Series 65: Simulated Exam 4

Assume you own KAPCO Stock Fund that returned 14% over the past five years, during which the stock market returned 12%. This fund has a beta of 1.1 and the risk-free rate of return is 4%. What is the fund's alpha? A. +9.1 B. +1.2 C. +6.0 D. +2.0

+1.2 14 − [4 + (12 − 4) 1.1] = 14 − [4 + 8.8] = 14 − 12.8 = 1.2. This positive result indicates that the fund manager outperformed the market by 1.2% on a risk adjusted basis.

A corporation sponsors a defined benefit pension plan. The assets of the plan are invested in a diversified portfolio of large-cap stocks. Which of the following options positions would be most appropriate if the corporation wished to protect their ability to meet their obligations to employees? A. Sell S&P 500 index calls B. Sell S&P 500 index puts C. Buy S&P 500 index puts D. Buy S&P 500 index calls

Buy S&P 500 index puts In a defined benefit plan, the corporation is assuming the investment risk. Regardless of the security, the best way to protect a long position is to buy a put, either on that security or on an index with a close correlation. In this case, with a portfolio of large-cap stocks, the S&P 500 index would seem to be the appropriate option to use.

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

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

A mortgage-backed security (MBS), such as a Ginnie Mae, makes a combination principal and interest payment to an investor. This payment will be A. taxed as a capital gain if underlying mortgage is prepaid. B. taxed as ordinary income. C. tax free. D. partly taxed as ordinary income and partly a tax-free return of principal.

Partly taxed as ordinary income and partly a tax-free return of principal All interest payments made on a mortgage-backed security (MBS) are taxed as ordinary income. MBSs may make principal and interest payments to investors, which are partly taxed as ordinary income and partly tax-free returns of principal.

Programs allowing for the direct pass-through of losses and income to investors include all of the following except A. S corporations. B. new construction real estate direct participation programs. C. REITs. D. oil and gas drilling direct participation programs.

REITs REITs allow for the direct pass-through of income but not losses. The other choices are forms of business that allow for pass-through of income and losses.

When current interest rates are at 6%, you would expect a bond with a nominal yield of 4% to be A. selling at par. B. selling at a premium. C. in danger of default. D. selling at a discount.

Selling at a discount With the market rate of return at 6%, a 4% bond just isn't as valuable, so the only way investors will be interested is if they can acquire it at a discount. That discount works out to be a figure that will result in a 6% return for the purchaser. Remember, as interest rates go up, bond prices go down, and vice versa.

The statement, "Stock prices fully reflect all information from public and private sources," can be attributed to which form of the efficient market hypothesis (EMH)? A. Semi-strong form EMH B. Strong form EMH C. Weak form EMH D. Passive form EMH

Strong form EMH This is the definition of the strong form EMH because it includes private information. Private sources include insider information, such as persons holding nonpublic access to information that may impact stock prices. There is no such term as passive form EMH.

An efficient portfolio is one that offers 1. the most return for a given amount of risk 2. the least risk for a given amount of return 3. the least return for a given amount of risk 4. the most risk for a given amount of return

The most return for a given amount of risk and the least risk for a given amount of return Under modern portfolio theory, (MPT), we look to assemble the efficient set, or efficient frontier. This is a collection of efficient portfolios. Portfolio efficiency is found when we can obtain the most return for a given amount of risk, or stated in the reverse, the least risk for a given amount of return.

In a trust account, the person who makes the account management decisions is A. the beneficiary. B. the nontrustee custodian. C. the investment adviser representative. D. the trustee.

The trustee A trust is a legal entity that designates a person (the trustee) to manage the trust's assets for the benefit of another person (the beneficiary or beneficial owner).

A client is considering the purchase of American depositary receipts (ADRs). The client is looking to further diversify her portfolio. Which of the following is not a feature of this type of investment vehicle? A. ADRs are both liquid and marketable. B. Information regarding the foreign company is more easily attainable than if directly purchased. C. They are not subject to exchange rate, or currency, risk. D. ADRs are denominated and pay dividends in U.S. dollars.

They aren't subject to exchange rate, or currency, risk Even though ADRs are denominated in U.S. dollars, they are subject to exchange rate, or currency, risk. The bank furnishes information about the underlying security in English rather than the foreign language and ADRs are traded like any domestic stock.

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 A. ABC B. DEF C. JKL D. GHI

GHI Mid-cap stocks are those with a market capitalization between $2 billion and $10 billion. GHI, with a market cap of $3 billion ($40 times 75 million), is the only company within that range. ABC's market cap is $1.2 billion ($12 times 100 million), DEF's is $1.2 billion ($150 times 8 million), and JKL's is $14 billion ($70 times 200 million). Two of these (ABC and DEF),are within the small-cap range, and JKL would be considered large-cap.

The general rules dealing with a broker-dealer extending credit for a customer to purchase securities are found in Regulation T of the Federal Reserve Board. However, Regulation T does not address A. mixed margin accounts B. loan value of securities C. initial margin requirements D. maintenance margin

Maintenance margin Maintenance margin levels are set by the SROs, such as FINRA. They are currently 25% for long accounts and 30% for short accounts (you will not have to calculate these).

Under modern portfolio theory (MPT), the optimal portfolio has A. the least return for a given amount of risk B. no risk for a given amount of return C. the most return for a given amount of risk D. the most return for the most amount of risk

The most return for a given amount of risk Under modern portfolio theory (MPT), the optimal portfolio is one that has the most return for a given amount of risk.

One of the reasons why the discounted cash flow method of valuation is useful in assessing the value of fixed income instruments is A. the predictability of income. B. the known maturity date. C. the priority of claim on earnings. D. the availability of ratings.

The predictability of income Discounted cash flow evaluates the expected cash flow from an investment and then factors in the time value of money. Obviously, if there is no predictable cash flow (not the case with the fixed interest payments on a bond), there are no reliable numbers to plug into the formula.

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

A mixed margin account When a margin account contains both long and short positions, it is known as a mixed or combined margin account.

An investment adviser representative for ABC Money Managers, a wholly owned IA subsidiary of ABC Securities, Inc., sold 1,000 shares of registered securities traded on the NYSE to one of her advisory clients. ABC Securities charged commissions for both the buyer and the seller of these securities. This is known as A. a fraudulent practice. B. an agency cross transaction. C. an arbitrage transaction. D. a prohibited practice.

An agency cross transaction When an investment advisory firm handles both sides of a transaction for a client of an investment adviser representative, the firm has performed an agency cross transaction—a legal practice, provided all of the required disclosures are made and permissions obtained.

What is the balance sheet equation? A. Assets = net worth B. Assets = liabilities + shareholders' equity C. Assets = shareholders' equity − liabilities D. Assets = liabilities − shareholders' equity

Assets = liabilities + shareholders' equity Total assets equal total liabilities plus total shareholders' equity.

An analyst uses a stock selection method that involves analyzing a specific corporation, followed by evaluating where it fits in its industry and then viewing the overall economy. The term that best describes this method is A. efficient frontier. B. capital asset pricing model. C. bottom-up. D. top-down.

Bottom-up The bottom-up method of stock selection goes from micro to macro—that is, identifying the specific company and then working up through the overall economy. It is the opposite of top-down.

If your client's entire investment portfolio consists of his company's employee stock ownership plan and stock in the company acquired under the executive stock option program, the client's portfolio is most exposed to A. interest rate risk B. inflation risk C. business risk D. market risk

Business risk Because the client's investment (and indeed his employment) is entirely invested in his employer's stock, his portfolio is disproportionately exposed to business risk. Should the company experience a business or industry setback, the portfolio could suffer substantial losses. There are a large number of historical examples where this has happened (frequently wiping out retirement savings).

A customer owns cumulative preferred stock (par value of $100) that pays an 8% dividend. The dividend has not been paid this year or for the two previous years. How much must the company pay the customer per share before it may pay dividends to the common stockholders? A. $24 B. $0 C. $8 D. $16

$24 If the company is going to pay a common stock dividend, it must pay the preferred dividends first. A cumulative preferred stockholder must also receive all dividends in arrears. There are $16 due in back dividends, in addition to $8 this year, for a total of $24.

Use the following chart to answer this question: STOCK 50% 30% 10% 0% BONDS 50% 70% 90% 100% High return 39.4% 37.2% 34.3% 32.7% Low return 1.4% 6.5% 7.2% 8.5% Ave. return 15.8% 16.2% 15.5% 15.2% Std. Dev. 11.25 10.75 10.15 10.34 Which portfolio mix would you recommend to a client who is most concerned about projected near-term volatility? A. 30%/70% B. 50%/50% C. 10%/90% D. 100%/0%

10%/90% Although this might look complicated, this is very simple if you realize that standard deviation is the measure of volatility. So, just pick the allocation with the lowest standard deviation and that is the 10%/90% at 10.15.

Richard purchased a 30-year bond for 103½ with a stated coupon rate of 8.5%. What is the approximate yield to maturity for this investment if Richard receives semiannual coupon payments and expects to hold the bond to maturity? A. 8.68% B. 9.36% C. 8.50% D. 8.19%

8.19% No calculation is necessary here. Why not? Because anytime a bond is purchased at a premium over par (103½% is a premium), the YTM must be less than the nominal (coupon) rate. There is only one choice lower than 8.5%. It isn't about your computational skills; it is about your understanding of the relationship between prices and yields.

The term earned income would include A. alimony received as part of a divorce decree executed on January 15, 2019. B. a bonus paid as a result of your division exceeding its goals. C. the death benefit from a variable annuity policy. D. the death benefit from a variable life insurance policy.

A bonus paid as a result of your division exceeding its goals The IRS defines earned income as wages, salaries, tips, and other taxable employee pay, such as bonuses. The death benefit from a variable annuity policy is taxed as ordinary income but is not earned. The death benefit from a variable life insurance policy is generally free of income tax, so it cannot be earned income. Under the TCJA of 2017, alimony received from a divorce decree dated January 1, 2019 or later is not earned income.

Walt and Bryan are old friends who are agents with different broker-dealers. Bryan attends one of Walt's investment seminars and, at a prearranged point in the presentation, stands up and exclaims that his rich brother-in-law wisely purchased the same investment. This action is A. only problematic if someone invests in the product and loses money B. a deliberate attempt to mislead and deceive investors C. a dubious sales practice but not strictly prohibited D. a legitimate sales tactic known as priming the pump

A deliberate attempt to mislead and deceive investors This tactic is a deliberate attempt to mislead investors and get them to invest; it would likely be considered fraudulent.

An individual investor specifies to her investment adviser representative that her portfolio must produce a minimum amount of cash each year. This would be considered A. a legal and regulatory constraint. B. a tax constraint. C. a liquidity constraint. D. a unique circumstance.

A liquidity constraint Liquidity constraints arise from an investor's need for spendable cash.

Myla is retiring in two years and will need income. Which of the following mutual fund types would most likely be the least desirable for her? A. A special situation fund B. A bond fund C. A balanced fund D. A growth and income fund

A special situation fund Special situation mutual funds are risky and would not usually be considered suitable for a potential retiree. First of all, the nature of those funds is such that they generally do not produce regular income (one of Myla's stated objectives). Secondly, with a relatively short time horizon, recommended investments should be those that tend to have greater price stability.

Under the Uniform Securities Act, the definition of person includes which of the following? 1. An unincorporated investment club 2. An individual who buys and sells securities only for his own account 3. Associations and partnerships, whether or not they issue certificates 4. The U.S. government

An unincorporated investment club, an individual who buys and sells securities only for his own account, associations and partnerships, whether or not they issue certificates, and the U.S. government An unincorporated investment club; an individual who buys and sells securities for his own account; associations and partnerships (whether or not they issue certificates); and the U.S. government are specifically listed as persons in the act. On the exam, minor children, deceased individuals, and mentally incompetent individuals are the only choices that are not persons under the act.

The Conference Board releases information about the economy on a monthly basis. Included are a number of different indicators. Economic indicators can be leading, lagging, or coincidental, which indicates the timing of their changes relative to how the economy as a whole changes. Which of the following is a lagging economic indicator? A. Manufacturers' new orders for consumer goods B. Average prime rate C. Nonagricultural employment D. Building permits (housing starts)

Average prime rate Both the S&P 500 and housing permits are leading economic indicators, as is the measure of hours worked because it reflects changes in the average workweek during the current period. The average prime rate is a lagging indicator because, in an economic downturn, the longer rates stay low, the quicker the recovery should be.

Judy is in the business of giving general investment advice, suggesting appropriate asset allocation percentages but not recommending specific securities. George's business model is giving investment advice and recommending specific securities. Assuming that both receive compensation, who must register as an investment adviser under the Uniform Securities Act? A. Only George B. Only Judy C. Both D. Neither

Both Two of the three critical elements in the definition of investment adviser are whether the person provides advice regarding securities and receives compensation for doing so. (The third element is "being in the business," and the question states that both are). Even without recommending specific securities, the fact that Judy suggests asset allocation percentages constitutes investment advice. Both Judy and George provide advice regarding securities for compensation and must register, unless specific exemptions apply.

A customer upset with his agent for the execution price of a recent trade sends the agent a complaint via email. The agent should A. disregard it because only when a complaint is on paper is action necessary. B. bring the customer complaint to his supervisor immediately. C. call the customer and apologize, promising to make it up on the next trade. D. tell the customer there is nothing he can do.

Bring the customer complaint to his supervisor immediately There is only one choice here. If there is a written customer complaint that happens to get to the agent directly, that agent's only choice is to forward that complaint to an appropriate supervisory person of the firm

Which of the following investment companies registered under the Investment Company Act of 1940 can include senior securities in its capital structure? A. Unit investment trusts B. Closed-end management investment companies C. Face-amount certificate companies D. Open-end management investment companies

Closed-end management investment companies Only the closed-end company is legally permitted to issue senior securities (preferred stock and bonds).

One of your clients is considering allocating about 10% of her portfolio to commodities. Her current portfolio is a mix of stocks, bonds, and broad market index ETFs. Relative to her existing portfolio, you would explain to her that the primary benefit of the commodity investment is most likely A. commodity returns have a low or negative correlation to the other assets in her portfolio. B. increased short-term performance. C. lower trading costs. D. an increase in the reliability of income generated in the portfolio.

Commodity returns have a low or negative correlation to the other assets in her portfolio The returns on commodities exhibit low or even negative correlation with stock and bond returns. This is generally cited as a major advantage to investing in commodities. Commodities do not generate income; there are no dividends or interest paid on them—the investor recognizes a gain or a loss, but no income. In general, allocating a small percentage of the portfolio to commodities should be viewed as a long-term, not short-term, strategy. There is no evidence that trading costs on commodities are lower than on traditional investments. In fact, it seems likely the opposite is true.

To be defined as an investment adviser under the Uniform Securities Act, which of the following must apply? 1. Compensation must be received. 2. Advice is provided regarding securities. 3. Advice must be provided through direct written communication.

Compensation must be received and advice is provided regarding securities This question contains two of the three key "prongs" of the definition of investment adviser. Those are that the person provides advice on securities and that the person receives compensation for rendering that advice. The advice may be provided orally or in writing. The third prong, not included here, is that the person must be in the business of providing investment advice

All of the following statements regarding futures contracts are correct except A. futures contracts can be written on financial assets or commodities. B. completing a futures contract requires the delivery of the commodity. C. a short position will increase in value if the underlying commodity or asset declines in value. D. purchasing a contract for future delivery is considered taking a long position.

Completing a futures contract requires the delivery of the commodity In almost all cases, the holder of the futures contract will purchase an offsetting contract canceling the original position or sell the contract prior to the expiration

In order to achieve its goals, an inverse ETF uses A. derivatives and debt. B. short selling. C. arbitrage. D. preemptive rights.

Derivatives and debts An inverse ETF will almost always use derivatives, such as options, and—in the case of a leveraged ETF—will use debt, primarily in the form of margin. Inverse ETFs do not engage in short selling; they are an alternative to selling short a specific index without the unlimited risk potential of the short sale. Arbitrage is used, typically by institutional investors, to take advantage of temporary imbalances between the ETF's net asset value and market price.

Two contrasting styles of portfolio management are growth and value. Which of the following pairs best describes the contrast? A. Earnings momentum/book value B. Dividend yield/dividend payout ratio C. Capital structure/earnings per share D. High P/E ratio/low current ratio

Earnings momentum/book value One of the important metrics to growth managers is the rate at which the company is growing. Earnings momentum is an excellent indicator of that. On the other hand, the primary tool of the value manager is the company's financial statements. Value managers frequently look for companies whose market price is less than their book value. Perhaps you misread "low current ratio" as "low P/E ratio" (which would have been a correct contrast). This is why you have to read each word carefully.

A retired woman whose sole income comes from a portfolio of investments with a fixed rate of return is most affected by A. high income taxes B. high inflation C. bearish market conditions D. volatile interest rates

High inflation Portfolios of fixed-income securities are most affected by inflation or rising prices. Rising prices or inflation is known as purchasing power risk. Because the portfolio has a fixed rate of return, interest rate changes will not affect the income received, but that income will have lost some of its purchasing power as a result of rising prices. Tax rates and market conditions would be of lesser importance to this investor.

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

Internal rate of return (IRR) The yield to maturity (YTM), or internal rate of return, of a bond is the total return earned on a bond that is held to maturity. A major assumption when calculating YTM is that all interest payments on the bond are reinvested at the calculated YTM. For example, if the calculated YTM is 7%, any interest payments generated from the bond are also assumed to be reinvested at 7%. The NPV indicates how the market price of the bond compares to its present value. The real rate of return, often called the inflation-adjusted return, compares the actual return with the inflation rate. The annualized return is the return an investor would have received had he held an investment for one year.

The price of which of the following will fluctuate most with a change in interest rates? A. Money market instruments B. Long-term bonds C. Short-term bonds D. Common stock

Long-term bonds Long-term debt prices fluctuate more than short-term debt prices as interest rates rise and fall.

Investment company portfolio managers are apt to classify common stocks into groups. One measurement is the product of multiplying the market price per share times the number of shares outstanding. The result is known as A. market capitalization B. total value C. market value D. debt-to-equity ratio

Market capitalization A stock's market capitalization is determined by multiplying the price per share times the number of outstanding common shares. For example, if a company had 1 billion shares outstanding and the market price was $20 per share, the company would be said to have a market cap of $20 billion. This would put it into the category of "large-cap" stocks.

To comply with the regulations regarding customer identification programs, the minimum identifying information that must be obtained from each customer before opening an account includes 1. name 2. oral assurance that the customer is of legal age 3. a street address, unless the primary mailing address is a PO Box located in the state of residence 4. a taxpayer identification number

Name and a taxpayer identification number Mere oral assurance that the customer is of legal age is not sufficient; the actual date of birth must be obtained. A PO Box is never acceptable without a physical address. In addition, the identity of the person opening the account must be verified through documentation such as an unexpired driver's license or passport.

Under federal law, the statute of limitations for civil liability is A. two years after discovery or three years after the action, whichever is sooner. B. one year after discovery of the action. C. two years after the action. D. one year after discovery or three years after the action, whichever is sooner.

One year after discovery or three years after the action, whichever is sooner In the federal regulations, the statute of limitations for a civil action is the sooner of one year after discovery or three years after the action. Under the USA, it is the sooner of two years after discovery or three years after the action.

Which of the following statements is not true? A. The sale of open-end investment company shares is a continuous public offering and must be accompanied by a prospectus. B. Open-end investment companies must have a minimum of $1 million in assets to have a public offering. C. Mutual fund shares may not be purchased on margin because their shares are always public offerings of new shares. D. Mutual funds may be used as collateral in a margin account if they have been owned for more than 30 days.

Open-end investment companies must have a minimum of $1 million in assets to have a public offering Minimum assets of $100,000 are required.

A term used to describe the results of subtracting a corporation's liabilities from its assets is A. operating income. B. retained earnings. C. owners' equity. D. net income.

Owners' equity There are several terms used on the exam to express the results of the balance sheet formula. In most cases, it will be shown as assets minus liabilities equals net worth. Net worth can also be expressed as owners' equity or shareholders' equity. Income has nothing to do with assets and liabilities, and retained earnings is a component of owners' equity.

Corpulent Asset Services of Hamburg (CASH), a covered investment adviser, has a philosophy of placing most of their clients' assets into broad market index funds and ETFs. This would indicate that CASH's portfolio management style is most likely A. active B. tactical C. passive D. conservative

Passive Investing in broad market index funds and ETFs is generally considered to be a passive management style. The active style follows a tactical strategy and is based on the belief that value can be added by stock-picking rather than following the market. Although CASH may be acting in a conservative manner, "conservative" is not considered to be a portfolio management style.

According to the Uniform Securities Act, a state-registered investment adviser may have custody of a customer's funds and securities if A. it does not share in the capital gains and losses of the account. B. it has received the permission of the Administrator. C. the Administrator has been notified of the custody arrangement. D. it has received permission from the state banking authorities.

The Administrator has been notified of the custody arrangement As long as retaining custody of funds is not prohibited, an investment adviser may have custody of a customer's account after providing notice to the Administrator. Performance-based compensation is not related to the custody rules.

An individual is currently registered as an agent with a broker-dealer. If the agent would like to offer wrap fee programs through the firm, all of the following statements are correct except A. the agent would be defined as an investment adviser. B. the agent would now come under a greater fiduciary responsibility. C. the agent would be defined as an investment adviser representative. D. the broker-dealer would have to be registered as an investment adviser.

The agent would be defined as an investment adviser Once the broker-dealer decides to offer wrap fee programs, it is no longer excluded from the definition of an investment adviser and would be required to register on either the state or federal level. The agent would now have to register as an IAR of the firm and, as such, would carry the additional fiduciary responsibility incurred in the advisory business.

If the U.S. dollar has been appreciating against foreign currencies, all of the following statements are true except A. U.S. goods become more expensive in foreign countries. B. the U.S. dollar buys more of foreign currencies. C. foreign goods become cheaper in the United States. D. U.S. exports become more competitive.

U.S. exports become more competitive The U.S. exports will cost more to foreigners and become less competitive. The dollar is worth more in terms of foreign currencies and will purchase more foreign goods per dollar.

One of your clients is confused about the difference between active and passive styles of management. It would be correct to state that, compared to the active style, passive portfolio managers A. would be more likely to include index funds or ETFs in their portfolio. B. tend to try to time the market. C. are likely to charge higher fees. D. generally manage mutual funds while active managers manage closed-end companies.

Would be more likely to include index funds or ETFs in their portfolio The passive style of portfolio management lends itself to investing in the overall market, generally through index funds or index ETFs. Because there is less trading, the fees are usually lower than an active manager. Active managers try to time the market and are in and out of positions far more often. The type of investment company, open-end or closed-end, does not have a bearing on the investment style of the manager.

Your 55-year-old client owns a nonqualified variable annuity. He originally invested $50,000 4 years ago. The annuity has grown to a value of $60,000. If the client, who is in a 30% tax bracket, makes a random withdrawal of $15,000, what will he pay to the IRS? A. $4,500.00 B. $4,000.00 C. $0.00 D. $3,000.00

$4k Because this is a nonqualified annuity (with no tax deduction), the client pays taxes only on the growth portion or, in this case, $10,000. The tax on this amount is $3,000. However, because the client is not yet age 59½ when making the withdrawal, he also pays a 10% tax penalty, or $1,000. This makes a total of $4,000 tax and tax penalty paid on the random withdrawal.

Which of the following would be least likely to be organized as a limited partnership? A. A private equity fund B. A hedge fund C. A venture capital fund D. An index ETF

An index ETF On the exam, ETFs are generally organized as open-end investment companies (but are not mutual funds). The exam always considers the other choices to be structured as limited partnerships.

Components of a company's net worth would include all of these except A. goodwill. B. fixed assets. C. inventory. D. operating income.

Operating income Net worth is all of the company's assets minus its liabilities as found on the balance sheet. Operating income is found on the income statement and is neither an asset nor a liability.

An agent's client calls on Monday to discuss the current market situation. They discuss how 100 shares of Kapco common stock would be an appropriate addition to the client's portfolio. On Thursday, the client calls and tells the agent to place an order for the Kapco stock at whatever price the agent feels is best. The agent waits until Friday, purchasing the stock at a price $2 per share below Thursday's low. In this case, the agent acted A. properly because the agent saved the client money. B. improperly; the order should have been placed on Monday. C. properly because the agent used discretion as to price and time. D. improperly; the order should have been placed on Thursday.

Improperly; the order should have been placed on Thursday In this question, the client specified that the agent should determine the best price. Nothing other than oral permission is necessary in order for an agent to use discretion as to time or price. However, time or price discretion are only good for that day—those are considered "day" orders, so the agent is able to use judgment, but the order must be placed during the day it was received.

The risk of not being able to convert an investment into cash at a time when cash is needed is what type of risk? A. Reinvestment B. Legislative C. Liquidity D. Market

Liquidity Liquidity risk is the measure of how quickly and easily a security can be converted to cash without a significant change to its market price. Legislative risk is a measure of how legal changes (e.g., taxes) affect an investment. Market risk is a measure of the volatility of a stock or the risk of loss as a result of market changes. Reinvestment risk is the risk that an investor will not be able to reinvest interest payments on a bond at the original rate during the life of the bond.

Which of the following investment activities are acceptable for a fiduciary acting under the prudent expert rule? 1. Purchasing AAA-rated debentures 2. Purchasing a growth mutual fund 3. Purchasing new issues of a AAA-rated issuer 4. Writing covered calls on dividend-paying stocks

Purchasing AAA-rated debentures, purchasing a growth mutual fund, purchasing new issues of a AAA-rated issuer, and writing covered calls on dividend-paying stocks The prudent expert rule permits a fiduciary to invest in securities that a prudent expert might buy. These investments are nonspeculative, low to moderate risk, and likely to be considered prudent if they are used in a way consistent with modern portfolio theory (MPT).

When communicating with clients, which of the following designations may not be used? A. MBA B. CLU® C. CFP® D. RIA

RIA The initials RIA do not represent a specific designation and may not be used in communications with clients. Registered investment adviser is the proper term. The other designations are permitted, assuming, of course, that they were earned.

Which of the following statements regarding corporate zero-coupon bonds is true? A. They are beneficial for investors in higher tax brackets. B. They have lower price volatility than other bonds. C. The discount is in lieu of periodic interest payments. D. Interest is paid semiannually.

The discount is in lieu of periodic interest payments The investor in a corporate zero-coupon bond receives the return in the form of growth of the principal amount over the bond's life. The bond is purchased at a deep discount and redeemed at par at maturity. That discount from par represents the interest that will be earned at maturity date. However, the discount is accreted annually and the investor pays taxes yearly on the imputed interest creating "phantom income." Zero-coupon bonds have greater, not lower, price volatility.

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? A. This may be done, but only if the entire account is rolled over. B. Even though these plans are generally under state control, the rollover rules are federal law. C. Unless a change of beneficiary is involved, only one rollover is permitted in a 12 month period. D. 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 Partial rollovers are permitted.

Which of the following bonds would most likely be exposed to the greatest amount of interest rate risk? A. GHI 7s of 2047 B. DEF 6s of 2046 C. ABC 5s of 2045 D. JKL 4s of 2025

ABC 5s of 2045 The bond with the longest duration is generally going to have the greatest exposure to interest rate risk. Because there is very little difference between maturity dates of 2045 through 2047, the bond with the lowest coupon will have the longest duration. The 4s of 2025 have a relatively short duration, even though their coupon is low.

An investor wishes to be able to obtain the right, but not the obligation, to purchase 100 shares of KAPCO common stock at $50 per share for the next six months. KAPCO is currently selling for $52 per share. This investor's wishes could be met by A. the purchase of a call option. B. the purchase of a preemptive right. C. the sale of a put option. D. the purchase of a forward contract.

The purchase of a call option A call option gives the holder the right, but not the obligation, to buy an asset at a specific price during a specific period. Although it would be possible to purchase a stock right in the open market, it is unlikely to ever find one with an expiration date more than 45 days from issuance. Selling a put creates an obligation on the seller to buy the stock if the option is exercised and there are no forward contracts on stock

Which of the following are subject to the holding period requirements of Rule 144 of the Securities Exchange Act of 1934? 1. Registered securities held by a control person 2. Unregistered securities held by a noncontrol person 3. Registered securities held by a noncontrol person 4. Unregistered securities held by a control person

Unregistered securities held by a noncontrol person and unregistered securities held by a control person The holding period requirement of Rule 144 applies to unregistered securities, no matter who the owner is.

A primary issue is A. the first transaction between two parties in the over-the-counter market. B. a new offering of an issuer sold to investors C. a secondary market transaction in a security recently offered to the public. D. a sale between investors of securities traded on the New York Stock Exchange.

A new offering of an issuer sold to investors A primary issue is a new offering of securities by an issuer sold to investors. Transactions between two investors in the over-the-counter market refer to secondary transactions (the market between investors). A sale between investors of securities traded on the New York Stock Exchange is another example of a secondary transaction.

Which of the following is not an advantage of investing in a mutual fund? A. Absence of market and business risk B. Professional portfolio management C. Identifiable investment objectives D. Portfolio diversification

Absence of market and business risk Mutual funds offer investors the benefits of portfolio diversification, identifiable investment objectives, and professional portfolio management. They do not completely do away with market and business risk, however. Even if a mutual fund invests in a diversified portfolio of stocks, a poorly performing market can reduce the fund's returns. In addition, portfolio managers for mutual funds can sometimes perform poorly and fail to generate acceptable returns.

A frequently used metric by analysts is the yield, or credit, spread. Common methods of computing this would be comparing which of these? 1. Bonds of similar quality and similar maturities 2. Bonds of similar quality and different maturities 3. Bonds of different quality and different maturities 4. Bonds of different quality and similar maturities

Bonds of similar quality and different maturities and bonds of different quality and similar maturities The term spread always signifies a difference. Therefore, the correct choices have to reflect some kind of difference. One way is when the quality (rating) of the bonds is the same but the length to maturity is different. A very common example of this is the U.S. 2-year Treasury note plotted against the 10-year Treasury note. The other method is to take bonds of different quality (ratings) having the same maturities. An example might be comparing two bonds with a 20-year maturity: one has a AAA rating and the other a BBB rating.

An investment adviser who trades on material nonpublic information is A. engaging in the unethical business practice known as front running. B. straddling a commingled arbitrage. C. in violation of the antifraud provisions of the Uniform Securities Act. D. generally going to increase the returns in client accounts.

In violation of the antifraud provisions of the Uniform Securities Act Using inside information is a fraudulent act under both state and federal law. Front running, an unethical business practice, is when a securities professional "runs in front" of a client order to take advantage of the impact that client order will have on the security's price. Even if the use of the material nonpublic information increases client returns, the ends don't justify the means.

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. is taxed on $10 per share as if it were salary. C. has a capital gain of $10 per share. D. is taxed on $30 per share as if it were salary.

Is taxed on $10/share as if it were salary In the case of NSOs, the difference between the exercise (or strike) price and the current market value is considered salary to the employee.

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? A. Nonfinancial B. Unsystematic C. Systematic D. Financial

Nonfinancial There are 2 basic investment considerations, financial and nonfinancial. The former deals largely with quantifiable items and the latter with attic attitudinal ones. Wanting to avoid a certain type of asset is generally considered to be attitudinal. The fact that the mid-cap stocks lost money is probably a systematic risk, but that isn't what the question is asking.

An example of systematic rather than unsystematic risk is A. political risk. B. tenure risk. C. purchasing power risk. D. financial risk.

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

According to both the Investment Advisers Act of 1940 and the Uniform Securities Act, under which of the following circumstances is an investment adviser required to make disclosure to the client? 1. The adviser intends to recommend the use of the broker-dealer with whom he is affiliated. 2. The transactions recommended to the client are inconsistent with those for the adviser's own account. 3. The investment adviser intends to sell the client the insurance policy recommended for his financial plan. 4. The adviser is employed by a broker-dealer but provides investment advisory services outside the scope of his employment with the broker-dealer.

The adviser intends to recommend the use of the broker-dealer with whom he is affiliated, the transactions recommended to the client are inconsistent with those for the adviser's own account, the investment adviser intends to sell the client the insurance policy recommended for his financial plan, and the adviser is employed by a broker-dealer but provides investment advisory services outside the scope of his employment with the broker-dealer. All of the situations listed involve some potential conflict of interest. Although such transactions are not prohibited, proper disclosure is required.

A general risk component representing the variability of a stock's total return as it directly relates to overall movements in the general economy is known as A. systematic risk. B. business risk. C. political risk. D. financial risk.

Systematic risk Systematic risk, also referred to as market risk, is the variability in a stock's total return that is directly associated with overall movements in the general economy and cannot be eliminated through diversification. The other 3 choices are all unsystematic risks.

Investors with a short time horizon most likely will invest in which class of mutual fund shares? A. Class B shares B. Class A shares, then convert to Class B shares C. Class C shares D. Class A shares

Class C shares Class C shares may be less expensive than Class A or B shares for investors with a short time horizon. The front-end load on Class A shares and the back-end load on Class B shares make them unattractive for short-term investors. Class A shares do not convert to Class B shares; it goes the other way.

It is agreed by most investment advisers that diversifying an investment portfolio can reduce the overall risk. Benefits of diversification would include all of the following except A. lowering the volatility of the portfolio. B. increasing risk-adjusted returns. C. mitigating the effects of a bankruptcy of a security held in the portfolio. D. lowering trading costs.

Lowering trading costs If anything, diversifying a portfolio will increase the trading costs. Those higher costs are outweighed by the benefits in risk reduction and potential higher returns. With a well-diversified portfolio, a single company going bankrupt will have a much smaller impact than if that security was the only asset held by the investor. It is the old theory of "don't put all of your eggs in one basket". Broad diversification, which includes different asset classes, has the effect of reducing the overall volatility of the portfolio and by holding assets that tend to rise while others decline, the risk-adjusted returns may well be increased.

It would be correct to state that 1. the specialist stands ready to buy or sell stock on the floor of an exchange in an effort to keep an orderly market 2. the specialist stands ready to buy or sell stock on the over-the-counter market in an effort to keep an orderly market 3. the market maker stands ready to buy or sell stock on the floor of an exchange in an effort to keep an orderly market 4. the market maker stands ready to buy or sell stock on the over-the-counter market in an effort to keep an orderly market

The specialist stands ready to buy or sell stock on the floor of an exchange in an effort to keep an orderly market and the market maker stands ready to buy or sell stock on over-the-counter market in an effort to keep an orderly market The specialist performs his activities on the floor of an exchange, while the market maker performs a similar function in the OTC market. Note: The term specialist has been replaced by designated market maker (DMM), but specialist might still appear on the exam.

Under the Investment Advisers Act of 1940, a registered investment adviser may A. use the statement "registered with the SEC" in advertisements. B. imply SEC approval or sponsorship because of passing an exam. C. use the initials RIA after its name on a business card. D. imply SEC approval or sponsorship because of registration.

Use the statement "registered w/ the SEC" in advertisements Although an investment adviser registered with the SEC may state that fact, a registered investment adviser may not use the title in any way to suggest or imply that the SEC sponsors or approves the adviser. The title in no way indicates that the adviser's abilities or qualifications have been approved. Because RIA is not an academic designation, it may not be used as such.

If a company successfully gets the owners of its long-term bond issue paying 7% annual interest to exchange them on a dollar-for-dollar basis with the company's preferred stock paying a 7% annual dividend, what is the effect on EPS? A. Decrease B. No effect C. Not enough information D. Increase

Decrease The 7% interest payment is moved from a pre-tax deduction to an after-tax dividend payment. This increases the amount of taxable income, thereby increasing the company's tax liability. The 7% payment remains the same. With an increased tax burden and everything else remaining the same, the EPS will decrease.

If your 39-year-old customer is the sole owner of a business, earns $260,000 a year, and makes the maximum contribution to a Keogh plan, how much money may he contribute to his IRA in 2023? A. $66,000 B. $73,500 C. $6,500 D. $0

$6,500 The maximum contribution is the lesser of 100% earned income or $6,500. In this case, the amount of the Keogh contribution is irrelevant. Under current tax law, the IRA contribution would not be tax deductible because the customer's earnings are way over the limit at which a taxpayer is covered by an employer-sponsored plan, but that does not affect the ability to contribute the maximum amount to the IRA. The maximums for a Keogh contribution are never tested, but for 2023 they are $66,000 or $73,500 for those 50 and older.

A client in the 28% marginal federal income tax bracket invests in a corporate bond with an 8% coupon. To calculate the client's after-tax rate of return, A. divide 0.08 by 0.28. B. multiply 0.08 by 0.72. C. divide 0.08 by 0.72. D. multiply 0.08 by 0.28.

Multiply .08 by .72 To determine a taxable bond's after-tax rate of return, multiply the coupon rate by the complement of the client's marginal federal income tax bracket. The client's tax bracket is 28% (0.28), so the complement is 100% − 28% (1.00 − 0.28) = 0.72.

ABC Securities, a registered broker-dealer, has a wholly owned subsidiary, ABC Real Estate Ventures. ABC Real Estate Ventures is in the business of structuring limited partnership offerings designed to afford qualified investors an opportunity to earn income from commercial property. If an agent representing ABC Securities were to recommend one of these programs to a qualified client, A. it would be necessary to obtain consent of the agent's supervisor. B. a sale could not take place without a review by the firm's compliance officer. C. the agent would be engaging in an unethical business practice. D. disclosure of the potential conflict of interest must be made.

Disclosure of the potential conflict of interest must be made One of the more common cases of a conflict of interest is when a broker-dealer (or one of its agents) recommends a security issued by an entity affiliated with the firm. As long as disclosure of the relationship is made, there are no problems. Compliance officers do not review every transaction—they look for the red flags.

Which of the following statements about the federal government's fiscal policy are true? 1. The federal government's fiscal policy is its policy for managing taxation, spending, and debts. 2. The federal government's fiscal policy can have a great impact on the securities markets. 3. The federal government finances its deficit spending by selling bonds

The federal government's fiscal policy is its policy for managing taxation, spending, and debts, the federal government's fiscal policy can have a great impact on the securities markets, and the federal government finances its deficit spending by selling bonds. The federal government's fiscal policy establishes the government's taxation, spending, and debt practices. Fiscal policy can affect the securities markets because it can be used to regulate prices, employment, and economic growth. If fiscal policy includes deficit spending, the government sells bonds to make up the deficit.

When analyzing a security's standard deviation, which of the following statements accurately describes observations according to a normal frequency distribution curve? A. Approximately 97.5% of all observations will be within two standard deviations on either side of the mean. B. Approximately 95.5% of all observations will be within three standard deviations of the mean. C. Approximately 97.5% of all observations will be within three standard deviations of the mean. D. Approximately two-thirds, or 68%, of observations will be within one standard deviation on either side of the mean.

Approximately two-thirds, or 68%, of observations will be within one standard deviation on either side of the mean Approximately two-thirds, or 68.26%, of observations will be within one standard deviation on either side of the mean. Approximately 95% will be within two standard deviations and approximately 99% will be within three.

Each of the following would represent a potential conflict of interest except A. an agent limiting recommendations to mutual funds distributed by the agent's broker-dealer. B. a broker-dealer writing a favorable research report about a company that was recently the subject of an IPO managed by the firm. C. an agent of a broker-dealer making a recommendation of a stock of a company in which the agent has a financial interest. D. a broker-dealer writing a favorable research report about a company that was recently the subject of an IPO managed by another firm.

A broker-dealer writing a favorable research report about a company that was recently the subject of an IPO managed by another firm Preparing a favorable research report about a company whose IPO was underwritten by another broker-dealer would not appear to be considered a conflict of interest.

Under the minimum distribution rules, Jason is required to take a minimum distribution of $10,000 in 2023 from his IRA. However, a distribution of only $8,000 has been made. Assuming that Jason does not correct the problem, what is the dollar amount of penalty that may be assessed in this situation? A. $4,000 B. $500 C. $200 D. $2,000

$500 The penalty for failure to make the correct amount of required minimum distribution is 25% of the difference between the minimum required amount and the actual distribution. In this case, this would be 25% of $2,000 ($10,000 − $8,000) or $500. Please note that the SECURE Act 2.0 reduced the penalty to 25% or even as low as 10% if promptly corrected.

Which of the following statements regarding warrants is true? A. Warrants' terms are generally shorter than rights' terms. B. Warrants are safer than corporate bonds. C. Warrants are often issued with other securities to make the offering more attractive. D. Warrants give the holder a perpetual interest in the issuer's stock.

Warrants are often issued w/ other securities to make the offering more attractive Warrants are generally issued with bond offerings to make the bonds more attractive. Warrants are long-term options to buy stock, and because they are equity securities, warrants, as investments, are considered less safe than bonds.

Under the Uniform Securities Act, which of the following persons has to register as an investment adviser? A. A broker-dealer who gives advice for which he charges a specific fee B. A broker-dealer who gives investment advice that is incidental to the course of its business and for which no special compensation is received C. An agent of a broker-dealer who gives investment advice within the course of his duties with the firm, for which a fee is charged D. An attorney who writes a legal opinion for a municipal bond indenture

A broker-dealer who gives advice for which he charges a specific fee Broker-dealers need not register as investment advisers unless they charge a separate fee for providing investment advice. If the advice is strictly incidental and without a separate charge, the broker-dealer is not an investment advisor. Attorneys are not investment advisers, provided their investment advice is incidental to their practice. Giving a legal opinion on a municipal security indenture is not investment advice. Agents giving advice for which a fee is charged must register as investment adviser representatives and their broker-dealers as investment advisers.

While searching for a suitable investment for your client, you narrow the choice to the following four companies: Company A with returns over the past 4 years of 12%, 4%, 8%, and 6% Company B with returns over the past 4 years of 7%, 8%, 9%, and 6% Company C with returns over the past 4 years of 10%, 12%, -2%, and 10% Company D with returns over the past 4 years of 15%, 20%, -8%, and 3% Which of these choices has the highest standard deviation? A. Company C B. Company A C. Company D D. Company B

Company D Although the exam will not ask you to compute standard deviation, you are required to know that it measures the deviation from the mean (average). In all four of these examples, the mean is 7.5% (30 divided by 4). In which of the choices do the returns occur furthest from that mean? In choice D, they range from 12.5% higher to 15.5% lower. In choice A, the range is from 4.5% higher to 3.5% lower; in choice B, the range is from 1.5% higher to 1.5% lower; in choice C, the range is from 4.5% higher to 9.5% lower. That should clearly point out that the greatest volatility, or dispersion from the mean, is choice D, while choice B would have the lowest standard deviation.

Your 30-year-old client has $100,000 to invest and willing to assume a moderate amount of risk, but she would also like to have $10,000 available for a down payment on a home in 6 months. Which of the following asset allocation strategies would best suit her situation? A. 70% high-yield corporate bond fund, 20% growth fund, 10% government bond fund B. 50% government bond fund, 50% large-cap fund C. 50% large-cap stock fund, 40% municipal bond fund, 10% money market fund D. 70% large-cap stock fund, 20% balanced fund, 10% money market fund

70% large-cap stock fund, 20% balanced fund, 10% money market fund This question is dealing with 2 different time horizons. First we have the short-term of 6 months for the home down payment, so she'll need capital preservation and liquidity. That is accomplished with the money market fund. Then, being 30 years old, she has a long-term time horizon that necessitates investing for growth and inflation protection. That is where the 70% in large-cap securities is the most appropriate asset allocation for her. The 20% in the balanced fund helps keep the overall risk level on the moderate side. One point to remember is that municipal bonds (or municipal bond funds) will never be the correct investment choice unless the question states that the client is in a high tax bracket or is looking for tax-free income.

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

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

Which of the following statements regarding the risks inherent in bonds is most accurate? A. The reinvestment rate assumption in calculating bond yields is generally not significant to the bond's yield. B. Price risk refers to the decrease in bond prices as interest rates fall. C. Interest rate risk is the risk that the bond's coupon rate will be adjusted downward if market rates decline. D. Default risk deals with the likelihood that the issuer will fail to meet its obligation to pay interest and/or principal.

Default risk deals w/ the likelihood that the issuer will fail to meet its obligation to pay interest and/or principal As is the case with any debt, the lender is always concerned that the borrower will default. This risk does not apply to U.S. Treasury securities (at least for exam purposes). One way to minimize this risk is by limited exposure to debt with higher credit ratings. Once the bond's coupon (interest) rate has been set, it doesn't change with changes to market interest rates. There are adjustable rate debt instruments available, but, unless the question specifically refers to them, disregard that possibility. Reinvestment is crucial to bond yield, and interest rate risk is the risk of changes in a bondholder's return due to changes in a bond's yield. Price risk, also referred to as market risk, refers to the decrease (increase) in bond prices as interest rates rise (fall).

Which of the following statements regarding provisions of the Investment Advisers Act of 1940 is true? A. Pledging a client's contract as collateral for a loan to the adviser would not be considered an assignment of the contract. B. Five Partners Advisers, Ltd., must inform all clients that one of the five partners has retired and been replaced by a new partner. C. Big Gains Registered Investment Advisers must disclose its sources of information for specific recommendations they make to their clients. D. An investment adviser must obtain client permission to accept a buyout offer for all of the adviser's stock.

Five Partners Advisers, Ltd., must inform all clients that one of the five partners has retired and been replaced by a new partner Both state and federal law require advisers operating as partnerships to notify their clients of changes in partners where it represents a minority interest in the firm. No adviser is required to disclose the sources for a particular recommendation; that is not the same thing as the requirement to disclose the use of material prepared by a third party. An advisory firm can be sold without client permission. However, if the transaction results in a change that would be deemed to be an assignment, the adviser must obtain the consent of the clients to maintain their contracts. The regulatory bodies consider a pledge of clients' contracts to be an assignment.

Because a trust account is managed for the beneficial interest of the beneficiary, the investment adviser representative handling the account can A. have funds withdrawn from the account at the direction of the beneficiary. B. have a check drawn on the account payable to the trustee for trustee expenses. C. arrange to have the trust's funds pledged to support a loan for the trustee. D. place the securities in the trust fund in a noncustodial brokerage account.

Have a check drawn on the account payable to the trustee for trustee expenses The trustee can be reimbursed for trustee expenses that are reasonable. A trust account must be managed by the trustee and not by the beneficiary. Only the trustee can direct a withdrawal of funds, provided the withdrawal is done in a manner consistent with the trust document. Trust funds must be placed in custodial accounts (not to be confused with custodian for minors), not in noncustodial accounts.

When an IA tells a client who is investigating the common stock of two different issuers that there is no linear relationship between the two stock's returns, it means A. the correlation coefficient is zero B. one of the stock's standard deviation is significantly higher than the other C. one is likely to pay dividends, the other not D. one is listed on an exchange, the other traded OTC

The correlation coefficient is zero A correlation coefficient of zero means that knowing the actual return of one security tells you nothing about the return of the other. They may move in the same or opposite directions.

According to the USA, under what circumstances is an employee of a licensed broker-dealer in a state allowed to sell exempt securities as an unregistered agent? A. Under no circumstances is an employee of a licensed broker-dealer in a state allowed to sell exempt securities as an unregistered agent. B. The securities are federal covered securities. C. The employee is not paid any commission or salary. D. The transaction is exempt.

Under no circumstances is an employee of a licensed broker-dealer in a state allowed to sell exempt securities as an unregistered agent. Whether the securities are exempt from registration or not, it is unlawful for a person to transact business on behalf of a broker-dealer unless that person is registered as an agent in the state. Only individuals selling on behalf of the issuer may qualify to be exempt from registration as an agent.

Affray Compassionate Finance Company (ACFC) is offering $100 million of 150-day commercial paper for sale in State L. The paper is available in minimum denominations of $100,000 and has been rated AA by a leading rating organization. Whom of the following would be required to register as an agent in State L in order to legally sell this security in the state? A. None of these (Because this security is exempt from registration, offers and sales can be made without registration as an agent.) B. An agent of a broker-dealer registered in the state C. An investment adviser who recommends this security to clients D. An employee of ACFC who receives a 1% commission on sales

An agent of a broker-dealer registered in the state Those individuals who represent broker-dealers registered in the state must register as agents in that state if they wish to sell securities to that state's residents. It makes no difference what kind of security it is or to whom the security is being sold. Yes, this is an exempt security (less than 270 days' maturity; minimum $50,000 denomination; rating in the top three grades), but that only means that the security does not have to register. An exclusion from the definition of agent is given to those who represent issuers of certain exempt securities. Commercial paper is one of the five cases where this exclusion applies, so ACFC's employee would not be defined as an agent. This is true even though compensation is being received. Investment advisers don't register as agents if all they do is give investment advice.

A profitable company reports net income of $10 million. A cash dividend of $7 million is declared. From an accounting standpoint, the other $3 million will be credited to which balance sheet account? A. Working capital B. Capital surplus C. Dividends payable D. Retained earnings

Retained earnings Retained earnings are increased to the extent that company profits (net income) are undistributed—in essence, retained. Capital surplus comes from original investors purchasing stock at a price in excess of stated or par value. Working capital is not a balance sheet account; it is a computation. When the dividend is declared, it becomes a current liability (dividends payable), but this question is asking for the portion of the income that is not going to be paid out.

Adnan is an investment adviser representative associated with a state-registered investment adviser. He is registered in several states. To be in compliance with the Uniform Securities Act, Adnan A. must meet the financial requirements of the state in which the investment adviser's principal office is located. B. must meet the financial requirements of the state with the most stringent requirements. C. has no financial requirements with regard to a minimum net worth. D. must meet the financial requirements of all of the states in which he does business.

Has no financial requirements w/ regard to a minimum net worth There are no financial requirements placed on IARs, only the IA. Investment advisers must meet the financial requirements of the state where the firm's principal office is located.

Which of the following actions by an agent would be an unethical practice under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents? A. Recommending securities that result in losses in the customer's account B. An agent with discretionary authority entering a buy order for a security when its price is rising C. Telling a customer that the investment being recommended will be sold from the inventory of the agent's firm D. Splitting commissions with a customer service representative who is not registered but works for the same firm

Splitting commissions w/ a customer service representative who is not registered but works for the same firm Commissions can be received only by those with the appropriate registrations. A nonregistered person cannot participate in transaction-based compensation. We can never guarantee that our recommendations will be successful, and sometimes they do result in losses.

Given below are the EPS for the previous four quarters for four different companies being analyzed by your research department. Which of these companies is exhibiting earnings momentum? A. JKL - Q1: $0.82; Q2: $0.90; Q3: $0.83; Q4: $0.92 B. ABC - Q1: $0.58; Q2: $0.61; Q3: $0.64; Q4: $0.67 C. GHI - Q1: $0.25; Q2: $0.27; Q3: $0.30; Q4: $0.36 D. DEF - Q1: $0.58; Q2: $0.52; Q3: $0.50; Q4: $0.49

GHI - Q1: $0.25; Q2: $0.27; Q3: $0.30; Q4: $0.36 Earnings momentum is a term used to describe accelerating growth in earnings per share (EPS). The first thing to note about GHI's earnings is that they are increasing. That is good, but, what is more important is that they are increasing at a faster rate. For instance, the rate of change between Q1 and Q2 was about 8%. The rate of change from Q2 and Q3 was higher—about 11%—and the rate of change from Q3 to Q4 was even higher—about 20%. This is earnings momentum. The company isn't just growing, it's growing faster. Although ABC's earnings are also growing, the rate of change is not increasing as each quarter's growth is the same amount. Company DEF's earnings are declining, and Company JKL's earnings are fluctuating up and down.

GEMCO Manufacturing Co. has appointed the company's CFO as the trustee for their employee retirement plan. You are an IAR and you advise a substantial portion of the plan's assets. You are contacted by the CFO requesting a short-term loan from the plan assets for which he will pay the plan prime + 2%. Your best course of action would be to A. permit the loan once you have been satisfied that there is adequate collateralization in place B. refuse to allow this to happen because the plan assets will suffer C. permit the loan because the CFO is the plan trustee D. refuse to allow this to happen because it would be a violation of your fiduciary responsibility

Refuse to allow this to happen b/c it would be a violation of your fiduciary responsibility ERISA never permits transactions of this type for a plan trustee. As an IAR handling some of the plan's investments, you would be placed in a fiduciary position and could not violate that trust.

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following practices is appropriate for an adviser who does not have custody or discretion over clients' assets? A. Chris purchases shares of a stock without discussing it with his client. The client previously agreed to buy another stock, but at the time of purchase, it was losing heavily. To spare his client from a loss, Chris purchases the stock. B. Tom manages 35 clients who suffer financial loss while he is trying to contact them for authorization to trade. C. Vanessa discusses a security with a client who agrees it is a good buy. A short time later, she learns shares are available and purchases them for the client. D. Without authority, Shawna trades a security that is losing heavily for a similar security that she recently discussed with her client.

Tom manages 35 clients who suffer financial loss while he is trying to contact them for authorization to trade An investment adviser must have a client's authority before placing an order for a purchase or a sale. Discretionary authority must be in written form, with two exceptions: first, if the client has determined the specific security and the amount to be transacted, leaving discretion as to price and timing only; and second, if the client has agreed to give the adviser written authority over the account within 10 business days by way of an advisory contract or discretionary agreement. Neither of these cases applies to Vanessa, Shawna, or Chris, who all traded without proper client authority. Only Tom acted properly.

Which of the following are prohibited practices? 1. An investment advisory firm organized as a partnership fails to inform its clients of the departure of a partner with a very small interest in the partnership. 2. An investment advisory firm charges an annual fee equal to 2% of the first $250,000 in assets under management; 1% of the next $500,000; and 0.5% for everything in excess of $750,000. 3. The majority stockholder of a registered investment adviser pledges his stock as collateral for a loan taken out by the firm to expand its services without obtaining client consent for assignment of their contracts. 4. An investment advisory firm engages in agency cross transactions.

An investment advisory firm organized as a partnership fails to inform its clients of the departure of a partner with a very small interest in the partnership and the majority stockholder of a registered investment adviser pledges his stock as collateral for a loan taken out by the firm to expand its services without obtaining client consent for assignment of their contracts Any change in the ownership of an investment advisory firm organized as a partnership, no matter how small, requires notification to all clients within a reasonable amount of time. If the firm is structured as a corporation, pledging a controlling interest in the company's stock is viewed as an assignment of the contracts. This requires the consent of the clients. Agency cross transactions—that is, where the adviser represents both sides of the trade—are permitted as long as the adviser makes the proper written disclosures and does not make the buy-sell recommendations to both parties. Choice II is an example of a graduated fee schedule where the management fee is reduced as the size of the account increases—there is nothing prohibited about this very common practice in the industry.