Practice Exam #4

When an investment adviser prepares a BCP, it should be based on I. the size of the firm II. the firm's annual net income III. the number of locations of the firm IV. the types of services provided A) I and III B) I, II, III, and IV C) I, III, and IV D) III and IV

C) I, III, and IV The amount of an investment adviser's net income is not relevant to a BCP

Ineligible investments in an IRA would include all of the following EXCEPT A) American Silver Eagles B) cash value life insurance C) Kruggerands D) stamps

A) American Silver Eagles

Which of the following industries would tend to be the most cyclical? A) Appliance manufacturers B) Tobacco producers C) Food producers D) Supermarkets

A) Appliance manufacturers

Julie owns 100 shares of CCC at $25. CCC declares a 25% stock dividend. After the ex-date, what will she own? I. 125 shares II. 100 shares III. Cost basis of $25 IV. Cost basis of $20 A) I and IV B) II and III C) I and II D) II and IV

A) I and IV Remember that the ex-date is the first day on and after which, a purchaser of a stock is not entitled to a previously declared dividend (cash or stock). That means the owner of the stock on and after the ex-date (Julie) is the one who receives the cash or, in this case, the additional stock. The payment of a stock dividend causes the number of shares owned to increase while the cost per share decreases. The total value of the position will always remain unchanged. She had 100 shares at $25 per share, or $2,500, and now has 125 shares × $20 = $2,500.

Which of the following methods of compensation to an investment adviser may be in violation of the USA? I. An adviser charges a standard, or flat, fee for all accounts of $100,000 or less. II. An adviser charges all accounts a percentage of assets under management. III. A client agrees to compensate an adviser on a percentage of capital gains in excess of the S&P 500 in return for guaranteeing the S&P return. A) III only B) I and II C) I only D) I, II, and III

A) III only Guaranteeing a level of performance is a prohibited business practice whether the client agrees or not. An adviser may charge clients a flat fee, provided it is fair and reasonable for the services offered. Charging accounts a percentage of assets under management is also an acceptable business practice under the Uniform Securities Act.

An agent of a broker-dealer has a client who lost her job but will be starting a new job in 3 weeks. The client is in need of $900 for the 3-week gap. Under what circumstances may the agent arrange a loan for the client? A) If the client has $5,000 in her brokerage account B) If the loan is repaid within 30 days C) If the loan is less than $1,000 D) If the client is agent's niece

A) If the client has $5,000 in her brokerage account Loans may be made to clients if the person making the loan is in the lending business. Broker-dealers are permitted to lend money against securities held in client's portfolios. This is known as a margin loan. In fact, with $5,000 in the account, current regulations would permit a loan of up to $2,500.

What generally happens to outstanding fixed-income securities when the rate of inflation slows? A) Prices go up. B) Short-term securities are affected the most. C) Coupon rates go up. D) Yields go up.

A) Prices go up. When the rate of inflation slows and is expected to remain stable, coupons on new issue bonds will often decline to offer lower yields. The prices of outstanding bonds will go up to adjust to the lower yields on bonds of similar quality.

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

A) 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. There is an exclusion for income tax purposes on the sale of a primary residence, but that has nothing to do with the estate. Finally, when property is owned tenants in common, the percentage belonging to the deceased is part of the gross estate.

Which of the following risks would be associated with long-term, AAA-rated bonds? A) Purchasing power risk B) Ability of the issuing company to pay interest and principal C) Marketability D) Unstable interest payments

A) Purchasing power risk

You have a client who is not covered under an employer-sponsored retirement plan and has been contributing the maximum to her traditional IRA. She has just informed you that she won $1 million in the lottery, plans to continue working, and would like to continue to contribute to her IRA. Which of the following statements is correct? A) She may continue to contribute and her contribution will be tax deductible. B) She may continue to contribute, but only a portion of her contribution will be tax deductible. C) She may continue to contribute, but her contribution will not be tax deductible. D) Her income for the year exceeds the allowable limit for making a contribution.

A) She may continue to contribute and her contribution will be tax deductible. The only time that there is an earnings limit is when the individual (or spouse) is covered under an employer-sponsored retirement plan. That is not the case here. It is important to note that the client intends to continue in her job because lottery winnings are not considered earned income for an IRA contribution.

Which of the following best describes the death benefit provision of a variable annuity? A) The principal amount at death is the greater of the total of premium payments or the current market value. B) Upon death, the beneficiary will receive the benefit as a lump sum. C) Upon death, the proceeds pass to the beneficiary free of federal income tax. D) If death should occur before age 59½, the 10% early withdrawal penalty does not apply.

A) The principal amount at death is the greater of the total of premium payments or the current market value. The death benefit insures that the investor will never receive back less than the original amount contributed to the account. Unlike life insurance proceeds, with annuities, anything above the cost basis is taxed as ordinary income. Receiving the benefit as a lump sum is only one of the options available to a beneficiary of a variable annuity death benefit. There are others, such as annuitizing the benefit.

When would an individual employed by an issuer to sell its stock to the public have to register as an agent? A) When the employer is an insurance company B) When the transaction is exempt C) When the employer is the U.S. Treasury D) When the employer is a savings institution

A) When the employer is an insurance company The question is not looking for the exemption - it wants to know when the individual must register. There are two instances where an individual employed by the issuer to sell its securities is notconsidered an agent. The first is when the issuer is one of 5 specific named cases. That list includes savings institutions (banks), and the federal governments of the United States and Canada, as well as any of their political subdivisions. The list does not include insurance companies. The second case is when the securities are being sold in an exempt transaction. From a practical standpoint, the most common case where this occurs is when the issuer makes a private placement of its shares.

All of the following are true about education funding plans except A) a beneficiary of an ESA who withdraws the funds for nonqualified expenses will be taxed on the entire amount of the withdrawal plus a 10% penalty B) proceeds in ESAs may be withdrawn income tax free for qualified education expenses even if the child is under age 18 C) proceeds in 529s may be withdrawn income-tax free only if used for qualified educational expenses. D) Section 529 plans allow a gift tax exclusion equal to five times the annual limit that may be repeated every 5 years

A) a beneficiary of an ESA who withdraws the funds for nonqualified expenses will be taxed on the entire amount of the withdrawal plus a 10% penalty

A private equity fund would most likely be structured as A) a limited partnership. B) an ETF. C) a unit investment trust. D) an open-ended investment company.

A) a limited partnership.

A broker-dealer acting as a principal in a trade would A) add a markup to the offering price when selling shares to a client B) must disclose to clients the amount of earnings he made on principal transactions in excess of the amount he would have made had he charged a commission C) add a markup to the bid price when offering shares to a client D) must always disclose the amount of markup on a client's confirmation statement

A) add a markup to the offering price when selling shares to a client When selling a security to a public customer, the broker-dealer adds his markup to the ask price (offer price), not the bid price. A broker does not add a markup to the bid price when buying shares from a client; the broker-dealer would mark down the bid price. Unlike commissions, which are always disclosed on the trade confirmations, only for certain categories of securities is the markup or markdown shown.

An investor will likely exercise a put option when the price of the stock is A) below the strike price. B) above the strike price plus the premium. C) above the strike price. D) at the strike price.

A) below the strike price. First of all, we know this investor is long the put. How? Because only those who own options (are long) can decide to exercise. The owner of a put (long put) profits when the stock falls. The put would be exercised when the price of the stock is below the strike price. For example, if this is a 50 put, the investor has the right to exercise and sell the stock at $50 per share. That is a benefit when the market price of the stock is below 50 and the lower the better. Remember the phrase "put down" because a put option becomes valuable to the holder when the market price goes below the exercise (strike) price.

An investment adviser representative is prohibited from A) charging a fee for investment advice and then earning commissions on recommended trades without disclosing the nature of the dual relationship B) disclosing to clients that he is not buying the security being recommended to them for his personal account C) as part of a comprehensive financial plan, selling a life insurance policy to an advisory client issued by a company he represents, even with disclosure to the client D) recommending proprietary products only

A) charging a fee for investment advice and then earning commissions on recommended trades without disclosing the nature of the dual relationship

A corporation would like to offer their employees an opportunity to participate in the future growth of the company. Among the methods you might suggest are A) employee stock options B) voting-trust certificates C) preemptive rights D) subordinated debentures

A) employee stock options

One of the ways in which a simple trust differs from a complex trust is that simple trusts A) must distribute their distributable net income each year. B) may retain income. C) may make distributions from the corpus of the trust. D) are easier to prepare.

A) must distribute their distributable net income each year.

A business reporter claims that we are suffering from inertial inflation. This means A) the current rate of inflation will remain at this level until economic shocks cause it to change. B) prices are increasing at a steady rate. C) the business cycle is heading towards a trough. D) the economy is about to enter a deflationary period.

A) the current rate of inflation will remain at this level until economic shocks cause it to change. Inertial inflation means that there is not expected to be a change in the inflation rate until some kind of economic event "shakes things up" and causes the rate to move up or down.

You have a client who is switching jobs. The HR department of the new company delivered a beautiful brochure describing all the benefits offered to employees. One of these is a noncontributory money purchase pension plan. When asked by your client for an explanation, you would reply that this plan has mandatory contributions of A) the employer but no employee contributions. B) the employee but none for the employer. C) the employer and optional employee contributions. D) both the employer and the employee.

A) the employer but no employee contributions. In a contributory plan, both the employer and employee make contributions to the account. In a noncontributory plan, only the employer makes the contributions.

Disregarding any potential redemption or CDSC fees, an investor tendering shares of an open-end investment company for redemption will receive A) the next computed net asset value B) the last computed net asset value C) the next computed public offering price D) the next computed net asset value plus a portion of the sales load

A) the next computed net asset value When an investor redeems (or purchases) open-end investment company shares, the investor receives the next computed net asset value (NAV) of those shares. This is known as the forward pricing rule.

All of the following are true of negotiable, jumbo certificates of deposit EXCEPT A) they are secured obligations of the issuing bank B) they usually have maturities of 1 year or less C) they are usually issued in denominations of $100,000 to $1 million D) they are readily marketable

A) they are secured obligations of the issuing bank Negotiable CDs are general obligations of the issuing bank; they are not secured by any specific asset. They do qualify for FDIC insurance (up to $250,000), but that is not the same as stating that the bank has pledged specific assets as collateral for the loan.

An individual has been employed by a broker-dealer to make cold calls to solicit prospects for the firm's new wrap fee program. Under the USA, it is true to state that this individual A) would be defined as an investment adviser representative B) is not defined as an investment adviser representative because he is only making cold calls C) does not need supervision because he is only making cold calls D) would be permitted to use the term investment counsel

A) would be defined as an investment adviser representative As we know, when a broker-dealer offers wrap fee programs, the exclusion from the definition of investment adviser is lost. Any individual soliciting for that program would be considered an investment adviser representative and would need adequate supervision. Cold calling is about as far as you can get from the role of an investment counsel.

A member of the investment banking department of ABC Securities is explaining some of the advantages and disadvantages of rights and warrants to the board of directors of XYZ Corporation. Which of the following statements could he make? I. The exercise prices of stock rights are usually below the current market price of the underlying security at time of issue. II. The exercise prices of warrants are usually above the current market price of the underlying security at time of issue. III. Both rights and warrants may trade in the secondary market and may have prices that include a speculative (time) value. IV. Warrants are often issued attached to a bond issue to reduce the interest costs to the issuer. A) I and II B) I, II, III, and IV C) I, II, and III D) I only

B) I, II, III, and IV

Differences between static and interactive content on social media include I. only static content can be reused by others II. only static content needs preapproval III. only static content can be changed by the person who originated it IV. only interactive content can be commented on by others A) I and IV B) II and IV C) II and III D) I and III

B) II and IV Static content requires preapproval. Interactive content can be reused by others and can be commented on by others. Both static and interactive content can be changed by its originator, but static canbe changed only by its originator and interactive by the originator or others.

An investor bought a parcel of raw land for $50,000 several years ago. A developer has offered to exchange another property, currently valued at $100,000, with this investor. Under Section 1031 of the Internal Revenue Code, the investor's tax consequences would be A) $50,000 long-term capital gain. B) $0.00. C) $50,000 ordinary income. D) $50,000 short-term capital gain.

B) $0.00. Section 1031 permits a tax-free exchange of one property for another. This has the effect of deferring any gain until final disposition of the property. This is a parallel to Section 1035 for annuity products.

An analyst is viewing a subject company's financial statements. She notices that the company has current assets of $20 million, fixed assets of $50 million, and total liabilities of $45 million (of which $10 million is considered long-term). This company's debt-to-equity ratio is A) 40% B) 28.6% C) 64.3% D) 22.2%

B) 28.6% The debt-to-equity ratio is computed by dividing the issuer's long-term debt by their total capitalization. Total capitalization is the company's net worth (assets minus liabilities) plus the long-term debt. In this example, the net worth is $70 million minus $45 million, or $25 million. Adding the long-term debt of $10 million results in total capital of $35 million. Divide the $10 million by that $35 million to arrive at 28.57%. As we point out in the LEM, this is really a misnomer—it should be called the debt-to-total-capital ratio, but probably will not be shown that way on the exam.

Which of the following investments would provide the highest after-tax income to your client in the 35% federal income tax bracket? A) 5% general obligation municipal bond issued by State H B) 8% debenture issued by the LMN Corporation C) 6% U.S. Treasury bond D) 7% bond issued by Canadian Province M

B) 8% debenture issued by the LMN Corporation Only the State H bond is exempt from federal income tax. Using the tax equivalent yield formula of the muni coupon divided by (100% minus the investor's tax bracket %) we get 5% divided by 65% or 7.7%. That's a better deal than receiving 6% on the Treasury and paying taxes as well as 7% on the Canadian bond (although you learned that securities issued by Canadian provinces were exempt from registration under the Uniform Securities Act, that has nothing to do with U.S. income taxes). However, with a TEY of 7.7%, your client would take home more with the 8% taxable corporate security. You can also work backward to get the correct answer. Simply subtract 35% tax from each of the choices (other than the muni) and see which is the highest. In this case, 8% minus a 35% tax equals 5.2%—just a bit higher than the 5% coupon on the municipal bond.

Which of the following is NOT a fraudulent business practice when committed by a registered broker-dealer? A) Trading securities between house accounts and customer accounts to create trading volume or the appearance of interest in a security B) Acting as agent for both buyer and seller on a transaction C) Engaging in trades between other broker-dealers to increase or decrease the price of securities D) Conducting transactions that do not result in the transfer of ownership between buyers and sellers

B) Acting as agent for both buyer and seller on a transaction A broker-dealer may act as agent for both buyer and seller in a transaction. In other words, the BD can have one client sell and another client buy and act as the go-between. All the other activities represent market manipulation and are therefore fraudulent practices.

The capital asset pricing model (CAPM) is based on several limiting assumptions. Which of the following statements is correct regarding the CAPM? A) The CAPM does not assume that investors have access to the same information. B) The CAPM assumes that the optimal portfolio should be the one with the highest Sharpe ratio of all possible portfolios. C) The CAPM assumes that investors' expectations regarding risk and return are not identical but normally distributed. D) The CAPM does not assume that the expected excess returns for the market are known.

B) The CAPM assumes that the optimal portfolio should be the one with the highest Sharpe ratio of all possible portfolios. The CAPM assumes that investors should construct a portfolio with the highest Sharpe ratio because that offers the highest risk-adjusted return. It also assumes that the expected excess returns for the market are assumed to be known in that investors have access to the same information. As well, it assumes that returns are normally distributed and investors' expectations for risk and return are identical.

A broker-dealer provides HotScores, a portfolio analysis tool that allows clients to indicate their retirement goal. After disclosing age, current financial condition, and risk tolerance, those participating will receive a list of specific securities the customer could buy or sell to meet the investment goal. Which of the following is TRUE? A) This would be considered an example of social media communication and therefore not specifically covered by NASAA as a recommendation. B) This would be regarded as making a recommendation. C) This is not a recommendation because the analysis tool is automated. D) This is not a recommendation because the customer will receive a list or series of securities that the customer could buy or sell to meet the goal at a later date.

B) This would be regarded as making a recommendation.

Market interest rates rise by 50 basis points. If each of these bonds has about the same maturity date, which of the following would decline the least? A) AA corporate bond carrying a 7% coupon B) Treasury bond issued at par carrying a 7% coupon C) AAA corporate bond carrying a 6% coupon D) Treasury bond issued at par carrying a 6% coupon

B) Treasury bond issued at par carrying a 7% coupon All other factors being equal, bonds of higher quality experience less price volatility than do bonds of lower quality. Treasury securities have higher quality than other debt securities due to the elimination of default risk. When market interest rates rise, bonds having higher coupons will decline less than bonds having lower coupons.

One of your customers has a substantial savings account at the local S&L. The customer has several grandchildren and wants the flexibility of being able to change the beneficiary allocations as their financial conditions change. You should recommend that the customer investigate the use of A) an irrevocable trust. B) a Totten trust. C) a Uniform Transfers to Minors Act (UTMA) account. D) a durable power of attorney (POA).

B) a Totten trust. A Totten trust allows for the transfer of ownership of a bank account to a beneficiary or beneficiaries after the owner's death. It is the predecessor of today's POD (pay on death) and TOD (transfer on death) accounts. Beneficiary names and/or percentages can be changed at will. An irrevocable trust can't be changed; there is no flexibility. In an UTMA account, once the money is allocated, the decision is irrevocable (and who says the grandchildren are minors). The durable POA gives a designated person the authority to manage the affairs of the account, and this customer wants the control.

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

B) an estimate of all of the possible returns an investment is expected to yield

An investor is of the opinion that the recent bull market has run its course, and she wants to protect her portfolio consisting largely of equities with a market cap of less than $1 billion. Her best choice would be to A) sell puts on the S&P 500. B) buy puts on the Russell 2000. C) sell futures on the Russell 2000. D) buy puts on the S&P 500.

B) buy puts on the Russell 2000. When a bull market runs out of steam, a decline usually follows. The best way to protect her positions is purchasing a put option on a benchmark that represents her holdings. Because this investor's portfolio is so heavily invested in small-cap stocks, the appropriate benchmark for hedging would be the Russell 2000.

A country decides to nationalize its sugar industry. This is an example of A) business risk. B) political risk. C) financial risk. D) sovereign risk.

B) political risk.

All of the following actions will increase the deficit in the U.S. balance of payments EXCEPT A) Americans buying Japanese cars B) purchase by foreigners of U.S. securities C) investments by U.S. firms abroad D) U.S. foreign aid

B) purchase by foreigners of U.S. securities

One element of the formula used to compute the Sharpe ratio is A) alpha B) standard deviation C) beta D) net present value

B) standard deviation Standard deviation is used as the denominator in the formula used to compute the Sharpe ratio, a risk-adjusted rate of return. Standard deviation generally reflects the variability of portfolios that are not well diversified, while beta generally reflects the volatility of portfolios that are well diversified. Net present value measures the theoretical intrinsic value of an investment having uneven cash flows.

When comparing mutual funds, one of the factors to consider is A) the amount of sales charge levied on reinvested capital gain distributions B) the length of time the fund manager has been managing the fund C) the length of time it takes for the fund to redeem shares D) the fund's net asset value per share

B) the length of time the fund manager has been managing the fund Tenure in the job can be an important consideration when evaluating and comparing mutual funds. All funds must redeem in 7 days, and no fund can levy a sale charge on reinvested capital gains.

A form of business structure that exposes all personal assets of the owner to creditors is A) the C corporation B) the sole proprietorship C) the limited partnerships D) the LLC

B) the sole proprietorship One of the reasons why few large businesses are organized as sole proprietorships is the fact that all personal assets, not just those of the business, are placed at risk if the business fails. In each of the other choices, the maximum potential loss is the amount of the investment.

One way in which closed-end management investment companies differ from open-end investment management companies is that A) they are federal covered securities B) they trade at a price independent of their net asset value C) their portfolio may contain common stock, preferred stock and debt securities D) they were in existence prior to 1940

B) they trade at a price independent of their net asset value Unlike open-end companies (mutual funds) where the price is based on the net asset value (NAV), closed-end companies trade at a market price based on supply and demand which could be above, below or the same as the NAV. Both are federal covered, both can have equity and debt in their portfolios (although only closed-end companies can issue senior securities) and both were in existence prior to passage of the Investment Company Act of 1940.

Mr. and Mrs. Williams are a retired couple receiving most of their income from a diversified portfolio of high-quality bonds and preferred stock. One of the reasons that life insurance might be a useful addition to their overall planning is that A)dividends received on a life insurance policy are tax free B) upon the death of the insured, the insurance provides liquidity to preserve income-producing assets from having to be liquidated to cover death expenses C) the proceeds of a life insurance policy are free of income tax D) the premiums can be paid directly from their brokerage account

B) upon the death of the insured, the insurance provides liquidity to preserve income-producing assets from having to be liquidated to cover death expenses Even for those whose estate is not large enough to incur estate tax, life insurance proceeds provide liquidity to cover the expenses incurred at death without having to sell assets out of the portfolio. It is true that the proceeds are free of income tax, but that is not the major reason to own life insurance.

Kate, age 59, has an investment portfolio exceeding $250,000. She considers herself a moderate to conservative investor. To generate additional income, she is anticipating adding bonds to her portfolio. She lives in a state that does not have an income tax and she is in the 28% federal income tax bracket. Which of the following bonds would be the best recommendation for her portfolio? A) Bond D, AAA-rated Treasury note with a 2.55% coupon rate B) Bond B, BBB-rated municipal bond with a 3.75% coupon rate C) Bond A, A-rated corporate debenture with a 6.5% coupon rate D) Bond C, CCC-rated corporate debenture with an 8% coupon rate

C) Bond A, A-rated corporate debenture with a 6.5% coupon rate Even though Bond C has the highest after-tax rate of return, this bond would not be appropriate for Kate based on her risk tolerance. Therefore, Bond A would be the best choice. Calculations: Bond A: 6.5 × (1 - 0.28) = 4.68% Bond B: 3.75% Bond C: 8% × (1 - 0.28) = 5.76% Bond D: 2.55% × (1 - 0.28) = 1.84%

A licensed agent with a registered broker-dealer in a state would be permitted to engage in which of the following transactions in unregistered nonexempt securities? A) The sale of a preorganization certificate on which the agent receives no commission on the amount paid by the investor B) The sale of commercial paper with a 12-month maturity C) A private placement D) A solicited transaction in a small Canadian mining company

C) A private placement Under the USA, it is unlawful for any person to offer or sell any security in this state unless (1) it is registered under the USA; or (2) the security or transaction is exempted under the USA; or (3) it is a federal covered security. In this case, a private placement is an exempt transaction, so the agent is within the limits of the law. The sale of the preorganization certificate is not an exempt transaction because, although the agent received no commission, the investor paid for the subscription, and in order to be an exempt transaction, no payment is allowed.

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

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

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser may NOT borrow money from which of the following clients? A) A broker-dealer not affiliated with the adviser B) A bank not affiliated with the adviser C) A federal covered investment adviser not affiliated with this adviser D) A finance company not affiliated with the adviser

C) A federal covered investment adviser not affiliated with this adviser

Under which of the following circumstances would the Administrator of this state not have jurisdiction? A) A mass mailing offering a security for sale was made in this state. B) A letter offering a security for sale was sent to a client in this state from an agent in another state. C) A radio broadcast advertising a security was made from a neighboring state. D) A television broadcast advertising a security for sale was made from this state.

C) A radio broadcast advertising a security was made from a neighboring state. Radio or TV broadcasts made from outside the state do not come under the Administrator's jurisdiction. The letter sent from out of state does because the offer is being made in this state.

Which of the following statements regarding the SEC's power to revoke the registration of an investment adviser is TRUE? A) An investment adviser receiving substantial prepayment of fees from 50% of its clients that fails to include a copy of its balance sheet in its brochure delivered to all clients would give the SEC cause for beginning revocation proceedings. B) Revocation would occur, with appropriate notice, when a firm's annual updating amendment was received by the SEC 120 days after the end of the registrant's fiscal year. C) Failure to adequately supervise a person associated with the adviser could be cause for the SEC to revoke the firm's registration. D) If it is determined that an investment adviser is insolvent, the SEC may revoke the registration.

C) Failure to adequately supervise a person associated with the adviser could be cause for the SEC to revoke the firm's registration.

Under the Insider Trading and Securities Fraud Enforcement Act of 1988, which of the following are insiders for purposes of insider trading? I. Attorney who writes an offering circular for a company II. An investor holding 4% of the company's stock III. The next-door neighbor of a board member of a company IV. Brother of a company's president A) I and III B) II and IV C) I and IV D) II and III

C) I and IV The Securities Exchange Act of 1934 defines an insider as an officer, director, or stockholder owning more than 10% of a company's outstanding voting equity. The definition also includes anyone else who has or could have access to insider information, such as immediate family members. Merely being someone's neighbor does not automatically classify someone as an insider. Any professional who takes part in preparing the registration statement is automatically considered to have insider information.

A foreign private adviser is defined in the Dodd-Frank Act as any investment adviser that I. has no place of business in the United States. II. has, in total, fewer than 15 clients and investors in the United States in private funds advised by the adviser. III. has aggregate AUM attributable to clients in the United States and investors in the United States in private funds advised by the adviser of less than $25 million. holds itself out to the public in the United States as an investment adviser or acts as an investment adviser to an investment company registered under the Investment Company Act of 1940. A) II and III B) I and IV C) I, II, and III D) IV only

C) I, II, and III There are 4 requirements to be considered a foreign private adviser. Choices I, II, and III are all included, and, if choice IV said - does not hold..., it would have been the fourth requirement. By holding itself out to the public, it can't be a private adviser.

Pontourny Advisory and Investment Services (PAIS) is a federal covered investment adviser. Its principal office is in State X. PAIS also maintains branch offices in States Y and Z. Brenda is the manager of the branch office in State Y. Some of the individuals being supervised by Brenda have clients in States X and Y, and others have clients in States Y and Z. Brenda must register as an IAR in A) States Y and Z B) States X, Y, and Z C) State Y D) States X and Y

C) State Y Those who supervise the activities of investment adviser representatives are themselves defined as IARs. An IAR representing a federal covered investment adviser need only register in the state or states in which she (the IAR) has a place of business. There is nothing in this question to suggest that Brenda has a place of business anywhere other than in State Y, where her branch office is located. Remember, when it comes to federal covered advisers, registration of their IARs is dependent on the IAR's place of business, not the location of their clients.

Under the Uniform Securities Act, which of the following is NOT cause for disciplinary review action by the state securities Administrator? A) Ed is suspended from conducting business in the securities industry for a period of 6 months by FINRA. B) Joe files an application for registration as an investment adviser and omits the fact that he was convicted of fraud 12 years ago. C) The ABC Advisory Group, a registered investment adviser, employs several investment adviser representatives as independent contractors. D) Tom, a registered investment adviser, fails to disclose that he recently filed for bankruptcy protection.

C) The ABC Advisory Group, a registered investment adviser, employs several investment adviser representatives as independent contractors. Even though the Administrator's power to deny a registration is limited to convictions within the past 10 years, not only any conviction of a felony or securities-related misdemeanor, but even an arrest or charge for one must be disclosed without any time limitation. Failure to disclose a bankruptcy filing is cause for disciplinary action on the part of the Administrator. A suspension by FINRA would be reason for the Administrator to initiate a review. Investment advisers may employ investment adviser representatives as independent contractors.

An investment adviser who has not been given discretionary authority notices a stock's value declining in a client's portfolio. The adviser is unable to contact the client and sells the stock to prevent the loss. Which of the following statements is TRUE regarding this situation? A) It is proper to make the transaction provided the loss would have been more than $5,000. B) The investment adviser acted unethically by purchasing the stock in the first place. C) The investment adviser is acting unethically by selling the stock without the client's permission. D) It is proper to make the transaction to prevent the loss.

C) The investment adviser is acting unethically by selling the stock without the client's permission. Unauthorized trading, as is the case when discretionary authority has not been given, is unethical conduct. Unless discretionary authorization has been granted, trading the stock is not allowed. Best intentions aside, the adviser's actions were unauthorized and illegal.

Which of the following reasons is appropriate justification for selling a stock short? A) To cut losses on a long position B) To benefit from a rise in the price of the stock C) To benefit from a decline in the price of the stock D) To seek a modest potential reward with limited risk

C) To benefit from a decline in the price of the stock The appropriate time to sell short is when (one believes) a stock price is about to drop. The investor sells borrowed stock at current prices and then buys the stock later at a lower price to replace the borrowed stock. Selling short does not reduce the risk of a long position; the investor is selling borrowed, not owned, stock. If the stock moves up, the short investor can lose a great deal of money. If the stock price moves up, the risk of loss is unlimited.

There are number of potential sources of income to a client that would have to be reported on their Form 1040 tax return. Among them could be all of these EXCEPT A) interests in a DPP B) ownership of stock in an S corporation C) death benefit received from a life insurance policy D) operation of a sole proprietorship

C) death benefit received from a life insurance policy An individual can generate income from running a sole proprietorship or being a shareholder in an S corporation (the exam will possibly use the obsolete term, Subchapter S). And, if units of a DPP throw off income, that would be reported as well. Of course, taxable income can be generated by investments in the form of dividends, interest, and capital gains from any source. The death benefit is from a life insurance policy and those, unlike the death benefit from an annuity, are not subject to income tax. Depending on how the ownership is structured, the death benefit could be subject to estate tax, but that would be reported on the Form 706 and is generally not considered income.

An agent tells his customer that a corporation has graduated to the level of quality acceptable for trading on the New York Stock Exchange and, therefore, has less market risk. If he recommends the stock to the customer based on the exchange's listing requirements, the agent has acted A) properly, because the New York Stock Exchange requires that the companies it lists are substantially capitalized B) fraudulently because the NYSE listing requirements are not a matter of public knowledge C) fraudulently, because listing on the New York Stock Exchange does not reduce the client's loss exposure and, therefore, the agent misled his client D) properly, because returns were not guaranteed

C) fraudulently, because listing on the New York Stock Exchange does not reduce the client's loss exposure and, therefore, the agent misled his client

An employee is offered a nonqualified stock option with an exercise price of $20 per share. If the option is exercised when the current market value of the stock is $30, the employee A) is taxed on $20 per share as if it were salary B) has a capital gain of $10 per share C) is taxed on $10 per share as if it were salary D) is taxed on $30 per share as if it were salary

C) is taxed on $10 per share as if it were salary

An investment adviser has legal access to a broker-dealer's confidential research document and uses the information to support a recommendation to a client. The investment is successful. Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, the adviser A) must share the commission with the broker-dealer that prepared the research document B) must provide the client with a copy of the research document C) need not disclose the source of the information D) must notify the client that the recommendation was based on the broker-dealer's research document

C) need not disclose the source of the information If an adviser provides its clients with reports or recommendations prepared by a third party without disclosure of the source, the adviser has acted unethically. There is, however, an exception to this rule, which happens to apply here. If the adviser uses third-party reports as a basis for its own recommendation or as a support to its own recommendation to its client, it does not have to disclose this information.

Under the Investment Advisers Act of 1940, a registered investment adviser who provides investment advisory services to individuals must A) avoid the control or custody of client funds and securities B) sell only listed securities C) provide each client with a disclosure statement or brochure no later than when entering into the advisory agreement D) have a net worth of $100,000

C) provide each client with a disclosure statement or brochure no later than when entering into the advisory agreement

A unique requirement for those investment advisers who maintain custody of customer assets is the filing of A) the Form ADV-H B) the Form ADV Appendix 1 C) the Form ADV-E D) the Form ADV Part 1

C) the Form ADV-E

If interest rates are dropping, an investor with a maturing bond will be most concerned with A) a negative yield curve B) the quality declining with the yield C) the difficulty in finding another investment with a like yield D) a positive yield curve

C) the difficulty in finding another investment with a like yield

A widowed customer with no children has a portfolio invested in mutual funds valued at $250,000. The portfolio generates a monthly income of $1,600, an amount that exceeds her living expenses by $300. The investment portfolio is her sole source of income. Her agent recommends she sell $30,000 worth of her mutual funds and purchase a deferred variable annuity to take advantage of the tax deferral and death benefit features. This recommendation is A) suitable because it provides tax deferral features B) suitable because it offers a growth opportunity with a death benefit for a portion of her holdings C) unsuitable D) suitable because it provides diversification

C) unsuitable

Which of the following debt instruments does not make periodic interest payments? A) T-notes B) TIPS C) T-bonds D) T-bills

D) T-bills Treasury bills are always issued at a discount from their face value. At maturity, the investor receives the face value. The other choices pay interest semiannually. What makes TIPS different from the others is that the principal adjusts for inflation every six months. That means the fixed interest rate is paid on a varying principal.

Which of the following is true regarding ETNs? A) As fixed-income investments, they do not have market risk. B) They are non-callable prior to maturity. C) They are suitable for conservative investors seeking income. D) Their value can be impacted by changes in the issuer's credit rating.

D) Their value can be impacted by changes in the issuer's credit rating.

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 A) 15% B) 12% C) 18.2% D) 14%

D) 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%. The standard deviation is not relevant to this computation.

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 A) 8.6% B) 3% C) 1.75% D) 5%

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

An investor has $100,000 to invest. If the account's estimated annual return is 8% and the investor plans to withdraw $20,000 at the end of each year, approximately how long will the money last? A) 5 years B) 7.55 years C) 8.33 years D) 6.65 years

D) 6.65 years

Which of the following statements regarding an investment adviser's use of a full-service broker for an account over which the adviser has investment discretion is TRUE? A) A full-service broker may not be used for any transaction that could be done by a discount broker. B) Sales incentives, such as free vacations, may be taken into consideration by the adviser in determining whether to use a full-service broker. C) A full-service broker may be used only if the broker is not affiliated with the adviser. D) A full-service broker may be used if the charge is reasonable in relation to the advice, analyses, or other services provided.

D) A full-service broker may be used if the charge is reasonable in relation to the advice, analyses, or other services provided.

Daniel has a number of investment company products within his retirement portfolio. One of these investments trades on an exchange, may trade at a premium or discount to its net asset value, and has a fixed capital structure. These features are most likely found in what type of investment? A) Unit investment trust B) Hedge fund C) Open-end investment company D) Closed-end investment company

D) Closed-end investment company A closed-end investment company (closed-end fund) is a type of investment company whose shares trade in the secondary market.

Which of the following statements regarding ADRs are TRUE? I. They are issued by large domestic commercial banks. II. They are issued by foreign banks. III. They facilitate U.S. trading in foreign securities. IV. They facilitate a foreign investor who wants to trade U.S. securities. A) I and IV B) II and IV C) II and III D) I and III

D) I and III

Securities industry rules require that securities professionals disclose all potential conflicts of interest to their clients. Examples of potential conflicts of interest include I. offering a proprietary product II. an agent having a financial interest in a recommended security III. a broker-dealer publishing a favorable research report after underwriting the issuer's stock offering IV. the sponsor of a mutual fund offering a trip to Key West for all agents reaching a minimum sales level of any of the sponsor's funds A) I, III, and IV B) II and IV C) I and III D) I, II, III, and IV

D) I, II, III, and IV

Which of the following are regulated under the Securities Exchange Act of 1934? I. New issues II. Broker-dealers III. Transfer agents A) I only B) I and III C) I, II, and III D) II and III

D) II and III The Securities Exchange Act of 1934 was designed to regulate securities transactions, securities markets, and the securities firms who do the trading. While the Securities Act of 1933 covers requirements relating to new issues, the Securities Exchange Act of 1934 covers almost everything else in the securities industry. Its greatest impact is on the securities firms and the people who sell securities (i.e., broker-dealers and their agents) in the secondary market. Of the choices listed, new issues would be regulated by the Securities Act of 1933.

Which of the following statements concerning market efficiency is not correct? A) The fundamental assumption of market efficiency is that current stock prices reflect all available information for a company and that prices rapidly adjust to reflect any new information. B) The efficient market hypothesis (EMH) is the proposition that the securities markets are efficient, with the prices of securities reflecting their current economic value. C) Any new information must be unexpected; therefore, any changes in the stock price resulting from this new information will be random. D) Investors who accept the efficient market hypothesis (EMH) usually adopt an active investment strategy.

D) Investors who accept the efficient market hypothesis (EMH) usually adopt an active investment strategy. Investors who accept the EMH usually adopt a passive investment strategy; investors who do not accept the EMH, pursue an active investment strategy. If the market is efficient, the best strategy is indexing rather than stock picking.

Watson, a customer of Gibraltar Securities, wishes to place an order to buy 50 shares of a thinly traded stock priced at $8 per share. Because the stock is so thinly traded, Gibraltar Securities feels it needs to charge Watson a commission of $100 to justify the time it must spend locating a seller of the stock. Which of the following statements best describes this action? A) Gibraltar Securities is not required to disclose the amount of commission in advance to Watson. However, it must receive clearance from the Administrator before charging commission in amounts exceeding 10% of the value of the securities traded under the transaction. B) A commission of $100 on a transaction involving $400 worth of stock would generally not be deemed excessive. C) It would not be considered a prohibited practice for Gibraltar to charge Watson $100 to complete the transaction. D) It would not be considered a prohibited practice for Gibraltar to charge Watson $100 to complete the transaction, provided Gibraltar informed Watson of the $100 commission prior to the transaction and Watson chose to proceed with the trade.

D) It would not be considered a prohibited practice for Gibraltar to charge Watson $100 to complete the transaction, provided Gibraltar informed Watson of the $100 commission prior to the transaction and Watson chose to proceed with the trade.

As a result of an inheritance, Danielle now owns a large position in XYZ stock. She is concerned that the stock may decline in the upcoming months while she is deciding what to do with the investment. What type of investment strategy could she employ to protect the stock from substantial downside risk? A) Write call options on XYZ B) Write put options on XYZ C) Purchase index put options D) Purchase put options on XYZ

D) Purchase put options on XYZ

Damon Raymond is an agent with ABC Investment Planning, a registered broker-dealer and investment adviser. Under what circumstances would Damon not have to obtain client consent when ABC Investment Planning is acting in a principal capacity? A) When the client has given ABC blanket permission to engage in this type of transaction B) Never C) Only if the client terminates the advisory relationship D) When the trade that is made is unrelated to the advisory relationship

D) When the trade that is made is unrelated to the advisory relationship Under normal circumstances, when acting in an advisory capacity, client consent must be obtained no later than completion of the trade. However, in a case like this where the transaction is strictly based on the broker-dealer relationship rather than on the advisory one, no consent is necessary.

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

D) a bank-insured certificate of deposit

According to the Uniform Securities Act, each of the following is a security EXCEPT A) a U.S. Treasury bill B) an interest in a condominium project with a rental pool C) a limited partnership in an oil and gas exploration program D) a contract in soybean futures

D) a contract in soybean futures

If ABC Fund pays regular dividends, offers a high degree of safety of principal, and appeals especially to investors seeking tax advantages, ABC is A) a corporate bond fund B) a money market fund C) an aggressive growth fund D) a municipal bond fund

D) a municipal bond fund

Under the Uniform Securities Act, the Administrator may require a broker-dealer to post a surety bond of A) $10,000.00 B) $25,000.00 C) $50,000.00 D) an amount not in excess of that set by the SEC

D) an amount not in excess of that set by the SEC Unlike investment advisers where the USA specifies posting a surety bond in the amount of $35,000, the Uniform Securities Act does not specify an amount for broker-dealers. However, the NSMIA states that the Administrator may not require a broker-dealer be bonded in an amount above that set by the SEC. Furthermore, bonds will not be required of broker-dealers that maintain a specified net capital.

Pemberton bought a stock share at $50 and wants to earn a profit, so he decided he will never sell it below $52. The company has now underperformed for multiple quarters as per street analysts, and the stock is down to $48. Pemberton continues to hold the stock in line with his original plan. In this case, Pemberton may be exhibiting A) herding bias. B) regret aversion bias. C) overconfidence bias. D) anchoring bias.

D) anchoring bias. In behavioral finance, an anchoring bias is when people tend to base their decisions on reference points that are often arbitrarily chosen. In this case, Pemberton "anchored" his selling price to the $50 he paid for it and will not recognize changes in the market.

A client asks her investment adviser representative what footnotes to the financial statements are for. The best reply would be that footnotes A) contain a detailed history of the enterprise and its products or services B) are used to explain how the various ratios are computed because companies recognize that many shareholders do not have a financial background C) serve as a bibliography indicating where additional information may be obtained D) contain information that doesn't have a place in the main body of the financial statements

D) contain information that doesn't have a place in the main body of the financial statements There are many important financial details that cannot be properly placed in either the balance sheet or the income statement. Examples of these are: method of accounting used, collateral securing debt, pension liabilities, and many others. Footnotes are an integral part of the financial statements and are usually found with this notation, "The accompanying footnotes to the financial statements are an integral part of these statements."

A customer has a financial commitment of $200,000 that will come due in 2 years. In the interim, the customer wishes to invest the $200,000 to maximize income and have the money available for the obligation in 2 years. You should recommend investments in A) large-cap stocks B) municipal bonds purchased at par with 20-year maturities C) preferred stock purchased in a private placement D) government securities with two year maturities

D) government securities with two year maturities

All of the following are advantages of mutual fund investment EXCEPT A) exchange privileges within a family of funds managed by the same management company B) the ability to qualify for reduced sales loads based on accumulation of investment within the fund C) the ability to invest almost any amount whenever desired D) investors retain personal control over the investments in the fund's portfolio

D) investors retain personal control over the investments in the fund's portfolio The control of the investment is given over to the investment manager. Exchange privileges, the ability to invest any amount at any time, and reduced sales loads are all considered advantages.

A registered investment adviser, in his financial planning practice, recommends and sells proprietary products offered through a broker-dealer affiliated with his investment advisory firm. All of the following statements are true EXCEPT A) the adviser may collect fees for investment advice and commissions for executing trades B) the adviser must state that the client may be subject to certain limitations because of this arrangement C) this practice is ethical if full disclosure is made to all clients D) the adviser must receive a signed statement from the customer that authorizes this practice before collecting any payment

D) the adviser must receive a signed statement from the customer that authorizes this practice before collecting any payment Disclosures are required, but written consent is not. If the client does not agree with these arrangements, he can take his business elsewhere. There are cases, such as agency cross transactions, where prior written consent of the client is needed.

Those investors wishing to examine a document that would probably give them the most information about a corporation's current and planned operations would seek out A) the investor's brochure B) the balance sheet C) the Form 10-K D) the annual report

D) the annual report The annual report to shareholders is going to contain not only a complete financial report of the prior year's operations but will also include statement from key personnel dealing with the company's future plans. The Form 10-K does not include discussion of future business plans - it is a report of "what has happened over the previous fiscal year."

Probable Return

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