially the same services Explanation A fee could be considered excessive if it were substantially higher than that charged by other advisers for performing similar services. The Administrator may research fees charged by various investment advisers for purposes of comparison. Whether clients have agreed to the fee or done their own price shopping is irrelevant in determining if an adviser's fee is unreasonable. U7LO1

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser's fee A) must reflect the amount of time the adviser spends managing a client's account B) may not be based on a percentage of the client's assets under management C) is not subject to regulatory oversight by the Administrator if the client may be considered financially sophisticated D) may be considered unreasonable if it is not competitive with fees charged by other advisers for essentially the same services

B) An unlimited amount Explanation The gift tax marital deduction permits an individual to give a spouse an unlimited amount of property without incurring a gift tax. However, if the spouse is not a U.S. citizen, the maximum marital gift is $155,000 (2019). U21LO5

Under the current gift tax marital deduction, how much can an individual give a spouse who is a U.S. citizen without incurring a gift tax? A) No more than $152,000 per year B) An unlimited amount C) No more than $15,000 per year D) No more than $30,000 per year

C) The cost to attend a summer camp Explanation You cannot use UTMA (or UGMA) money for the basics of food, clothing and shelter; those are the responsibility of the parent. An optional expense, such as summer camp, vacation, sports league registration, would be permitted. U24LO7

Under UTMA, which of the following are allowable distributions for the benefit of the minor? A) A percentage of food expense B) A percentage of housing expenses, such as the utilities for his bedroom C) The cost to attend a summer camp D) Clothing expense for child who has gone thru a growth spurt

C) $60,000 Explanation The current gift tax exclusion (2019) is $15,000 per donor to each recipient. A married couple can give $30,000 to a single individual and qualify for the exclusion. In this case, the married couple can give $30,000 to their son and $30,000 to their daughter-in-law without paying any gift tax. U21LO5

Under current tax law (2019), how much can a married couple give to their adult son and his wife without incurring a gift tax obligation? A) $15,000 B) Unlimited C) $60,000 D) $30,000

D) I, II, and III Explanation In general, the Administrator must provide appropriate prior notice, opportunity for hearing, and written findings of fact and conclusions of law. Even if an order is issued summarily—that is, made effective upon issue without prior notice—the registrant must be notified upon issue of the order and given the opportunity to request a hearing. U5LO2

Under the Uniform Securities Act, the Administrator is required to provide which of the following in a disciplinary proceeding? Appropriate prior notice Opportunity for a hearing Written findings of fact and conclusions of law A) I and II B) III only C) I and III D) I, II, and III

D) Putting the adviser's own interests before those of the customer Explanation An investment adviser may never put his own interests before those of customers. The Investment Advisers Act of 1940 does not prohibit employment with a broker-dealer and serving as an investment adviser. Any conflict of interests must be disclosed to the client. An adviser is not prohibited from investing in the same securities transactions as recommended to clients. U7LO1

Under the Investment Advisers Act of 1940, an investment adviser would be prohibited from engaging in which of the following practices, even if disclosed in writing to the customer? A) Providing advice to the customer and receiving compensation for the resulting sale of products B) Employment with a broker-dealer and also serving as an investment adviser C) Using advice she provides to customers regarding securities transactions as a basis for her own investment account trades D) Putting the adviser's own interests before those of the customer

A) I and II Explanation Usually, anyone who meets the federal definition of investment adviser must be registered with the SEC. Some investment advisers are not excluded from the definition but are exempt from the registration requirements of the SEC. One example is an adviser whose clients are all residents of the state in which the adviser maintains its principal office who renders no advice on any exchange-listed security and does not give advice to any private funds. Advisers whose clients are limited to insurance companies are exempt from registration, as are foreign advisers who limit themselves to fewer than 15 clients a year (none of whom can be investment companies), do not advertise or hold themselves out to be investment advisers and have less than $25 million in AUM in the United States. There is no exclusion for advisers whose only clients are banks. U1LO4

Under the Investment Advisers Act of 1940, which of the following are exempt from the requirements for registration? Foreign investment advisers with fewer than 15 clients per year who do not hold themselves out as investment advisers to the public and have less than $25 million in AUM in the United States Investment advisers who conduct all of their business in 1 state and who do not provide advice on securities listed on an exchange and have no private funds as clients Investment advisers whose only clients are banks A) I and II B) II only C) I only D) I, II, and III

D) A lawyer who advertises to the public that he offers comprehensive legal and investment advice to high-net-worth individuals Explanation A lawyer who advertises to the public that he offers comprehensive legal and investment advice to high-net-worth individuals falls within the definition of an investment adviser because he offers investment services as an integral part of his practice. U1LO3

Under the Investment Advisers Act of 1940, which of the following is included in the definition of an investment adviser? A) A professional research analyst who holds himself out to the public as an expert in trading the Euro and other foreign currencies B) A research service that offers advice on the value of gold C) A bank that advertises to the public that it offers a complete line of trust services D) A lawyer who advertises to the public that he offers comprehensive legal and investment advice to high-net-worth individuals

A) principal on equity issues Explanation Guarantees generally apply to income from the security (dividends or interest) and to payment of the principal amount at maturity. Third-party guarantees do not provide against market loss. Please note that capital gains are never included in this type of guarantee. U6LO3

Under the USA, a guaranteed security is protected by someone other than the issuer against loss of all of these EXCEPT A) principal on equity issues B) interest on debt securities C) principal repayment at maturity on debt securities D) dividends on equity securities

D) financial planners who provide fee-based investment advisory services to clients Explanation Financial planners who provide fee-based investment advisory services to the public generally must register with their state securities Administrator, as long as their total assets under management are less than $100 million. Investment advisers with no office in the state, who only advise employee benefit plans with assets of more than $1 million, need not register with state securities Administrators. Investment adviser representatives do not register as investment advisers but as investment adviser representatives. Financial publishers who do not publish specific investment advice are exempt from state registration. U1LO5

Under the Uniform Securities Act, all of the following are exempt from state registration as investment advisers EXCEPT A) investment adviser representatives B) publishers of financial publications that are not addressed to clients' specific individual investment situations C) investment advisers with no office in the state who only advise employee benefit plans with assets of more than $1 million D) financial planners who provide fee-based investment advisory services to clients

D) II and IV Explanation Among the reasons that give the Administrator cause to deny an applicant's registration are suspension from any securities regulatory agency, both in the United States and Canada, and the filing of an incomplete application. U5LO2

Under the Uniform Securities Act, the Administrator may deny an application for registration as an investment adviser because of a lack of experience because the applicant was suspended from membership on a Canadian stock exchange if the applicant is also registered as a broker-dealer when the applicant files an incomplete application A) III and IV B) I and II C) I and III D) II and IV

D) had no more than 5 clients in that state within the past 12 months Explanation An adviser who had no more than 5 clients in a state within the prior 12-month period or deals exclusively with institutions is not required to register in a state in which he has no place of business. U1LO3

Under the Uniform Securities Act, an investment adviser would be exempt from registration in a state in which he has no place of business if he A) had no more than 10 clients in that state within the past 12 months B) is registered as a broker-dealer C) had no more than 15 clients in that state within the past 12 months D) had no more than 5 clients in that state within the past 12 months

B) on the departure or death of a majority shareholder of an investment advisory corporation, the advisory agreement must be renewed to prevent an unlawful assignment of the account Explanation Investment advisers organized as corporations are under no obligation to inform their clients of changes to shareholders. However, if an investment adviser is a partnership, clients must be notified of any change in the membership of the partnership. Keep in mind the distinction between notification and assignment. Investment partnerships must notify clients of any change in the partnership's membership, no matter how insignificant the partner's position in the firm. However, the death of a minority partner does not constitute an assignment (transfer) of the account, although the information must be communicated to clients. A change in a majority interest in the partnership would be an assignment of the account that requires client consent. U6LO4

Under the Uniform Securities Act, an investment advisory contract must contain (in writing) all of the following provisions EXCEPT A) the investment adviser's compensation shall not be based on capital gains in client accounts B) on the departure or death of a majority shareholder of an investment advisory corporation, the advisory agreement must be renewed to prevent an unlawful assignment of the account C) no assignment of the investment advisory contract may be made without the client's consent D) the adviser, if a partnership, must notify the client of any change in the partnership's membership

C) I, II, III, and IV Explanation The Uniform Securities Act specifically excludes all 4 choices from the definition of an offer and a sale. U5LO1

Under the Uniform Securities Act, an offer and sale does NOT exist if it is the result of a class vote by stockholders regarding a merger or consolidation a bona fide pledge or loan an act incident to a judicially approved reorganization in which a security is issued in exchange for one or more outstanding shares a gift of nonassessable securities A) I and II B) II and IV C) I, II, III, and IV D) I, II, and III

D) actively solicited orders in unregistered exempt securities Explanation Securities that do not require registration under the USA are exempt securities. Although the securities are exempt from registration, thereby making the solicitation permitted, the agent who makes the solicitation and the broker-dealer must be registered. An agent may not make an untrue statement of a material fact, omit a material fact, or deliberately fail to follow a customer's instructions. U7LO5

Under the Uniform Securities Act, it is NOT considered fraudulent if an agent A) omitted a material fact because she knew she did not have time to cover everything in a short presentation B) made an untrue statement of a material fact C) deliberately failed to follow a customer's instructions D) actively solicited orders in unregistered exempt securities

D) I, II, III, and IV Explanation State registration of any securities professional expires on December 31, unless renewed. U3LO5

Under the Uniform Securities Act, unless renewed, the registration of which of the following securities professionals expires on December 31? Agents Broker-dealers Investment advisers Investment adviser representatives A) I and II B) III and IV C) II and III D) I, II, III, and IV

B) With the original application only Explanation Initial applications for registration must be accompanied by a consent to service of process. This document becomes a permanent part of the application and appoints the Administrator to accept subpoenas on behalf of the applicant. U1LO5

Under the Uniform Securities Act, when must a consent to service of process be filed with the Administrator? A) With the original application and renewal B) With the original application only C) When a case is pending D) It need not be filed, unless requested by the Administrator

B) II and IV Explanation An agent for a broker-dealer advising customers for a fixed fee, stated as a percentage of the customer's assets under management, is acting as an investment adviser representative. An individual who sells advisory services for AAA Advisers, Inc., is an investment adviser representative. A trust company is not an investment adviser under the USA. An investment adviser with no office in the state and does business exclusively with other investment advisers located in that state is also excluded as an investment adviser under the USA. U1LO3

Under the Uniform Securities Act, which of the following are NOT considered investment advisers or investment adviser representatives in this state? An individual who sells advisory services in several states, including this one, for AAA Advisers, Inc. United Trust Company of America An agent for a broker-dealer advising customers for a fixed separate fee stated as a percentage of the customer's assets under management An investment adviser with no office in the state that does business exclusively with other investment advisers located in the state A) IV only B) II and IV C) I and II D) I, II, III, and IV

C) I and III Explanation A sale is a contract or transaction for value. Therefore, when a security is given as a bonus in connection with the sale of another security, it is also considered a sale. Because an assessable stock may require a payment made by the recipient, the gift is considered a sale. The gift of a nonassessable stock is not a sale because it is not a contract for value. An offering of securities is not a transaction or sale of securities until the offer is accepted. U5LO1

Under the Uniform Securities Act, which of the following are defined as sales? A gift of an assessable stock A gift of a nonassessable stock A security given as a bonus for purchasing a bond An offer of securities A) III and IV B) II and IV C) I and III D) I and II

B) Both I and II Explanation It is illegal to sell securities that are not registered unless the security or the transaction itself is exempt from state registration requirements. This applies to new issues (primary distributions) and secondary market transactions. U4LO3

Under the Uniform Securities Act, which of the following circumstances would exempt a security from registration? The security is exempt from registration under the act. The transaction in which the security is sold is exempt under the act. A) Neither I nor II B) Both I and II C) I only D) II only

C) The agent, the former employer, and the new employer Explanation All three parties must notify the Administrator. U3LO5

Under the Uniform Securities Act, which of the following is responsible for notifying the Administrator when an agent changes his place of employment from one broker-dealer to another? A) Former broker-dealer B) New broker-dealer C) The agent, the former employer, and the new employer D) Agent

C) Issuer Explanation The burden of proof for claiming eligibility for an exemption falls to the person claiming the exemption. In the event the registration statement was filed by someone other than the issuer, such as selling stockholders or a broker-dealer, that person must prove the claim. U4LO3

Under the Uniform Securities Act, which of the following persons is responsible for proving that a securities issue is exempt from registration? A) No need to prove eligibility for an exemption B) Underwriter C) Issuer D) State Administrator

C) charge fees based on performance Explanation Section 102(c)(1) of the Uniform Securities Act states that, except as may be permitted by rule or order of the Administrator, it is unlawful for any investment adviser to enter into, extend, or renew any investment advisory contract unless it provides in writing that the investment adviser shall not be compensated on the basis of a share of capital gains upon or capital appreciation of the funds or any portion of the funds of the client. U7LO1

Unless done under a specific exemption described in the law, it would generally be prohibited for an investment adviser to A) have discretion over a client's assets B) charge fees in advance of services performed C) charge fees based on performance D) charge commissions

B) The purposes, terms, distribution requirements, and other circumstances of the trust Explanation Although there certainly is a case for preservation of capital, reasonable income, and minimizing expenses, the most important consideration is to follow the design and objectives of the trust. U18LO4

When a trustee is managing the trust assets, which of the following is the most important consideration? A) Minimizing expenses B) The purposes, terms, distribution requirements, and other circumstances of the trust C) Reasonable income D) Preservation of capital

A) the solicitor must register with the SEC as an investment adviser Explanation There must be a written agreement between a solicitor and an adviser. The solicitor is required to provide the customer with a copy of the adviser's brochure, as well as the solicitor brochure. The adviser or the solicitor must disclose any additional costs that the customer will pay due to the use of the solicitor. The solicitor cannot be subject to disciplinary actions involving finance or dishonesty. Although the investment adviser must register, there is no requirement for a solicitor to register with the SEC. U7LO1

When an investment adviser chooses to use a solicitor, the Investment Advisers Act of 1940 requires all of the following conditions EXCEPT A) the solicitor must register with the SEC as an investment adviser B) either the solicitor or the adviser must disclose to the customer any additional costs of providing advisory services due to solicitor involvement C) the solicitor must not be subject to disciplinary actions involving finance or dishonesty D) the solicitor must provide the customer with a copy of the investment adviser's brochure

B) a greater value of shares being redeemed than purchased Explanation Because shares are purchased and redeemed at NAV, net redemptions (this case) or net purchases have no effect on the net asset value of the fund's shares. However, receipt of cash in the form of interest payments causes assets to increase, while falling equity prices leads to a decrease. Distributions of capital gains (or dividends) represents a payment of cash, thus decreasing the amount of assets on hand. U14LO3

When an open-end management investment company computes its net asset value per share, each of the following occurrences would have an impact EXCEPT A) interest payments made on debt securities held in the fund's portfolio B) a greater value of shares being redeemed than purchased C) a drop in the value of equity securities held in the fund's portfolio D) a capital gains distribution

D) Selecting a random set of stocks for a portfolio Explanation The efficient market hypothesis states that an investor cannot consistently outperform the market. Selecting a random set of stocks is consistent with this theory. The other strategies are aligned with technical and fundamental analysis. U20LO10

Which investment strategy is consistent with a belief in the efficient market hypothesis? A) Searching for undervalued securities B) Comparing the calculated value of a security, through fundamental analysis, to the market value of the stock C) Waiting to purchase a stock until it increases above the 40-day moving average D) Selecting a random set of stocks for a portfolio

B) II and III Explanation Unless qualifying for an exemption, broker-dealers and agents must be registered in each state where offers or sales occur. Also, every security must be registered unless it is an exempt security. Buying a security on one exchange and selling it on another is an arbitrage activity and not a violation of the USA. Although the Canadian government bond is an exempt security, the agent must be properly licensed in each state in which an offer to sell is being made. U4LO3

Which of the following activities are prohibited practices under the principles of the Uniform Securities Act? Buying and selling the same stock on the same day on different exchanges Offering shares of an unregistered, nonexempt security to retail customers Offering a Canadian government bond to a resident of a state in which the agent of a broker-dealer is not registered A) I, II, and III B) II and III C) I only D) II only

B) Time value, but no intrinsic value Explanation Warrants could be thought of as call options with a long expiration period. They are always issued with a strike price in excess of the current market value, so there is no intrinsic value. One could say that on issuance, they are always out-of-the-money. The only value is in the time to expiration, usually several years or longer. U16LO3

Which of the following are characteristics of newly issued warrants? A) Time value and intrinsic value B) Time value, but no intrinsic value C) Intrinsic value, but no time value D) No intrinsic value and no time value

C) II and III Explanation Isolated nonissuer transactions and transactions by an ​administrator are included in the list of exempt transactions​. The private placement exemption is limited to a maximum of 10 offers to retail clients. If this were to institutions, (where there is no numerical limitation), commissions would be paid and immediate resale is permitted. If the common stock is federal covered (listed on the NYSE) and, therefore exempt from registration, then a senior security, such as the bond, would also be covered. But, it doesn't work in reverse. U4LO3

Which of the following are exempt from state registration? A common stock traded on the OTC Bulletin Board whose bonds are listed on the NYSE An isolated nonissuer transaction A transaction by an administrator of an estate A transaction with no commissions directed by the offeror to no more than 50 persons in the state who buy the security for investment purposes only A) III and IV B) I and II C) II and III D) I and IV

D) A large-cap growth fund Explanation A large-cap growth fund is the most appropriate choice for a moderate-risk client because large capitalization stocks are generally less volatile than small-cap stocks and provide long-term capital growth. This is a more appropriate choice than the index fund because there is no stock selection there, only investing to parallel the index. U19LO6

Which of the following funds would you recommend to a moderate-risk client seeking long-term capital gains who also values professional stock selection? A) S&P 500 Index fund B) An international index fund C) A small-cap growth fund D) A large-cap growth fund

D) An adviser waives a client's fee if the client experiences a loss for the year. Explanation A fee in which payment is contingent on investment results is prohibited unless the client meets certain financial standards; advisers are permitted to charge by the hour. U7LO1

Which of the following compensation arrangements is typically NOT allowed under the Investment Advisers Act of 1940? A) An adviser charges all clients a set fee, regardless of how long it takes to generate a recommendation or a recommendation's results. B) An adviser charges clients a percentage of assets under management. C) An adviser varies fees according to the time spent managing the account. D) An adviser waives a client's fee if the client experiences a loss for the year.

B) Limited partnership Explanation Schedule K-1s are issued to owners of partnerships (limited or general), LLCs with more than one member, and S corporations. Sole proprietors use a Schedule C, C corporations report dividends and/or interest paid on a Form 1099, and the same is true for distributions from a REIT. U21LO6

Which of the following entities would issue a Schedule K-1? A) REIT B) Limited partnership C) Sole proprietorship D) C corporation

D) Time to maturity Explanation The longer the time to maturity, the higher (longer) the duration. Yield to maturity and coupon rate have an inverse relationship. That is, the higher the YTM and the coupon, the lower (shorter) the duration. The bond's rating is irrelevant. U13LO11

Which of the following factors has a direct relationship to a bond's duration? A) Coupon rate B) Yield to maturity C) Rating D) Time to maturity

A) None of these Explanation The efficient market hypothesis is in direct contradiction to technical analysis because the efficient market hypothesis is founded on the notion that all historical price and volume data, which is used by technical analysts, is already accounted for in the current stock price. The weak form claims that fundamental analysis works and the semi-strong form claims that inside information works. True believers in EMH claim that none of these can outperform random selection. U20LO10

Which of the following forms of the efficient market hypothesis claims that technical analysis works? A) None of these B) Semi-strong C) Weak D) Strong

A) Rental apartment building Explanation Real estate (such as an apartment building) is among the most difficult investments to convert into cash and the most illiquid of the choices given. REITs provide investors with liquidity through trading in the secondary markets. A bond mutual fund is a redeemable security; the issuer provides liquidity. Unit investment trusts are more liquid than real estate because they are redeemable securities. U11LO2

Which of the following has the greatest liquidity risk? A)Rental apartment building B)Long-term bond mutual fund C)Real estate investment trust (REIT) D)Municipal bond unit investment trust (UIT)

B) Common stock Explanation The returns on common stock have historically outperformed inflation, making them less vulnerable to loss of purchasing power among the choices presented. Cash is a store of present purchasing power that inflation will erode. Fixed annuities have more exposure to inflation than common stock because their payments are fixed in nominal dollars. Preferred stock has the same exposure to inflation risk as do all fixed income instruments. U12LO2

Which of the following has the least exposure to inflation risk? A) Fixed annuity B) Common stock C) Preferred stock D) Cash

C) I and II Explanation Common and preferred stockholders have equity, or ownership positions. Bondholders (mortgage or otherwise) are creditors, not owners. U12LO1

Which of the following have equity positions in a corporation? Common stockholders Preferred stockholders Convertible bondholders Mortgage bondholders A) III and IV B) I and III C) I and II D) II and IV

A) Bonus annuity Explanation One of the characteristics of bonus annuities is that their surrender charges tend to be higher for a longer time than other insurance company products. When you see Class B shares on the exam, it will be referring to mutual funds, not insurance company products. U15LO4

Which of the following insurance company products is likely to have the longest time for which a surrender charge will be levied? A) Bonus annuity B) Class B shares C) Whole life insurance D) Variable annuity

D) An investment adviser who, during the preceding twelve-month period, has had no more than 6 retail clients. Explanation The de minimis exemption limits the number of retail clients to a maximum of 5 during the preceding 12 months. There are 3 ways to say that: Fewer than 6. Five or fewer. No more than 5. U1LO3

Which of the following investment advisers, with no place of business in the state, does not qualify for the de minimis exemption? A) An investment adviser who, during the preceding twelve-month period, has had no more than 5 retail clients. B) An investment adviser who, during the preceding twelve-month period, has had fewer than 6 retail clients. C) An investment adviser who, during the preceding twelve-month period, has had 5 or fewer retail clients. D) An investment adviser who, during the preceding twelve-month period, has had no more than 6 retail clients.

C) Dollar-weighted return Explanation The dollar-weighted return measures the internal rate of return (IRR) of a portfolio's actual performance between 2 dates, including all cash inflow and outflows. Because of this, the IRR of a portfolio can be significantly affected by both the timing and the size of any contribution or distribution. Luck in the timing of the investor's inflows or outflows can drastically swing numbers one way or the other. U23LO2

Which of the following is a method for determining the internal rate of return to an investor based on cash flow in and out of the portfolio? A) Dollar cost averaging B) Time-weighted return C) Dollar-weighted return D) Discounted cash flow

C) Effecting securities transactions not recorded on the books of the employing broker-dealer without prior written authorization Explanation It is an unethical practice for an agent of a broker-dealer to effect securities transactions not recorded on the books of the employing broker-dealer, unless prior written authorization is secured. Broker-dealers, acting in the capacity of underwriters, not their agents, must make a bona fide public offering in underwritings. U7LO4

Which of the following is an unethical practice for agents of broker-dealers? A) Borrowing money from a commercial bank that has investment accounts at the broker-dealer B) Effecting securities transactions not recorded on the books of the employing broker-dealer with the employing broker-dealers' approval in writing C) Effecting securities transactions not recorded on the books of the employing broker-dealer without prior written authorization D) Failure to make a bona fide public offering of all securities acquired as an underwriter

A)Unit investment trusts Explanation Only management companies, (open- and closed-end) have management fees. U14LO7

Which of the following is likely to be characterized by no management fees and a portfolio consisting of municipal or corporate bonds? A) Unit investment trusts B) Closed-end investment companies C) Open-end investment companies D) Face-amount certificate companies

A) offer managers high fixed fees Explanation Hedge funds attempt to attract the top managers because they offer performance-based fees, which vary based on fund performance. The typical fee structure is 2% + 20% where 2% is the fixed fee and 20% of the profits is the performance portion. U14LO6

Which of the following is not a characteristic of hedge funds? Hedge funds A) offer managers high fixed fees. B) use leverage, short positions, and concentrated positions. C) are privately organized and generally unregistered. D) invest in private securities, real assets, derivatives, and structured products.

C) Regulation of exchanges Explanation The purpose of the Securities Exchange Act of 1934 is to regulate secondary market trading of securities that have already been issued. It created the SEC and requires that all securities exchanges and firms register with the SEC if they are involved in interstate commerce. It was the Securities Act of 1933 that dealt with registration and exemption from registration of new issues and prospectus delivery requirements. U22LO3

Which of the following is regulated by the Securities Exchange Act of 1934? A) Exemptions of new issues from registration requirements B) Requirements for the provisions of a prospectus C) Regulation of exchanges D) Registration of new issues of stock

D) Aeronautical engineer Explanation Lawyers, accountants, engineers, teachers, and broker-dealers who do not charge a separate fee for investment-related advice, when such advice is solely incidental to the practice of their profession, are excluded from the definition. U1LO3

Which of the following is specifically excluded from the definition of investment adviser under the Investment Advisers Act of 1940, when that person's investment advice is solely incidental to the practice of their profession? A) Pension consultant B) Athlete's financial manager C) Financial planner D) Aeronautical engineer

D) Shares of a growth fund Explanation For this couple, the IRA should be established with an objective of long-term appreciation. DPPs, IPOs of small companies, and options on large-cap common stock are riskier investments and are generally considered imprudent for IRAs. U24LO5

Which of the following is the most suitable investment for the IRAs of a young couple with a combined annual income of $80,000? A) Options on large-cap common stock B) Partnership interests in an oil and gas drilling program C) Initial public offerings of small companies D) Shares of a growth fund

A) Buy and hold Explanation The key to answering this question correctly is recognizing that it is dealing with individual stocks. If the question dealt with managing a portfolio, then indexing would be the simplest style. U20LO5

Which of the following is the simplest portfolio management style for individual stocks? A) Buy and hold B) Core C) Indexing D) Moving averages

D) They have a high degree of transparency. Explanation Hedge funds are unregulated pooled investment vehicles with limited transparency. Because of the lack of transparency, they are generally only marketed to accredited investors. This is because they are considered too risky for the less financially-sophisticated investor. Minimum initial investment levels are usually high. Hedge funds can use sophisticated techniques such as short selling, leverage, and derivatives. U14LO6

Which of the following least accurately describes hedge funds? A) Many hedge funds can take short positions. B) Their investment style is generally aimed at producing returns in up or down markets. C) They require large entry-level investment amounts. D) They have a high degree of transparency.

A) Clerk at a broker-dealer who is authorized to take orders Explanation Anyone who solicits or receives an order while representing a broker-dealer is an agent. Silent partners, administrative personnel, and certain executives of broker-dealers, such as outside directors, who have nothing to do with the sales end of the business are not agents under the terms of the USA because they do not solicit or receive orders or supervise those who do. Remember, broker-dealers are not agents; agents represent broker-dealers. If, however, any of these individuals were authorized to accept orders, or supervise those that do, registration as an agent would be required. U3LO3

Which of the following persons is defined as an agent by the Uniform Securities Act? A) Clerk at a broker-dealer who is authorized to take orders B) Secretary of a branch office sales manager C) Silent partner of a broker-dealer D) President of the state university who sits on the broker-dealer's board of directors

C) Clerk at a broker-dealer who is authorized to take orders Explanation Anyone who solicits or receives an order while representing a broker-dealer is an agent. Silent partners, administrative personnel, and executives of broker-dealers with no sales responsibilities are not agents under the terms of the USA because they do not solicit or receive orders. U3LO3

Which of the following persons is defined as an agent by the Uniform Securities Act? A) Silent partner of a broker-dealer B) Broker-dealer executive who does not solicit or transact business C) Clerk at a broker-dealer who is authorized to take orders D) Secretary of a branch office sales manager

A) Issuing a cease and desist order to an agent without any prior notice Explanation Whenever it appears to the Administrator that any person has engaged, or is about to engage, in any act or practice constituting a violation of any provision of the USA or any rule or order hereunder, he may in his discretion issue a cease and desist order, with or without a prior hearing against the person or persons engaged in the prohibited activities, directing them to cease and desist from further illegal activity. Any person aggrieved by a final order of the Administrator (that means after the hearing has taken place) may obtain a review of the order in the appropriate court by filing a written petition in court, within 60 days, not 15, after the entry of the order. Broker-dealers and some IAs have to file annual audited financials with the Administrator, but the audit is conducted by an independent accountant, not the Administrator. U5LO1

Which of the following powers are under the jurisdiction of the Administrator? A) Issuing a cease and desist order to an agent without any prior notice B) Performing an annual audit of investment advisers registered in the state C) Issuing a final order suspending the registration of a person as long as, upon written request, a hearing will be granted in no more than 15 days D) Performing an annual audit of broker-dealers registered in the state

C) I, II, and III Explanation All government and municipal securities are exempt from registration requirements under the Uniform Securities Act, as are insurance company securities if the company is authorized to do business in this state. U4LO3

Which of the following securities is (are) exempt from registration under the Uniform Securities Act? Municipal securities Government securities Stock or bonds issued by an insurance company authorized to do business in this state A) II and III B) I only C) I, II, and III D) I and III

D) Working in a hazardous occupation Explanation In most cases, those who work in hazardous occupations will be denied disability income coverage. Premiums will be higher as one gets older and Type 2 diabetes or too high a BMI can lead to a premium surcharge (rated), but those are generally not causes for denial of coverage. U19LO5

Which of the following situations would most likely cause an individual's application for a disability income insurance policy to be denied? A) BMI over 26 B) Type 2 diabetes C) Being over 50 years of age D) Working in a hazardous occupation

A) The adviser receives compensation from the issuer of securities that he recommends to his clients Explanation An adviser has an affirmative duty to provide full and fair disclosure in those transactions where his interests may conflict with the best interests of the client. If an adviser receives payment from an issuer of securities sold to his clients, the adviser's judgment on the investment merits of the security could be influenced. The client must be informed of and consent to this arrangement to prevent fraud. Advisers are allowed to have separate businesses that do not, by their nature, present a conflict of interest. U6LO1

Which of the following situations would present a conflict of interest that an adviser must disclose to clients to avoid unlawful and deceitful behavior under the Investment Advisers Act of 1940? A) The adviser receives compensation from the issuer of securities that he recommends to his clients. B) A family member of the adviser has been indicted for securities fraud unrelated to the adviser or the clients' securities. C) The adviser owns real estate that is unrelated to his investment advisory business, but it requires considerable time and attention. D) The adviser has a non-securities-related loan from a large commercial bank where one of his clients is a vice president.

D) A self-employed person may participate. Explanation Only employees of schools, church organizations, and nonprofit organizations are eligible to participate in 403(b) plans. U24LO2

Which of the following statements describing traditional IRAs is NOT true of 403(b) qualified plans? A) Contributions are tax deductible. B) Distributions must begin by age 72. C) Distributions after age 59½ are taxed as ordinary income. D) A self-employed person may participate.

A) Beta is a measure of a security's deviation from its historical average returns Explanation A measure of a security's deviation from its historical average returns is the security's standard deviation. Beta measures a security's volatility in relation to the overall market. Stocks with a beta greater than 1 are more volatile than the market and stocks with a beta less than 1 are less volatile than the market. U10LO4

Which of the following statements is NOT true? A) Beta is a measure of a security's deviation from its historical average returns. B) A stock with a beta of 0.8 will move 20% less than the market. C) A stock with a beta of 1.2 will move 20% more than the market. D) Beta is a volatility measure of a security compared with the overall market.

C) Unit values are computed daily and cash values are computed monthly Explanation Unit values are computed each day. Policy cash values are a monthly computation. U15LO6

Which of the following statements is TRUE concerning variable life separate account valuation? A) Unit values are computed monthly and cash values are computed daily. B) Unit values are computed weekly and cash values are computed monthly. C) Unit values are computed daily and cash values are computed monthly. D) Unit values are computed monthly and cash values are computed weekly.

A) It represents the maximum return for a given level of risk Explanation The purpose of the efficient frontier is to plot the most efficient portfolios. An efficient portfolio is one that offers: the most return for a given amount of risk or the least risk for a given amount of return. U20LO8

Which of the following statements is correct in relation to the efficient frontier? A) It represents the maximum return for a given level of risk. B) It allows an investor to create a risk-free portfolio. C) It identifies the required rate of return on a particular stock. D) It implies an inefficiency in stock valuations.

C) I and IV Explanation Creditors don't have recourse to the owners of either entity unless the owners have specifically allowed it. Both are flow-through or conduit entities. Owners of S corporations are stockholders, whereas those in an LLC are members. Nonresident aliens may not own an S corporation. U18LO3

Which of the following statements regarding an S corporation owner and an owner of an LLC are TRUE? Creditors have very limited recourse rights to the owners. They may not be nonresident aliens. They both are considered stockholders. Both receive the tax benefit of owning flow-through entities. A) I and III B) II and III C) I and IV D) II and IV

B) Revocation of the registration of that agent's broker-dealer will result in that agent's effective registration being put "on hold." Explanation An agent of a broker-dealer is active only when that broker-dealer's registration is in force. The exam may refer to the agent's registration being placed into suspense or canceled; any of these has the same effect. U3LO5

Which of the following statements regarding an agent's registration is CORRECT? A) If the broker-dealer with which that agent is registered should have its registration revoked, the agent may continue to do business only with existing clients and may not acquire any new ones until registered with an active broker-dealer. B) Revocation of the registration of that agent's broker-dealer will result in that agent's effective registration being put "on hold." C) Agents may be licensed in a state even if their broker-dealer is not. D) If the broker-dealer with which that agent is registered should have its registration revoked, the agent's license will be held by the Administrator and the agent will be required to register with an active broker-dealer within 30 days.

C) Two investments with the same expected return will not necessarily have the same level of risk and standard deviation Explanation Two investments can have the same expected return but have significantly different deviations. The investment with the larger standard deviation is the riskier of the 2 and will be more volatile even if the expected returns are the same. Standard deviation measures the deviation percentage from the average of the expected or historical returns of an investment. The larger the standard deviation, the riskier the investment. Standard deviation is not expressed in dollars, it is expressed in percentages. U10LO5

Which of the following statements regarding standard deviation is TRUE? A) Standard deviation quantifies expected return. B) Standard deviation is expressed in dollars. C) Two investments with the same expected return will not necessarily have the same level of risk and standard deviation. D) The smaller the deviation from the average performance, the riskier the investment becomes.

D) Registration by coordination is effective concurrent with federal registration. Explanation Coordination is the method used to register a security simultaneously under the Securities Act of 1933 and under the USA in a state. If the security's federal registration is pending and the Administrator has received all of the required material, the two registrations can be declared effective at the same time. U4LO3

Which of the following statements regarding state registration of securities is TRUE? A) Registration by coordination is effective on the 10th day after filing with the Administrator. B) Registration by qualification is effective after 30 days. C) Notice filing is effective when ordered by the Administrator. D) Registration by coordination is effective concurrent with federal registration.

C) A final order of the Administrator may not be appealed Explanation Final orders of the Administrator may be appealed to the appropriate court within 60 days of the issuance of the order. U5LO4

Which of the following statements regarding the powers of the Administrator under the USA would NOT be true? A) Denial of registration may take place in the event of the filing of an incomplete application. B) In the case of noncompliance, the Administrator may apply to a court of competent jurisdiction for the issuance of an injunction. C) A final order of the Administrator may not be appealed. D) The administrator may issue cease and desist orders.

C) 5 years, the first 2 in the principal office of the adviser Explanation For state-registered investment advisers, records must be kept for a total of 5 years. For the first 2 of those years, they must be located in the principal office of the adviser. U1LO5

With regard to the keeping of records, the Uniform Securities Act states that investment advisers must keep records for A) 3 years B) 3 years, the first 2 in the principal office of the adviser C) 5 years, the first 2 in the principal office of the adviser D) 5 years

D) II and IV Explanation Without the prior consent of the client, an IA may disclose information relating to specific accounts only when requested by the IRS or by court order. U7LO5

Without prior authorization from the client, an investment adviser could release information relating to the client's account in order to comply with the brochure delivery requirements of the USA when requested by the IRS as part of litigation against the client for the purpose of furnishing information for a statistical survey being compiled by the Administrator upon the receipt of a subpoena from a court of competent jurisdiction A) I, III, and IV B) I, II, III, and IV C) II and III D) II and IV

D) 7.60% Explanation Use the CAPM to calculate the expected rate of return. Expected (required) return = 0.03 + [0.92 (0.08 − 0.03)] = 0.0760, or 7.60%. U20LO8

XYZ stock has a beta of 0.92. The risk-free rate of return is 3% and the market's rate of return is 8%. Using the capital asset pricing model (CAPM), what is the expected rate of return of this stock? A) 10.12% B) 6.85% C) 5.06% D) 7.60%

A) Expected cost of college Explanation To determine whether the investment will satisfy the goal, the investment adviser representative needs to know the amount needed to pay for college. The information we have here will allow us to compute the future value: $25,181.70. This may not be enough to pay for even 1 year of college 12 years from now. U10LO1

Your client has $10,000 to invest today and expects to earn an after-tax return of 8% to send his daughter to college in 12 years. Which of the following is needed to determine whether the investment is likely to satisfy the client's goal? A) Expected cost of college B) Present value C) Consumer Price Index D) Client's marginal federal income tax bracket

C) Large-cap stock fund Explanation A mutual fund investing in large-cap stocks (see Glossary of Terms) would be a reasonable investment for a growth-oriented investor in a bullish economic environment. Bonds are not a growth-oriented investment vehicle, GNMAs provide monthly income (not the growth that the client seeks), and preferred stocks are appropriate for income-oriented investors. U19LO6

Your firm's market analyst believes the current bullish market in equities will continue. Which of the following would be most suitable for a growth-oriented investor? A) Preferred stock fund B) Bond fund C) Large-cap stock fund D) GNMA fund

D) disclosure to the client and consent prior to completion of the transaction Explanation Unlike broker-dealers, investment advisers must obtain the consent of and make written disclosure to the client of the intent to act as agent or principal in any transaction with that advisory client. SEC Release IA- 1732 requires that this be accomplished before the completion of the transaction, where completion is defined as settlement date. U6LO1

n designing a client's portfolio, a registered investment adviser representative of Greater Wealth Advisory Services recommends the purchase of several stocks from the inventory of Greater Wealth's wholly owned broker-dealer. Under the Investment Advisers Act of 1940, this activity requires written A) consent of and the disclosure to the client prior to execution of the transaction B) disclosure to the client C) consent of the client D) disclosure to the client and consent prior to completion of the transaction

B) He will receive a reduced load on $13,200 worth of the shares Explanation An investor signing a letter of intent has 13 months to contribute funds to reach the reduced load. The sales charge in this case, then, will be based on the total investment of $13,200. If at the end of the 13 months the investor had not invested up to the breakpoint, the fund would liquidate enough shares to pay the difference in sales load. U14LO4

A client invests $2,200 in an open-end investment company and signs a letter of intent for a $10,000 breakpoint. If 6 months later he deposits $11,000, which of the following statements is TRUE? A) He will receive a reduced load on $10,000 worth of the shares. B) He will receive a reduced load on $13,200 worth of the shares. C) He will receive a reduced load on $8,800 worth of the shares. D) He will not receive any reduction in the sales load.

C) the right to determine the par value of the stock Explanation Par value is an accounting decision made by the company when the stock is first issued and is not something voted on by shareholders. Common stockholders are the owners of a corporation. This basic form of ownership entitles them to all of the privileges discussed here. It also allows them to transfer their ownership, inspect company records, vote on corporate objectives, and lay claim to any residual assets in the event of a liquidation. U12LO2

A common stockholder's rights include all of the following EXCEPT A) the receipt of dividends, if declared by the board of directors B) electing the board of directors C) the right to determine the par value of the stock D) preemptive rights

D) 4.2:1 Explanation The current ratio is the current assets divided by the current liabilities. The higher the ratio, the more liquid the company. Therefore, a 4.2 to 1 ratio is the strongest and a 0.5 to 1 ratio is the weakest. U10LO7

A fundamental analyst reviewing the current ratios of four different companies would consider which of the following to be in the most liquid position? A) 2.7:1 B) 0.5:1 C) 1.5:1 D) 4.2:1

B) average annual net assets Explanation A mutual fund's expense ratio is calculated by dividing its expenses by its average annual net assets. For example, if the fund had net assets of $100 million and its annual expenses are $1 million, the expense ratio is $1 million divided by $100 million = 1%. U14LO4

A mutual fund's expense ratio is found by dividing its expenses by its A) income B) average annual net assets C) dividends D) public offering price

D) Your free subscription will start once we have received your name and mailing or email address. Explanation A free offer must not only be free of financial cost, it must be free of any other burden or commitment. U6LO5

A registered investment adviser advertises that it is offering a free 6-month subscription to their advisory newsletter. Which of the following qualifiers is acceptable under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers? A) Your free subscription will start upon receipt of your completed financial profile. B) Your free subscription will start after your third trade with our affiliated broker-dealer. C) Your free subscription will start once you have furnished us with the names and addresses of 3 of your friends. D) Your free subscription will start once we have received your name and mailing or email address.

C) investors retain personal control over the investments in the fund's portfolio Explanation 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. U14LO10

All of the following are advantages of mutual fund investment 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

B) 9% Explanation The formula for this computation is as follows: 8% (the return on the market is a beta of 1.0) minus the risk-free rate of 6%, or 2%. Then, multiply that by the beta of this stock (1.5) to arrive at 3%. That is, the stock should return 3% over the risk-free rate of 6%, or 9%. Inflation rate is only important if we are looking for the real (inflation-adjusted) return, not the expected return. U20LO9

An investment adviser representative is evaluating DEF stock to see if it is a good fit for a client's portfolio. Using the security market line (SML), what is the expected return for DEF when the return on the market is 8%, the 91-day Treasury bill is yielding 6%, DEF's beta is 1.50, and the inflation rate, as measured by the CPI, is 4%? A) 8% B) 9% C) 12% D) 5%

C) if the clients are told that the report was prepared by a third party Explanation An adviser may use research prepared by others provided disclosure is made that the report was prepared by a third party, not the adviser. There is an exception for certain statistical information, but not research reports. U7LO4

If an investment adviser purchases a research report from the advisory arm of a nonaffiliated broker-dealer, the adviser may distribute this report to clients A) provided a fee is paid to the broker-dealer for each copy distributed B) without restriction C) if the clients are told that the report was prepared by a third party D) under no circumstances

C) II and III Explanation GIC's and investment-grade corporate bonds (A- or higher-rated bonds) are considered appropriate investments for a qualified plan. A municipal bond fund will potentially convert tax-free income into ordinary income and using leveraged investments in retirement plans is generally prohibited. U24LO1

In the construction of a qualified retirement plan portfolio, which of the following investment vehicles would be considered generally inappropriate? A guaranteed investment contract (GIC) A municipal bond fund A leveraged real estate limited partnership A corporate bond rated A or higher A) I and II B) III and IV C) II and III D) I and IV

C) Current assets divided by current liabilities Explanation Current assets divided by current liabilities is the current ratio, a ratio that measures the liquidity of a firm. Gross profit divided by net sales is a profitability ratio that measures the gross profitability of the firm's business operations, not its liquidity. Net income divided by average total equity is the return on stockholders' equity, which measures the efficiency of common shareholders' investment or equity in the firm. Dividend amount divided by earnings per share is the dividend payout ratio which measures how much of a company's earnings are distributed to common stockholders. U10LO7

Liquidity ratios measure the solvency of a firm or the firm's ability to meet short-term financial obligations. Which of the following is a liquidity ratio? A) Dividend divided by earnings per share B) Gross profit divided by net sales C) Current assets divided by current liabilities D) Net income divided by average total equity

B) annually whether or not the adviser has custody or discretion Explanation Unless there have been no material changes, a copy of the adviser's brochure or brochure supplement must be delivered to all current clients [except those who are exempt from the brochure delivery requirements (impersonal advise costing less than $500 per year and investment companies registered under the Investment Company Act of 1940)] within 120 days of the end of the adviser's fiscal year. Custody or discretion is irrelevant to this question. Under the USA, all advisory contracts, both initial and renewal, must be in writing. U6LO4

Under the USA, an investment adviser's current clients must be delivered a brochure A) within 48 hours of renewal B) annually whether or not the adviser has custody or discretion C) quarterly if the adviser has both discretion and custody D) annually​, but only​ if the adviser has neither custody nor discretion

B) Hedge Explanation Margin trading and selling short are techniques commonly found in hedge funds, rather than in open-end or closed-end management funds or ETFs. Because hedge funds are considered private funds, exempt from registration, the offering document is called the private placement memorandum. U14LO6

When reading the prospectus for a fund, you notice that it states that the fund may make portfolio purchases on margin, take short positions, and use arbitrage techniques. This is most likely what type of fund? A)nClosed end B) Hedge C) Index D) Exchange traded

C) Announcing that the first 50 new clients to sign up will receive a 25% discount on their fees for the first year Explanation This is not considered discrimination, because the discount applies equally to all (if they are among the first 50). Fee reimbursement or waivers are not permitted. The 5-day withdrawal provision applies to state-registered investment advisers when the brochure is not delivered at least 48 hours prior to (not after) the signing of the contract. U6LO1

Which of the following actions by an investment adviser registered in 3 states is permitted? A) Stating in the advisory contract that fees will be reimbursed if account performance is less than agreed upon B) Guaranteeing a rate of return equivalent to a 5-year insured bank CD or waiving their yearly fees C) Announcing that the first 50 new clients to sign up will receive a 25% discount on their fees for the first year D) Delivering the brochure within 48 hours after signing of the contract, as long as there is a 5-day, penalty-free withdrawal provision

D) a low coupon and a long maturity. Explanation Other things equal, a bond with a low coupon and long maturity will have the longest duration and therefore greatest price volatility. U13LO11

Which of the following bonds is most likely to exhibit the greatest volatility due to interest rate changes? A bond with A) a high coupon and a long maturity. B) a high coupon and a short maturity. C) a low coupon and a short maturity. D) a low coupon and a long maturity.

C) Real assets Explanation Traditional investments include cash, bonds, and stocks, regardless of the adjective used. Alternative investments include four major categories: real assets, hedge funds, private equity, and structured products. U17LO5

Which of the following categories of assets is most likely classified as an alternative asset? A) Cash B) Preferred stocks C) Real assets D) Convertible bonds

A) A wealthy individual withdraws $10,000 from his IRA to purchase his first principal residence Explanation Any individual withdrawing $10,000 from his IRA to purchase his first principal residence would have the penalty waived. The wealth of the individual is not relevant. The purchase must be a first-time purchase as well as the primary residence. A single parent who withdraws funds from her IRA to pay for the education of a nephew will pay a 10% tax penalty. Educational withdrawals are limited to the taxpayer or a spouse, child, or grandchild. A single parent who supplements a home equity loan with funds from her IRA to pay for an additional home will pay a penalty because only a primary residence can be purchased with early withdrawal funds. A person who withdraws funds from his IRA to buy a principal residence after he sold his first home as a result of medical expenses will pay a penalty because the purchase is not for his first principal residence. U24LO1

Which of the following is an allowable early withdrawal from a traditional IRA without penalty? A) A wealthy individual withdraws $10,000 from his IRA to purchase his first principal residence. B) A single parent supplements a home equity loan with $5,000 from her IRA to pay for an additional home (a vacation home). C) A person withdraws funds from his IRA to buy a principal residence after he sold his first home as a result of medical expenses. D) A single parent withdraws funds from her IRA to pay for the education of a nephew.

D) I, II, and III Explanation An associated person is any officer or person in a control position to the broker-dealer or any employee of the broker-dealer, except for clerical or ministerial employees. U3LO3

Which of the following is(are) considered an associated person(s) of a broker-dealer under the Securities Exchange Act of 1934? Any employee of a broker-dealer, except for clerical or ministerial employees Any officer, partner, or manager associated with the broker-dealer Any employee, other than a clerical or ministerial employee, who is supervised by, supervises, or is under common supervision of the broker-dealer A) I and III B) II and III C) I and II D) I, II, and III

D) Money market funds Explanation Money market funds offer check-writing privileges permitting their investors to cash out virtually immediately. U14LO10

Which of the following types of investments would have the lowest liquidity risk? A) Preferred stock B) Real estate C) Gold D) Money market funds Explanation Money market funds offer check-writing privileges permitting their investors to cash out virtually immediately. U14LO10

A) ABCD, Inc. preferred stock paying a 6% dividend Explanation The key to this answer is that corporations have a 50% dividend exclusion on dividends received from other companies. The math looks like this: Only half of the 6% dividend is taxable. That means 3% per year is tax free and the other 3% is subject to tax at the 21% rate. So, we have 3% + 79% of the taxable 3% = 3% + 2.37% = 5.37% after-tax return. The municipal bond is not taxed, but that only produces 5% after tax. The corporate bond is subject to 21% tax so the corporation gets to retain the other 79%. That computes to 6.75 x 79% = 5.33%, just a bit less than the preferred stock. In most cases, dividends paid to corporations by REITs are fully taxable. That makes the after-tax return on the 6.5% dividend only 5.14%. U21LO6

XYZ, Inc. is a C corporation in the 21% federal income tax bracket. Which of the following investments offers the company the highest after-tax return? A) ABCD, Inc. preferred stock paying a 6% dividend B) Corporate bond with a 6.75% coupon C) REIT paying a 6.5% dividend D) Municipal bond with a 5% coupon rate

A) the yield to maturity is higher than the yield to call Explanation Whenever a bond is selling at a premium, the return, in descending order is: nominal yield, current yield, YTM, and YTC. It is the reverse order when the bond is selling at a discount. When the bond is at par, all are the same (if the call is at par). U23LO1

ABC Corporation's 5% mortgage bond is currently trading at a premium. The bond is callable at par in 10 years and matures in 15 years. When comparing the returns available to an investor, it would be accurate to state A) the yield to maturity is higher than the yield to call. B) the yield to maturity is higher than the current yield. C) the current yield is higher than the nominal yield. D) the yield to call is higher than the current yield.

A) I, II, III, and IV Explanation All of the situations listed involve some potential conflict of interest. Although such transactions are not prohibited, proper disclosure is required. U6LO1

According to both the Investment Advisers Act of 1940 and the Uniform Securities Act, under which of the following circumstances is an investment adviser required to make disclosure to the client? The adviser intends to recommend the use of the broker-dealer with whom he is affiliated. The transactions recommended to the client are inconsistent with those for the adviser's own account. The investment adviser intends to sell the client the insurance policy recommended for his financial plan. The adviser is employed by a broker-dealer but provides investment advisory services outside the scope of his employment with the broker-dealer. A) I, II, III, and IV B) II and IV C) I and III D) III and IV

D) an agent soliciting a customer to buy a new issue of corporate bonds Explanation Solicited trades are generally not exempt transactions unless with institutional buyers. Sales by a fiduciary (such as an executor of an estate) are exempt from the registration provisions. Sales to financial institutions (such as a bank) are also exempt under the act. Unsolicited trades in securities traded in the secondary markets are exempt from state registration and advertising filing requirements. U4LO3

All of the following are exempt transactions under the USA EXCEPT A) an executor selling shares of common stock for an estate B) an agent buying a listed stock at the client's request C) a bank buying common shares in a publicly traded railroad D) an agent soliciting a customer to buy a new issue of corporate bonds

D) a prohibition against testimonials from clients Explanation Advertisements may not contain false statements, include testimonials from clients, refer selectively to past recommendations, refer to a chart or device for evaluating securities without explaining its limitations and difficulties, or offer anything free of charge if in fact there will be some requirement, however minor, for obtaining the free item. There is no federal filing requirement for advertisements of investment advisers (although filing may be required by the state Administrator). As long as the past performance is displayed in a manner consistent with the rules, there is no problem. U6LO5

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, advertisements must comply with rules set out under the Investment Advisers Act of 1940. Those rules include A) a prohibition against reduced-fee introductory offers B) a requirement that a copy of all advertisements be sent to the SEC at the time they are disseminated to the public C) a prohibition against showing the adviser's past performance D) a prohibition against testimonials from clients

C) I and II Explanation Investment clubs and otherwise unaffiliated groups may not pool their money to receive a breakpoint. Incorporated or otherwise affiliated entities, such as spouses or a parent and minor child, may do so. The fact that the custodian of the daughter's account is the spouse does not change things. U14LO4

Under the Investment Company Act of 1940, purchases by which of the following are eligible for the reduced sales charges applicable at the fund's stated breakpoints? A qualified retirement plan The combined purchases of a man and a custodial account for his daughter where his wife, not he, is the custodian Two friends who have pooled their money to make a large purchase An investment club A) II and IV B) III and IV C) I and II D) I and III

B) Weak Explanation The weak form holds that current stock prices reflect all historical market data and that historical price trends are, therefore, of no value in predicting future prices. However, this form holds that credible fundamental analysis and insider information may produce above-market returns. Those who truly believe in the EMH are of the opinion that none of these will do any better than the market; random selection is as good as anything else. Random walk is not one of the 3 forms. U20LO10

Which form of the efficient market hypothesis (EMH) suggests that fundamental analysis and insider information may produce above-market returns? A) Semi-strong B) Weak C) Strong D) Random walk

C) an estimate of all of the possible returns an investment is expected to yield Explanation The probable return is computed by taking the various likely returns for an investment and adding them together. The difference between an investment's present value and its cost is the NPV. The current worth of future income discounted to today is used to determine present value. The one discount rate that equates the future value of an investment with its NPV is the internal rate of return (IRR). U20LO9

Probable return is A) the current worth of future income discounted to reflect what that income is worth today B) the difference between an investment's present value and its cost C) an estimate of all of the possible returns an investment is expected to yield D) the one discount rate that equates the future value of an investment with its net present value

A) I and IV Explanation As long as the offering is limited exclusively to accredited investors, Rule 506(c) offerings may be publicly advertised; Rule 506(b) offerings can never be advertised. The limit of 35 nonaccredited investors applies to Rule 506(b); there is no limit on the number of accredited investors for either rule. Both rules are subject to the bad actor provisions. U4LO3

Which of the following statements regarding the differences between Rule 506(b) and Rule 506(c) of Regulation D of the Securities Act of 1933 are TRUE? Rule 506(c) offerings can be advertised, while Rule 506(b) offerings cannot. Rule 506(c) offerings are limited to 35 nonaccredited investors, while Rule 506(b) offerings do not have a limit. The bad actor provisions only apply to Rule 506(c) offerings. Rule 506(c) offerings are limited exclusively to accredited investors, while nonaccredited investors can participate in Rule 506(b) offerings. A) I and IV B) III and IV C) II and III D) I and II

A) raw land Explanation Raw land does not generate income; it is most often held for future capital appreciation. U17LO2

You have a client who wishes to allocate a portion of his funds to investment real estate in an attempt to generate additional income. That goal could be reached by investing in any of the following EXCEPT A) raw land B) rental real estate C) REITs D) real estate limited partnerships

A) II and III Explanation Guarantees against loss and failure to inquire into a client's investment objectives, situation, and needs are unethical. Conflicts of interest must be disclosed and, if the client wants to continue, the client may enter into the contract. U6LO3

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser representative would be acting improperly if she allowed a client to sign an advisory contract after disclosing a potential conflict of interest to that client agreed to personally make up the difference if a client's account lost money failed to inquire into a client's investment objectives, financial situation, and needs A) II and III B) I and III C) I, II, and III D) I and II

C) the chief compliance officer (CCO) Explanation Although all of these "C" level officers have an important role to play, it is the CCO who is responsible for administering the policies and procedures designed to prevent violation of the federal securities laws and review those policies and procedures annually for their adequacy and the effectiveness of their implementation. U7LO6

Under rule 206(4)-7 of the Investment Advisers Act of 1940, each investment adviser registered with the SEC is required to adopt and implement written policies and procedures designed to prevent violation of the federal securities laws. Ensuring that this is done is the role of ​ A) the chief executive officer (CEO) B) the chief financial officer (CFO) C) the chief compliance officer (CCO) D) the chief operating officer (COO)

A) rights have intrinsic and time value while warrants only have time value Explanation At the time of issuance, preemptive rights always offer the stock at a price below the current market thus creating intrinsic value. Although rights rarely are effective for longer than 45-60 days, that does represent time value. On the other hand, warrants are always issued with an exercise price above the current market (no intrinsic value) but do have time value. U16LO3

When contrasting preemptive rights and warrants, it would be correct to state that, at issuance, A) rights have intrinsic and time value while warrants only have time value. B) rights have time value while warrants have intrinsic and time value. C) rights have intrinsic and time value while warrants only have intrinsic value. D) rights have intrinsic value while warrants have intrinsic and time value.

D) TOD account Explanation A simple way for an individual account owner to ensure that the assets in the account pass directly to the named beneficiary is to use the Transfer on Death (TOD) option. Although the assets in a JTWROS account pass to the survivor without probate, the question specifies an individual, not a joint account. U18LO5

Which type of individual account allows for investments held in that account to go straight to a named beneficiary outside of probate? A) Advisory account B) Testamentary account C) Account titled JTWROS D) TOD account

C) Sell the security Explanation In the event of bankruptcy, all debt holders have priority over equity holders in claims on the assets of the corporation in liquidation. The safest alternative is to sell the stock. Buying puts on the underlying common stock would be an effective hedge, but with a 3-year wait, the position would have to be renewed several times because the usual option only has a life of 9 months; this would lead to increased transaction costs. U20LO12

If a client who holds a convertible preferred stock believes the company may go bankrupt within the next 3 years, what would you advise the client to do with the stock? A) Immediately convert to common stock because the preferred dividends may no longer be paid. B) Sell calls on the preferred stock. C) Sell the security. D) Buy puts on the common stock as a hedge.

C) Buy stop Explanation 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. U22LO6

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) Buy limit B) Sell stop C) Buy stop D) Sell limit

B) The​ ​investment adviser must notify the Administrator​ by the close of business on the following business day​ Explanation 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. U1LO5

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 ​must increase its surety bond to make up the deficiency. B) The​ ​investment adviser must notify the Administrator​ by the close of business on the following business day​. C) The ​investment adviser is not required to file​ ​an amendment to its registration with the Administrator. D) The investment adviser must notify the Administrator promptly.

D) tax free if the recipient is disabled Explanation A distribution to someone who is disabled is free of the 10% penalty tax but is still subject to taxation as ordinary income. Distributions from a qualified retirement plan (e.g., a 401(k) plan) prior to retirement are subject to tax and possible penalty unless the funds are rolled over or transferred into a traditional IRA. If, instead, the move is made into a Roth IRA, there is no penalty, but tax would be due just the same as if one converted from a traditional to a Roth IRA. U24LO1

It would be incorrect to state that a lump-sum distribution from a 401(k) before retirement may be A) subject to ordinary income tax and penalty B) eligible to be rolled over into a traditional IRA C) eligible to be transferred to a Roth IRA D) tax free if the recipient is disabled

D) a market maker Explanation A market maker is a firm that stands ready to buy and sell a particular stock on a regular and continuous basis at a publicly quoted price. The term is most often used in the context of the over-the-counter (OTC) markets. Market makers trade for their own inventory (position trade). The term specialist historically referred to the person on the floor of a stock exchange who performed a similar function; the current term is designated market maker (DMM). U22LO4

Nite Capital Group is a registered broker-dealer whose primary business model is providing quotations for OTC stocks in which they position trade. Nite would be known as A) an investment company B) a secondary market C) a specialist D) a market maker

C) II and III Explanation No broker-dealer or agent may exercise discretion in a client's account without having received prior written authorization. Read choice IV carefully. The use of inside information is a prohibited practice under all circumstances, not only if the client makes money. Win or lose, it is still prohibited. It is appropriate to disclose material information in such manner as to make it easily understandable and all recommendations must be suitable, whether or not the client agrees with them. U7LO5

The NASAA Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents describes many actions considered by NASAA to be prohibited under the intent of the USA, as amended. Under that Statement of Policy, which of the following actions would be a prohibited practice? Stating material facts in such a manner that they may be easily understood by a prospective client Making unsuitable investment recommendations even when the client agrees with your assessment Exercising discretion without previous written authority Using inside information, but only if the client makes money as a result of the trade A) I and II B) III and IV C) II and III D) I and III

D) II and III Explanation A registered person may apply to withdraw the registration. The withdrawal is effective in 30 days, unless the person is under investigation in connection with pending disciplinary action or an investigation is instigated during the 30 days after filing the application to withdraw. If there is an investigation underway, the Administrator will determine when the withdrawal will become effective. The Administrator has one year from the effective date of withdrawal to begin disciplinary actions for violations of the act. U5LO2

Under the USA, which of the following statements regarding the withdrawal of an IAR's registration is TRUE? The withdrawal automatically becomes effective 90 days after filing. If disciplinary action is initiated within 30 days after filing, the automatic effective date may be delayed. The Administrator may institute disciplinary proceedings within one year after the effective date of the withdrawal. A) I and III B) I, II, and III C) I and II D) II and III

A) II and IV Explanation When a fund has net redemptions, it means that less money is coming in than is going out. In order to meet those redemptions, the fund's manager will either have to sell securities that they planned to hold onto, or maintain more assets in cash (which generally will return less than other investments). Because the expense ratio is the annual expenses divided by the average annual assets, with less assets to cover the fixed expenses, the ratio will probably increase. U14LO10

A client of yours has been investigating a particular mutual fund. She mentions that she saw a blurb on the internet that the fund has had net redemptions over the past 6 months and asks you to explain how that might affect the fund's performance. You should explain that this is a good thing because now, with less money to invest, the fund's adviser is able to be more selective performance will probably suffer because the fund's adviser will have to sell positions prematurely in order to meet redemption requests this would be a good time to buy because the supply of shares exceeds the demand many of the fund's expenses are relatively fixed so with less assets in the fund, the expense ratio will probably increase A) II and IV B) I and IV C) II and III D) I and III

A) Liquidating a portion of that stock to take advantage of the tax savings offered by the stepped-up basis at death Explanation Under current tax law, a beneficiary inherits assets at their fair market value as of the time of death. This is known as a stepped-up basis (probably because these assets are generally at a higher price than when originally purchased). In this question, we are told that there is a large unrealized gain. Therefore, with a portfolio that is overconcentrated in 1 security, it would make sense to diversify while, at the same time, avoiding or minimizing capital gains taxes. It would be against the provisions of the UPIA for a fiduciary to ever engage in trading from his own account. U21LO5

A deceased client's trust account has over 90% of its value invested in a single common stock whose recent performance has been outstanding, resulting in a very large unrealized capital gain at the time of death. What action would most likely be taken by the investment adviser handling this account? A) Liquidating a portion of that stock to take advantage of the tax savings offered by the stepped-up basis at death B) Continuing to hold that stock position if it is felt that it meets the objectives of the trust C) Selling all of that stock in order to rebalance the trust's assets D) Exchanging a portion of that stock for a suitable security held in the adviser's trading account

A) II and IV Explanation An investment adviser required to register with the SEC under the Investment Advisers Act of 1940 must submit its Form ADVs to the SEC. In some cases, the Form ADV will also be filed with the state Administrator, but that is state law, not a federal requirement. A balance sheet must be submitted with Part 2 if the adviser receives "substantial" prepayments of fees. Part 2 may be used as an investment adviser's disclosure brochure to clients. U1LO5

According to the Investment Advisers Act of 1940, which of the following statements regarding Part 2 of Form ADV are TRUE? It must be filed with the state Administrator. A balance sheet must be submitted if the adviser collects prepaid fees of more than $1,200, 6 or more months in advance. Certain minimum business and education qualifications must be met before an investment adviser can file. It may be used to satisfy the brochure requirements of the act. A) II and IV B) I, II, and III C) I and IV D) I, II, and IV

D) accepting an order from a client wishing to purchase a nonexempt security that is not properly registered in the state Explanation An unsolicited order is an exempt transaction, so accepting this from the agent's client would not be a prohibited practice. There is never a case when backdating of confirmations is permitted, even by 1 day. No discretionary activity may take place until the written authorization is actually received by the firm. Although an agent can use discretion as to time and price without written authority, oral instructions from the client are required, and nothing in the question indicates that the client instructed the agent to "buy when you think the price is right." U7LO5

All of the following actions, if performed by a registered agent, would be considered a prohibited activity under the Uniform Securities Act EXCEPT A) the agent saves the client money by deliberately withholding the client's buy order for a stock when the agent sees the stock price is trending down. When the order is finally placed later in the day, the execution price is $1 less than when the agent received the order. B) the client informs the agent that the appropriate written discretionary authorization forms are being hand-couriered to the agent and should arrive within the hour. Knowing the required paperwork is on its way, the agent begins discretionary trading in the account. C) the agent backdates customer confirmations in order to enable the client to achieve a long-term holding period, thereby saving considerable income taxes D) accepting an order from a client wishing to purchase a nonexempt security that is not properly registered in the state

C) a solicitor and required to register as an IAR Explanation The term "investment adviser representative" is quite broad and includes any partner, officer, director of (or a person occupying a similar status or performing similar functions) or other individual employed by or associated with an investment adviser that is registered or required to be registered under the USA, or who has a place of business in this state and is employed by or associated with a federal covered adviser; and who does any of the following: (1) makes any recommendations or otherwise renders advice regarding securities; (2) manages accounts or portfolios of clients; (3) determines which recommendations or advice regarding securities should be given; (4) solicits, offers, or negotiates for the sale of or sells investment advisory services; or (5) supervises employees who perform any of the foregoing. U2LO1

An individual employed by or associated with an investment adviser that is registered or required to be registered under the Uniform Securities Act, or who has a place of business in this state and is employed by or associated with a federal covered adviser and whose only role is to solicit, offer, or negotiate for the sale of or sell investment advisory services would be considered A) an administrative employee exempt from registration B) an IAR only if soliciting noninstitutional clients C) a solicitor and required to register as an IAR D) a solicitor and required to register as an IA

A) an employee of the firm with a degree in communications whose job is the graphic design of the investment adviser's research publications. Explanation Graphic design would be considered a clerical function. All of the other choices describe persons who meet the definition. U2LO2

As written in the Investment Advisers Act of 1940, a "person associated with an investment adviser" is any partner, officer, or director of such investment adviser (or any person performing similar functions), or any person directly or indirectly controlling or controlled by such investment adviser, including any employee of such investment adviser. Persons associated with an investment adviser whose functions are clerical or ministerial are not included in this definition. Based on that definition, all of the following would be associated persons EXCEPT A) an employee of the firm with a degree in communications whose job is the graphic design of the investment adviser's research publications. B) a senior officer of an investment adviser responsible for marketing the adviser's services as opposed to making investment advisory decisions. C) an individual employed by an investment adviser to solicit new advisory clients, compensated at a rate of $500 for each new account. D) a silent partner in an advisory firm organized as a general partnership.

B) She may review the company's stock 200-day moving average. Explanation Reviewing the company's stock 200-day moving average is a technique used by technical analysts (chartists). All of the other techniques are used by fundamental analysts. The process of examining the economy, the specific industry, and the specific company is a reflection of top-down fundamental analysis. U12LO6

Kellie is a senior equity analyst for a large brokerage firm. She primarily uses fundamental analysis techniques to assist her in picking stocks for her firm's clients. Today, she is reviewing the XYZ Corporation. The company is a manufacturer of computer keyboards and is currently going through an expansion phase. Which of the following techniques would Kellie be least likely to use to determine whether to buy, sell, or hold this company's stock? A) She may consider trends towards tablets and smart phones. B) She may review the company's stock 200-day moving average. C) She may calculate the intrinsic value of the stock using one or more of the stock valuation models. D) She may examine the overall state of the economy, the computer industry, and then XYZ Corporation.

A) interest received from specified private purpose municipal revenue bonds Explanation The Internal Revenue Code provides that interest on specified private activity bonds is an item of tax preference. Therefore, this interest must be added to a taxpayer's regular taxable income in order to compute the taxpayer's AMTI. Accelerated depreciation and excess intangible drilling costs are preference items. 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. U21LO4

The alternative minimum tax is designed to ensure that certain high-income taxpayers do not avoid all income tax through the use of various tax preference items. Those preference items are added back to the taxpayer's ordinary income on IRS Form 6251 and would include A) interest received from specified private purpose municipal revenue bonds. B) intangible drilling costs in connection with an oil drilling program. C) straight-line depreciation taken on investment real estate. D) long-term capital gains in excess of $3,000 annually.

B) if the broker-dealer's membership in the FINRA was revoked because of a violation of FINRA rules Explanation This is tricky because the USA only permits an Administrator to take action against a person convicted of a securities violation in another state if that action would be a violation in his state. However, when the license is revoked on a federal basis, whether through the actions of the SEC or a national SRO like FINRA (the exam may still use NASD), it would be cause for denial by the Administrator even when the action involved is not a violation in his state. As long as BD meets the SEC's net capital requirements, the state cannot impose a higher one. U5LO2

Using the powers granted under the Uniform Securities Act, the Administrator would have the right to deny the registration of a broker-dealer A) if the broker-dealer had agents registered in the state B) if the broker-dealer's membership in the FINRA was revoked because of a violation of FINRA rules C) if the broker-dealer's net capital only met SEC requirements, but not those of the state D) if the broker-dealer's membership in the FINRA was revoked because of a violation of FINRA rules, but only if the activity involved was a violation of the Uniform Securities Act

D) Soliciting orders for unregistered, nonexempt securities Explanation It is unlawful under the USA for an agent to solicit orders for securities that must be registered (nonexempt). An agent may indicate that he is registered to conduct business in a state, if that is true. The agent may not state that the Administrator has approved or endorsed a registration. An adviser is not under any legal obligation to disclose that his brother was convicted of a securities-related felony. The adviser, however, must disclose within 48 hours of entering into the contract if he has been convicted of a securities-related felony within the last 10 years. An agent may accept indications of interest for securities during the registration process. The red herring prospectus is used during this period, and neither offers to sell nor orders to buy may be accepted prior to the effective date. U4LO3

Which of the following practices is considered unlawful under the Uniform Securities Act? A) Claiming an agent is registered and authorized to conduct business in the state in which he practices B) Accepting indications of interest in securities that are in the process of registering with the SEC C) Not disclosing to a client within 48 hours of entering into an advisory contract that the adviser's brother was recently convicted of a securities-related felony D) Soliciting orders for unregistered, nonexempt securities

B) Owners have a continuing claim to their dividends, and all arrears must be paid before any dividends can be paid on common stock. Explanation Owners of cumulative preferred stock have a continuing claim to their dividends, even when the directors pass a dividend. Their claim accumulates, which means that all past dividends (arrears), as well as current dividends, must be paid before any dividend can be paid on common stock. By contrast, the owners of noncumulative preferred stock lose their claim to dividends that are not paid in any one year. U12LO2

Which of the following statements best describes cumulative preferred stock? A) Owners receive an extra dividend, along with common shareholders, in addition to the preferred dividend. B) Owners have a continuing claim to their dividends, and all arrears must be paid before any dividends can be paid on common stock. C) Owners lose any claim to dividends that are not paid in any one year. D) Owners are allowed to vote for directors using the cumulative voting procedures.

B) An investor invests a set amount of money each interval to buy more shares when the prices are low and fewer shares when prices are high Explanation Dollar cost averaging involves investing a set amount of money each interval. If the market fluctuates, the client will buy more shares when the prices are low and fewer shares when prices are high. The result of this is a lower average cost per share than average price paid. An investor who sells shares when the market rises and buys shares when the market declines is not dollar cost averaging, but using another system, such as a constant ratio or constant dollar plan. An investor who averages the cost of the shares purchased and then enters limit orders to purchase additional shares at the average price is not engaged in a dollar cost averaging program. In dollar cost averaging, the same dollar amount is invested each interval. U20LO11

Which of the following statements is an accurate description of dollar cost averaging? A) An investor averages the costs of his shares purchased and then enters limit orders to purchase additional shares at the average price. B) An investor invests a set amount of money each interval to buy more shares when the prices are low and fewer shares when prices are high. C) An investor sells shares when the market rises and buys shares when the market declines in order to average his costs. D) An investor buys the same number of shares each interval, averaging his purchase prices over time.

D) The client's oral approval is sufficient for a specific order. Explanation Oral approval from the client authorizing a stated amount of a specified security is sufficient to place an order. An agent must receive authority to place orders for a client whether or not there is a conflict of interest. Written approval from the client authorizing a stated amount of a specified security is not required before placing the order. However, written authority is necessary for the agent to exercise discretion in the account. U7LO2

Which of the following statements regarding an agent's authority to place orders for a client's account under NASAA's Statement of Policy on Unethical or Dishonest Business Practices of Broker-Dealers and Agents is TRUE? A) The agent may, without the client's approval, place a sell order for the purpose of avoiding losses but may not place a buy order without the client's authorization. B) Written approval from the client authorizing a stated amount of a specified security is required before placing an order. C) The agent is not required to obtain authorization to place orders for a client's account unless a conflict of interest is involved. D) The client's oral approval is sufficient for a specific order.

B) An owner of a put has the obligation to purchase securities at a designated price (the strike price) before a specified date (the expiration date). Explanation An owner of a put has the right, not the obligation, to sell, not purchase, a security at a designated price (the strike price) before a specified date (the expiration date). Although this exam deals exclusively with listed equity options, there are options traded in the OTC market. Two of the factors affecting the market price of an option (its premium) are the length of time until expiration (the longer the time, the greater the time value) and whether or not the option has intrinsic value (the difference between the stock price and the market price). U16LO3

Which of the following statements regarding derivative securities is NOT true? A) An option contract is a derivative security because it has no value independent of the value of an underlying security. B) An owner of a put has the obligation to purchase securities at a designated price (the strike price) before a specified date (the expiration date). C) An option contract's price fluctuates in relationship to the time remaining to expiration as well as with the price movement of the underlying security. D) Derivative securities can be sold on listed exchanges or in the over-the-counter market.

B) The excess of the alternative tax over the regular tax is added to the regular tax Explanation The excess of the alternative tax over the regular tax is added to the regular tax amount. The taxpayer does not have the option of paying the alternative tax or the regular tax depending on his tax bracket. The purpose of the alternative minimum tax is to ensure that certain taxpayers pay a tax consistent with their wealth and income. U21LO4

Which of the following statements regarding the alternative minimum tax is TRUE? A) The alternative minimum tax is added to the regular tax. B) The excess of the alternative tax over the regular tax is added to the regular tax. C) The tax bracket will determine whether the regular tax or the alternative tax is paid. D) The lesser of the regular tax or the alternative tax is paid.

D) I and III Explanation An international mutual fund (or ETF) invests in the securities of companies that are not domiciled in the United States. Therefore, we have the benefit of added diversification. These pooled investment vehicles offer investors the specific benefit (whether foreign or domestic) of not having to worry about individual stock selection—the professional managers do that. There are no specific tax benefits to investing through the fund rather than directly and, in most cases, the regulatory controls in other countries do not offer the same degree of investor protection as those of the United States. U14LO10

Why would you suggest a client invest in international mutual funds or ETFs? Diversification Tax benefits Avoids having to pick individual stocks Greater regulatory controls A) II and III B) I and IV C) I, II, III, and IV D) I and III