Part 4

If the Consumer Price Index (CPI) rose 5% during the past year, during which time your client held a 6% bond, what would be the approximate annualized inflation-adjusted return? 6% 1% 5% 0%

1% (Because inflation, as measured by the CPI, rose by 5% each year and the client's bonds returned 6% annually, inflation would have reduced the client's purchasing power by 5%, leaving an inflation-adjusted return of 1% each year.)

If the risk-free rate of return is 3.5%, the expected market return is 9.5%, and the beta of a stock is 1.3, what is the required return on the stock according to the capital asset pricing model? 11.30% 7.80% 8.85% 12.35%

11.30% (The formula for the required return is: E(R) = Rf + (E (RM) - Rf) × Beta or 0.035 + (1.3 × [0.095 - 0.035]) = 0.035 + 0.078 = 0.113, or 11.3%.)

If the current risk-free rate is 5%, and the expected return on the market is 10%, what return can be expected from a security that has a beta of 1.5? 12.5% 20% 15.5% 15%

12.5% 5% + (10% - 5%) × 1.5 = 5% + (5% x 1.5) = 5% + 7.5% = 12.5%.

The capital asset pricing model (CAPM) is used by many to assess the expected return of a security. If the current risk-free rate is 2%, the current return on the market is 10%, and a particular stock's beta is 1.5 with a standard deviation of 3.2, the expected return would be 12% 14% 18.2% 15%

14% (The formula for this computation is as follows: 10% (the return on the market is a beta of 1.0) minus the risk-free rate of 2%, or 8%. Then, multiply that by the beta of this stock (1.5) to arrive at 12%. That is, the stock should return 12% above the risk-free rate of 2%, or 14%)

An investor purchases 100 shares of RIF common stock. In the year following the purchase, the RIF shares appreciated by 12% and paid a 2% dividend. If inflation, as measured by the CPI, was at a 4% rate, the investor's total return on the RIF shares is closest to 10% 14% 12% 8%

14% (This question is asking for the total return, which is 14% (12% appreciation + 2% dividend). Had the question asked for the inflation-adjusted return, (which it doesn't), that is 14% minus the 4% CPI.)

An investor purchases a 6% callable senior lien mortgage bond at par. Exactly two years later, the bond is called at $102½. The investor's total return is 9.5%. 14.5%. 8.5%. 7.25%.

14.5%. (Total return consists of income plus gain. Buying this bond at par and having it called at $102½ results in a $25 gain. With a 6% coupon, there will be four semiannual interest payments of $30 in a two-year holding period. Adding the $25 + $120 = $145 total return on an investment of $1,000 which = 14.5%)

If GHI currently has earnings of $3 and pays an annual dividend of $1.75 and GHI's market price is $35, the current yield is 8.6% 1.75% 5% 3%

5% (The current yield is calculated by dividing the annual dividend by the current market value ($1.75 ÷ $35 = 5%).)

An investor purchases $10,000 of A-rated debentures in early January. At the end of the year, $500 in interest has been received and the value of the investment is $9,500. If the investor is in the 25% tax bracket, the after-tax yield is 3.75%. 0.0%. -1.25%. 5.0%.

3.75%. (The only return (as far as yield is concerned) is the $500 of interest. Subtracting 25% for taxes leaves $375 which, when divided by the $10,000 initial cost, is an after-tax yield of 3.75%.)

Without the need to meet any special conditions, a participant in which of the following retirement plans would be able to withdraw funds prior to age 59½ and not incur a 10% tax penalty? 501(c)(3) 401(k) 457 403(b)

457

Which of the following employer-sponsored plans allows coverage to discriminate in favor of key employees? Defined benefit pension plan 401(k) plan 457 plan 403(b) plan

457 plan

As a rule, loans from a 401(k) plan must be repaid within how many years? 10 20 15 5

5

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? 1.25% 5% 10% 15%

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

A hedge fund with a 2-plus-20% fee structure has equal probabilities of a 10% loss or a 30% gain in its first year. The probable return to an investor in the fund for the first year is closest to 17.6%. 5.2%. 8.8%. -2.0%.

5.2%. (With a 30% gain, the fund would earn fees of 2% + 0.20(30% - 2%) = 2% + 0.20 (28%) = 2% + 5.6% = 7.6%. With a 10% loss, the fund would only earn its management fee of 2%. To the investor, the expected return is 0.5(-10% - 2%) = 0.5 (-12%) = -6% + 0.5(30% - 7.6%) = -6% + 0.5 (22.4%) = -6% + 11.2% = 5.2%.)

What is the total return on a 1-year, newly issued (365 days to maturity) zero-coupon debt obligation priced at 95? 5% 5.26% plus the implied coupon rate 5.26% The return cannot be determined without knowing current interest rates.

5.26% (To determine the total return on this zero-coupon debt obligation, the $50 capital appreciation is divided by the cost of the bond, in this case $950, for a total return of 5.26%.)

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

60 (The customer's cost basis is the fair market value of the stock on the date that the decedent died.)

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

7% (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%))

The following numbers (in %) represent the returns from an investment fund over the past seven years: 2014: 13%, 2015: 11%, 2016: 2%, 2017: 6%, 2018: 5%, 2019: 8%, 2020: 6%. Using the range measure would indicate that the seven-year returns from the fund had a mid-range of 7.5%. 2%. 4%. 11%.

7.5%. (The midrange of any group of numbers occurs between the highest and lowest in the group. In this example, the highest number is 13% and the lowest is 2%. The number in the middle of those two is 7.5%.)

George and Martha Washington are both in their mid-70s, very active in their community, and both work part time at the local community bank. They would like to contribute a small portion of their earnings to some form of retirement plan. Which of the following choices would be the most appropriate for this couple? A Roth IRA A Keogh Plan A spousal IRA A traditional IRA

A Roth IRA

Money in an UTMA may be used to pay for certain expenses relating to the minor. Which of the following would be permitted usage of funds in an UTMA? A vacation trip to Orlando A new suit Paying for the minor's share of the heating and lighting expenses Milk, bread, and eggs

A vacation trip to Orlando

Investors wishing to employ a passive strategy for their bond portfolios would most likely elect which of the following? Laddering Bullet Barbell Buy and hold

Buy and hold

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? Sell limit Buy limit Buy stop Sell stop

Buy stop

Which of the following orders would be most likely to add fuel to a bullish stock market? Sell stop Buy limit Sell limit Buy stop

Buy stop

Which of the following could accelerate a rise in a bull market? Sell stop Buy limit Buy stop Sell limit

Buy stop (Buy stop orders are placed above the market, and as prices increase, the stops are hit, creating additional buying.)

Which of the following business accounts does not require considering the suitability of the owners? General partnership S corporation Sole proprietorship C corporation

C corporation (Because the C corporation is an entity separate from its shareholders, suitability for a C corporation account is based solely on the company itself.)

Which of the following business entities files a tax return on the 15th day of the 4th month after the end of the calendar (or fiscal) year? S corporations on Form 1120s C corporations on Form 1120 Multiple member LLCs on Form 1065 Partnership returns on Form 1065

C corporations on Form 1120 (Of this group, the C corporation is the only one filing on the 15th day of the 4th month (April 15 for a calendar-year filer). The other three all file their returns along with a Schedule K-1 for each partner, member, or shareholder on the 15th day of the 3rd month, typically, March 15.)

Which of the following is not correct regarding the capital asset pricing model (CAPM)? The stock risk premium is the inducement necessary to entice the individual to invest in a particular stock. The market risk premium is the incentive required for the individual to invest in the securities market. CAPM uses standard deviation as a measure of market risk. CAPM only considers the systematic risk.

CAPM uses standard deviation as a measure of market risk. (CAPM accounts for the impact of systematic risk (as measured by beta) only and does not take into consideration unsystematic risk, which is assumed to have been diversified away.)

Who is obligated for the payment of taxes in an UTMA account? Custodian Child Parent Donor

Child

An investment adviser cannot adequately advise a client without knowing the client's financial status. When determining that status, it is important to differentiate between financial and nonfinancial considerations. Which of the following would be considered a financial consideration rather than a nonfinancial one? Fact that both parents were smokers who died of lung cancer Client's membership in Greenpeace Client's stamp collection Client's marital status

Client's stamp collection (Financial considerations are those which can be categorized as an asset or a liability, something that can be assigned monetary value)

Lena died at the age of 50 with $100,000 in her traditional IRA account. In addition to income taxes due on the distribution, her beneficiary, who is 52, will have to pay a premature distribution penalty tax of how much? $6,000 $15,000 $10,000 $0

$0 (The premature distribution penalty does not apply if the distribution is made after the death of the account owner, regardless of the age of the owner or the beneficiary)

Two years after their wedding, Pam and Jim became the proud parents of child. Both grandparents want to help ensure educational funds for their new grandchild by using the Coverdell ESA. Assuming they are within the earnings limitations, which of the following would be permitted? $2,000 from Pam's parents and $2,000 from Jim's parents into separate ESAs $1,000 from Pam's parents and $1,000 from Jim's parents into separate ESAs $2,000 from Pam's parents and $2,000 from Jim's parents into a single ESA $2,000 from Pam's mother, $2,000 from Pam's father, $2,000 from Jim's mother, and $2,000 from Jim's father

$1,000 from Pam's parents and $1,000 from Jim's parents into separate ESAs (the total contribution to all accounts on behalf of a beneficiary in any year can't exceed $2,000.)

After receiving some money from an inheritance, an individual purchases a rare gold coin for $10,000. Five years later, he gives the coin to his daughter-in-law after receiving an appraisal showing the coin is worth $15,000. The daughter-in-law's cost basis of the coin is $10,000. $0.00. $15,000. $5,000.

$10,000. (When a gift is made of an asset, whether it be a security or a collectible, the donor's cost basis passes to the donee. In this case, the original cost is $10,000 and that becomes the cost basis for the daughter-in-law)

John and Jane have a net worth of $20,000 and total assets of $150,000. If their revolving credit and unpaid bills totals $8,000, how much are their total liabilities? $130,000 $150,000 $138,000 $122,000

$130,000 (The balance sheet formula is assets − liabilities = net worth)

A customer in the 25% tax bracket bought 200 shares of ABC at $93 per share plus commission of $50. Considering the customer's cost basis, when she sold 100 shares six months later at $96 per share, less commission of $50, her after-tax net was $168.75. $150.00. $300.00. $56.25.

$168.75. (Because the purchase and sale were of different lots, you must compute the net proceeds on a per share basis. Dividing the cost of $93 + commission of .25 ($50 ÷ 200 shares) gives you a total per share cost of $93.25. Selling for $96.00 - 0.50 ($50 ÷ 100 shares) = $95.50 proceeds per share. $95.50 - $93.25 = $2.25. $2.25 multiplied by 100 shares sold = $225.00. In a 25% tax bracket, this is a taxable short-term gain and 25% of $225.00 = $56.25. Therefore, her after-tax net was $168.65 ($225 - 56.25).)

William died in 2019 with the following assets and liabilities: $200,000 in securities left to his wife, $650,000 home left to his wife (the home cost $150,000), $250,000 life insurance policy with his daughter named as beneficiary, and $75,000 in debts and estate expenses. What is William's net estate? $750,000 $0; it is below the $11.4 million exemption equivalent $625,000 $175,000

$175,000 (In this case, the $1.1 million gross estate is reduced by the $850,000 left to his wife and then by the $75,000 in debt and expenses. That leaves a net estate of $175,000. That is well below the estate tax exemption of $11.4 million in assets for 2019.)

A highly compensated customer owns 200 shares of Datawaq. He bought it 20 years ago, and it is now trading at 90. If he donates the stock to a 501(c)(3) charity, how much can he claim as a tax deduction for this donation? $6,000 $0 $12,000 $18,000

$18,000 (Securities can be gifted to charity and deducted at their fair market value, as long as they have been held more than one year.)

A married couple has lived in the same home for 40 years and now, with the children all gone, they've decided to sell and move to a retirement village. They purchased the home for $80,000 and have accepted a contract for $800,000. The tax consequences of this sale is $0 capital gain. $470,000 capital gain. $220,000 capital gain. $720,000 capital gain.

$220,000 capital gain. (The profit on the sale was $720,000 ($800,000 minus the cost of $80,000) and the exclusion of $500,000 reduces the reportable gain to $220,000.)

An investor in the 28% tax bracket has a $5,000 loss after netting all capital gains and losses realized. How much may the investor deduct from income that year? $5,000.00 $2,500.00 $0.00 $3,000.00

$3,000.00

A complex trust has the following income for the year: $1,500 in taxable interest, $2,000 in dividends (reinvested in the stock), and $3,000 in tax-exempt interest. In addition, the portfolio realized $3,500 in capital gains that were reinvested in the corpus. What is the distributable net income (DNI) for the trust? $4,500 $10,000 $1,500 $6,500

$6,500 ($1,500 in taxable interest + $2,000 in dividends (reinvestment means nothing here) + $3,000 in tax-exempt interest. This is a total of $6,500 of DNI. When distributed, only $3,500 will be taxable.)

Grandpa bought 100 shares of XYZ common stock 10 years ago for $10 per share. The stock split 2 for 1 several years ago and grandpa gave all of the stock to his grandson when the price per share was $20. Three months ago, grandpa passed away and left the grandson another 100 shares of XYZ that had been purchased one month earlier at $25 per share. At the date of death, the XYZ stock had already climbed to $30 per share. If the grandson sells the XYZ stock for $35 per share, the taxable consequences would be $4,000 long-term capital gain. $6,000 long-term capital gain plus $500 short-term capital gain. $2,500 long-term capital gain plus $1,000 short-term capital gain. $6,500 long-term capital gain.

$6,500 long-term capital gain. (Adding the $6,000 of gain from the gift and the $500 of gain from the inheritance gives a total of $6,500 long-term capital gain.)

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? $60,000 $30,000 Unlimited $15,000

$60,000 (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.)

During the previous fiscal year, The Kaplan Family Trust received $24,000 in dividends and $35,000 in interest from corporate bonds. Securities transactions during the year resulted in long-term capital gains of $48,000, $20,000 of which were reinvested in the corpus. The DNI for the Kaplan Family Trust is $87,000 $11,000 $79,000 $107,000

$87,000 (Distributable Net Income (DNI) is dividends and interest plus capital gains that have not been reinvested back into the trust. In this case, $24,000 + $35,000 + $28,000 = $87,000)

Three years ago, a customer bought 200 shares of ABC for $60.50 per share. Upon her death, she left the shares to her husband when ABC was trading at $98.25. If her husband sells the shares for $99.25, what is his cost basis for tax purposes? $79.38 $98.25 $60.5 $99.25

$98.25 (The cost basis to the recipient of inherited securities is the fair market value on the date of the owner's death. In this case the fair value is the market value of $98.25.)

You are viewing 2 securities to place in a client's portfolio. Security A has an expected return of 12%, and Security B has an expected return of 16%. If you were to place 25% of the portfolio into Security A with the balance going into Security B, the probable return of the portfolio is 15% 18% 14% 7%

15%

If the current risk-free rate is 3% and the expected market risk premium is 6%, what return should we expect from a security that has a beta of 2? 12% 9% 15% 18%

15% (Expected return = 3% + ([9% -3%] × 2) = 3% + (6% x 2) = 3% + 12% = 15%. In this question, because we're already given the risk premium, we can avoid the first step. That would be 3% + (6% x 2) = 3% + 12% = 15%.)

During the past year, the market price of Kapco common stock has increased from $47 to $50 per share. Over that period, Kapco's earnings per share (EPS) have increased from $2.00 to $2.50 per share, and their dividend payout ratio has decreased from 50% to 40%. Based on this information, the current yield on Kapco common stock is 2.13% 2% 6.34% 4.26%

2% (The current yield on a stock is computed by dividing the annual dividend rate by the current market price. With EPS of $2.50 and a 40% payout ratio, the annual dividend is $1.00. This dollar divided by the current market price of $50.00 results in a current return of 2%.)

To fill a customer buy order for 800 WXYZ shares, your firm requests a quote from a market maker. The response is "bid 15, ask 15.25." If the order is placed, the market maker must sell 800 shares at $15.25 per share 800 shares at no more than $15 per share 800 shares at $15 per share 100 shares at $15.25 per share

800 shares at $15.25 per share (A market maker is responsible for honoring a firm quote. If no size is requested by the inquiring trader, a quote is firm for 100 shares. In this example, the trader requested an 800-share quote, so the market maker is responsible for selling 8 round lots of 100 shares at the ask price of $15.25 per share.)

On June 20, 2016, an investor in the 30% marginal federal tax bracket acquired a growth stock paying no dividend for $10 per share. On June 22, 2017, the investor sold the stock for $20 per share. Presuming capital gains rates are 15%, the investor's after-tax rate of return is closest to 70% 85% 200% 100%

85% (Although the stock grew at a 100% rate of return (by doubling), the investor must pay capital gains tax on the investment at 15%, and the investor realizes an after-tax rate of return of approximately 85%. Because the investor held the stock for more than 1 year, the sale is taxed at a favorable capital gains rate rather than at the investor's ordinary income tax rate.)

A premature distribution from an IRA would be exempt from the premature distribution penalty under all of the following circumstances EXCEPT as a result of hardship upon the death of the IRA owner to pay for qualifying medical expenses to correct an excessive contribution to the IRA

as a result of hardship

Suzy Stanton's wealthy Uncle Ray is a client of yours and is asking for some advice on funding a program to save for Suzy's college education with the lowest possible tax impact. Ray tells you that he set up an UGMA account for Suzy's older brother, Sammy; but, when Sammy turned 18, he took the money, bought a motorcycle, and joined a commune. Ray wants to avoid seeing something like that happen again. What would probably be the best suggestion to help Ray meet his objectives? A Roth IRA for Suzy with Ray's name as co-owner A Section 529 plan An UTMA account A living trust

A Section 529 plan (The Section 529 plan will give the uncle both tax savings and, because in this plan the assets remain under the control of the donor, the ability to retain the funds if Suzy does not use them for higher education.)

The Wrights live in Texas, where Maria Wright has had an extremely successful cattle business for a number of years. As a very generous person, how much money can Maria give to her spouse, a Canadian citizen, in 2019 without incurring gift tax consequences? A limited amount because her spouse is not a U.S. citizen $100,000 $15,000 Unlimited

A limited amount because her spouse is not a U.S. citizen

If a businessowner's goal is to establish an entity that features ease in raising capital, which of these entities is the most appropriate? An S form of corporation A limited liability company (LLC) A general partnership A sole proprietorship

A limited liability company (LLC) (If a businessowner's goal is ease in raising capital, the limited liability company (LLC) is preferable because it has no restrictions on the number or nationality of investors. While the regular or C corporate form is also preferable, the S form of corporation is limited to a maximum of 100 potential shareholders, none of whom may be a nonresident alien.)

Among investor objectives is preservation of capital. Which of the following would be most appropriate for inclusion in the portfolio of this kind of investor? Blue-chip stocks U.S. Treasury bonds A money market fund International funds

A money market fund

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 municipal bond fund A leveraged real estate limited partnership

Which of the following statements describing traditional IRAs is NOT true of 403(b) qualified plans? Distributions after age 59½ are taxed as ordinary income. Contributions are tax deductible. Distributions must begin by age 70½. A self-employed person may participate.

A self-employed person may participate.

Which of the following stocks would probably be most appealing to a value investor? A stock with a relatively low dividend yield A stock that has relatively high volatility A stock with a relatively low P/E ratio A stock with a relatively high price-to-book value ratio

A stock with a relatively low P/E ratio (Value investors look for stocks in companies that have been overlooked or undervalued by other investors. They often focus on stocks with relatively low P/E ratios or price-to-book value ratios or on stocks with relatively high dividend yields compared to other stocks in the same industry.)

A pension plan administrator would probably be able to qualify for the exemption offered under the safe harbor provisions of 404(c) of ERISA if the plan offered which of the following choices? DEF Long-term Investment Grade Bond Fund; PQR U.S. Government Bond Fund; STU High Yield Bond Fund ABC Large-Cap Growth Fund; JKL Small-Cap Technology Fund; MNO International Equities Fund ABC Large-Cap Growth Fund; DEF Long-term Investment Grade Bond Fund; GHI Money Market Fund PQR U.S. Government Bond Fund; GHI Money Market Fund; VWX Global Bond Fund

ABC Large-Cap Growth Fund; DEF Long-term Investment Grade Bond Fund; GHI Money Market Fund (In order to qualify for the safe harbor under 404(c), the portfolio selections must include at least 3 different asset classes, such as equity, debt, and cash equivalent. All equities or all debt won't qualify.)

Jill is an investment adviser representative with FairPlay Advisers, an SEC-registered investment advisory firm. At the recommendation of a close friend who is a client of Jill's, Tom comes in for an interview and portfolio analysis. When examining Tom's IRA, which of the following holdings would Jill feel the need to immediately review? GHI Large-Cap Equity Index Fund ABC Municipal Bond Fund DEF U.S. Government Bond Fund JKL Money Market Fund

ABC Municipal Bond Fund (Although not illegal, it is generally considered inappropriate to include tax-exempt securities, such as municipal bonds (whether individual bonds or in a fund), in a tax-deferred retirement plan.)

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? REIT paying a 6.5% dividend Municipal bond with a 5% coupon rate ABCD, Inc. preferred stock paying a 6% dividend Corporate bond with a 6.75% coupon

ABCD, Inc. preferred stock paying a 6% dividend (The key to this answer is that corporations have a 50% dividend exclusion on dividends received from other companies. )

A U.S. citizen purchases a bond issued by the government of Sweden. The interest payments received are taxed at which of the following levels? Federal State Local

ALL

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

ALL

Distributions from which of the following can be rolled over into an IRA? Another IRA Corporate pension plan Corporate profit-sharing plan Keogh plan

ALL

Which of the following statements about capital gains are TRUE? (#) The minimum holding period required to qualify for long-term capital gains treatment is 1 day longer than 12 months. The highest federal income tax rate on long-term capital gains is less than the highest federal income tax rate on ordinary income. If an investor holds stock for 12 months or less and has no other transactions, any gain on the sale of the stock is taxed at the same rate as ordinary income.

ALL

Which of the following statements regarding Coverdell Education Savings Accounts are TRUE? (#) After-tax contributions of up to an indexed maximum per student per year are allowed. Contributions may not be made for students past their 18th birthday. If the account value is not used for educational purposes, it can be rolled over into a traditional IRA. Distributions are always taxable.

After-tax contributions of up to an indexed maximum per student per year are allowed. Contributions may not be made for students past their 18th birthday.

Cecil has a discretionarily-managed account with Pelf Reliable Advisors (PRA), an investment adviser registered in States C, D, and G. Over the past year, the portfolio produced a 12% return with a beta of 1.05. The risk-free rate is 3.5%, and the overall market returned 10.85%. Based on this information, calculate alpha and determine if PRA added any value to the portfolio. Alpha = 1.15%; the adviser outperformed the market by 1.15% Alpha = 0.78%; the adviser outperformed the market by 0.78% Alpha = -1.21%; the adviser underperformed the market by 1.21% Alpha = 0.78%; the adviser underperformed the market by 2.72%

Alpha = 0.78%; the adviser outperformed the market by 0.78% 12% - [3.5% + 1.05 (10.85% - 3.5%)] = 12% - [3.5% + 7.7175] = 12% - 11.2175 = +0.7825. A positive alpha indicates that the investment adviser outperformed the market on a risk-adjusted basis.

Jane and Malka are discussing the possible form of efficient markets. Jane states that, "A weak form price-efficient market is one in which security prices fully reflect past share price and trading volume data." Malka retorts that she is not sure of Jane's thoughts and says, "If markets are weak form efficient, we cannot consistently outperform the market based on technical analysis." Malka is correct, but Jane is incorrect. Both are incorrect. Jane is correct, but Malka is incorrect. Both Jane and Malka are correct.

Both Jane and Malka are correct. (A weak form price-efficient market is one in which security prices fully reflect past share price and trading volume data. Therefore, successive future share prices should move independently of this past data in a random fashion, thereby nullifying any perceived informational advantage from adopting technical analysis to analyze trends.)

A customer has just died. If his wife asks you what amount of federal estate tax will be imposed on the transfer of their personal property to her name, which of the following responses would be best? Consult a qualified tax specialist. The amount of tax will depend on your late husband's tax bracket. The amount of tax will depend on the size of the estate to be transferred. The amount may be prorated over the next 4 years.

Consult a qualified tax specialist. (Specific tax advice should be referred to a qualified tax adviser such as an accountant or tax attorney. No federal estate tax is imposed as a result of the marital exclusion as long as the spouse is a U.S. citizen.)

Which of the following statements are TRUE about both an individual Roth IRA and a Roth 401(k) plan? (#) Contributions are made with after-tax dollars. One must have AGI below a certain level in order to maintain either Roth. If all the conditions are met, withdrawals are tax free. There are no RMDs at age 70½.

Contributions are made with after-tax dollars. If all the conditions are met, withdrawals are tax free.

Minnie's Uncle Bob would like to contribute to his one-year-old niece's education expenses. He is able to contribute a maximum of $1,200 per year. There is no other family member in a position to make a contribution. If minimizing the taxes at withdrawal and low cost investing, such as index mutual funds, is the objective, which of the following would you recommend? Coverdell ESA Section 529 plan Dollar cost averaging UTMA

Coverdell ESA (When you see contribution levels at $2,000 per year or less, that is a signal that Coverdell is the proper recommendation.)

A 457 plan could cover which of the following? (#) Employees of a corporation Independent contractors providing services to the county Employees of a nonincorporated business City employees

Independent contractors providing services to the county City employees

Which of the following would generally NOT result in any income tax liability? Profits generated by an S corporation Profits generated by a sole proprietorship Death benefit proceeds from a life insurance policy Qualified dividends from common stock

Death benefit proceeds from a life insurance policy (As a rule, profits from flow-through businesses like S corporations and earnings from a sole proprietorship are subject to income tax. Qualified dividends are taxed at a lower rate than nonqualified ones; in fact, for taxpayers in the 10% or 15% tax bracket, the rate on these dividends is 0%)

The employer does not get a current tax deduction when offering which of the following retirement plans? Deferred compensation plan SIMPLE plan Money purchase plan Defined benefit plan

Deferred compensation plan

Based on the following information, which stock is most likely to appeal to a growth investor? P/E ratio of 8:1 Dividend payout ratio of 65% Book value of $22 per share, current market value of $17 per share Dividend yield of 0.3%

Dividend yield of 0.3% (Growth investors usually seek stocks with high-growth expectations, reflected by a higher-than-normal P/E ratio, typically 20:1 or higher, and a low dividend yield, usually caused by a low dividend payout ratio. It would be unlikely to find a growth stock selling for close to its book value and certainly not below it.)

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? Dollar cost averaging Discounted cash flow Time-weighted return Dollar-weighted return

Dollar-weighted return (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.)

Which of the following is price-weighted rather than cap-weighted? Wilshire 5000 Dow Jones Industrial Average Russell 2000 Standard & Poor's 500

Dow Jones Industrial Average (Of the major averages/indexes, the DJI is the only one which is price-weighted. All of the others are weighted based on market capitalization.)

Which of the following is not a market cap-weighted index? Morgan Stanley Capital International S&P 500 Dow Jones Industrial Average FTSE 100 and FTSE All-Share

Dow Jones Industrial Average (The Dow Jones Industrial Average is a price-weighted index. All other options are market cap-weighted indexes.)

An individual who is a proponent of the efficient market hypothesis (EMH) will likely invest in which of the following? Index funds Sector mutual funds Growth mutual funds Balanced mutual funds

Index funds (Inherent in this strategy is a belief that an investor cannot outperform the market with active portfolio management techniques)

As a client's only child is about to complete her college education, it is obvious that the 529 Plan used to accumulate funds has been overfunded. Which of the following might be suggested to minimize tax consequences? (#) Encourage the daughter to go to graduate school and use the money for qualified expenses there. Roll over the funds to a member of the beneficiary's family. Roll over the funds to a Coverdell ESA. Roll over the funds to the donor's IRA.

Encourage the daughter to go to graduate school and use the money for qualified expenses there. Roll over the funds to a member of the beneficiary's family. (There is no such thing as a rollover to a Coverdell ESA and money in a 529 plan is not part of a qualified plan, so rolling over to an IRA is out of the question.)

Which of the following statements are generally TRUE of the buy-and-hold strategy? (#) Equities would grow relative to fixed income Lower taxes and transactional costs Easy to manage The portfolio would more accurately demonstrate the client's investment objectives and risk tolerance

Equities would grow relative to fixed income Lower taxes and transactional costs Easy to manage

Your customer redeemed 200 of her 500 Kapco common shares without designating which shares were redeemed. Which of the following methods does the IRS use to determine which shares she redeemed? Wash sale rules LIFO FIFO Identified shares

FIFO (When a customer does not choose a method, the IRS uses FIFO)

A customer buys 100 XYZ at $30. Two years later, with the stock trading at $70, the customer makes a gift of the securities to his son. Which of the following statements are TRUE? (2) For gift-tax purposes, the value of the gift is $3,000. For gift-tax purposes, the value of the gift is $7,000. The son's cost basis on the stock is $3,000. The son's cost basis on the stock is $7,000.

For gift-tax purposes, the value of the gift is $7,000. The son's cost basis on the stock is $3,000.

Which of the following securities would most likely be included in the portfolio of a mid-cap manager? ABC, $12 per share, 100,000,000 shares outstanding DEF, $150 per share, 8,000,000 shares outstanding GHI, $40 per share, 75,000,000 shares outstanding JKL, $70 per share, 200,000,000 shares outstanding

GHI (Mid-cap stocks are those with a market capitalization between $2 billion and $10 billion)

Samantha Wells, a British citizen temporarily working in the United States, wants to form a business venture with other investors. She is looking for favorable tax treatment of earnings and losses. She also wants to limit the number of investors, but is willing to share control of the enterprise with others to attract them. What business form do you advise to her? C Corporation S Corporation General Partnership Limited Partnership

General Partnership (Limited partnerships would not work because the other investors have limited say in how the enterprise is run. C corporations do not provide favorable tax treatment of gains or losses. While an S corporation appears to be the right answer, only U.S. citizens or resident aliens can own one.)

For which of the following business entities would suitability be based on the objectives of all the owners on a collective basis? Sole proprietorship C corporation General partnership Pension plan

General partnership (the investment policy to be followed in the business's account is based on the collective suitability of all partners.)

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

Her cost basis and date of purchase is used.

Which two of the following would you expect of a growth stock? (2) High price/earnings ratio Low price/earnings ratio High dividend payout ratio Low dividend payout ratio

High price/earnings ratio Low dividend payout ratio

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

IRS

Why are ERISA Section 404(c) and the accompanying Department of Labor regulations important for an employer who sponsors a Section 401(k) retirement plan and who offers at least 3 diversified categories of investments with materially different risk and return characteristics? This section permits the employer to avoid certain coverage and participation rules that would otherwise apply to a qualified plan. If followed, the employer is relieved of fiduciary liability for any unsatisfactory investment results experienced by the employee. If followed, the employer need not provide a Summary Plan Description (SPD) to any employees participating in the plan. Union-negotiated contracts are exempt from Department of Labor review under this safe harbor section.

If followed, the employer is relieved of fiduciary liability for any unsatisfactory investment results experienced by the employee.

Which of the following statements is most accurate regarding employer-sponsored retirement plans? In a defined benefit plan, the payments provided are related to the contributions made and investment performance achieved. In a defined benefit plan, the client can have some reasonable certainty about the amount of income that will be received in retirement. The employee in a defined benefit plan bears the shortfall risk. In a defined contribution plan, the payments received are related to the number of years of service and the individual's final salary.

In a defined benefit plan, the client can have some reasonable certainty about the amount of income that will be received in retirement.

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? Interest on a private purpose municipal bond Dividends paid on preferred stock Interest on a general obligation municipal bond Distributions from a corporate bond mutual fund

Interest on a private purpose municipal bond

A client is interested in investing in a mutual fund that will provide current income without the risk of large swings in the portfolio's value. The client is in a high-income tax bracket and has a moderate risk tolerance. Which of the following funds is most appropriate for this client? Money market fund High-yield bond fund Intermediate-term municipal bond fund Long-term municipal bond fund

Intermediate-term municipal bond fund (When the question states a high-income tax bracket, the answer will almost always be municipal bonds.)

Which factor is least important when assessing a defined benefit pension? Expected amount payable Investment performance of the fund Lump sum available at retirement Age at which benefits can be taken

Investment performance of the fund (Under a defined benefit plan, the pension payable is related to the length of service and usually expressed as a proportion of final earnings. The investment performance of the fund is therefore the least important factor to consider.)

Which of the following would an investor who believes in MPT probably select for a client? JKL, with a return of 15% and a standard deviation of 15 GHI, with a return of 13% and a standard deviation of 20 ABC, with a return of 11% and a standard deviation of 15 DEF, with a return of 13% and a standard deviation of 18

JKL, with a return of 15% and a standard deviation of 15 (Modern portfolio theory (MPT) proponents believe that the most appropriate investments are those that offer the greatest return with the lowest risk. JKL has delivered the highest return with a standard deviation (risk) equal to that of ABC (which has a much lower return).)

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

Limited partnership (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.)

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? Continuing to hold that stock position if it is felt that it meets the objectives of the trust Liquidating a portion of that stock to take advantage of the tax savings offered by the stepped-up basis at death Selling all of that stock in order to rebalance the trust's assets Exchanging a portion of that stock for a suitable security held in the adviser's trading account

Liquidating a portion of that stock to take advantage of the tax savings offered by the stepped-up basis at death (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)

A client purchases 1,000 shares of the ABC Global Growth Fund when the NAV is $8.75 and the POP is $9.21. Three years later, the client makes a gift to her daughter when NAV is $9.50 and POP is $10.00, and the daughter elects to receive all distributions in cash. Two years later, she sells all shares when the NAV is $14.25 and POP is $15.00. What are the tax consequences of this sale? Long-term capital gain of $5,500 Long-term capital gain of $5,040 Long-term capital gain of $4,750 Long-term capital gain of $5,000

Long-term capital gain of $5,040 (In the case of a gift of securities, the donee acquires the donor's cost basis, $9.21 per share. Sale (redemption) takes place at the NAV ($14.25) for a profit of $5.04 per share (times 1,000 shares).)

An investor inherits 1,000 shares of the ABC Global Growth Fund when the NAV is $9.50, the bid price is $9.00, and the ask price is $9.15. Two years later, the investor sells all shares when the NAV is $14.25, the bid is $14.50, and the ask is $14.60. What are the tax consequences of this sale? Long-term capital gain of $5,500 Long-term capital gain of $5,350 Long-term capital gain of $4,750 Long-term capital gain of $5,450

Long-term capital gain of $5,500 (Upon death, the beneficiary inherits closed-end funds at their bid price (what the estate could have sold them for), or $9.00 per share. The sale two years later takes place at the bid ($14.50) for a profit of $5.50 per share (times 1,000 shares). Remember, in the case of a closed-end fund, the NAV does not figure into any computations)

A client of your broker-dealer accepts your recommendation and turns in a market order to purchase 600 shares of MNOP Corporation common stock. Based on the following market maker quotes, it would be expected that the firm's trader would direct the market order to MMC: 22.10 - 22.28, 10 x 6. MMA: 22.05 - 22.25, 10 x 8. MMB: 22.08 - 22.25, 6 x 5. MMD: 22.11 - 22.30, 6 x 6.

MMA: 22.05 - 22.25, 10 x 8. (A market order to buy should be done at the best possible (lowest) ask (offering) price. That is $22.25 (MMA and MMB), but MMB is only firm for up to 500 shares and the client's order is for 600 shares. Therefore, it would be sent to the lowest price that is firm for at least 600 shares and that is MMA.)

A client of your broker-dealer, currently long 1,000 shares of DEF Corporation common stock, wishes to liquidate the position. Based on the following market maker quotes, it would be expected that the firm's trader would direct a market order to MMC: 9.75 - 9.85, 20 x 20. MMD: 9.75 - 9.90, 5 x 10. MMB: 9.65 - 9.75, 10 x 10. MMA: 9.65 - 9.85, 5 x 5.

MMC: 9.75 - 9.85, 20 x 20. (A market order to sell 1,000 shares should be directed to the market maker with the highest bid price that is firm for at least 1,000 shares. The highest bid price is $9.75 by both MMC and MMD, but MMD's quote is only firm for 500 shares.)

What does MPT preach?

MPT preaches that investors will always seek the highest return commensurate with the lowest risk.

Your client turns in a buy limit order for 100 shares of ABC at $58. Following the entry of the order, trades occur at 59, 59, 58.80, 58.20, 58.40, 57.95, 57.85. At what price was this limit order triggered? $57.95. The order was not triggered. $58.20. $57.85.

The order was not triggered. (Only stop orders have triggers. A buy limit order will be executed at the limit price or better (lower). In this case, $57.95.)

An investor is in a low tax bracket and wishes to invest a moderate sum in an investment that will provide some protection from inflation. Which of the following should you recommend? Mid-cap common stock mutual fund Money market mutual fund Ginnie Mae fund Municipal unit investment trust

Mid-cap common stock mutual fund (Mid-cap stocks have historically provided good hedges against inflation making them appropriate for an investor seeking long-term growth and inflation protection. There are several key words here to remember for the exam. Whenever you see "low tax bracket," the answer cannot be a municipal bond. Likewise, whenever you see "inflation protection," the answer will be common stock (unless a TIPS is given as a choice).)

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

Money market fund, intermediate-term government bond fund, large-cap stock index fund

Which of the following business entities has an income tax filing due date (disregarding possible extensions) of March 15? Sole proprietorship Single-member LLC Multiple-member LLC electing to be treated as a corporation​ S corporation

Multiple-member LLC electing to be treated as a corporation​ S corporation (For partnership returns (including LLCs with more than 1 member) and S corporation returns, the due date is March 15.)

Which of the following is not included in adjusted gross income on an individual's federal income tax return? Unemployment compensation Municipal bond interest Salary and commissions Dividends paid on preferred stock

Municipal bond interest (Although tax-exempt interest is reported on the Form 1040 (line 8b), it is not included in adjusted gross income.)

Which of the following would have the effect of reducing a taxpayer's taxable income? (#) Net capital loss Traditional IRA contribution Public purpose municipal bond interest Earnings in a deferred variable annuity

Net capital loss Traditional IRA contribution (Up to $3,000 in net capital losses can be deducted against ordinary income. Contributions to a traditional (but not Roth) IRA are deductible against ordinary income (unless the taxpayer is above certain income limits and is covered by an employer plan). Municipal bond interest is not taxable, but it is not deductible; earnings in a variable annuity are deferred, not deductible.)

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

None of these (The efficient market hypothesis is in direct contradiction to technical analysis. True believers in EMH claim that none of these can outperform random selection.)

A new client indicates a desire to avoid investing in mid-cap stocks because of large losses suffered several years ago. What type of consideration would this be? Nonfinancial Financial Unsystematic Systematic

Nonfinancial

A margin account could be opened for which of the following? Coverdell ESA Partnership IRA UTMA account

Partnership (A margin account could never be opened for retirement accounts, Coverdell ESAs, and UTMA/UGMA accounts.)

Which of the following retirement plans is NOT legally required to establish vesting, funding, and eligibility requirements? Keogh plan Defined benefit pension plan Payroll deduction plan Profit-sharing plan

Payroll deduction plan (A payroll deduction plan is a nonqualified retirement plan. Profit-sharing, pension, and Keogh plans must have established standards.)

Which of the following items are NOT included in the gross estate of a decedent? The first $250,000 of a primary residence if owned singly, $500,000 if owned jointly with spouse Proceeds from a life insurance policy owned by the deceased's spouse Proceeds from a life insurance policy held in a revocable trust Property held in an account registered tenants in common

Proceeds from a life insurance policy owned by the deceased's spouse (One popular estate-planning technique is to have life insurance owned by (and premiums paid by) someone other than the insured. In that case, proceeds are generally excluded from the gross estate of the deceased. If the trust was irrevocable, that same benefit might be achieved, but not with one that is revocable.)

The strong-form efficient market hypothesis (EMH) asserts that stock prices fully reflect which of the following types of information? Market Public, private, and future Inside only Public and private

Public and private

What new benefit did the TCJA of 2017 bring to 529 plans effective 2018? Tax-deductible contributions of up to $10,000 per year to pay for K-12 tuition Qualified withdrawals of up to $10,000 per year to pay for K-12 tuition Withdrawals may be made for qualified expenses at certain foreign educational institutions. Qualified withdrawals of up to $10,000 per year to pay for K-12 expenses

Qualified withdrawals of up to $10,000 per year to pay for K-12 tuition

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

Qualifying distributions are received free of income tax if a holding period and age requirement is met.

It would be least likely for dividends paid on which of the following investments to meet the requirements to be considered qualified? Common stock REITs Equity mutual funds Preferred stock

REITs (Qualified dividends are those eligible for the reduced income tax rates. Those rates can be as low as 0% and as high as 23.8%, with most falling within the 15% or 20% bracket. Dividends on bond funds and money market funds are not qualified.)

Under industry rules, customers who wish to trade options must receive a copy of the options disclosure document (ODD) within 15 days of account approval at or before the mailing of the confirmation representing the first options trade at or before account approval at or before the mailing of the next monthly statement

at or before account approval

Over the past year, the market, with a beta of 1.0, has returned 15%. Under CAPM, which of the following stocks would be considered overvalued? ACR, beta 0.9, return 13.6% RJP, beta 1.2, return 17.5% LQR, beta 0.7, return 11% BED, beta 1.5, return 23.5%

RJP, beta 1.2, return 17.5% (RJP's beta of 1.2 would have led to an expected return of 120% of that of the market. That would be 15% x 120% = 18%. With an actual return of 17.5%, the stock did not perform relative to the additional risk taken. The actual return for all of the others exceeded the expected return. LQR was 11% compared to 10.5%; BED was 23.5% compared to 22.5%; and ACR was 13.6% compared to 13.5%.)

Your client's wife retired as a 3rd grade teacher in 2009, where she was covered under the school system's 403(b) plan. If she resumes employment with a corporate employer, and that new employer has a 401(k) plan, is she entitled to defer RMDs from the 403(b) plan past the regular age 70½ date? RMDs may be deferred only if the current employer offered a 403(b) plan. RMDs may be deferred as long as the individual is employed on a full-time basis. RMDs may never be deferred for those who were participants in a 403(b) plan. RMDs may be deferred only from the plan sponsored by the current employer.

RMDs may be deferred only from the plan sponsored by the current employer.

Which of the following could reduce the amount that an individual may contribute to a Traditional IRA? Roth IRA contributions made for the year High income level Participation in an employer-sponsored plan Marital status

Roth IRA contributions made for the year

Which of the following statements regarding Roth IRAs is TRUE? Roth IRA withdrawals are tax free in their entirety regardless of the participant's age at withdrawal. Like traditional IRAs, Roth contribution eligibility is restricted by active participation in an employer's retirement plan. Roth IRAs are not subject to the minimum distribution rules until the death of the owner/participant of the plan. Like traditional IRAs, Roth IRA contributions may not be made after the participant reaches age 70½.

Roth IRAs are not subject to the minimum distribution rules until the death of the owner/participant of the plan. (For a Roth IRA withdrawal to be entirely tax free, it must be made following a 5-year holding period after the first contribution and after the participant reaches age 59½.)

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

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

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? UTMA accounts Variable annuities Section 529 plans Coverdell ESAs

Section 529 plans (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.)

An agent taking which of the following actions would be committing a violation? Selling securities from a corporate account by using limited power of attorney trading authority for the account Buying securities in a cash account with the consent of the customer Selling securities from a minor's custodial account without the custodian's consent but with the beneficial owner's consent Buying securities in a joint account at the request of one party only

Selling securities from a minor's custodial account without the custodian's consent but with the beneficial owner's consent (The custodian, not the beneficial owner (minor), is the person who has the authority to make investment decisions for an account. Any tenant in a joint account may give instructions for the account.)

Employee contributions to a 401(k) plan are subject to? Social Security taxes federal unemployment taxes federal income tax withholding state income tax withholding

Social Security taxes federal unemployment taxes

There are a number of different ways in which a business may be structured. For tax purposes, which form is taxed on its income? LLC S corporation Sole proprietorship General partnership

Sole proprietorship (A sole proprietorship's income is taxed on the owner's Form 1040.)

What is the risk measure associated with the capital market line (CML)? Beta Standard deviation Systematic risk Alpha

Standard deviation (In the context of the CML, the measure of risk is total risk, or standard deviation. Beta (systematic risk) is used to measure risk for the security market line (SML).)

When completing an individual tax return on Form 1040, one of the most important numbers is the adjusted gross income (AGI). Which of the following would NOT be included in AGI? Alimony received from pre-2019 divorce decree Tax-exempt interest received from municipal bonds Qualifying dividends on common stock Salary and commissions

Tax-exempt interest received from municipal bonds (Even though municipal bond interest is reported on line 8b of the 1040, it is specifically not included in AGI.)

If a client wanted an investment that would eliminate interest risk as to principal, you would recommend a 91-day Treasury bill a bank-insured certificate of deposit preferred stock TIPS

a bank-insured certificate of deposit (Because bank-insured CDs are nonnegotiable (we're not discussing the $100k minimum jumbos), there is no market fluctuation caused by changes in interest rates as with marketable securities. If you invest $10,000, you will always get back that $10,000 whenever you cash in the CD, regardless of current interest rates.)

Which of these is an advantage of using a Coverdell ESA rather than a 529 plan to fund a child's future education? The Coverdell allows for transfer of beneficiary. The Coverdell offers greater investment flexibility. The Coverdell has greater tax advantages. Contributions to the Coverdell are eligible for the annual gift tax exclusion.

The Coverdell offers greater investment flexibility. (A Coverdell ESA works similar to a self-directed IRA where stocks, bond, mutual funds, ETFs, and other investment vehicles are options. With a 529 plan, the donor is limited to whatever is available in the state plan chosen)

Which of the following statements about bid and asked prices are TRUE? (#) The bid price is the price a dealer is willing to pay to buy a security. The asked price is the price a dealer is willing to accept to sell a security. The bid price for a security is higher than the asked price for the security.

The bid price is the price a dealer is willing to pay to buy a security. The asked price is the price a dealer is willing to accept to sell a security.

Opening a margin account involves significant documentation. Which of those documents discloses the interest rate charged by the broker-dealer, including the method of interest computation and situations under which interest rates may change? The loan consent agreement The interest computation agreement The credit agreement The hypothecation agreement

The credit agreement

What is the total amount that may be invested in a Coverdell Education Savings Account in 1 year? The current maximum per couple The current maximum per family member The current maximum per child The current maximum per parent

The current maximum per child

A day order is entered to buy 500 LMN at 24.35. By the close, the firm has 100 shares at 24.25 and 200 at 24.35. If the remainder is unfilled, what is the outcome? The customer may demand that the firm deliver the remaining shares at 24.35. The customer may reject the incomplete order unless the remainder can be filled within 3 business days. The customer may reject the incomplete order unless the broker-dealer can guarantee filling the remainder by the end of the day. The customer must accept the execution for 300 shares, and the remainder of the order is canceled after the close.

The customer must accept the execution for 300 shares, and the remainder of the order is canceled after the close. (The representative cannot guarantee that the order will be filled by the end of day.)

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

The excess of the alternative tax over the regular tax is added to the regular tax.

Margin is borrowing money from a broker-dealer to buy a stock using the investment as collateral. In many cases, the brokerage firm then uses that collateral for a loan from a bank. Which of the following account documents authorizes the firm to pledge the customer's stock? The loan consent agreement The credit agreement The hypothecation agreement The securities pledge agreement

The hypothecation agreement

Which of the following statements regarding a traditional IRA is TRUE? Distributions without penalty may begin after the age of 59½ and must begin by April 1 of the year before an individual turns 70½. Distributions before age of 59½ are subject to a 10% penalty in lieu of income taxes. The income and capital gains earned in the account are tax deferred until the funds are withdrawn. Because contributions to a traditional IRA are not currently tax deductible, all qualifying withdrawals are tax free.

The income and capital gains earned in the account are tax deferred until the funds are withdrawn. (The income and capital gains earned in the account are tax deferred until the funds are withdrawn. It is the Roth IRA that can have tax-free withdrawals.)

Which of the following is TRUE of the tax consequences when a participant in a noncontributory pension plan withdraws a monthly income at retirement? The income is partly taxed as ordinary income and partly taxed as capital gains. The income is nontaxable. The income is taxable as ordinary income. The income is taxable as capital gains.

The income is taxable as ordinary income. (The employer has been making all the contributions to the pension plan. Noncontributory means that the employee has made no contributions. Under the Internal Revenue Code, the income to the retiree from the plan is ordinary income.)

Which of the following statements are NOT true? (#) The kiddie tax applies to any income received by a child under the age of 19. IRAs have advantages over other estate assets when left to charity. Simple trusts have to distribute income annually. For U.S. citizens, there is an unlimited marital estate tax deduction.

The kiddie tax applies to any income received by a child under the age of 19. IRAs have advantages over other estate assets when left to charity.

Under the UTMA, which of the following statements is NOT true? The maximum amount of money an adult can give to a minor in any one year is $15,000 Once a gift is given to a minor, it cannot be reclaimed. Only an adult can make a gift to a minor. An UTMA account may have only one custodian for only one minor.

The maximum amount of money an adult can give to a minor in any one year is $15,000

Which of the following would you expect to see in the investment policy statement of a qualified plan? The information in the summary plan document specified by the Department of Labor The method to be used to measure the investment performance of the plan A listing of the portfolio assets as of the most recent quarter Investment limitations placed on the portfolio managers

The method to be used to measure the investment performance of the plan Investment limitations placed on the portfolio managers

Which of the following statements regarding modern portfolio theory is NOT correct? The optimal portfolio will always lie above the efficient frontier. The optimal portfolio for an investor depends upon the investor's ability to assume risk. The optimal portfolio has the lowest risk for a given level of return. The optimal portfolio offers the highest return for a given level of risk.

The optimal portfolio will always lie above the efficient frontier. (The optimal portfolio for an investor will always lie on the efficient frontier.)

If a client places an order to buy 300 DWQ at 140 stop, but not over 144, and the order is left with a specialist, this is a market order a buy limit order a buy stop limit order a buy stop order

a buy stop limit order

An investor purchases 1,000 shares of ABC at $42 per share. One year later, the stock is trading at $50 per share and the investor receives 50 shares of ABC as a stock dividend. How will this dividend be currently taxed? As a $2,500 capital gain As $2,500 ordinary income The shares are not subject to taxation As a $2,100 capital gain

The shares are not subject to taxation (Shares received per a stock dividend are not currently taxable. Instead, shareholders who receive stock dividends must adjust their cost basis in the shares downward. The total number of new shares, multiplied by their new adjusted basis, must equal the shareholder's total interest before the stock dividend was received.)

One of your clients wishes to reallocate the assets in his 401(k) plan. Specifically, he plans to assist his parents in the purchase of a retirement home. He claims that it makes sense to have about 10% of his plan assets in real estate. This is prohibited as qualified plans cannot own real estate. An asset allocation model would not have 10% in real estate. This is not permitted because a prohibited party will benefit. This would only be permitted if the home were for his personal use.

This is not permitted because a prohibited party will benefit. (any investment in a qualified plan (or IRA), must be for future use (or else it would be considered a distribution subject to tax). Second, real estate may be used prior to your retirement, but not by "related" parties.)

The donor to a 529 plan has decided to move the existing plan to one offered by another state. Which of the following statements is NOT true? Even though these plans are generally under state control, the rollover rules are federal law. Unless a change of beneficiary is involved, only one rollover is permitted in a 12 month period. If there is a distribution of the assets, the rollover must be completed within 60 days. This may be done, but only if the entire account is rolled over.

This may be done, but only if the entire account is rolled over. (Partial rollovers are permitted.)

When saving money for a child's college education, one consideration is the impact that those savings will have on the child's eligibility for financial aid. Funds saved in which of the following vehicles has the most detrimental effect on financial aid? Coverdell ESA Section 529 UTMA Prepaid tuition plan

UTMA

Saving for higher education using which of the following tools will generally result in the worst outcome when filing the FAFSA form? UTMA Section 529 plan Cash value in the parent's insurance policy Coverdell ESA

UTMA (One of the negatives of using UTMA (or UGMA) to save for a child's education is that those funds are counted at a far higher percentage of the child's assets than are funds in a Coverdell ESA or 529 plan. Cash value in the parent's life insurance policy is not counted at all.)

Which of the following does not provide for a change of beneficiary? Roth IRA Coverdell ESA Section 529 plan UTMA account

UTMA account

Which of the following securities can legally be purchased on margin? Units of a variable annuity issued by an insurance company authorized to do business in the state Warrants exercisable into shares of a stock traded on the Nasdaq Stock Market Preemptive rights to acquire shares of a stock traded on the New York Stock Exchange Put options where the underlying common stock is listed on the New York Stock Exchange

Warrants exercisable into shares of a stock traded on the Nasdaq Stock Market (Warrants, but not rights, may be purchased on margin if the underlying stock is traded on the NYSE or the Nasdaq. No insurance product is marginable and the same is true for options.)

An agent has a client who calls in with the following instructions: "Please place a sell stop order at $33 for my 100 shares of ABC common stock." A week later, the agent receives inside information that ABC's upcoming earnings report will be disastrous. Three days after that, the report is released and the stock plunges, falling to $33. Can the client's stop order be executed? Yes, because the order was received prior to the agent receiving the information No, because the order isn't triggered until the price falls below $33 No, because the agent was in possession of material inside information Yes, but only if the execution price is higher than $33

Yes, because the order was received prior to the agent receiving the information

Your client is 75 years old and has $100,000 to invest. He enjoys a relatively high income and is not concerned with immediate liquidity, although he is risk averse. The most suitable asset allocation strategies listed below would be a 50% municipal bond fund, 40% government bond fund, 10% money market fund a 50% municipal bond fund, 40% money market fund, 10% large-cap common stock fund a 50% municipal bond fund, 50% large-cap common stock fund a 50% municipal bond fund, 40% government bond fund, 10% large-cap common stock fund

a 50% municipal bond fund, 40% government bond fund, 10% large-cap common stock fund (The allocation of 50% municipal bond fund, 40% government bond fund, and 10% large-cap common stock is appropriate for a high-income person of age 75 who is not concerned with liquidity. The 10% large-cap fund provides some inflation protection with very moderate downside risk.)

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

a C corporation. (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 nonqualified plan designed to provide additional retirement benefits limited to a select group of management or highly-compensated employees is called a defined contribution plan. a SERP. a payroll deduction plan. a defined benefit plan.

a SERP. (A supplemental executive retirement plan (SERP) is a nonqualified plan designed to provide additional retirement benefits limited to a select group of management or highly-compensated employees. It is probably not a testable point, but these are frequently funded with cash value life insurance policies.)

A frequent concern of parents initiating a savings plan for the college education of their child is the lack of control over the assets, particularly if the child decides to forego higher education. When you have a client who shares this concern with you, it would be most appropriate to suggest an UTMA account. opening a new account in the client's name for this purpose. U.S. Treasury zero-coupon bonds. a Section 529 plan.

a Section 529 plan. (One of the features of the Section 529 plan is that the donor maintains control over the funds in the account)

Investors looking to minimize the effects of taxation on their investments would probably receive the least benefit from a corporate bond an S&P 500 index fund an apartment building a growth stock

a corporate bond (Investors receive interest income from corporate bonds. That income is fully taxable at ordinary income rates. Real estate ownership has certain tax benefits, such as depreciation and a deduction for operating expenses. Index funds are known for their high tax efficiency and investors in growth stocks anticipate long-term capital gains which are taxed at a lower rate than ordinary income.)

Under the Securities Exchange Act of 1934, a market maker is a security in high demand a dealer who holds itself out as being ready at all times to buy or sell shares of a specified security at a quoted price a marketplace to bring together buyers and sellers of securities any person who buys and sells securities for his own account or for the accounts of others

a dealer who holds itself out as being ready at all times to buy or sell shares of a specified security at a quoted price

An employer wishing to offer a retirement plan with a goal of retaining key employees would probably start with a defined benefit plan a payroll deduction plan a deferred compensation plan a SEP IRA

a deferred compensation plan (Because the deferred compensation plan allows the employer to discriminate, it is a popular choice for offering special benefits to retain key employees. Defined benefit plan will be the answer to a question dealing with offering maximum benefits to older employees.)

Among the clients of a broker-dealer could be an individual declared mentally incompetent. a minor. a foundation. a deceased individual.

a foundation. (Clients could include any person, as defined in the Uniform Securities Act. Minors, deceased individuals, and mentally incompetent individuals are not persons.)

A margin account that contains both long and short stock positions is known as a hedged margin account a mixed margin account an opposition margin account a long/short margin account

a mixed margin account

When, as per the Sharpe ratio, a stock exhibits superior performance, it implies a negative alpha. a high beta. a low beta. a positive alpha.

a positive alpha. (The higher the Sharpe ratio, the higher the risk-adjusted return. In other words, the stock is returning significantly more than the risk-free rate. That will result in a positive alpha. Beta is not part of the Sharpe ratio.)

A firm declares a $3.00 cash dividend to its shareholders. The firm has issued dividends of only $.07 per share for each of the last 15 quarters, and market analysts had anticipated a similar dividend this quarter. In an efficient market, one would expect a price decrease after the announcement. a price increase before the announcement. a price change upon the announcement. no price change before or after the announcement.

a price change upon the announcement. (In an efficient market, the price of the stock will represent all information that is public. Because the increase in the dividend was not public knowledge until it was declared, no price change would take place before the announcement. A price change, representing the increase in dividends, would be expected immediately after the information became public.)

An investment adviser registered in 4 states would be permitted to enter into an advisory contract with all of the following prospective clients except a registered investment company. a university endowment fund. a charitable foundation. a single parent.

a registered investment company. (In order for an investment adviser to enter into an advisory contract with an investment company, the adviser must be SEC registered (federal covered). Federal covered investment advisers are never registered in any states.)

A portfolio manager's performance is often measured against a benchmark such as the S&P 500. A manager whose performance beats the benchmark by taking greater risk than the S&P 500 may not have had superior returns as measured on a total-return basis an expected-return basis an inflation-adjusted basis a risk-adjusted basis

a risk-adjusted basis (Unless the portfolio's performance is better than the extra risk taken, the manager has not beaten the performance benchmark, the S&P 500, on a risk-adjusted basis.)

An advisory client of yours discusses a business project she is involved with where the partnership is using accelerated depreciation to maximize losses in the early years. It would be prudent of you to inform the client that accelerated depreciation could trigger the alternative minimum tax. a maximum of $3,000 in losses can be taken against passive income in any year. accelerated depreciation leads to a reduction in the partnership's cash flow. a maximum of $3,000 in losses can be taken against ordinary income in any year.

accelerated depreciation could trigger the alternative minimum tax. (Accelerated depreciation is a tax preference item and could result in requiring this client to pay the AMT. These would be passive losses and they can only be taken against passive income. There is no limit to the amount of passive loss that can be deducted against passive income.)

A form of business organization that offers flow-through of income and loss while providing the owner(s) with limited liability is? (2) a sole proprietorship an LLC a C corporation an S corporation

an LLC an S corporation (Only an LLC or an S corporation allows for direct participation in the income or losses of the business while offering limited liability. The sole proprietorship has flow-through, but unlimited liability. The C corporation limits liability but has no flow-through.)

Although all new accounts must be approved by a designated supervisor before any trading activity may take place, there is one type of account that must be approved by a specially qualified supervisor. That would be a margin account a discretionary account an IRA an options account

an options account

Under the Securities Exchange Act of 1934, an exchange is? an organization of securities professionals designed to promote fair practices in doing business with the public an organization that provides facilities for bringing together buyers and sellers of securities any transaction involving a security a disposition of a security for value

an organization that provides facilities for bringing together buyers and sellers of securities (Under the Securities Exchange Act of 1934, exchange does not refer to a transaction but to an organization or facilities for bringing together buyers and sellers of securities)

A 61-year-old wanting to take a lump-sum distribution from his Keogh will incur a 50% penalty tax incur a 10% penalty tax be taxed at ordinary income rates be taxed at long-term capital gains rates

be taxed at ordinary income rates

A benefit of waiting until the age of 70 to claim Social Security benefits is that? benefits are increased by 8% for each year from the full retirement age. Medicare benefits are increased. a higher percentage of the monthly benefit is exempt from income taxes. the income tax rate is reduced once the claimant reaches 70.

benefits are increased by 8% for each year from the full retirement age. (If an individual delays taking Social Security until age 70, the benefit is increased by 8% for each year from the full retirement age. If full retirement age is 66, four years at 8% means the payout is 132% of the base amount. Medicare (Part A) goes into effect at 65 and income tax rates do not change at 70.)

One of the primary differences between trading on listed exchanges and trading in the over-the-counter market is that only on the exchanges are prices determined by the FINRA 5% markup policy. by the exchange itself. through a negotiation process. by an auction process.

by an auction process.

Investors who buy shares in state-specific municipal bond funds may be subject to capital gains tax no taxation out-of-state property tax federal income tax

capital gains tax (Interest received from municipal bonds and municipal bond funds is generally income tax free on a federal basis, but taxable in states other than the state of issue. State-specific funds avoid that problem.)

All of the following statements concerning IRA contributions are true EXCEPT if you pay your tax on January 15, you can still deduct your IRA contribution, even if not made until April 15 between January 1 and April 15, contributions may be made for the current year, the past year, or both contributions can be paid into this year's IRA from January 1 of this year until April 15 of next year contributions for the past year may be made after April 15, provided an extension has been filed on a timely basis

contributions for the past year may be made after April 15, provided an extension has been filed on a timely basis (Contributions can be made to an IRA only until the first tax filing deadline (April 15), regardless of having filed an extension.)

An investment adviser who believes that we are in the early recovery portion of the business cycle would most likely recommend defensive stocks. long-term bonds. cyclical stocks. value stocks.

cyclical stocks.

Under ERISA, all of the following retirement plans must set standards for vesting, eligibility, and funding EXCEPT profit-sharing plans Keogh plans corporate pension plans deferred compensation plans

deferred compensation plans (Deferred compensation plans are not qualified plans and may be discriminatory. Keogh, profit-sharing, and corporate pension plans must meet set standards for vesting, eligibility, and funding under ERISA.)

An investment constraint that is unique to private foundations is the requirement to distribute 5% of its assets each year as qualifying distributions. invest 5% of its assets each year in qualifying investments. have a board of directors. have an investment policy statement.

distribute 5% of its assets each year as qualifying distributions. (Under Section 4942 of the Internal Revenue Code, a private foundation must pay out each year an amount equal to 5% of its net investment assets in "qualifying distributions". There is no legal requirement on how much must be invested each year, and having an investment policy statement is not unique to foundations.)

A client profile is not complete without a family income statement. A typical one would include dividends credit card debt autos mortgage interest

dividends mortgage interest (Income statements reflect the family's income and expenses, not assets and liabilities. Dividends represent money received, and mortgage interest is money paid out. Credit card debt is a liability and autos are assets.)

Risk-adjusted return is calculated by multiplying the return of an investment by its standard deviation dividing the price of the stock by the standard deviation dividing the security's return in excess of the risk-free rate by its standard deviation dividing the security's price by its beta

dividing the security's return in excess of the risk-free rate by its standard deviation

Mrs. Jones, age 70, is retiring, and her employer has 3 investment options for her 401(k). You should advise her to? do a rollover to a variable annuity under a Section 1035 exchange do a rollover to a traditional IRA take a distribution of 100% of the funds in the account D) leave the investments with her employer

do a rollover to a traditional IRA (Most advisers would agree that even when the employer's 401(k) plan permits retirees to continue to maintain their account, it is better for the client to move the assets to a self-directed IRA when the plan offers a limited number of investment choices. One cannot do a rollover into a variable annuity; Section 1035 only applies to insurance contract exchanges.)

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

employees who leave the company prior to retirement would not receive benefits (Deferred compensation plans are usually structured so that if the employee leaves prior to retirement or is terminated with cause, benefits are forfeited.)

- scheduled premium - fixed death benefit - premiums to general account - guaranteed cash value what type of insurance?

whole life

Each of the following are advantages offered by a nonqualified deferred compensation plan that are not found in a qualified plan EXCEPT they are an attractive benefit for highly compensated employees because they're free from the contribution limits. they are an attractive benefit to the employer because participation requirements and nondiscrimination restrictions do not apply. employer contributions to the plan are not subject to current taxation to the employee. deferred compensation plans are not subject to most of the requirements of the Employee Retirement Income and Security Act of 1974 (ERISA).

employer contributions to the plan are not subject to current taxation to the employee. (Tax deferral is found in both NQDC plans and qualified plans, so there is no advantage that one has over the other. However, NQDC plans have much more flexibility without the burdensome compliance issues with ERISA)

All of the following are progressive taxes except gift taxes. personal income taxes. estate taxes. excise taxes on cigarettes.

excise taxes on cigarettes. (Progressive taxes are those where the tax rate increases as the amount being taxed increases. The opposite of that is the regressive tax where the rate remains the same regardless of the dollar amount being taxed. Excise taxes, such as those on cigarettes, are a prime example.)

The capital asset pricing model (CAPM) is most commonly used to determine an investor's expected return risk-adjusted return time-weighted return holding period return

expected return (expected return is a form of risk-adjusted return and is the more specific answer to this question)

Among the benefits of an HSA is funds may be used for various medical expenses once the low deductible has been met. up to $10,000 per year may be accumulated. the amount that may be contributed is based on the number of dependents. funds not used for health expenses may be invested in mutual funds and other securities.

funds not used for health expenses may be invested in mutual funds and other securities.

As part of its suitability determination, an IA firm requires that all potential nonbusiness clients complete a family balance sheet. Items that would be included are? gold jewelry loan secured by the family automobile the amount paid thus far this year for Botox injections the balance owed to the dentist for new crowns

gold jewelry loan secured by the family automobile the balance owed to the dentist for new crowns (The amount already paid for the Botox injections is no longer on the balance sheet.)

Derivatives have a major role to play in the management of many large portfolios and can be used for all of the following except hedging. asset allocation. income. highly risk-averse investors.

highly risk-averse investors. (Some of the common uses of derivatives are for: Hedging to reduce the impact of adverse price movements (e.g., by buying put options or selling futures contracts). Anticipating future cash flows. Asset allocation changes. Income (selling options).)

A grantor retained annuity trust (GRAT) would not be used to reduce? estate taxes. gift taxes. income taxes.

income taxes.

A new client wants your recommendation on available investment options. You prepare a client profile, which reveals that the investor is 66 years of age, has a low risk tolerance, and is in a low tax bracket. The investor's primary objectives are safety and income. Of the following, the most suitable choice would be insured bank certificates of deposit a municipal bond mutual fund investing solely in AAA- and AA-rated bonds large-cap common stock a growth and income mutual fund

insured bank certificates of deposit (Whenever you see "low tax bracket," the answer cannot be municipal bonds. With a low risk tolerance, the only suitable choice for "safe" income would be insured bank CDs.)

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 straight-line depreciation taken on investment real estate. long-term capital gains in excess of $3,000 annually. interest received from specified private purpose municipal revenue bonds. intangible drilling costs in connection with an oil drilling program.

interest received from specified private purpose municipal revenue bonds. (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.)

The yield to maturity of a bond represents the bond's real rate of return. net present value (NPV). internal rate of return (IRR). annualized rate of return.

internal rate of return (IRR).

An investor would have to pay the alternative minimum tax when there are tax-preference items reported on the tax return the investor has received income from a limited partnership the investor's capital gains exceed 10% of total income it exceeds the investor's regular income tax

it exceeds the investor's regular income tax (A taxpayer must pay the alternative minimum tax in any year that it exceeds regular tax liability. Tax-preference items are re-input in figuring AMT, but the AMT is paid only if that amount is higher than the regular income tax.)

As compared to value investors, growth investors tend to? take more of a long-term approach to their investments look for companies that are undervalued or overlooked by other investors look for companies whose sales, earnings, or market share are increasing at an above-average rate be very price-conscious when purchasing stocks

look for companies whose sales, earnings, or market share are increasing at an above-average rate

Growth companies tend to have all of the following characteristics EXCEPT low dividend payout ratios low P/E ratios potential investment return from capital gains rather than income high earnings retention ratio

low P/E ratios

An investor has just received an inheritance of $100,000 and has decided to use the money to buy a new home. Because it will take time to decide where to buy, it is expected that the purchase will not be made for another 6-9 months. If this investor placed the money into a broad market index ETF, the primary risk taken would be unsystematic risk business risk interest rate risk market risk

market risk (A major risk involved with investing in equities, even through a broad market index ETF (or mutual fund), is the systematic risk known as market risk. The shorter the time horizon (and less than 1 year is certainly a short time horizon), the greater the market risk)

Writing an option provides all of the following EXCEPT limited downside protection when long the underlying asset maximum protection against loss hedging income

maximum protection against loss (Writing an option provides only limited protection for a long or short position. That protection is limited to the amount of the premium received and is why this is called a partial hedge.)

A fiduciary of an ERISA plan is preparing an investment policy statement. Included would probably be? specific security selection methods of performance measurement determination for meeting future cash flow needs the Summary Plan Description

methods of performance measurement determination for meeting future cash flow needs

One of your clients has reached his company's mandatory retirement age of 67. He has been a participant in his employer's 401(k) plan and his account is valued at $400,000. The account is funded with mutual funds and company stock. The cost basis of the company stock is $25,000 and it is currently worth $125,000. If he were to rollover the entire account into an IRA, the tax treatment would be current tax at ordinary income rates on the unrealized appreciation of the company stock, ordinary income rates on the balance when withdrawals are taken no current tax, but any withdrawals would be taxed as ordinary income no current tax on the portion applicable to the mutual funds; ordinary income on the cost basis of the company stock; and long-term capital gains on the unrealized appreciation of the company stock when it is sold no current tax, but any withdrawals representing the gain on the company stock would be taxed as long-term capital gains

no current tax, but any withdrawals would be taxed as ordinary income (As with any rollover from a qualified plan to an IRA, there is no current tax, but withdrawals are taxed at ordinary income tax rates)

You have a 62-year-old client who opened a Roth IRA with your firm one year ago. The account was funded with a $6,500 deposit and the account's value is now $7,500. The client has another Roth, opened eight years ago at another firm. The client would like to withdraw $7,000 from this account rather than the one at the other firm. The tax consequences of this withdrawal would be ordinary income tax on the $500 that exceeds the original cost. no tax. ordinary income tax on the entire amount because the account has not been open for 5 years. ordinary income tax on the $1,000 growth because the account has not been open for 5 years.

no tax.

To comply with the safe harbor requirements of Section 404(c) of ERISA, the trustee of a 401(k) plan must? (2) offer plan participants at least three different investment alternatives ensure that plan participants are insulated from control over their portfolios allow plan participants to change their investment options no less frequently than quarterly allow plan participants to purchase U.S. Treasury securities

offer plan participants at least three different investment alternatives allow plan participants to change their investment options no less frequently than quarterly

One of your clients has reached his company's mandatory retirement age of 67. He has been a participant in his employer's 401(k) plan, and his account is valued at $400,000. The account is funded with mutual funds and company stock. The cost basis of the company stock is $25,000 and it is currently worth $125,000. If he were to use the net unrealized appreciation (NUA) approach when taking the distribution of the company stock, the tax treatment would be ordinary income on the $25,000 cost basis, long-term capital gain on the appreciation when sold ordinary income on the entire $125,000 ordinary income on the $25,000 cost basis, short-term capital gain on the appreciation when sold long-term capital gain on the entire $125,000

ordinary income on the $25,000 cost basis, long-term capital gain on the appreciation when sold

Amie Lear is a securities analyst employed by Empyreal Benefits, Inc., a registered broker-dealer. She is assigned to cover a number of different equity and debt investments. One of the investments is Taylor, Inc. (Taylor), a manufacturer of a wide range of children's toys. Based on her extensive analysis, she determines that her expected return on the stock, given Taylor's risks, is 10%. In applying the capital asset pricing model (CAPM), the result is a 12% rate of return. Based on Lear's analysis, Taylor's stock is correctly valued. neither overvalued nor undervalued. undervalued. overvalued.

overvalued. (The CAPM gives us the expected rate of return. That return is 12%. Taylor's expected return is 10% which is lower than the required return indicating that the stock is overpriced.)

An employer whose 401(k) plan complies with ERISA Section 404 is placing investment risk with the plan participant Securities and Exchange Commission employer Internal Revenue Service

plan participant

The concept of creating a model portfolio, through asset allocation principles, that both increases return and reduces risk is known as portfolio optimization risk reduction fundamentals rebalancing corrective adaptation

portfolio optimization

An investor purchased 100 shares of GRA stock at $100 per share in a margin account. Two years later, the GRA was sold for $120 per share. If the investor's account was charged $700 in margin interest, it would be proper to state that this is an example of negative margin. a long-term capital gain of $1,300. positive margin. a speculative investment.

positive margin. (Positive margin means that, after taking into consideration the interest paid on the borrowed money in a margin account, a specific transaction was profitable (negative margin is the reverse). In this case, the sale resulted in a gain of $2,000 which is $1,300 more than the interest cost.)

The capital asset pricing model (CAPM) is an investment theory that serves as a model for? pricing securities based on their total risk pricing securities based on their unsystematic risk measuring the correlation between a security and the overall market pricing securities based on their systematic risk

pricing securities based on their systematic risk (Under the CAPM, securities are priced based on their systematic risk only, because this risk cannot be eliminated through diversification. The expected return of a security or portfolio is calculated by adding the rate on a risk-free security to a risk premium multiplied by the asset's systematic risk.)

Among the options available to replace the lost income of an employed individual who becomes unable to work due to a disability would be any of these EXCEPT proceeds of a life insurance policy disability income insurance Social Security disability payments workers' compensation

proceeds of a life insurance policy

One of the features of broker-dealers is that they sometimes maintain an inventory of securities, even when not in the role of market maker. If a broker-dealer has shares of a somewhat speculative, thinly traded stock in its inventory whose last reported trade was several days ago at $4 per share and the firm were to offer its shares at $10 per share, the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents might consider this may only be done if the broker-dealer makes adequate disclosure to clients who purchase the stock prohibited because the offering price does not bear a reasonable relationship to the current market prohibited because broker-dealers may not offer stock to the public from their own inventory not prohibited because with thinly traded stocks, one expects there to be a wide spread

prohibited because the offering price does not bear a reasonable relationship to the current market (Yes, it is always possible that in just a couple of days, this company's stock may have increased by 250%, but there is nothing in the question to indicate that. Yes, thinly traded stocks tend to have wider spreads, but not like this.)

ERISA regulation does not apply to? (#) public school district retirement plans publicly traded utility company retirement plans federal government employee retirement plans

public school district retirement plans federal government employee retirement plans (ERISA rules only apply to private sector plans. Government or public sector plans are not subject to the Employees Retirement Income Security Act of 1974)

As a registered investment adviser, you have managed $10 million of a customer's funds for several years. The customer asks you to prepare a trust for his children, to transfer $3 million of his funds into the trust, and to trade the trust with the same objectives as the existing account. You should tell the customer to contact a tax specialist prepare the trust, transfer funds, and begin investing explain to the customer that trusts cannot be traded refer the customer to an attorney that can set up the trust

refer the customer to an attorney that can set up the trust

All of the following statements about an broker-dealer's agent's need to be registered in a state are correct EXCEPT? registration is not required in a state where the agent has no place of business and only deals with existing clients who are vacationing in that state registration is required if they solicit the sale of securities by telephone to fewer than 6 individuals residing in that state registration is required when they limit their activity to the sale of exempt securities registration is required in each state in which the employing broker-dealer has a place of business

registration is required in each state in which the employing broker-dealer has a place of business

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

risk

If an investor received a lump-sum distribution from a 401(k) plan when he left his job, he may? (2) roll over his account into an IRA within 60 days transfer his account without taking possession of the money keep the funds and pay ordinary income tax invest in a tax-exempt municipal bond fund to avoid paying tax

roll over his account into an IRA within 60 days keep the funds and pay ordinary income tax

With respect to a qualified retirement plan, fiduciaries must act in all of the following ways except? with the care, skill, prudence, and diligence under the circumstances then prevailing that a prudent professional would use. solely in the interest of the sponsoring employer. to diversify investments to minimize the risk of large losses, unless doing so is clearly not prudent under the circumstances. solely in the interest of plan participants and beneficiaries.

solely in the interest of the sponsoring employer

Tax preference items are used for the purpose of computing the alternative minimum tax. They include all of the following except excess intangible drilling costs. accelerated depreciation. certain incentive stock options. straight-line depreciation.

straight-line depreciation. (Straight-line depreciation is not a preference item. All of the other choices are included in the IRS listing of tax preference items. In the case of the ISO, it is a preference item to the extent that the fair market value of the employer's stock is in excess of the strike price of the option.)

Owners of private activity municipal bonds might find themselves in violation of MSRB rules if proper disclosures are not made. subject to the alternative minimum tax. taking an extraordinarily high risk. receiving less interest than with a similar GO bond.

subject to the alternative minimum tax. (The interest on private activity municipal bonds, used for things like airports, student housing, etc., is exempt from federal taxation, but is considered a preference item for the AMT.)

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

tax free if the recipient is disabled

Your client, Jane, died, and her 53-year-old son, Patrick, is the beneficiary of her IRA account. There is $750,000 in the account at the time of her death. All contributions were made with pre-tax dollars. Ten years later, the account has grown to $1.2 million, and Patrick begins to take distributions. The distributions will be tax free because the estate paid the taxes at the time of Jane's death taxed on the amount withdrawn in a given year 100% taxable on the amount over $1 million taxable on the growth and earning since Jane's death

taxed on the amount withdrawn in a given year (The account beneficiary is responsible for the taxes due on the funds that are withdrawn. One hundred percent of the distribution is taxable in the tax year the withdrawal is made.)

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

the 529 plan is counted at a lower percentage of assets when applying for financial aid.

A high net worth individual wishes to know when a gift can be made this year without being obligated to pay gift tax. You would respond that there is no gift tax when the gift is made to a non-citizen spouse. a grandchild of the donor. the American Red Cross. a sibling of the donor.

the American Red Cross. (Gifts to recognized 501(c)(3) charities, such as the American Red Cross, are never subject to the gift tax.)

The main disadvantage of a contributory defined contribution pension plan is that at retirement, the client might want to use the retirement fund to generate income in retirement, possibly by purchasing an annuity. the employees can choose the amount they wish to invest. the employer contributed toward the retirement planning of the employee. the actual sum an employee will receive at retirement is unknown.

the actual sum an employee will receive at retirement is unknown. (The liability of the employer in the defined contribution pension plan is an agreed contribution to the plan. The actual performance of the plan's investments will determine the final amount to be paid to the individual at retirement. In a contributory plan, the employee is also eligible to make contributions.)

One of the major changes incorporated into the Uniform Prudent Investors Act of 1994 was the ability of a trustee to delegate certain responsibilities to qualified third parties. However, a fiduciary would not be able to delegate the amount and timing of distributions the selection of different managers for different asset classes which investment style to be used for managing the portfolio the ability to decide on the specific securities to be acquired

the amount and timing of distributions

Trade confirmations sent by broker-dealers to their customers must always include the amount of commission charged the current market price of the security traded the tax identification number of the customer the amount of markup or markdown charged

the amount of commission charged

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

the beta of the security

When performing a capital needs analysis for a client, factors to be considered would include? the client's projected earnings the projected inflation rate projected market volatility the client's age

the client's projected earnings the projected inflation rate the client's age

There are several popular investment styles and, in many cases, portfolio managers use a blended approach to security selection. If a portfolio manager adhered to a pure value style, he would put most of his focus on using technical analysis lagging indicators projecting future earnings based on past earnings the company's financial statements

the company's financial statements (The value style of portfolio management looks for stocks that are undervalued. For example, the current market price is near or less than book value per share. The only way to find that out is by looking at the company's balance sheet.)

One measure of an investor's total return is called holding period return. The computation includes both income and appreciation and is used for both debt and equity securities. An investor's holding period return would be less than the bond's yield to maturity if the investor purchased a put option on the bond the bond was called at a discount the coupons were reinvested at a rate below the yield to maturity the bond was redeemed at a premium

the coupons were reinvested at a rate below the yield to maturity (The calculation of yield to maturity assumes reinvestment of the bond's interest at the coupon rate. Therefore, if the investor was only able to do less than that, the holding period return would be decreased. This is part of the concept of internal rate of return (IRR), which takes into consideration the time value of money (compounding). It is tempting to choose the answer "a call at a discount," but bonds are never called at a price below par. Just keep it simple: If the question says you can earn less than the YTM, your return will be lower than the quoted YTM.)

When an agent submits an order ticket to purchase securities for a client, all of the following would appear EXCEPT the current market price of the security the details of the order the agent's name the broker-dealer's name

the current market price of the security

One of the goals of modern portfolio theory (MPT) is to construct a portfolio that provides the highest return with the lowest risk. This would be known as? the efficient portfolio the Sharpe's portfolio the risk-free portfolio the managed portfolio

the efficient portfolio

Although not required by DOL regulations, if a plan administrator prepared a written investment policy statement meeting ERISA requirements, you would expect to find all of the following EXCEPT investment philosophy methods to be used for determining how the plan will meet future cash flow needs the identity of the specific securities to be chosen for the portfolio performance measurement parameters

the identity of the specific securities to be chosen for the portfolio

Each of the following terms is commonly found in modern portfolio theory EXCEPT the capital asset pricing model the feasible set the internal rate of return the efficient set

the internal rate of return

An investor decides to make monthly investments into the KAPCO Growth Fund. Each month, the investor purchases 10 shares of the fund. Over a 4-month period, the investor accumulated 40 shares at the following prices: Month 1 - $10 Month 2 - $8 Month 3 - $12 Month 4 - $10 If, instead of purchasing 10 shares per month, the investor had invested $100 per month, the investor would have paid slightly more in the second case. the investor would have acquired 40 shares in either case. the investor's cost basis would be the same. the investor would have acquired 40.833 shares instead of 40 shares.

the investor would have acquired 40.833 shares instead of 40 shares. (This shows the benefit of dollar cost averaging. This investor purchased 40 shares at a total cost of $400 or an average of $10 per share. If $100 per month had been invested instead, the total would have been the same $400, but the number of shares acquired would have been 40.833.)

One of your clients invested $10,000 into a mutual fund. The client elected to reinvest all dividends. As a consequence of this, the investor's basis is increased by the amount of the reinvested dividends the dividends will be taxed as capital gains once the shares are liquidated the reinvestments will purchase shares at a discount from the NAV taxes are deferred until those shares are redeemed

the investor's basis is increased by the amount of the reinvested dividends (Because the reported dividends are taxed each year, when the shares are ultimately liquidated, they have already been taxed. So, the investors cost basis is increased by the amount of the reinvestment.)

Investment advisers who preach the benefits of strategic asset allocation do so because they believe the market is perfectly efficient because stock prices reflect all available information over the long run, strategic management will eventually outperform the market active management of a portfolio offers tactical benefits the market is basically inefficient and there is a strategy that can beat it

the market is perfectly efficient because stock prices reflect all available information

A market maker is quoting ABC common stock at $76.10 - $76.31. That means the market maker is willing to pay $76.10 for the stock. the spread is probably excessive. the market maker's commission is $.21 per share. the market maker is willing to pay $76.31 for the stock.

the market maker is willing to pay $76.10 for the stock. (Marker makers provide a two-sided quote. Because market makers stand ready to buy and sell the specific security, they provide a bid price, the price the firm is willing to pay for the stock, and the offer price, the price they are asking to receive when selling the stock. Market makers do not earn a commission; they charge a markup or markdown. A $.21 spread on a stock at this price is certainly not excessive.)

If a customer of your firm receives stock from the estate of her mother, the stock's cost basis in the hands of the customer is the original cost of the stock the market value at date of distribution to the customer the original cost of the stock adjusted for any estate taxes paid the market value at date of death

the market value at date of death

IRAs and Keogh plans are similar in each of the following ways EXCEPT distributions without penalty may begin as early as age 59½ rollovers are allowed once every 12 months and must be completed within 60 days taxes on earnings are deferred the maximum allowable cash contribution is the same

the maximum allowable cash contribution is the same (Both IRAs and Keogh plans have maximum annual allowable contribution limits but they are significantly higher in a Keogh Plan)

Regarding the treatment of estates by the IRS, it would not be correct to state any of the following EXCEPT the maximum tax rate on estates is the same as that on gifts a deceased person may reduce the value of the estate by taking advantage of the annual gift tax exclusion estates may be valued either at date of death or 9 months later using the alternative valuation option income received by the estate is reported on Form 1040

the maximum tax rate on estates is the same as that on gifts

All of the following would be reasons for an employer to choose a nonqualified plan over a qualified plan except the nonqualified plan provides an immediate income tax deduction for the employer. the nonqualified plan provides greater flexibility. the nonqualified plan is not subject to ERISA reporting and disclosure requirements. the nonqualified plan can discriminate in favor of highly-compensated employees.

the nonqualified plan provides an immediate income tax deduction for the employer.

In the securities industry, the term contra party refers to the person on the other side of a civil suit the person on the other side of the trade the person identified on the trade confirmation as a broker a securities regulator who begins an investigation against a securities professional

the person on the other side of the trade (Contra party is defined as the broker-dealer or customer to whom a person has sold securities or from whom a person has purchased securities—they are on the other side of the trade.)

An employer whose 401(k) plan complies with ERISA Section 404(c) is placing investment risk with the plan participant the Securities and Exchange Commission. the Internal Revenue Service the plan fiduciary

the plan participant

When a will calls for property to be distributed per stirpes, it means that? the property is divided into as many equal shares as there are surviving children of the designated ancestor and deceased children who left surviving descendants the property is divided into as many equal shares as there are surviving children of the designated ancestor, with nothing going to surviving descendants of deceased children all living descendants of the ancestor receive equal shares in the property remaining after all estate expenses are paid the property is divided into as many equal shares as there are surviving children and grandchildren of the designated ancestor

the property is divided into as many equal shares as there are surviving children of the designated ancestor and deceased children who left surviving descendants

A taxpayer's marginal tax rate is? the rate of taxation on any additional taxable income received the rate of tax paid on margin account interest the rate of tax paid on total taxable income generally lower than the effective tax rate

the rate of taxation on any additional taxable income received

A bond of standard size has a nominal yield of 6%, paid in the customary fashion. The bond matures in 10 years, is callable at $105 in 5 years, and is currently priced at $110. An investor calculating the bond's yield to call would include the gain of $50 when called. 20 payment periods. the loss of $100 at maturity. the semiannual interest payments of $30.

the semiannual interest payments of $30. (A bond with a 6% coupon (nominal yield) will make $30 interest payments twice each year. Remember, unless otherwise stated, bonds have a par value of $1,000 and customarily pay interest semiannually. With a 5-year call, there are only 10 payment periods, not 20. The loss at call is $50 ($1,100 - $1,050); there is no gain and the loss at maturity of $100 is only relevant for YTM, not YTC.)

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 the current yield is higher than the nominal yield. the yield to call is higher than the current yield. the yield to maturity is higher than the yield to call. the yield to maturity is higher than the current yield.

the yield to call is higher than the current yield. (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).)

One year ago, ABC Widgets, Inc., funded an expansion to its manufacturing facilities by issuing a 20-year first mortgage bond. The bond is secured by the new building and land and is callable at par 15 years after the issue date. The bond was issued with a 5.5% coupon and is currently rated Aa. If the current market price of the bond is $105, the yield to call is higher than the current yield. the nominal yield is lower than the current yield. the yield to call is lower than the yield to maturity. the yield to maturity is higher than the current yield.

the yield to call is lower than the yield to maturity.

One of the assumptions underlying the capital asset pricing model is that there are no transaction costs or taxes. each investor has a unique time horizon. inflation must be taken into consideration. only whole shares are available.

there are no transaction costs or taxes.

One respect in which an LLC differs from an S corporation is that an LLC can be formed with as little as a single investor not only income, but losses, if generated, pass through to investors in an LLC there is more favorable tax treatment afforded to members of an LLC there is no statutory limit on the number of investors in an LLC

there is no statutory limit on the number of investors in an LLC

A client has made both tax-deductible and nondeductible contributions to a traditional IRA. When distributions are taken from the IRA, that portion derived from the nondeductible contributions is not subject to penalty if withdrawn before age 59½ they are taxed on a pro rata basis they are treated as being from the nondeductible portion first and the deductible portion last they are treated as being from the tax-deductible portion first and the nondeductible last

they are taxed on a pro rata basis (The portion of the distribution that is nontaxable must be prorated with amounts that are taxable. For instance, if the individual contributed $2,000 in after-tax amounts and $8,000 in pre-tax amounts, a distribution of $5,000 would be prorated to include $1,000 after-tax and $4,000 in pre-tax assets.)

An investor wishes to use funds in his IRA to purchase a condominium for personal use. Under current regulations, this would be a prohibited transaction. real estate, like life insurance, cannot be purchased in an IRA. real estate, such as a personal condominium, would be a permitted investment. this would not be a prohibited transaction unless the investor personally used the property more than 14 days per year.

this would be a prohibited transaction. (However, the moment the participant derives any personal benefit from the property, it becomes a prohibited transaction.)

When a participant in a 401(k) plan dies before retirement, the proceeds are distributed according to the terms of the will without going through probate. to the designated beneficiary after going through probate. according to the terms of the will after going through probate. to the designated beneficiary without going through probate.

to the designated beneficiary without going through probate. (This is done without regards to the terms of the will, similar to the beneficiary of a life insurance policy.)

- flexible premium - variable death benefit - premiums to separate account - no guaranteed cash value

universal variable life

One of your ultra-high net worth clients would like to give some low cost basis stock as gifts to her adult grandchildren. It would be prudent for you to tell her that making the gift under the Uniform Transfer to Minors Act is generally the most advantageous for the child. for purposes of the gift tax, her cost basis will be used. it would be wise for her to use a TOD account to avoid probate. unlike an inheritance, there is no stepped-up cost basis.

unlike an inheritance, there is no stepped-up cost basis. (One of the benefits of inheriting low cost basis securities is the stepped-up basis and that does not apply to gifts. Although the donor will not be the one subject to capital gains tax, it would be the right thing to do to let her know that the donees (her grandchildren) will be receiving the stock at her cost basis)

All of the following statements relating to an account registered as tenants in common are true EXCEPT each cotenant has an undivided interest in the entire account cotenants can own unequal percentages of the assets in the account upon the death of one of the cotenants, that individual's share of the account passes to the survivor(s) this form of registration is less common for married couples than JTWROS

upon the death of one of the cotenants, that individual's share of the account passes to the survivor(s) (Unlike an account registered JTWROS, when a cotenant in a TIC account dies, that individual's share of the account passes to the individual's estate, not the other cotenant(s). That would be the case with JTWROS (which is why that form is far more popular with married couples instead of TIC). In a TIC account, each cotenant has an undivided interest (specific securities in the portfolio are not designated to each cotenant—they share ownership in the entire portfolio). This is not to be confused with the fact that the ownership interests can be unequal. For example, one investor can own 40% of the account and the other 60%.)

- scheduled premium - minimum guaranteed + variable death benefit - premiums to general + separate account - no guaranteed cash value what type of insurance?

variable life

All of the following statements regarding qualified corporate retirement plans are true EXCEPT they are covered under ERISA all qualified retirement plans are either defined contribution or defined benefit plans all corporate pension and profit-sharing plans must be established under a trust agreement with defined benefit plans, the employee bears the investment risk

with defined benefit plans, the employee bears the investment risk (With defined benefit plans, the employer (not the employee) bears the investment risk. The employer must fund the defined benefits, regardless of the investment performance of funds set aside for this purpose. The retiree receives a defined benefit regardless of investment performance. All corporate pension and profit-sharing plans must be established under a trust agreement. All qualified retirement plans are either defined contribution or defined benefit plans.)