Series 66: Client Investment Recommendations and Strategies (30% of Exam)

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

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

Which of the following investments would be permitted in a client's IRA? A) Variable life insurance B) Term life insurance C) Municipal bonds D) Art

C) Municipal bonds Although not generally recommended for a retirement plan, municipal bonds are permitted. The other choices are not.

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) Passive form EMH B) Weak form EMH C) Strong form EMH D) Semi-strong form EMH

C) 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.

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.

Which of the following does not benefit both the employee and the employer? A) SERP B) SEP-IRA C) Traditional IRA D) Defined benefit plan

C) Traditional IRA There is no employee/employer relationship in a traditional (or Roth) IRA. A SEP-IRA is different in that the employer makes the contribution, gets the tax deduction, and the employee's account is enriched by that contribution. The same is true for the defined benefit plan and the SERP. A supplemental executive retirement plan is a nonqualified plan designed to provide additional retirement benefits limited to a select group of management or highly-compensated employees.

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

C) 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.

A basic difference between a Section 457 plan established on behalf of a governmental entity and one established by a private tax-exempt organization is that A) a tax exempt plan's distributions are not eligible for a favorable lump sum 10-year averaging treatment. B) a governmental plan cannot make a distribution before the participant attains age 70½ C) a governmental plan must hold its assets in trust or custodial accounts for the benefit of individual participants D) a tax-exempt plan participant does not have to include plan distributions in taxable income

C) a governmental plan must hold its assets in trust or custodial accounts for the benefit of individual participants A governmental Section 457 plan must be funded—that is, it must hold plan assets in trusts or custodial accounts for the benefit of individual participants. Conversely, a tax-exempt (nongovernmental) Section 457 plan may not be funded.

A grantor retained annuity trust is a planning tool designed to pass assets to beneficiaries (usually children) in a way to minimize A) excise taxes. B) income taxes. C) estate taxes. D) property taxes.

C) estate taxes. A GRAT is an estate planning tool designed to pass assets to beneficiaries (usually children) in a way to minimize gift and/or estate taxes. Because incidents of ownership remain with the grantor, all income is taxed to the grantor.

When advisory clients wish to structure their portfolios to support companies that engage in social or environmental policies that they agree with, it is known as A) asset allocation B) engineered investing C) impact investing D) program-related investing

C) impact investing Impact investing can be defined as the intentional allocation of capital to generate a positive social or environmental impact.

A securities analyst who recommends allocating to industries based on changes to the business cycle would most likely be said to be A) a tactician B) a contrarian C) sector rotating D) laddering

C) sector rotating Sector rotation is the practice of changing investment emphasis based on patterns to the business cycle. Yes, this could be a form of tactical management, and if the analyst is investing opposite the cycle, the analyst could be contrarian. However, on the exam, you will sometimes have to choose from several answers that could be correct by selecting the one that is most likely to be correct.

___________________ - The segment of the securities market that deals in instruments with more than one year to maturity-that is, long-term debt and equity securities/. In contrast, the money market is the raising of short-term capital such as Treasury bills and commercial paper

Capital Market

One of your clients currently holds a short position in DEF common stock. Which of the following types of orders is designed to offer the client protection against loss? A) Sell stop B) Sell limit C) Buy limit D) Buy stop

D) Buy stop The risk to a short seller is to the upside (there is, at least theoretically, no limit as to how high the stock's price can go). To protect against an increase to the stock's price beyond the point the investor is willing to lose, it is wise to enter a buy stop order at that price. If the stock should reach that price, the order is triggered, a market order is entered, and the short position is closed out. This is why stop orders are usually referred to as stop loss orders; they keep you from losing any more money.

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

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

The Sharpe ratio is the average annual return of a security A) divided by the expected return of the market B) plus the risk-free rate divided by the security's beta C) divided by the risk-free rate D) minus the risk-free rate for the period divided by the security's standard deviation

D) minus the risk-free rate for the period divided by the security's standard deviation The Sharpe ratio is the average annual return of a security less the risk-free rate divided by the security's standard deviation. In other words, the Sharpe ratio is a risk-adjusted return because it measures the amount of return per unit of risk taken; the most common risk-free rate is that paid by 91-day U.S. Treasury bills.

An analyst observes that the beta of a security is 1.3, the market return is 6%, and the risk-free rate is 1%. The analyst forecasts that the security will return 7% over the next year. Based on these assumptions, the security is A) undervalued, because the forecasted return exceeds the required return. B) undervalued, because the required return exceeds the forecasted return. C) overvalued, because the forecasted return exceeds the required return. D) overvalued, because the required return exceeds the forecasted return.

D) overvalued, because the required return exceeds the forecasted return. Under the CAPM, the required return is the RF rate plus the beta times (the market return - RF rate). Using the numbers in this question, it is 0.01 + 1.3 (0.06 - 0.01) = 0.01 + 1.3 (0.05) = 0.01 + 0.065 = 0.075 which is 7.5%. Because the forecasted return of 7% is less than the required return of 7.5%, this security is considered to be overvalued.

Your customer opens a Coverdell ESA for his niece. In order to meet qualified education expenses of $9,000, she takes a distribution of $10,000. The amount of the distribution in excess of her education expenses that represents earnings in the account will be A) taxable to the uncle, the donor to the plan B) automatically reinvested back into the plan C) nontaxable to either party D) taxable to the niece, the beneficiary of the plan

D) taxable to the niece, the beneficiary of the plan Any excess distribution representing earnings that is not used to meet qualified education expenses is taxable to the beneficiary who took the distribution.

In order to compute a client's realized holding period return, it is NOT necessary to know A) the ending value B) the original investment C) the income received D) the paper profits and losses

D) the paper profits and losses An investor's realized holding period return is the total return received over the specified holding period. That return includes any income plus or minus any realized gain or loss. That is why paper gains or losses, which are not realized, are not part of the computation.

A broker-dealer receives a request from a client to purchase an OTC stock. When the broker-dealer's trading department contacts the market maker in the stock, she receives a quote of 35 − 35.25, 7 by 9. Based on this information, the spread is A) $0.25 B) $2 C) within the allowable range of NASAA's 5% markup policy. D) $0.63

A) $0.25 The spread is the difference between the bid (35) and the ask (35.25) prices. In this question, that is 25 cents ($0.25). The 7 by 9 means that the market maker is willing to buy up to 700 shares at the $35 bid and sell up to 900 shares at the $35.25 ask. NASAA does not have a markup policy; the 5% Policy is FINRA's.

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

A) 60 The IRS allows a step-up in basis for inherited stock. The customer's cost basis is the fair market value of the stock on the date that the decedent died.

Which of the following orders may be used to acquire a security at a specific price or better? I. A buy stop limit II. A buy limit III. A sell stop IV. A sell limit A) I and II B) II and III C) I and III D) II and IV

A) I and II Only buy orders can acquire stock. Only buy limit orders (or buy stop orders with a limit attached) can acquire stock at a specific price or better.

Limited liability is a characteristic of being an owner of I. a general partnership II. an interest in a limited partnership III. shares of an S corporation IV. a sole proprietorship A) II and III B) I, II, and III C) III only D) I and IV

A) II and III Limited partnerships and any corporate form of ownership offer limited liability. Such is not the case with a general partnership and certainly not the case with a sole proprietorship.

An individual purchased a variable life insurance policy 10 years ago with a guaranteed death benefit of $100,000. The annual premium for this policy was $2,000 per year. The individual dies and, due to outstanding performance of the separate account, leaves a death benefit to the beneficiary of $121,000. What are the income tax consequences to that beneficiary? A) No tax is due. B) There is a long-term capital gain of $1,000. C) Ordinary income tax is due on $21,000. D) Ordinary income tax is due on the $1,000 that exceeds the original cost.

A) No tax is due. One of the nice things about life insurance proceeds is that even when the death benefit is increased due to separate account performance, it is still free of income tax.

Which of the following items would be found on a family balance sheet? A) Spouse's engagement ring B) Income taxes paid C) Dividends and interest received D) Annual salary

A) Spouse's engagement ring A balance sheet, whether for a family or a business, shows assets and liabilities, not income and expenses. The ring is certainly an asset; the others are income or expenses.

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

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

When a nonspouse inherits an IRA, the beneficiary can choose from all of the following options except A) keeping the money in the deceased's IRA B) withdrawing the funds over a 10-year period following the death of the owner C) withdrawing all of the funds immediately D) opening a separate inherited IRA in the name of the deceased FBO the beneficiary

A) keeping the money in the deceased's IRA It is only a beneficiary who is the spouse of the deceased who may continue that IRA. One caution, particularly when the surviving spouse is the younger partner, is that RMDs must begin when they would have started for the deceased.

Stock prices in the over-the-counter market are determined by A) negotiation B) an auction C) a competitive bid D) the 5% markup policy

A) negotiation The 5% markup policy is a FINRA policy regulating commissions and markups, not prices. The OTC market is considered to be a negotiated market in contrast to a stock exchange, which is an auction market.

A customer earns $31,432 this year and mistakenly overcontributes to her IRA. To avoid paying a penalty, she should A) remove the excess, plus associated growth, from the IRA B) never contribute to the IRA again C) make her usual contribution next year D) remove the entire contribution from the IRA

A) remove the excess, plus associated growth, from the IRA The 6% penalty can be avoided by removing the excess contribution plus any growth it experienced before removal.

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

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

ABC Combination Fund has dual objectives of capital appreciation and current income. Last year, the fund paid quarterly dividends of $0.25 per share and capital gains of $0.10 per share. The annualized growth rate of the fund was 15%. The current net asset value (NAV) of the fund is $28.50, and the current public offering price (POP) is $30. Advertising and sales literature of the fund may report the fund's current yield to be A) 83% B) 3.33% C) 3.85% D) 27.20%

B) 3.33% The current yield on mutual funds is calculated by dividing the annualized yield ($0.25 × 4 = $1) by the POP. In this case, $1 ÷ $30 = 0.0333 × 100 = 3.33%. In calculating the current yield, the law prohibits the inclusion of capital gains and growth.

Which of the following could reduce the amount that an individual may contribute to a Traditional IRA? I. Roth IRA contributions made for the year II. High income level III. Participation in an employer-sponsored plan IV. Marital status A) I, II, III and IV B) I only C) I and II D) I, II and III

B) I only The maximum annual contribution applies as a total among your Roth and your traditional IRA. So, if the maximum is $6,000 and you put $3,000 into your Roth, you could only put $3,000 into your traditional IRA. You could do a total of $7,000 if you were 50 or older. High income level and participation in an employer-sponsored plan will affect the amount you may deduct but not the amount you may contribute. Even though a married couple can have their own IRAs or set up a spousal IRA if one is nonworking, that doesn't reduce the amount that either spouse can contribute.

Distributions from which of the following can be rolled over into an IRA? I. Another IRA II. Corporate pension plan III. Corporate profit-sharing plan IV. Keogh plan A) II and III B) I, II, III, and IV C) I and IV D) III and IV

B) I, II, III, and IV Assets from any qualified corporate plan or from another IRA may be rolled over into an IRA.

Which of the following is not a characteristic of a Monte Carlo simulation? A) It is a technique used to model uncertainty in retirement planning. B) Large changes in the projected rate of return will make small differences in the outcome. C) The user gets a best-case scenario and a worst-case scenario. D) It provides insight into the range of outcomes.

B) Large changes in the projected rate of return will make small differences in the outcome. Small changes in the projected rate of return will make large differences in the outcome.

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

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

Under which of the following circumstances would a premature distribution from a traditional IRA be exempt from the premature distribution penalty? A) When the account is fully funded with nondeductible contributions B) When the distribution is paid in equal annual amounts over the owner's life C) A distribution taken to satisfy the terms of a court-ordered property settlement D) A distribution taken at age 55 if the owner is retired

B) When the distribution is paid in equal annual amounts over the owner's life A distribution from an IRA taken in equal annual amounts over the owner's life is not subject to the 10% premature distribution penalty even if started before age 59½. This is one of the exceptions that apply to IRAs. The exception for qualified domestic relations orders (QDROs) and for retirement at age 55 apply to employer-sponsored plans but not to IRAs.

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

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

If an employer installs a Keogh plan, it must include all full-time employees A) with at least 3 years of service, regardless of age. B) age 21, with at least 1 year of service. C) with at least 1 year of service. D) age 25 or older.

B) age 21, with at least 1 year of service. Keogh plans must have eligibility requirements that cover all employees who are full- time, are at least 21 years of age, and have 1 or more years of service.

The study of why people often make decisions using rules of thumb rather than rational analysis, basing those decisions on factors economists traditionally don't consider, such as fairness, past events, and aversion to loss, is known as A) systematic risk B) behavioral finance C) irrational finance D) risk tolerance

B) behavioral finance Today, through the study of behavioral finance, it is accepted that behavioral biases can cause investors to make financial decisions that are irrational.

If a company's dividend increases by 5% but its market price remains the same, the current yield of the stock will A)remain at 7% B) increase C) decrease D) remain at 5%

B) increase The current yield of a stock is the annual dividend divided by the market price. If a company's dividend increases and its market price remains the same, its current yield will increase.

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

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

An investment adviser would be least likely to gather financial planning information about a client from A) a 2-hour lunch meeting. B) the client's Tweets. C) an hour-long WhatsApp chat. D) a detailed financial planning questionnaire.

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

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

B) there are no transaction costs or taxes. The CAPM assumes frictionless markets, i.e., no taxes or transaction costs. Among the other assumptions of the CAPM are that all investors have the same time horizon and that all investments are infinitely divisible into fractional shares. The CAPM assumes that there is no inflation.

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

B) there is no statutory limit on the number of investors in an LLC There is no limit to the number of investors (members) in an LLC, while current regulations limit the number of investors (shareholders) in an S corporation to 100. The tax treatment is the same, and both can be formed with a single owner.

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

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

If Janet established a Coverdell Education Savings Account for her grandson, in each successive year, she may contribute A) $1,000.00 B) $4,000.00 C) $2,000.00 D) $3,000.00

C) $2,000.00 Under current regulations, the maximum contribution to a Coverdell Education Savings Account is $2,000 annually.

If the current risk-free rate is 5%, and the expected return from the market is 10%, what return should we expect from a security that has a beta of 1.5? A) 15% B) 10% C) 12.5% D) 11.5%

C) 12.5% The expected return = 5% + (10% - 5%) × 1.5 = 5% + (5% x 1.5) = 5% + 7.5% = 12.5%.

An investor purchased stock for $50 per share at the beginning of the year. In December, the investor liquidated his stock for $55 per share, while also receiving dividends of $2 per share during the year. Assuming an inflation rate of 3%, what is the investor's real rate of return? A) 11% B) 14% C) 4% D) 10%

A) 11% Given the fact the client liquidated his shares at a price of $55, we can conclude that he attained a 10% ($5 profit ÷ $50 initial investment) return based on capital appreciation of the stock. He also received dividends of $2 per share giving him an additional return of 4% ($2 ÷ $50). By adding these 2 percentages together, we can conclude that his total return is 14%, less an inflation rate of 3%, which would give a real rate of return of 11%.

Which of the following is not an assumption of the capital asset pricing model (CAPM)? A) Corporate and government taxes affect all transactions. B) All market participants are well-diversified investors, and specific risk has been diversified away. C) All investors want to achieve a maximum return for minimum risk. D) All market participants borrow and lend at the same risk-free rate.

A) Corporate and government taxes affect all transactions. CAPM assumptions include: - There are no tax or transaction costs to consider. - All market participants borrow and lend at the same risk-free rate. - All market participants are well-diversified investors, and specific risk has been diversified away. - All investors want to achieve a maximum return for minimum risk.

In determining an investor's risk tolerance, an investment adviser representative must consider I. level of tolerance toward market volatility II. investment time horizon, long term or short term III. liquidity requirements IV. investment temperament A) I, II and III B) I, II, III and IV C) I only D) I and II

B) I, II, III and IV The investment adviser representative must consider a client's volatility tolerance, investment time frame, liquidity needs, and comfort with different types of investments. These are all elements in the understanding of a customer's attitude toward risk.

Under UTMA, the custodian must be A) a member of the minor's family. B) an adult. C) appointed by the court. D) a trustee.

B) an adult. The only requirement to be the custodian of an UTMA (or UGMA) account is being of legal age (an adult).

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

D) $220,000 capital gain. As long as a homeowner has lived in the primary residence at least 2 of the previous 5 years, the first $250,000 of profit on a home sale is excluded from tax. In the event it is a married couple, as in this question, the exclusion is doubled to $500,000. The profit on the sale was $720,000 ($800,000 minus the cost of $80,000) and the exclusion of $500,000 reduces the reportable gain to $220,000.

In the administration of a qualified retirement plan, which of the following individuals is considered to be a fiduciary? A) A financial planner acting as a trustee over the plan assets B) A highly compensated employee who participates in the plan C) A CPA who prepares the plan's Form 5500 for an annual fee D) The marketing director of the plan sponsor

A) A financial planner acting as a trustee over the plan assets An individual or business entity is considered a fiduciary under ERISA if that person renders investment advice or services to the plan for direct or indirect compensation. Clearly, the financial planner-investment trustee is within this definition. Completing an IRS form (5500) is not an investment-related activity.

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

A) A limited amount because her spouse is not a U.S. citizen Under current tax regulations, there is a limit to the amount of a gift that may be made to a noncitizen spouse. For 2019, that limit is $155,000, (the amount is never tested).

The separate account subaccounts chosen by the purchaser of a variable life insurance policy have had outstanding performance over the past 15 years. There would generally be no tax implications in which of the following situations? A) A loan is taken equal to 95% of the policy's cash value B) The policy is surrendered C) There is a cash withdrawal in excess of the cost basis D) The death benefit is paid

A) A loan is taken equal to 95% of the policy's cash value Funds obtained from a policy loan are not considered taxable income (same as any loan - you owe the money). If the amount received at policy surrender is greater than the cost basis, the excess is taxed as ordinary income. The same is true with the withdrawal. Although the death benefit will always be free of income tax, it could be subject to estate tax.

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

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

Which of the following would you most likely consider characteristics of a growth stock? A) High P/E and low dividend yield B) High P/E and high dividend yield C) Low P/E and low dividend yield D) Low P/E and high dividend yield

A) High P/E and low dividend yield Growth stocks generally have high P/E ratios and low (or no) dividends. Value stocks normally have low P/E ratios with higher dividend payouts.

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

A) II and IV The IPS would include information on how the investment performance of the plan is measured as well as the investment parameters to be followed by the portfolio managers. It would not include the summary plan description (document), generally referred to by the initials SPD. That is for the employees' to learn about eligibility, vesting, matching contributions, etc. It has nothing to do with how the money is invested. The purpose of the IPS is to set "policy" for the portfolio, not to list its composition.

Which of the following may NOT be used to fund an individual retirement account (IRA)? A) Life insurance B) Mutual funds C) Stocks D) Bank accounts

A) Life insurance There are many funding options available to investors who open an IRA. IRA contributions can be invested in stocks, mutual funds, bank accounts, and annuities. They cannot be invested in life insurance, however.

Your daughter is getting married and, to celebrate, you give her fiancé a beautiful watch that you purchased for $5,575. What are the tax consequences of this gift? A) No tax B) Anything over the FINRA gift limit of $100 per person per year would be considered taxable. C) The fiancé would have to report this as ordinary income. D) Because they are not yet married, the fiancé is not actually a family member, so a gift tax would be levied.

A) No tax This very nice gift falls well within the annual exclusion, so no gift tax would be levied. As far as FINRA or the states, first of all, there is no indication that he is a client; and, even if so, the rules do permit gifts without concern for the $100 limit in a circumstance like this.

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

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

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

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

An individual is a participant in the 401(k) plan offered by her employer. If she were to invest $400 per month into a large-cap growth fund, she would be A) dollar cost averaging B) following a constant ratio plan C) using a tactical asset allocation style D) matching her employer's contribution

A) dollar cost averaging Dollar cost averaging (DCA) is a funding method that consists of investing the same amount of money at fixed intervals into the same investment. Almost all participants in 401(k) plans obtain the benefits of DCA because their contributions are made from regular payroll deductions. It is possible that the portfolio managers of the large-cap fund use a tactical style, but the investor is not buying and selling the fund shares to try to time the market.

A 75 year-old client's $500,000 portfolio is 40/60 equity/debt. Six months later, the portfolio balance is $480,000 of which $180,000 is equity. If the investment adviser recommends semiannual rebalancing, the client will A) sell $12,000 of the debt and use the proceeds to purchase $12,000 of equity. B) sell $12,000 of the equity and use the proceeds to purchase $12,000 of debt. C) stay put because selling now would realize a loss. D) purchase $12,000 of debt and $8,000 of equity to return to the original $500,000.

A) sell $12,000 of the debt and use the proceeds to purchase $12,000 of equity. Rebalancing involves getting the account back to its original percentage mix (not original market value). With a current value of $480,000, of which $180,000 is equity, the debt is $300,000, an amount greater than the 60% allocation. A 40/60 mix requires $192,000 in equity and $288,000 in debt.

One of the tasks of an investment adviser representative is gathering information to complete a client financial profile. Among the sources of this information would be all of the following except A) the client's social media accounts. B) the client's tax returns. C) the client's bank and brokerage statements. D) the client's life insurance policies.

A) the client's social media accounts. Although there are some people who divulge a great deal of personal information on their social media accounts, those are not the most reliable sources of the financial numbers an IAR needs to properly evaluate a client's financial position. Tax returns, bank and brokerage account statements, and life insurance policies (especially those with cash value) are a window to the client's assets.

Suzie McQueen has a very successful interior design shop she has run as a sole proprietorship. She has just celebrated her 60th birthday and has been giving thought to an eventual sale of the business. She wants your opinion on whether she should incorporate or change to a partnership. You might respond that A) the corporate form of business structure would be the easiest for ultimate transfer of ownership B) the corporate form of business structure would be the least expensive to form C) the partnership form of business structure would enable Suzie to maximize her sale price D) the partnership form of business structure would be the easiest for ultimate transfer of ownership

A) the corporate form of business structure would be the easiest for ultimate transfer of ownership In general, the corporate form of business leads to the easiest transfer of ownership. Because Suzie would probably own 100% of the stock, all she would have to do is sell that stock to a new purchaser and the corporation could continue just as before. If Suzie wanted to reorganize as a partnership, she would have to bring in at least one additional individual, ending her total ownership of the business. Even then, a partnership interest is not as easy to sell as stock.

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

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

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

B) I and II When there is money remaining in a Section 529 plan after a student has completed college, withdrawal of that excess will result in the portion representing earnings being taxed at ordinary income tax rates plus a 10% penalty. Those taxes and penalties can be avoided if the funds are properly used, such as graduate school for the original beneficiary or designating a new beneficiary who is an immediate family member (as defined in the law) and rolling over the funds. There is no such thing as a rollover to a Coverdell ESA and money in a 529 plan is not part of a qualified plan, so rolling over to an IRA is out of the question.

Under current federal tax law, which of the following would have an effect on the amount of taxes your client would pay? I. Age II. Citizenship III. Marital status as of the last day of the year IV. Residency A) I, III, and IV B) I, II, III, and IV C) II and IV D) I and III

B) I, II, III, and IV Each of these can affect your tax rate. Taxpayers age 65 and older get an extra exemption, so that lowers their tax. If you are not a U.S. citizen, and are considered a nonresident alien, you are taxed somewhat differently than others. Only married persons can file a joint return, which usually, but not always, results in lower taxes. Residency determines if you will also have to pay a state income tax and receive deductions for that (or a state sales tax) on your federal income tax.

Tax considerations are frequently an important factor when determining appropriate recommendations for advisory clients. In which of the following accounts is the tax status of the individual a critical factor? I. An account opened in the name of the XYZ Corporation, organized as a C corporation, by their chief investment officer II. An account opened by a sole proprietor in the name of the company III. An account opened in the name of ABC Corporation, an S corporation by one of its shareholders IV. An account opened in the name of the GHI Fund, a regulated investment company, by the fund's portfolio manager A) I and II B) II and III C) III and IV D) I and IV

B) II and III Sole proprietorships and S corporations have their income and losses pass through to the owners. Therefore, an account opened in the name of the business will create tax consequences for the owners. Regular, or C corporations, pay taxes on their earnings and, even though a regulated investment company passes through at least 90% of its earnings to shareholders, the tax situation of each individual shareholder of the fund is of no consideration when making recommendations to the fund's portfolio manager.

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

B) an options account Because trading options (puts and calls) generally involves a higher degree of risk than stocks, bonds, or mutual funds, a designated supervisory person with knowledge about options must approve the account opening.

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) regret aversion bias. B) anchoring bias. C) herding bias. D) overconfidence bias.

B) 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.

While reading the prospectus of a mutual fund, you notice that the management describes their style as contrarian. They further explain that they A) believe that indexing provides the most attractive returns. B) generally buy when the majority of other investors are selling and sell when the majority of other investors are buying. C) have higher-than-average income as their goal. D) tend to invest in stocks with a high correlation coefficient.

B) generally buy when the majority of other investors are selling and sell when the majority of other investors are buying. As the term implies, a contrarian takes positions that are opposite to the prevailing opinions.

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

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

Jason, a recently divorced individual, is currently 55 years old and has built up approximately $400,000 in several initially funded and rollover individual retirement accounts (IRAs). He now wants to take an early distribution from one of these IRAs. Which one of the following distributions will escape the imposition of a tax penalty for early withdrawal? A) A distribution made to Jason's ex-wife under a qualified domestic relations order (QDRO) B) A distribution made on account of financial hardship as determined by Jason's financial planner C) A distribution made in payment for higher-education costs of Jason's granddaughter D) A distribution made upon separation of service from Jason's current Employer

C) A distribution made in payment for higher-education costs of Jason's granddaughter Jason can take a distribution from any of his IRAs without imposition of a tax penalty as long as it is made in payment of higher-education costs (tuition, fees, books, supplies, and equipment) for his granddaughter. QDROs do not apply to IRAs. Separation from service will not affect Jason's ability to take a distribution from his IRA. A distribution due to financial hardship is always subject to the early distribution penalty if the participant is not yet age 59½.

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

C) American Silver Eagles A limited group of coins, especially the "eagles" minted by the U.S. Treasury Department, are eligible for investment in an IRA. The South African Gold Krugerrand is the world's first modern bullion gold coin and remains one of the most popular gold coins ever minted, but is not eligible for investment in an IRA. No form of life insurance is, and collectibles, such as stamps, are also ineligible.

If an investor purchases 500 shares of an aggressive growth stock, which strategy would limit his downside risk? A) Writing 5 puts on the stock B) Buying 5 calls on the stock C) Buying 5 puts on the stock D) Writing 5 straddles

C) Buying 5 puts on the stock A put gives the investor the right to sell stock at a set price (the strike price) for a period of time, and protects against losses below the strike price. Buying calls can protect a short stock position. If the customer is long stock, the purchase of calls on that security increases leverage and risk. Writing a put creates the obligation to buy more stock at the strike price, which increases downside risk.

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) DEF B) ABC C) GHI D) JKL

C) 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 GHI),are within the small-cap range, and JKL would be considered large-cap.

From your meetings with Avery, you realize there is a tendency to follow the actions of a larger group of people when making financial decisions. It makes no difference if those actions are rational or not. Choose the behavioral finance theory that explains Avery's behavior. A) Anchoring B) Overconfidence C) Herding D) Confirmation bias

C) Herding This is an excellent example of herding (following the herd). Confirmation bias is the tendency to pay attention to information that supports one's preconceived opinions, while disregarding accurate, unsupportive information. Overconfidence occurs when investors consider their abilities to be much better than they actually are. Anchoring occurs when a person makes an irrational decision based on information that should have no influence on the decision.

According to the USA PATRIOT Act of 2001, account identification and verification procedures should be applied to which of the following? I. New individual accounts II. New business accounts III. Existing individual accounts IV. Existing business accounts A) I and IV B) III and IV C) I and II D) II and IV

C) I and II The procedures required by the USA PATRIOT Act for the verification and identification of customer accounts should be applied to all new customers—whether individuals or businesses.

If a customer is in the 15% federal income tax bracket and his main investment objective is current income, which of the following securities should the agent recommend? A) Zero-coupon bond. B) City of Milwaukee GO bond. C) Investment-grade corporate bond. D) U.S. government bond.

C) Investment-grade corporate bond. The investor is in a low tax bracket, so the tax-exempt municipal bond is not a suitable investment. To maximize income, the best recommendation is the corporate bond which offers a higher yield than a government bond with a similar maturity.

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

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

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

C) The order was not triggered. This is a perfect example of how important it is to read the question. The subject of the question is a limit order and then it asks for the trigger price. Stop orders are the only orders that have triggers so there is no trigger for this limit order. If the question had asked about the execution price, a buy limit order will be executed at the limit price or better (lower). In this case, the first trade at $58 or lower is $57.95. When you have a question like this on your exam, don't say to yourself, "But what if there is stock ahead?" We never want to overcomplicate a question by looking for something that isn't mentioned.

One of the benefits of owning a home is the tax treatment of a sale of a primary residence. Under current IRS regulations, A) all gains from the sale of a primary residence are excluded from taxation. B) a married couple is permitted to exclude the first $500,000 of gain as long as the proceeds are reinvested in another home. C) a married couple is permitted to exclude the first $500,000 of gain. D) a married couple is permitted to exclude the first $250,000 of gain.

C) a married couple is permitted to exclude the first $500,000 of gain. As long as the requirements are met, a married couple is permitted to exclude the first $500,000 of gain on the sale of a primary residence. The exclusion for singles is $250,000. Years ago, the gain was deferred if the proceeds were reinvested in a new home, but that no longer applies.

When a broker-dealer acts in the capacity of a principal in a trade, the firm has acted A) as an agent B) for the benefit of the client C) as a contra party to the trade D) in an unethical manner

C) as a contra party to the trade In every trade, there are 2 principals—the buyer and the seller. If the broker-dealer is one of the principals (either buyer or seller), the firm is the contra party to the other side of the trade.

The risk/return pyramid where the bottom is lowest risk and the "point" is the highest, generally places commodities A) in the middle. B) halfway between the middle and the top. C) at the top. D) at the bottom.

C) at the top. The risk/return pyramid shown in your LEM places commodities at the very top, the point of the pyramid.

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

C) by an auction process. One of the chief characteristics of exchange markets is the auction process for determining the price of a security. In the OTC markets, prices are determined by negotiation. The stock exchanges do not set the price, and although FINRA's markup policy is used to determine the charges to customers, that is separate from determining the security's price.

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

C) must distribute their distributable net income each year. Unlike complex trusts, simple trusts must distribute their DNI on an annual basis. Unlike complex trusts, simple trusts may not make distributions from the corpus (body) of the trust nor may they retain income. The terms "simple" and "complex" do not refer to the simplicity of the trust preparation.

The bond strategy used most often by those with a target goal is A) the duration strategy. B) the laddering strategy. C) the bullet strategy. D) the barbell strategy.

C) the bullet strategy. When you think of a bullet, you think of it hitting a target. That is what the bullet strategy is all about. When an investor will be making periodic investments in bonds and there is a specific future goal, such as retirement, the bullet strategy seems most appropriate. Some investors might consider a barbell with the target date being in the middle of the short-term and the long-term group, but at least for exam purposes, select the bullet strategy when you are aiming for a target goal.

An individual's net worth is A) best determined by examining the individual's personal income statement B) largely irrelevant in identifying the individual's investment objectives C) the difference between the individual's assets and the individual's liabilities D) another term for discretionary income

C) the difference between the individual's assets and the individual's liabilities An individual's net worth is the difference between the individual's assets and the individual's liabilities. It is determined from the personal balance sheet rather than from the personal income statement. Net worth is relevant in determining an individual's investment objectives. Someone with a negative net worth might find it preferable to reduce his debt level before beginning an investment program.

One popular method used to predict the expected return of a stock is the capital asset pricing model. Analysts using CAPM rely on all of these EXCEPT A) the risk-free rate available in the market B) the beta coefficient of the stock C) the standard deviation of the stock D) the expected return on the market

C) the standard deviation of the stock Under the CAPM, using the SML, we can determine the expected return of any given stock by taking the risk-free rate and adding to that the product of that stock's beta coefficient and the difference between the expected return on the market and the risk-free rate. Standard deviation is not a factor in this computation.

A client approaches the IAR handling the advisory account with a request to find a preferred stock that will offer a 6% income return. The IAR suggests a stock paying a $.28 quarterly dividend. That stock will meet the income objective if it has a current market price of A) $4.67 B) $6.72 C) $11.91 D) $18.67

D) $18.67 The first thing to do is annualize the dividend by multiplying the $0.28 by 4. Once we have the annual dividend of $1.12, divide by 6% and the result is $18.6666 or $18.67 properly rounded. If you left your math skills at home, all you have to do is multiply each of the 4 choices by 6% to see which one is closest to $1.12.

Which of the following statements regarding a QDRO is correct? A) A QDRO applies only to assets in a traditional IRA. B) A QDRO applies to assets in a qualified employer plan and a traditional IRA. C) A QDRO must comply with ERISA to be effective. D) A QDRO applies only to assets in a qualified employer plan.

D) A QDRO applies only to assets in a qualified employer plan. A QDRO applies only to assets in a qualified employer plan; it would not be applicable to an IRA or a SEP. Under IRS regulations, early distributions that are taken pursuant to a qualified domestic relations order, or QDRO, are exempt from the 10% penalty. A QDRO is a court-issued order that gives someone the right to an individual's qualified plan assets, typically an ex- (or soon-to-be-ex-) spouse, and the QDRO is usually issued in the course of divorce proceedings or to satisfy child support obligations.

Your firm onboards a new investment advisory client. Which of the following would be the most appropriate way to obtain information about the client's objectives and constraints? A) Client's LinkedIn page B) Monitoring the client's Tweets C) Interview with the client's neighbors D) Face-to-face meeting at the client's home

D) Face-to-face meeting at the client's home There are a number of ways to gather information about your client's financial resources, but it is highly unlikely that a social media page would be one of them. Privacy laws would make interviewing neighbors of a client unethical.

Terry Bolton employs his 2 sons in the family gardening business. Josh is 12 years old and was paid $2,000 for the year. Drake is 14 years old and was paid $3,000 for the year. Which of the following are correct statements regarding the taxation of the income? I. Josh's income is taxed at his tax rate. II. Drake's income is taxed at his tax rate. III. Josh's income is taxed at trust tax rates. IV. Drake's income is taxed at trust tax rates. A) II and III B) I and IV C) III and IV D) I and II

D) I and II As the money paid is earned income, it is not subject to the kiddie tax rules, regardless of age.

An advantage of dollar cost averaging is that it results in an average cost per share that is less than the stock's average price, assuming which of the following? I. The price of the underlying shares fluctuates. II. A set number of shares is purchased regularly. III. A set dollar amount is invested regularly. IV. A set dollar amount of investments is maintained. A) II and IV B) III and IV C) I and II D) I and III

D) I and III Dollar cost averaging results in a lower average cost per share, provided the share price fluctuates and the same number of dollars is invested at each interval (e.g., monthly).

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

D) The optimal portfolio will always lie above the efficient frontier. The optimal portfolio for an investor will always lie on the efficient frontier. That is where, for any given level of risk, the return is the highest. Stated another way, for a given level of return, the risk is the lowest.

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

D) a buy stop limit order The customer has placed a buy stop limit order. If the stock rises to the stop price of $140, the order will be triggered and becomes a buy limit order at $144, meaning an order to buy at $144 or better (lower).

You have a client with a margin account at your broker-dealer. If the market price of the securities in the client's account should fall to a point where your firm has to ask the client for additional funds, it is A) a market call B) a Regulation T call C) a margin call D) a maintenance margin call

D) a maintenance margin call The original call for funds is the Regulation T or margin call. When the call is for additional money, it is known as maintenance margin.

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

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

The basis of an asset received from a decedent's estate is referred to as a stepped-up basis. This means that the asset's basis is generally A) the amount the decedent originally paid for the asset B) the amount the recipient ultimately sells the asset for C) the fair market value of the asset on the day the decedent acquired it D) the fair market value of the asset on the day the decedent died

D) the fair market value of the asset on the day the decedent died Generally, a taxpayer's basis in an asset is the amount the taxpayer paid for the asset. When an asset is acquired by inheritance, however, the asset's basis is generally the fair market value of the asset on the date of the decedent's death (or 6 months after the date of death if the estate elects the alternate valuation date). Because this value is often higher than the price the decedent originally paid for the asset, this kind of basis is called a stepped-up basis.

When comparing cash and margin accounts, it is important to note that A) the interest charged on debit balances in cash accounts reduces the investor's returns. B) the investor will generally make more money by using margin. C) IPOs must be purchased in margin accounts because of their higher risk. D) the investor can lose more than his original capital in a margin account.

D) the investor can lose more than his original capital in a margin account. As is true with most of life, when you use borrowed money, you can lose your original capital plus the amount borrowed. That is the risk in using margin and is why extra precautions have to be taken to make sure that margin trading is suitable for the client. Can an investor make more by using margin? Yes, but by the same token, the investor can lose more so there is no way to generalize and say that investors in margin accounts achieve better results than those in cash accounts. The interest charged on the debit balance in a margin account eats away at returns - cash accounts cannot have a debit balance. Finally, SEC rules prohibit the purchase of new issues on margin until the issue has been trading for a minimum of 30 days. At that point in time, investors are no longer buying the IPO from the issuer - the stock is trading in the secondary market rather than the primary market.