Greenlight Exam 2
A portfolio contains fixed-income instruments and common stock. The portfolio's beginning value was $240,000; however, the portfolio was valued at $280,000 at the end of the second year. If interest and dividends totaled $20,000, what's the annualized yield on the portfolio? A) 12.50% B) 25% C) 16.60% D) 8.30%
A) 12.50% **The formula for calculating total return is: (Ending Value - Beginning Value) + Income/ Beginning Value In this question, the gain is $40,000 ($280,000 - $240,000) and the income is $20,000, for a total of $60,000. The $60,000 is then divided by the starting value of $240,000, which equals a total return of 25%. However, the 25% return was based on performance over two years. Since the question is asking for the annualized return, the 25% return must be divided by the two years, which equals an annualized return of 12.5%.
An investor owns a large portfolio of stock and wants to hedge against a market downturn. Which of the following orders are the most appropriate? A) Market orders to sell B) Sell limit orders C) Sell stop orders D) Buy limit orders
C) Sell stop orders **Stop orders are often entered to protect existing positons. Sell stop orders allow an investor to sell their existing stock position if the stock's price falls to a certain price. Although sell limit orders also allow an investor to sell, these orders are only executed if the market rises. For that reason, an investor will be realizing a gain, rather than protecting against a loss.**
A 19-year-old high school graduate who lives in State A has decided to attend college in State B. Her parents have been funding her college education through a Section 529 savings plan. Which of the following statements is TRUE concerning the tax considerations on her withdrawals for her education expenses? A) They may be withdrawn without federal tax liabilities B) They are federally taxable since she is attending an out-of-state school C) Her parents must pay federal tax on the withdrawals D) The withdrawals will be exempt from state income taxes
A) They may be withdrawn without federal tax liabilities **Under federal law, 529 plan contributions are made with after-tax dollars and any earnings grow tax-deferred. However, any withdrawals that are used for educational purposes (e.g., room, board, books) are considered qualified and tax-free at the federal level. These provisions are available regardless of whether the beneficiary attends an in-state or out-of-state school.**
According to SEC Release 1092, which of the following persons is considered an investment adviser? A) A brokerage firm that offers retirement planning advice to clients B) A pension consultant who advises several large publicly traded companies C) The publisher of Bulls, Bears, and Pigs, a financial magazine D) A teacher who offers advice to students who remained after class
B) A pension consultant who advises several large publicly traded companies **Under the Investment Advisers Act of 1940, an entity must meet a three-part test to be considered an investment adviser. The three parts of the test are Advice, Business, and Compensation. SEC Release IA-1092 expanded the definition to specifically include financial planners, pension consultants, and sports and entertainment representatives as investment advisers.**
A company whose stock is listed on the NYSE intends to issue additional shares in State X. The Administrator of State X: A) May require the issuer to perform notice filing. B) May not require the registration of the offering in State X. C) May require the issuer to pay a fee. D) May ignore any allegations against the underwriter for possible fraud in connection with the offering.
B) May not require the registration of the offering in State X. **Securities that are listed on a national exchange (e.g., NYSE, Nasdaq, or AMEX) are referred to as federal covered securities and, therefore, are not required to be registered at the state level. Additionally, if the federal covered security is listed on an exchange, the state may not require the issuer to pay a fee, submit a notice filing, or provide a consent to service of process. However, the state Administrator may investigate any broker-dealer (including the underwriter) that participates in the offering for fraud or deceit and file an enforcement action if it is warranted.**
All of the following statements are TRUE regarding term life insurance, EXCEPT: A) It provides insurance coverage for a limited period. B) The policy matures and its cash value is paid out at the end of the term period. C) It may be converted to an individual whole life plan. D) It does not build equity against which owners may borrow.
B) The policy matures and its cash value is paid out at the end of the term period. **Term life insurance policies remain in force for a specified period (e.g., 10 or 20 years) and are the simplest type of life insurance that may be purchased. The policyholder pays the premiums with the agreement that the company will pay the death benefit to the beneficiary if the insured dies while the policy is in force. Term life insurance is best suited for a person who only wants life insurance protection and is not interested in using his life insurance policy for investment purposes, since term policies do not build cash value. Term insurance policies do not have a maturity; instead, they simply provide coverage if the insured dies within the policy's term period.**
A registered investment adviser is located in State X and is going out of business. Which of the follow is TRUE regarding the registration of the adviser and its IARs? A) The registrations of both the IA and its IARs will remain effective until December 31. B) The registrations of both the IA and its IARs will become ineffective 30 days after the IA files withdrawal forms with the Administrator. C) The registration of the IA will be withdrawn 30 days after filing a withdrawal form, but the registrations of its IARs will remain effective until December 31. D) The registration of the IA will be withdrawn 30 days after filing, but there is a two-year grace period before its IAR are required to reregister.
B) The registrations of both the IA and its IARs will become ineffective 30 days after the IA files withdrawal forms with the Administrator. **When an IA files forms to withdraw its registration, it must also file to withdraw the registrations of all of its IARs. According to the Uniform Securities Act, the withdrawal is effective 30 days after the filing.**
Under the Uniform Securities Act, which of the following persons is considered an investment adviser representative? A) A registered representative of a broker-dealer who occasionally offers complimentary tax and financial planning advice to clients B) A lawyer who refers business to an advisory firm C) An office manager of an advisory firm who supervises salespersons, but does not have her own clients D) All of the above
C) An office manager of an advisory firm who supervises salespersons, but does not have her own clients **The Uniform Securities Act defines an investment adviser representative (IAR) as any partner, officer, director, or other individual who is associated with an investment adviser and, 1) makes recommendations or gives advice regarding securities, 2) manages accounts or portfolios of clients, 3) determines which recommendations or what advice should be given, 4) solicits, offers, or negotiates the sale of investment advisory services, or 5) supervises employees who perform any of these functions. In choice (c), although the office manager has no clients of her own, she is considered an IAR since she is responsible for supervising employees who manage accounts and offer investment advice.**
The primary advantage of establishing a trust is: A) Tax-free income distributions by the grantor B) Tax-free income for the beneficiaries C) Separate tax status of the trust, which is distinct from the party that establishes the trust D) The grantor will realize tax benefits when establishing himself as beneficiary to the trust
C) Separate tax status of the trust, which is distinct from the party that establishes the trust **A trust is created when one person (a trustee) is put in charge of managing property for the benefit of another person (a beneficiary). The trustee has legal control of the trust property (corpus), but must manage it in the interests of the beneficiary. For tax purposes, the trust is a separate taxable entity; therefore, taxes are the responsibility of the trust (or potentially the beneficiary), not the trustee or the person who created the trust.**
When should a federal covered adviser (FCA) file an amendment to its registration? A) Within 30 days of the amendment B) Within 90 days of the end of calendar year C) Within 90 days of the end of its fiscal year D) By the end of the calendar year
C) Within 90 days of the end of its fiscal year **Within 90 days after an adviser's fiscal year end, it must file an "Annual Updating Amendment." This amendment to the adviser's Form ADV reaffirms the eligibility information contained in the form and updates the responses to any other item for which the information is no longer accurate.**
According to the Uniform Securities Act, which of the following statements is NOT misleading if it is made by an agent? A) "Diversifying a portfolio with multiple issues of common stock will reduce market risk and increase long-term performance." B) "Fixed-income instruments represent a conservative investment and are the most appropriate investment vehicle for older clients." C) "Investments in equities will permit an investor to maintain positive returns in an inflationary economy." D) "A gift of assessable stock is technically treated as both an offer and a sale."
D) "A gift of assessable stock is technically treated as both an offer and a sale." **Assessable stock is a class of stock on which the issuing company is allowed to demand additional funds from existing stockholders. A gift of assessable stock involves both an offer and a sale and is subject to the USA's requirement to disclose all material facts. Prior to the USA, individuals could give gifts of assessable stock without disclosing that additional capital (an assessment) was required in order to maintain ownership. The Uniform Securities Act made this practice illegal. The other three choices are considered misleading statements and/or the use of inflated language. The problem with choice (a) is that all equities (even a portfolio consisting of multiple common stock issues) is fully subject to market risk.**
Which of the following is a risk-adjusted rate of return? A) Beta B) Duration C) Convexity D) Alpha
D) Alpha **Alpha is risk-adjusted rate of return that measures the amount that a stock, bond, or portfolio returned above the expected rate of return, which is predicted by the CAPM formula. Duration and convexity are measures of interest-rate risk and do not specifically measure the performance of investments (i.e., they are not rates of return). Beta is also a measure of risk, specifically the degree to which an investment or portfolio moves in relation to the market as a whole. Beta is used to find the expected rate of return in the CAPM formula, but alone is not a measure of return.**
An agent is registered in State A and provides financial services to an older client who lives in State A. The client's son, who lives in State B, calls the agent and indicates his intention to open an account, but wants to immediately place an order to buy 1,000 shares of XYZ stock. If the agent is not currently registered in State B, what course of action should he take? A) Conduct the trade through the client's account who lives in State A and then transfer the shares once he is registered in State B B) Open an account for the son using his mother's State A address C) Ask the son if he is willing to wait for a few weeks while the agent registers in State B D) Decline the order
D) Decline the order **Since the broker-dealer is not registered in State B, the order from the son must be declined. A broker-dealer is only permitted to effect transactions in a state(s) in which it is registered.**
An IAR has been discussing the advantages of purchasing a financial plan with a potential client. During a party that they are both attending, the client mentions that she has looked over the contract and is ready to move forward with the financial plan. The client hands her signed contract and a check to the IAR. Although the IAR has not provided the client with his firm's brochure, the client states that she has reviewed it online. Regarding the disclosure document, which of the following statements is TRUE? A) The IAR may obtain the client's signature on the contract as long as he delivers a brochure to her within five business days. B) The IAR is not required to provide the client with the brochure, since she has reviewed it online. C) The IAR must ensure that the client receives the brochure within 48 hours. D) The IAR may not accept the contract until he has provided the client with a copy of his firm's brochure.
D) The IAR may not accept the contract until he has provided the client with a copy of his firm's brochure. **In this question, since the IAR did not give the client his firm's brochure earlier, he must provide it at the time of entering into the contract. When clients are given the brochure at the time of signing a contract, they must be provided with five business days to cancel the contract without a penalty. However, if a client is given a brochure 48 hours in advance of signing a contract, she cannot cancel the contract without a penalty.**
A 30-year-old single mother has income of $25,000 and has put money into an equity fund for her 12-year-old son's college education. She wants to balance out the risk with a small bond investment and is hoping to avoid accessing any of this money until her son turns 18. Which of the following securities is the MOST appropriate for the mother? A) A government bond fund B) A 15-year zero-coupon bond C) A 15-year municipal bond D) A high-yield corporate bond fund
A) A government bond fund **The most appropriate choice for the mother is to invest in a government bond fund. Since U.S. government securities have no credit risk, this choice will balance out the risk of the equity fund. Additionally, the fund will offer the benefit of a diversified portfolio of government securities. Choices (b) and (c) are NOT appropriate since they are direct bond investments. To explain the problem, let's assume that the mother needs the funds early due to an emergency and it is at a time that interest rates have increased. In this situation, since the bonds have a 15-year maturity, their values will have declined. Choice (d) is too risky for a person who only makes $25,000 per year. Remember, high-yield bonds are high-risk investments.**
An individual is licensed as an agent of a broker-dealer, an insurance agent, and an investment adviser representative. One of her clients is nearing retirement and explains that he intends to live off his investments and pension once he retires. He believes that his pension will provide the monthly income he needs to cover his basic expenses. His main investment objectives are to leave a substantial amount of assets to his grandchildren upon his death and to prevent a loss of purchasing power in the event that he lives another 20 to 30 years. The agent should NOT consider recommending a: A) Fixed immediate annuity B) Variable annuity C) Growth and income mutual fund D) Permanent life insurance policy
A) Fixed immediate annuity **Based on the objectives of the client, the fixed immediate annuity is unsuitable. Since the insurance company assumes the investment risk of a fixed annuity, it will not be invested in such a way to provide protection of purchasing power. Additionally, since it is an immediate annuity, the funds are already being distributed to the annuitant and will not be available to his grandchildren upon his death. However, each of the other choices will satisfy the client's needs.**
Which TWO of the following factors are used in a discounted cash flow (DCF) analysis? I) Present value of future cash flows II) Expected rate of return earned on reinvested cash flows III) Future value of current cash flows IV) Expected risk-free rate of return over the life of the investment A) I and II B) I and III C) II and III D) II and IV
A) I and II **Discounted cash flow analysis uses the present value formula and applies it to an investment with multiple future cash flows (e.g., the interest and principal payments of a bond). In order to find the present value of a single cash flow, an investor needs the future cash flows, an expected rate of return (i.e., discount rate), and the number of years until the future cash flow will be received. The risk free-rate of return is used in the Capital Asset Pricing Model (CAPM) formula and is generally not required when performing a discounted cash flow analysis.**
According to the National Securities Markets Improvement Act (NSMIA), which TWO of the following federal covered securities are subject to notice filing? I) Investment company securities II) Securities sold under Rule 506 of Regulation D III) Exchange listed securities IV) Securities sold to qualified purchasers A) I and II B) I and III C) II and III D) III and IV
A) I and II **Notice filing is required of issuers of investment company securities as well as issuers that distribute their securities pursuant to a Rule 506 private placement. Notice filing refers to a state's demand that certain issuers of federal covered securities satisfy state requirements such as signing a consent to service of process, paying a filing fee, and possibly filing with an Administrator any copies of material that has been filed with the SEC as a part of the issuer's federal registration.**
An IAR intends to recommend speculative debt offerings to some of her more aggressive accounts. Since the IAR specializes in equity investments, she plans to use an outside fixed-income expert to help in the selection process. In this situation, which of the following statements is TRUE under the UPIA? A) The IAR may delegate her investment decision-making authority. B) The IAR may delegate her investment decision-making authority once each client signs a third-party indemnity waiver form. C) The IAR may use an outside resource, provided the expert is given full documentation regarding each client before any recommendations are made. D) The IAR is prohibited from using outside experts, since any fees paid would increase a client's management cost.
A) The IAR may delegate her investment decision-making authority. **In the past, any person acting in a fiduciary capacity was solely responsible for making decisions on behalf of another person. However, the Uniform Prudent Investor Act (UPIA) now permits fiduciaries to delegate investment responsibilities to competent third parties (e.g., accountants, attorneys, or securities professionals with different expertise).**
An investor placed money in his Roth IRA and invested in mutual fund shares. He has consistently reinvested any distributions and purchased extra shares. Since the fund charges an 8.5% sales charge, the fund allowed for reinvestment at the NAV. When the investor withdraws money at retirement, how will the distributions be taxed? A) The distributions are considered tax-free. B) Capital gains will be taxed at ordinary rates, but interest and dividends will be exempt from taxation provided reinvestment occurred in the year of distribution. C) Interest and short-term capital gains are taxed at ordinary rates, while the qualified dividends and long-term capital gains will be taxed at a maximum rate of 20%. D) The principal will be treated as tax-free, while the growth is taxable as ordinary income.
A) The distributions are considered tax-free. **Since Roth IRAs are always funded with after-tax dollars, investors may withdraw their contributions at any time without paying taxes. However, any accumulated earnings in the account may only be withdrawn tax-free if the distribution is made five years after the first taxable year in which a contribution was made and the investor is age 59 1/2 or older. In this question, it is assumed that the client meets both of these requirements; therefore, the distributions are tax-free.**
According to the Uniform Securities Act, which of the following persons is an agent? A) A state official who sells his state's investment-grade G.O. bonds to qualified pension plan buyers B) A CEO who sells shares of his company's IPO to family, friends, and other retail investors C) A CFO who structures a private placement offering directly with institutional investors D) All of the above
B) A CEO who sells shares of his company's IPO to family, friends, and other retail investors **This question is about identifying when a person who represents the issuer of securities is considered an agent. Since the CEO is representing his company by selling its stock to the public, he is considered an agent of the issuer. One exclusion from the definition of an issuer agent exists when the individual effects transactions in securities that are exempt, such as U.S. government of municipal securities. Another exclusion from the definition is when the person is involved in exempt transactions, including private placements, sales to qualified purchasers, and transactions between the issuer and its underwriter. If an individual represents a broker-dealer in effecting securities transactions, he is always considered an agent and required to be registered.**
Which TWO of the following statements regarding investment advisory contracts are TRUE? I) Under the Uniform Securities Act, IA contract must be written II) Under the Uniform Securities Act, IA contracts are not required to be written III) Under the Investment Advisers Act of 1940, IA contracts must be written IV) Under the Investment Advisers Act of 1940, IA contracts are not required to be written A) I and III B) I and IV C) II and III D) II and IV
B) I and IV **State law (the USA) requires that contracts between clients and state-registered advisers be in written form. However, federal law (the IA Act of 1940) does not require investment advisory contracts to be in written form. Despite this, as a matter of good business, most advisers formalize client contracts with a written agreement.**
Which TWO of the following statements are TRUE regarding a time-weighted rate of return? I) It may be used to compare the performance of two money managers. II) It is a way of calculating an investor's internal rate of return III) .It does not consider the inflows and outflows of cash. IV) It measures the average return that a client's investment earned. A) I and III B) I and IV C) II and III D) II and IV
B) I and IV **Time-weighted return is used to compare the performance of two money managers. Since managers cannot control when investors either deposit or withdraw their funds, the time-weighted return does not consider inflows and outflows. Dollar-weighted return is used to calculate a client's internal rate of return and takes into account how much the client earned based on the amount of money invested.**
Two friends are forming a business. They want the benefits of incorporation, but want to protect their personal assets and also avoid being taxed twice on any profits that the business generates. Which TWO structures will meet their needs? I) An S Corporation II) A C Corporation III) A limited partnership IV) A limited liability company A) I and III B) I and IV C) II and III D) II and IV
B) I and IV **To meet their needs, the friends should consider forming the business as either an S Corporation or a limited liability company (LLC). Both S Corporations and LLCs avoid corporate taxation by electing to pass their corporate income, losses, deductions, and credits through to their owners. Therefore, shareholders of S Corporations and LLCs report the flow-through of income and losses on their own personal tax returns and are assessed tax at their individual income tax rates (thereby avoiding double taxation).**
An issuer is seeking to raise capital through a private placement offering. The company is located in State A and does not want to incur registration expenses for the offering at either a state or federal level. To satisfy the issuer's goal, the offering: A) Must be registered in State A even if it is exempt at the federal level, since the issuer has a place of business in State A B) May be offered to institutional investors in State A without any registration C) May be offered in State A to no more than 35 non-accredited investors without requiring registration D) May be offered to accredited investors in State A without being registered
B) May be offered to institutional investors in State A without any registration **By selling the securities to only institutional investors in State A, the issuer will be able to avoid registration at either the state or federal level. Remember, if an offering is conducted within only one state, federal regulations will not apply. For that reason, initially choices (b), (c), and (d) seem to work, but both (c) and (d) have problems. Choice (c) indicates that the securities may be offered to a maximum of 35 non-accredited investors; however, a private placement at the state level allows for no more than 10 non-accredited investors. Choice (d) references accredited investors which are defined under Regulation D as officer/directors of the issuer, institutions, and individuals who meet a financial test. Since choice (d) does not indicate a limited number of investors, Choice (b) is a better answer.**
When calculating the current ratio of a corporation, all of the following are included, EXCEPT: A) Accounts payable B) Net income C) Accounts receivable D) Inventory
B) Net income **The formula for calculating the current ratio is current assets of a firm divided by its current liabilities. Both accounts receivable and inventory are current assets and are therefore included. Accounts payable is a current liability on a company's balance sheet and is also included. However, net income is not actually included on a firm's balance sheet; instead, it appears on the income statement. As a result, net income is not needed when calculating the current ratio.**
An investment adviser intends to purchase 100,000 shares that it will place into various clients' accounts. Which of the following is an acceptable method of allocating the bunched order? A) Provide all clients with the average price per share based on the security's trading on that day B) Provide clients with the average price at which the investment adviser purchased the shares C) Allocate the lowest cost shares to the clients that have had an account for the longest period D) Bunched orders are prohibited under NASAA model rules
B) Provide clients with the average price at which the investment adviser purchased the shares **Bunched orders allow investment advisers to buy shares for several clients at the same time. However, since the purchased shares are a part of a large order and may not be executed at the same price, investment advisers must allocate these shares to their clients in a manner that is fair and non-preferential. Most investment advisers use the average price of the shares that they have purchased. Note, the average price of the shares over the entire trading day is not an acceptable practice.**
An investment advisory firm has created a new contract for its advisory clients. Which of the following clauses should NOT appear in the contract? A) The adviser will provide various services, including management of the client's portfolio on a discretionary basis, monthly summaries of account activity, and quarterly personal review of the client's assets under management. B) The adviser will not be held liable for civil damages unless criminal liability is established. C) The client will pay the adviser a quarterly fee equal to 3/4 of 1%, which is based on the ending value of the assets under management. D) The adviser will select the broker-dealer that will execute all portfolio transactions.
B) The adviser will not be held liable for civil damages unless criminal liability is established. **Advisers are not permitted to include provisions in contracts that claim to waive compliance with the any applicable rules or regulations. Therefore, contract language may not include exculpatory clauses which lead clients to believe that they have waived any available right to take legal action against the adviser. Additionally, advisory contracts may not contain hedge clauses that absolve the adviser from liability or mandatory arbitration provisions.**
An equity-indexed annuity is suitable for which of the following clients? A) A person who desires a high rate of return with little risk B) A person who needs a guaranteed return for life with no risk C) An person who needs a minimum guaranteed return with the potential for a greater return than CDs offer D) A client who needs tax-free income with limited risk
C) An person who needs a minimum guaranteed return with the potential for a greater return than CDs offer **Equity-indexed annuities are NOT considered securities. Instead, they are hybrid products that combine elements of both fixed and variable annuities. The return of an EIA is linked to the performance of an underlying stock index. The insurance company that issues an equity-indexed annuity guarantees a minimum rate of return (as in a fixed annuity), but the annuity's ultimate return (which is capped) will vary depending on the performance of the index to which it is linked. To receive the EIA's guarantees, an investor must be willing to accept the limited potential gain.**
A client of an agent has instructed her to buy 1,000 shares of a Nasdaq stock as close to the opening price as possible. However, at 9:00 a.m., negative news about the company is released. If the agent placed a call to inform the client of the news, but has not yet reached him, what should she do? A) Wait for the client to return the call B) Attempt to reach a family member C) Execute the trade D) Obtain permission from her supervisor and compliance department prior to the execution of the trade
C) Execute the trade **Despite the news release, the agent is obligated to execute the trade based on the client's directions. Agents of broker-dealers are required to follow all lawful client requests when servicing their accounts. If a client indicates a desire to purchase, sell, transfer, or close an account, the agent has an obligation to properly execute the client's instructions in a timely manner. This rule applies even if the broker-dealer or agent has discretion over the account.**
Which TWO of the following statements are TRUE regarding TIPS? I) During a period of inflation, the interest rate is adjusted upward. II) During a period of deflation, the principal is adjusted downward. III) During a period of inflation, the principal is adjusted upward. IV) During a period of deflation, the interest rate is adjusted downward. A) I and II B) I and III C) II and III D) II and IV
C) II and III **Treasury Inflation Protected Securities (TIPS) have a fixed coupon rate, but have a principal amount that is periodically increased or decreased based on changes in the Consumer Price Index (CPI). The semiannual interest payments for TIPS are calculated based on the adjusted principal. The CPI is a key measure of inflation. If the CPI rises (inflation), the principal of TIPS will rise; however, if the CPI falls (deflation), the principal of TIPS will fall.**
Which TWO of the following persons are required to register as agents according to the Uniform Securities Act? I) The CEO of a company who sells his company's new issue of stock to its underwriter II) A life insurance salesperson who solicits sales in separate account products III) An outside consultant who has entered into a contract with a municipality to assist in the marketing of its debt obligations IV) A branch manager of a brokerage firm who supervises several salespersons who are engaged in the sale of securities A) I and II B) I and III C) II and IV D) III and IV
C) II and IV **The two persons who are required to register as agents are the insurance salesperson who is selling separate account products and the branch manager who supervises salespersons who engage in securities sales. Remember, separate account products are associated with variable contracts and variable contracts are considered securities. At the state level, to offer securities products, a person must be registered as an agent. Although the branch manager does not have her own customers, to be responsible for supervising agents, she too must be registered as an agent. Choices (I) and (III) both relate to persons representing the issuer who are not required to register as agents, either because they are involved in an exempt transaction (between issuer and underwriter) or because they are involved in the sale of an exempt security (municipal debt obligations).**
Which of the following is NOT considered an active portfolio management strategy? A) Tactical asset allocation B) Value investing C) Indexing D) Sector rotation
C) Indexing **Investors who subscribe to the Efficient Market Hypothesis believe that market timing is ineffective. These investors usually favor passive asset allocation strategies, including buy-and-hold and market indexing strategies. Indexing involves maintaining investments in companies that are part of major stock (or bond) indexes, such as the DJIA and the S&P 500. Each of the other choices are references to active (tactical) asset allocation.**
A married couple wants to pay off their mortgage when they retire in 15 years, which will require $60,000. After receiving an inheritance of $30,000, they meet with their investment adviser representative for help in determining the lowest annual rate of return that they need to earn on the inheritance in order to use it to pay off the mortgage in 15 years. The IAR tells them the rate is 4.75%, which is referred to as the: A) Present value B) Future value C) Internal rate of return D) Expected return
C) Internal rate of return **This question relates to the formula for present value. In this question, the couple knows the present value of their investment (the $30,000 inheritance) and also knows the future value that they need ($60,000 to pay off their mortgage). The part that is missing is the rate of return that is required to make the $30,000 grow to $60,000 in 15 years. This return is referred to as the internal rate of return.**
From a compliance standpoint, which of the following activities causes the greatest concern when determining if there are conflicts of interest between an advisory firm and its clients? A) The firm has a minimum size for client accounts of $250,000. B) Clients are permitted to choose the broker-dealer that will execute their trades. C) Investment adviser representatives are allowed to own the same securities that the firm recommends to its clients. D) Investment adviser representatives may not recommend commodities or futures contracts to clients.
C) Investment adviser representatives are allowed to own the same securities that the firm recommends to its clients. **Of the choices listed, the greatest concern is when IARs are permitted to own the same securities as those being recommended to clients. One potential concern that could arise from this includes trading ahead (IARs placing their own personal trades before client trades).**
In an effort to generate new business, an investment adviser wants to publish a list of its past recommendations. According to the USA, which of the following best describes the adviser's obligations? A) The list must include all recommendations that it made within the past three months B) The list must include all recommendations that it made to retail accounts during the prior six months C) The list must include all recommendations that it made over a minimum one-year time frame D) The adviser may publish a list of its most favorable recommendations if it is based on an investment period of at least one year and the list is maintained for a minimum of three years
C) The list must include all recommendations that it made over a minimum one-year time frame **An investment adviser may include a list of its previous investment recommendations in advertising and sales materials as long as the list includes all of the adviser's recommendations during the relevant period (which must be at least one year).**
Under the Uniform Securities Act, all of the following transactions are exempt, EXCEPT: A) The sale of corporate bonds to a savings and loan B) The sale of corporate bonds to an investment company C) The sale of corporate bonds to a customer in a solicited trade D) The sale of corporate bonds to a customer in an unsolicited trade
C) The sale of corporate bonds to a customer in a solicited trade **Under the Uniform Securities Act, certain transactions are exempt and not subject to the Uniform Securities Act either because the purchasers are limited in number or they are sophisticated. Securities being sold to institutions (e.g., investment companies, banks, and savings and loan associations) are exempt under the USA. Another type of exempt transaction is an unsolicited sale, in which an agent of a broker-dealer does not recommend (i.e., solicit) the customer to buy or sell. However, solicited transactions are non-exempt**
A married couple wants to fund IRAs to save for their retirement. The husband is 60 years old and is a retired CFO, while the wife is 55 years old and works for the federal government. What is the maximum amount that the couple may contribute? A) No contributions are permitted once either spouse reaches age 59 1/2 B) $6,000 for the wife, but no contribution is allowed for the husband, since he is retired C) $12,000 D) $14,000
D) $14,000 **For a married couple, as long as one person has earned income, contributions may be made in two separate IRAs. Since both the husband and wife are age 50 or older, the total amount that may be contributed annually to each IRA is $7,000 ($6,000 plus the additional catch-up contribution of $1,000). Therefore, the total combined contribution is $14,000.**
An investor has purchased a corn futures contract at $1.20 per bushel and the contract delivery size is 5,000 bushels. If the price of corn has fallen to $1.10 per bushel, what is the client's profit or loss? A) There is no profit or loss since the client did not exercise the contract. B) $0.10 loss C) $500 profit D) $500 loss
D) $500 loss **Since the investor bought (i.e., went long) a futures contract, he wants the price to rise. At the expiration of the contract, if the price of corn has fallen by $0.10, the client will lose $0.10 per bushel. Since the corn futures contract has 5,000 bushels, the customer's total loss is $500 ($0.10 per bushel x 5,000 bushels).**
A young, married couple are ready to start investing and their main objective is long-term growth. Of the following choices, the most appropriate mutual fund for the couple is one with a portfolio that contains: A) 40% stocks and 60% bonds B) 50% domestic stocks and 50% foreign stocks C) 100% money-market investments D) 40% large-cap stocks, 20% mid-cap stocks, 20% small-cap stocks, and 20% bonds
D) 40% large-cap stocks, 20% mid-cap stocks, 20% small-cap stocks, and 20% bonds **The best choice for the young couple is a diversified portfolio that primarily consists of stocks along with a smaller percentage of bonds. When determining an appropriate asset allocation, a generally guideline is to start with the number 100 and subtract the investor's age to determine the percentage that may be devoted to equities. Although the question does not specify the ages of the couple, since they are young and want long-term growth, it should be assumed that a large percentage of equities is appropriate. Although Choice (b) is 100% equities, half of the portfolio is devoted to foreign stocks and is probably too risky.**
An investor who is in a high federal tax bracket and also subject to state and local taxes will benefit the MOST by purchasing: A) A state general obligation bond B) A transportation revenue municipal bond C) A zero-coupon Treasury STRIPS D) A Commonwealth of Puerto Rico Water and Sewer bond
D) A Commonwealth of Puerto Rico Water and Sewer bond **The interest on bonds that are issued by territories and possessions of the United States is triple-tax-exempt (i.e., it is not subject to federal, state, and local income taxes). For that reason, these bonds are attractive investments for investors in high tax brackets. General obligation bonds and revenue bonds are the two types of municipal bonds and their interest is exempt from federal tax, but may still be subject to state and local tax. Interest on Treasury STRIPS is exempt from state and local tax, but still subject to federal income tax.**
Under the Uniform Securities Act, which of the following firms is excluded/exempt from the definition of investment adviser? A) An advisory firm that is headquartered in the State A and has $115 million under management B) A newly established adviser in State A that manages a mutual fund's $11 million portfolio C) An in-state bank that conducts business exclusively with institutions D) All of the above
D) All of the above **According to the Uniform Securities Act, the following persons are excluded/exempt from the investment adviser definition—investment adviser representatives (IARs), banks, savings institutions, and trust companies, professionals whose investment advice is incidental to the practice of their professions (specifically, lawyers, accountants, teachers, and engineers), broker-dealers and their agents, and federal covered advisers. Choices (a) and (b) are examples of federal covered advisers since Choice (a) has assets under management of $115 million ($110 million or more determines FCA status) and Choice (b) is an adviser to a registered investment company (mutual fund). Choice (c) references a bank, and banks are not IAs**
After conducting extensive research on XYZ Company, an agent believes that the company's prospects are very positive. The agent thinks the stock could easily double in the short-term and plans on sending out an e-mail to all of his customers recommending purchase of XYZ stock. How should the agent proceed? A) He should send out the e-mail once he obtains his approval from another agent. B) He should send out the e-mail with a risk disclaimer. C) He should file the group e-mail and await approval from his compliance department, since the communication is considered sales literature. D) He should reconsider his plan, since XYZ stock may not be appropriate for all of his clients.
D) He should reconsider his plan, since XYZ stock may not be appropriate for all of his clients. **Agents should always have reasonable grounds for recommending a particular security and must ensure that the recommendation is suitable for each client to whom the recommendation is made. When determining suitability, agents depend on the information obtained from clients, such as financial status, needs, objectives, and willingness to assume risk. The same recommendation being made to all of the agent's clients is likely an unsuitable practice.**
XYZ broker-dealer is located in State A and maintains its only office there. Under the Uniform Securities Act, XYZ will NOT be considered a broker-dealer in State B in which TWO of the following situations? I) It sells securities to an investment club that is located in State II) It engages in securities sales with no more than five retail investors who are residents of State III) It conducts business only with financial institutions in State IV) It enters into a transaction with a resident of State A, who is temporarily visiting State B A) I and II B) I and III C) II and III D) III and IV
D) III and IV **According to the USA, there are two exclusions from the broker-dealer definition that are necessary to answer this question. The first is that a person is NOT considered a broker-dealer in a state if it has no place of business in the state AND only transacts business with issuers, other broker-dealers, financial institutions, or institutional buyers (Choice II). The second is that a person is NOT considered a broker-dealer in a state if it has no place of business in the state AND is registered where the person maintains its place of business AND only conducts business with existing retail clients who are not residents of the state (e.g., clients on vacation, attending school, or working in another state), which is the case in Choice IV. The investment club referenced in Choice I is not considered an institutional investor since it could simply be a group of retail investors. As for Choice II, broker-dealers are not offered a de minimis exemption for the number of retail clients it can have in a state in which it has no office. At the state level, the exemption that allows a person to have no more than five clients in a state without being registered there is only available to investment advisers.**
According to NASAA's Statement of Policy Regarding Dishonest and Unethical Business Practices, which of the following statements regarding customer accounts is TRUE? A) A broker-dealer must receive a written order ticket from the account owner before executing every trade. B) Conversion of customer's cash is acceptable; however, broker-dealers must segregate securities positions. C) An agent of a broker-dealer is not permitted to lend money to his parents. D) Margin agreements must be signed promptly following the first transaction.
D) Margin agreements must be signed promptly following the first transaction. **Margin agreements must be signed by a client, but the signature may be received after the first transaction. Customers are able to place orders with their broker-dealers over the phone, they are not required to be written. Conversion, which is defined as the unauthorized use of client assets for personal use (e.g., theft), is always prohibited. An agent is allowed to borrow from or lend money to immediate family members.**
An investor has a portfolio comprised of large-cap, mid-cap, and international equities. To which of the following risk is the investor LEAST exposed? A) Market B) Regulatory C) Currency D) Money-rate
D) Money-rate **In this question, the equity portfolio may be subject to business risk, regulatory risk, and currency risk. Business risk is simply the risk that a business may not be profitable or may be unable to meet its goals. Regulatory risk is based on the fact that changing laws could have a negative impact on the business. In this question, currency risk is being assumed since the portfolio consists of international equities, which may involve the need to exchange foreign currencies into U.S. dollars. However, since the portfolio consists of equities, money-rate (interest-rate) risk less likely to be a concern. Money-rate risk is more likely to be associated with bond portfolios.**
An S Corporation is similar to a partnership in that both: A) Provide limited personal liability B) Require full personal liability C) Do not provide flow-through of losses D) Provide flow-through of losses
D) Provide flow-through of losses **Both S Corporations and partnerships are considered pass-through investments. In other words, any profits and losses that are generated by these entities are distributed (passed through) to the owners/partners and reported on their personal tax returns (i.e., profits are only taxed once). Since the question did not specify whether the partnership was a limited partnership, choice (a) is incorrect. In some partnerships (e.g., general partnerships), the partners assume unlimited personal liability.** **when they say "partnerships" assume that they are talking about general AND limited partnerships**
Which of the following statements is TRUE regarding research reports that are prepared by others? A) Third-party research that is used to reach an independent conclusion by a broker-dealer or investment adviser must disclose the name of the provider. B) Research that is obtained from an outside source and is made available to the public is not required to disclose the name of the provider. C) Third-party research may not be distributed to clients under any circumstances. D) Research that is obtained from an external source and distributed to clients must disclose the name of the source.
D) Research that is obtained from an external source and distributed to clients must disclose the name of the source. **An adviser that provides its clients with research reports or recommendations that are produced by third parties must disclose that the adviser is not the author of these materials. Instead, the adviser must disclose the name of the provider. However, this disclosure requirement does not apply when an adviser uses various outside sources to formulate its own independent conclusions.**
Two agents (Agent X and Agent Y) work for the same brokerage firm that is located in State A. Agent X recently contacted a referral who currently works in State A, but maintains a primary residence in State B for tax purposes. Agent X is not registered in State B, but Agent Y is registered there. Since the account may be a multimillion dollar, actively traded account, Agent X wants to have the account serviced by Agent Y, with whom she will split the commissions. How should this be handled? A) This is permissible since splitting commissions is allowed between agents who are employed by the same or affiliated firm. B) This is permissible since the sale would go under Agent Y's registration. C) Commission splitting is not permissible under any circumstances. D) This is not permissible since Agent X is not registered in State B.
D) This is not permissible since Agent X is not registered in State B. **For an agent to be permitted to split or divide commissions with another person, the other person must be a registered agent in the same state and be employed by the same broker-dealer or one that is under common control. A firm under common control includes an affiliate, subsidiary, or parent company. In this question, since both of the agents are not registered in State B, splitting commissions on transactions involving this client is not permitted.**
The owner of a small investment advisory practice has decided to close her firm. The adviser currently has a sizable surety bond posted with the state Administrator and the owner wants to use these funds for personal reasons. The adviser is required to maintain the bond with the Administrator for: A) 10 business days following the receipt of a Letter of Release from the Administrator B) Six months from the firm's withdrawal date or December 31 of the year in which the resignation occurred, whichever is later C) One year following the firm's withdrawal date D) Three years following the firm's withdrawal date
D) Three years following the firm's withdrawal date **A surety bond must be maintained for as long as the registrant is in business and for three years thereafter. The requirement to post a bond may apply to registered broker-dealers, agents, and investment advisers if any of these securities professionals maintain custody of, or discretionary authority over, their clients' funds or securities.**
An investor is seeking an investment that will pay her family after she dies. The investor's income is sufficient to satisfy her living expenses and she is willing to accept a moderate degree of risk. Which of the following is the MOST suitable? A) Fixed annuity B) Variable annuity C) Whole life insurance D) Variable life insurance
D) Variable life insurance **Since the investor can tolerate some risk, a variable life insurance policy is likely the most suitable recommendation. Annuities are typically a retirement savings vehicle and not the best way to pass money on to family members after death.**
The Modern Portfolio Theory uses which of the following to measure volatility? A) Standard deviation B) Beta C) Alpha D) Sharpe Ratio
MODERN PORTFOLIO THEORY USES STANDARD DEVIATION TO MEASURE VOLATILITY NOT ALPHA!!!!! A) Standard deviation **The primary measure of volatility used in the Modern Portfolio Theory is standard deviation. Standard deviation is a statistical measures of the amount of variability or dispersion around an average. In simple terms, volatility is a reflection of the degree to which a security's price moves. A stock with a price that has wide fluctuations or moves erratically is volatile. On the other hand, a stock that maintains a relatively stable price has low volatility. Beta shows the sensitivity of a fund's, security's, or portfolio's performance in relation to the market as a whole. Alpha is considered a risk-adjusted return and represents the difference between an asset's expected return and its actual return. The Sharpe Ratio is a risk-adjusted return measurement that indicates the amount of return earned per unit of risk. The basic idea is to determine how much additional return is being received for the willingness to hold a risky asset.**
