Series 66 Final Exam Test Questions

When is a statutory (final) prospectus used? A) For all new issues B) Only for sales of investment company securities in the primary market C) Only for new issues of stocks and bonds D) Only for underwriting variable annuities and variable life insurance

A) For all new issues Statutory (final) prospectuses are required for the sale of any new issue in the primary market, including, stocks, bonds, investment company securities, and variable products.

If an agent participates in a joint account with a client, the agent may: A) Share disproportionately in any gains or losses B) Initiate transactions in the account C) Follow the client's instructions only D) Withdraw sale proceeds

B) Initiate transactions in the account If an agent has a joint account with a client, she may share in the gains and losses proportionately, and initiate transactions. However, any distribution will be made payable to all parties in a joint account unless the joint owners consent.

An investor has a total of $350,000 to invest, but he wants to invest $150,000 in a manner that will follow the business cycle. This type of investing is referred to as: A) Strategic asset allocation B) Tactical asset allocation C) Technical asset allocation D) Timing asset allocation

B) Tactical asset allocation Tactical asset allocation shifts assets based on market timing, trends, and the business cycle. Technical analysis utilizes theories and pattern analysis, but it is a form of analysis, not a form of asset allocation. Strategic asset allocation uses a blend of particular securities that are rebalanced over time as the performance within the portfolio causes the weighting of the assets to shift outside the optimal percentages.

When determining the risk premium on an investment, an investor would analyze the difference between: A) The total return and annualized rate of return B) The total return and the risk-free rate of return C) The mean return and dollar-weighted return D) The coupon rate of a bond and current interest rates

B) The total return and the risk-free rate of return Total return - risk-free rate of return = risk premium. The risk premium is the amount of return earned in excess of the risk-free rate of return (i.e., the return on a T-bill).

The S&P 500 is a(an): A) Inflation-adjusted index B) Price-weighted index C) Capitalization-weighted index D) Time-weighted index

C) Capitalization-weighted index The S&P 500 is a capitalization-weighted index. Indexes that are cap-weighted calculate their value based on the total value of the stocks, rather than the per share price. Market capitalization is determined by multiplying a company's shares outstanding x the price per share. The Dow Jones Industrial Average (DJIA) is a price-weighted index

While acting in a fiduciary capacity, what must an investment adviser provide to a customer who's intends to make an investment? A) Information that an inexperienced investor needs in order to make an investment decision B) Information that an average investor needs in order to make an investment decision C) Information this particular investor needs in order to make an investment decision D) Information that a reasonable investor needs in order to make an investment decision

C) Information this particular investor needs in order to make an investment decision As fiduciaries, investment advisers have a duty of loyalty to their clients. In addition to providing suitable advice, fiduciaries must provide their clients enough information for them to make informed investment decisions. Fiduciaries are required to make recommendations based on what a "prudent investor" would do. However, if a particular client needs additional disclosures, a fiduciary must provide them. A fiduciary that advises a more experienced client is able to tailor the information to that client's specific needs. In many cases, an adviser is not required to provide all of the information that a beginning or average investor would need.

What does the dividend discount model take into account to estimate a company's share price? A) A corporation's book value B) The earnings per share (EPS) in the most recent 12-month period C) Interest payments the company is required to make to its bondholders D) A corporation's expected future dividends and a discount rate

D) A corporation's expected future dividends and a discount rate The dividend discount model is a way to estimate a company's share price by dividing a company's future (i.e., expected) dividend by a discount, typically the corporation's cost of equity (i.e., Stock Price = Dividend ÷ Discount Rate). Notice that this is the same formula as the present value of a perpetuity. Under the dividend discount model, investors are assuming that the price of a stock should be equal to the present value of the dividends, which are expected to be paid perpetually (i.e., forever)

The manager of the XYZ Fund is permitted to move assets between the stock and bond markets, depending on economic conditions. Last year the manager had 70% of the fund's assets invested in stocks while only 30% in bonds. This year she has reversed the ratio. XYZ fund is most likely a(n): A) Balanced Fund B) Hedge Fund C) Equity Income Fund D) Asset Allocation Fund

D) Asset Allocation Fund An asset allocation fund permits the manager to change investment strategies and vehicles, based on changing market/economic conditions

Under the Capital Asset Pricing Model, risk is defined as: A) Failure to accomplish the client's objective B) Loss of interest C) Loss or principal D) Deviation in returns

D) Deviation in returns The Capital Asset Pricing Model (CAPM) measures risk using beta to measure systematic risk and alpha to measure nonsystematic risk. Risk is the variance in expected return, not the loss of client funds or failure to meet an objective.

A mutual fund wants to report to its shareholders the fund's average return over a 10-year period. What's the best way to calculate the fund's annual return? A) Standard Deviation B) Arithmetic mean C) Sharpe Ratio D) Geometric mean

D) Geometric mean The geometric mean, which is also referred to as the time-weighted return, is the best way to measure the performance of a mutual fund. This method eliminates the distortion from cash inflows and outflows (e.g., investors withdrawing their investments). On the other hand, the arithmetic mean can be misleading for reporting average returns over several continuous years since it's actually distorted by cash inflows and outflows.

What information is important when determining whether a limited partnership is appropriate for a particular client? I. The client's ability to assume risk II. The client's investment objectives III. Whether the client's other investments are liquid IV. The client's educational background A) I, II, III, and IV B) I and II only C) I only D) I, II and III only

D) I, II and III only A client's educational background is not an important factor when determining whether a limited partnership is appropriate for the client

Which of the following return calculations removes the distortions caused by the deposit and withdrawal of capital from an investment account over time? A) Current yield B) Dollar weighted return C) Expected return D) Time-weighted return

D) Time weighted return Time-weighted returns eliminate biases caused by the inflow or outflow of investor money. It is often used to compare the performance of money managers. On the other hand, dollar-weighted returns provide a better idea of how an individual investor has done over time by eliminating the biases caused by superior performance in one year or inferior performance in another

An investment adviser must record the personal securities transactions that are effected by its officers, directors, partners, and employees by no later than: A) 30 days after the end of the calendar quarter B) Monthly C) Within 90 days of the adviser's fiscal year D) The day of the trade

A) 30 days after the end of the calendar quarter According to NASAA's Model Rule for Recordkeeping Requirements for Investment Advisers, an adviser must maintain a record of each personal securities transaction in which the adviser, an IAR, an officer, director, partner, or employee (i.e., an access person) acquires either direct or indirect ownership. These transactions must be recorded by no later than 30 days after the end of the calendar quarter in which the transaction occurred.

Under the Uniform Securities Act, the statute of limitations for criminal violations of the Act is: A) 5 years B) 1 year C) 3 years D) There is no time limit for criminal violations

A) 5 years The statute of limitations for criminal violations under the Act is five years.

All of the following statements about Benchmark Portfolio Management are TRUE, EXCEPT: A) Benchmarks should be reweighted at least quarterly to improve the relative performance of the portfolio B) The manager determines what securities will and will not be included in the portfolio C) Portfolio risk and return will be heavily influenced by the benchmark D) Certain benchmarks are better suited to specific investment goals than others

A) Benchmarks should be reweighted at least quarterly to improve the relative performance of the portfolio When portfolio managers construct a portfolio, they usually start with the securities in the benchmark as a beginning point. Then the decision as to what additional positions to take is made in an effort to add value. The benchmark indicates not only the kinds of securities that should be included in the portfolio, but also the types that should not be. For example, choosing a government bond index as the benchmark makes it clear that the portfolio should not include a large percentage of securities with a high degree of risk. Reweighting a benchmark on a quarterly basis would not have any effect on the actual performance of the portfolio. If it were done to make the portfolio appear to perform better, that would be considered, at best, unethical and, more likely, fraudulent

Regarding the possession of funds held by investment advisers (IAs), which of the following is FALSE? A) Clients must receive a statement at least annually that discloses certain details of the funds held by the firm B) Client funds may only be held in an account that is established for that specific purpose C) Client funds may be held by a qualified custodian that has met certain standards D) Client notification must be made immediately regarding the location where the firm will hold the funds

A) Clients must receive a statement at least annually that discloses certain details of the funds held by the firm Client account statements are sent on a quarterly basis and must include the amount of funds in the firm's possession, a list of securities held in custody, a record of transactions, and all fees charged. If a custodian holds the assets (i.e., not the IA), the IA must have a reasonable belief that the statements are being provided.

Z Best, a broker-dealer, has filed an application for registration with the Administrator of New York. Three years ago, the firm was suspended from trading on the London Stock Exchange, due to the activities of a rogue trader. The firm's clients were not affected in any way. Upon receipt of the application, the Administrator may: A) Deny registration, as any action by a foreign securities regulator may result in a denial by the Administrator B) Grant registration since foreign governments have no jurisdiction in the U.S C) Deny registration, since any suspension is a securities-related misdemeanor D) Grant registration, because the evidence would be inadmissible in court

A) Deny registration, as any action by a foreign securities regulator may result in a denial by the Administrator Under Sec. 204(H.1) of the USA, the Administrator may, by order, deny, suspend, revoke, cancel, or withdraw the registration of any registrant (i.e., broker-dealer, agent, investment adviser, investment adviser representative) that has been the subject of a foreign securities regulator's disciplinary action, within the past five years. The fact that foreign governments have no jurisdiction or that evidence may be inadmissible is irrelevant.

According to SEC Release IA-1092, a fiduciary must: A) Disclose all potential conflicts of interest B) Avoid all conflicts of interest C) Engage only in conflicts of interest if it can be shown that the conflicts provide a tangible economic benefit to the client D) Limit conflicts of interest to accounts owned by institutional or accredited investors

A) Disclose all potential conflicts of interest In Release IA-1092, the SEC reminds investment advisers that they are fiduciaries. A fiduciary is a person who acts on behalf of, and in the interest of, another person. As fiduciaries, an investment adviser must put the client's interests ahead of its own. Not all conflicts can be avoided. If a conflict exists, the IA must inform the client prior to making a recommendation. In this way, a client can make a decision as to whether to execute the transaction/and or accept the advice given.

What is the name of the process by which an investor calculates the sum of the present values of projected cash flows to determine the fair market value of an investment? A) Discounted Cash Flow B) IRR C) CAPM D) Net Present Value

A) Discounted Cash Flow When an investor takes an investment's future cash flows (e.g., dividends or interest payments) and calculates their present value, she is using discounted cash flow analysis. The process is referred to as discounting since the present value formula takes the future value and divides by the time value of money term, i.e., (1+r)t. Net present value takes the process a step further by subtracting the actual market price of an investment by the fair market value that is found in the discounted cash flow analysis.

According to NASAA Model Rules, an IA may be compensated on the basis of performance provided the adviser discloses all the following information in writing to the client, EXCEPT the: A) Fact that the adviser has discretion as to any index to measure performance B) Adviser may receive a share of both realized and unrealized gains in the account C) Period used to measure performance D) Fee arrangement may create an incentive for the adviser to make riskier or more speculative investments

A) Fact that the adviser has discretion as to any index to measure performance The adviser may not use any index to measure performance, only one that is appropriate. The adviser must disclose the nature of any index and why the adviser believes it is appropriate.

An investor is negotiating a contract with an investment adviser. The adviser wants to charge the investor a 2% management fee plus 20% of any appreciation that is realized in any given quarter. Although the investor is not opposed to the idea, in order to comply with the law, the investor must: A) Have assets under management of at least $1.1 million or a net worth of more than $2.2 million B) Have an existing brokerage account with an affiliated firm C) Be identified as an institutional investor D) Be an accredited investor

A) Have assets under management of at least $1.1 million or a net worth of more than $2.2 million Investment advisers may only charge performance-based fees to persons who are categorized as qualified clients. A qualified client is defined as a person that has $1.1 million of assets under management with the adviser or a net worth of more than $2.2 million. It's important to recognize that being considered an accredited investor does NOT satisfy the levels necessary to be considered a qualified client. Under Regulation D of the Securities Act of 1933, an accredited investor is a person with annual income of at least $200,000 or a net worth of at least $1 million. For qualified clients, the $1.1 million is the assets under management requirement; however, for accredited investors, the $1 million is the net worth requirement. Also note, the net worth does NOT include the person's primary residence or any associated mortgage.

According to the Uniform Securities Act, in which TWO of the following cases is an investment adviser exempt from sending clients a written disclosure document under the Brochure Rule? I. The adviser's clients are only investment companies. II. An adviser provides impersonal advisory services to online subscribers that cost $250 per year. III. An investment adviser has no office in the state. IV. The adviser's clients are select institutional investors. A) I and II B) I and IV C) II and III D) II and IV

A) I and II According to the Uniform Securities Act, an investment adviser must satisfy the Brochure Rule and provide its clients or prospective clients with a disclosure document (usually Form ADV Part 2). Exceptions to this rule are made available if the adviser's only clients are investment companies or for contracts which involve impersonal advisory services that cost less than $500.

Rancho Rio Investments is a single-office investment advisory firm that is based in New Mexico and plans to expand its business to New Jersey. Under the Uniform Securities Act, in which TWO of the following situations is Rancho Rio NOT considered to be an IA in New Jersey? I. The firm transacts business only with New Jersey broker-dealers II. The firm transacts business in New Jersey, but only with a few employee benefit plans that contain assets under $500,000 III. The firm's only business in New Jersey is with 10 or fewer non-institutional customers within a 12-month period IV. The firm's only business in New Jersey is with a limited number of federal covered advisers A) I and IV only B) II and III only C) I and II only D) II and IV only

A) I and IV only Under the Uniform Securities Act, any investment adviser that has no place of business in a given state and whose clients are banks, broker-dealers, investment advisers, and other institutions is exempt from registration in that state. Also, any IA that has no place of business in the state and deals with five or fewer retail customers who are residents of the state within a 12-month period is also exempt. Since this question makes no reference to Rancho Rio having an office in New Jersey, it may transact business with New Jersey institutional investors, such as broker-dealers (choice I) and investment advisers (choice IV), without being registered in New Jersey. To do business with an employee benefit plan in a state without being registered, the plan must have assets of $1 million or more.

Which of the following choices is NOT a broker-dealer in State B? I. An agent in State A who contacts a client in State B II. A corporation that sells commercial paper every other week in State B III. A broker-dealer registered in State A, where its only office is located, which has only insurance companies as clients in State B IV. A bank trust department that buys and sells securities for its customers A) I, II, III, and IV B) I only C) IV only D) III only

A) I, II, III, and IV Agents, issuers, and banks are not broker-dealers. Also, a person with no place of business in a state, who deals only with institutional investors, is not a broker-dealer.

Which TWO of the following investments are NOT considered money-market instruments? I. A U.S. Treasury bill II. A money-market mutual fund III. A convertible debenture IV. A tax anticipation note A) II and III B) II and IV C) I and III D) I and II

A) II and III Money-market securities are defined as debt instruments that have less than one year until maturity. U.S. Treasury bills and tax anticipation notes (TANs) are both short-term debt instruments and are considered money-market instruments. A money-market mutual fund is an instrument that issues common shares which represent an investor's ownership interest in a portfolio of money-market securities. Convertible debentures are debt instruments; however, since the maturity of the debentures is not provided in the answer, it should not be assumed to be one year or less.

Jack has a substantial amount of cash value built up in his variable life insurance policy. He would like to use some of it for a home renovation project. Which TWO of the following choices would be used to explain to Jack his options for accessing his cash value? I. If he withdraws some of his cash value, it will be treated as taxable earnings first, then a tax-free return of premiums (LIFO). II. If he withdraws some of his cash value, it will be treated as a tax-free return of premiums first, then taxable earnings (FIFO). III. If he takes a loan against the cash value, it will be taxed as earnings first, then treated as a tax-free return of premiums (LIFO). IV. If he takes a loan against the cash value, it will be tax-free. A) II and IV B) I and IV C) II and III D) I and III

A) II and IV Any withdrawal of cash value from a life insurance policy is considered a return of premiums first, which would be tax-free. Withdrawals above the amount of premiums paid will be considered interest and, therefore, taxable as income. Policyholders usually prefer to borrow against their cash value, since this would be tax-free. The loan does not need to be repaid, but any amount still outstanding upon the death of the insured will be subtracted from the death benefit.

In order to better diversify a client's portfolio, an investment adviser recommends that its client invest in tangible assets, such as gold and silver. Which of the following risks is the adviser attempting to reduce? A) Inflation Risk B) Any risks associated with the fact that the stock market may become illiquid and cause equity products to decrease in value C) Any risks associated with the fact that the expected rate of return may be in error D) Business risk

A) Inflation Risk When an adviser recommends that clients invest in tangible assets, such as precious metals (gold) and real estate, its general purpose is to help them hedge against inflation

An agent of a broker-dealer is also employed as an investment adviser representative. A client asks the agent for assistance in placing the shares of his start-up company's initial public offering (IPO). Under what conditions may the agent accept the client's offer of commissions for completing the offering? A) Only with the written permission and supervision of the broker-dealer B) Only if a separate set of books and records is used to track these trades independently from the trades of other clients C) Only if disclosure is made to the clients that this investment will not appear on their statements D) Only when the purchases are made by clients of another broker-dealer

A) Only with the written permission and supervision of the broker-dealer This is an allowable action provided written permission is obtained from the supervising broker-dealer and the transactions are recorded on the broker-dealer's books and records. If the agent fails to notify her firm, it is considered selling away, which is an unethical and prohibited business practice.

All of the following statements regarding the Capital Asset Pricing Model (CAPM) are TRUE, EXCEPT it: A) Predicts future values for the stock B) Was developed to explain the behavior of security prices C) Is based on the efficient market theory and assumes all investors act rationally D) Provides a mechanism to assess risk and return

A) Predicts future values for the stock CAPM does not establish a price objective for the stock. All of the other statements regarding this theory are true

From what is an exchange-traded note (ETN) derived? A) The creditworthiness of the issuer B) The credit rating of the stocks in the index that's being tracked C) The value of guarantees made by SIPC D) A portfolio of securities that's held by a custodian

A) The creditworthiness of the issuer Exchange-traded notes (ETNs) are unsecured bonds that promise to pay a rate of return that mirrors the return of a portfolio of securities. This means that ETNs are created based on the creditworthiness of the issuer.

The securities holdings report that an access person of an adviser is required to file with her firm's chief compliance officer does NOT include: A) The prices paid to acquire the securities B) The type of securities held in her personal account C) The date that the person submits the report D) The name of the broker-dealer that maintains the person's account

A) The prices paid to acquire the securities The securities holdings report that an access person files with her firm's CCO include the types of securities held in her personal account, the date that the report is submitted, and the name of the broker-dealer that maintains her personal account. However, the price that is paid to acquire securities is actually included in a different report (the transaction report).

Why would an investment adviser perform a capital needs analysis for a client? A) To determine how much insurance the client needs in order to fund future financial goals B) To determine how much disposable income the client has available to purchase insurance C) To determine how to best reduce the client's tax liability D) To determine how much income the client will need at retirement

A) To determine how much insurance the client needs in order to fund future financial goals A capital needs analysis is used to determine the amount of insurance a client needs to purchase today in order to fund her future financial goals. For example, if the client dies prematurely and the value of her investments are not sufficient to pay for her child's college education, life insurance is needed to fund the difference.

When is the internal rate of return (IRR) be used? A) When determining the rate that makes the net present value of an investment zero B) When measuring the profitability of an investment portfolio relative to the portfolio's risk C) When estimating the future cash flows D) When calculating a bond's price relative to its yield

A) When determining the rate that makes the net present value of an investment zero The internal rate of return (IRR) is a rate that makes the present value of an investment equal to the market price of the investment. In other words, the IRR is the rate that makes the net present value (NPV) of an investment equal to zero

A client wants to make a payment in perpetuity of $3,000 per year to a beneficiary. Assuming a 3% annual return, how much principal would your client need to deposit? A) $30,000 B) $100,000 C) $3,000 D) $250,000

B) $100,000 The client would need to deposit $100,000. To calculate the required principal, take the annual payment in perpetuity of $3,000 and divide it by the annual rate of return of 3% ($3,000 / .03 = $100,000). The phrase in perpetuity may also be referred to as a perpetual payment, meaning that payments will continue to be made forever

If an investment adviser uses a social media site as a form of advertising, all records of its use must be maintained for at least: A) The life of the firm, plus three years B) 5 years C) 3 years D) 2 years

B) 5 years According to NASAA's recordkeeping requirements, any notice, circular, or advertisement, including any communications through social media, must be maintained for five years.

Which of the following is TRUE of a Qualified Domestic Relations Order (QDRO)? A) A QDRO is a court order that divides all jointly held property in the event of a divorce B) A QDRO is a court order that provides an alternative payee the right to receive all or a portion of the benefits that are payable to a participant under a qualified retirement plan C) A QDRO is a court order that provides an alternative payee the right to receive all or a portion of the benefits that are payable to a participant under a non-qualified retirement plan D) A QDRO is a court order that requires one person involved in a divorce to provide for the payment of alimony or child support

B) A QDRO is a court order that provides an alternative payee the right to receive all or a portion of the benefits that are payable to a participant under a qualified retirement plan A QDRO is a court order that is entered as a part of a property division in a divorce or legal separation that splits a qualified retirement plan or pension plan by recognizing joint marital ownership in the plan. The court may award all or a portion of the plan participant's benefit to an alternative payee, such as a spouse, child, or other dependent of the plan participant.

An investment advisory firm is analyzing the market and building a portfolio for a client. The firm starts by identifying companies with strong financial performance and then creates forecasts for the entire sector based on its analysis. This is an example of: A) A form of top-down analysis for the entire sector B) A bottom-up approach C) A form of technical analysis D) A top-down approach

B) A bottom-up approach When an investment adviser analyzes the market by first evaluating individual companies, it is considered a bottom-up approach. Conversely, when an adviser begins by analyzing the performance of a sector as a whole, it is considered a top-down approach.

Which of the following is addressed in behavioral finance? A) The efficient distribution of information in stock prices B) An aversion to losses C) Predicating market trends using historical pricing patterns D) An investor making large and sudden withdrawals

B) An aversion to losses Behavioral finance, which is a sub-category of behavioral economics, uses psychological biases to explain the behavior of individuals and markets. Unlike traditional financial theory, behavioral finance doesn't assume that all investors are rational. Some of the topics behavioral finance addresses include loss avoidance, confirmation bias, disposition bias, recency bias, and self-attribution. The Efficient Market Hypothesis (EMH) assumes that stock prices reflect all information and assumes that investors behave rationally. Predicting market trends on historical data is referred to as "technical analysis." While an investor making large withdrawals is not rational, it doesn't reflect a specific psychological bias that's covered in behavioral finance.

Under the Investment Advisers Act, the form that is filed annually with the SEC and determines an adviser's continued eligibility for federal registration is called: A) Consent to service of process B) Annual updating Amendment C) ADV Part 2 D) ADV-W

B) Annual updating Amendment The Annual Updating Amendment is submitted to confirm that an SEC registered investment adviser is still eligible for federal registration. The form must be filed within 90 days after the end of the adviser's fiscal year.

Which investment offers income tax relief? A) Growth mutual fund B) Apartment building C) Stock fund D) Index fund

B) Apartment building Real estate investments offer tax breaks that mutual funds cannot offer. For real estate, one of the largest tax breaks is the interest deductions on loans. If a person purchases an apartment building with a mortgage, the interest paid on the loan can be deducted against the rent received from tenants. Similarly, owners of apartment buildings can also depreciate the cost of their buildings.

Kevin is an agent of CMP Broker-Dealers which is registered in 10 states. Kevin is currently registered in five states, but only transacts business with institutional clients. Due to recent mergers, some of Kevin's clients will be relocating to North Carolina and CMP now wants to open a new office there. Kevin will not be moving from his current office in Missouri, a state in which both Kevin and CMP are registered. Under the USA: A) CMP is required to be registered in North Carolina, but Kevin is not B) Both Kevin and CMP are required to be registered in North Carolina C) Neither Kevin nor CMP is required to be registered in North Carolina D) Only Kevin is required to be registered in North Carolina

B) Both Kevin and CMP are required to be registered in North Carolina This is a tricky question, but the main concept is that a broker-dealer is not required to register in a state if it has "no place of business in the state." However, since CMP is opening an office in North Carolina, the firm is required to be registered in the state regardless of the type of securities being sold or the types of clients with which it conducts business. Since the broker-dealer will be registered in North Carolina, any agents of that broker-dealer who execute client transactions in that state are also required to be registered, regardless of the types of clients being represented. Although Kevin may not visit or work out of the North Carolina office, since his firm has a place of business there and Kevin will be effecting transactions in the state, he must register

When is a broker-dealer required to deliver a prospectus? A) Prior to the sale B) By the settlement date C) No later than 24 hours after the sale D) At the time of sale

B) By the settlement date Broker-dealers are required to deliver prospectuses to purchasers of a new issue along with the confirmation, which is due by the settlement date.

Which of the following advisory fees is prohibited? A) Charging a 1% flat fee for assets under management B) Charging the client a flat fee regardless of how much management has been provided C) Charging a client an hourly rate for managing the account D) A $5,000 fee for creating a financial plan

B) Charging the client a flat fee regardless of how much management has been provided Advisory fees must be appropriate for the service being provided. Charging a flat fee, regardless of how much management has been provided, is prohibited. Investment advisers are allowed to charge flat fees for creating financial plans, as well as hourly fees or fees that are based on assets under management, provided they're not excessive for the service being provided. Charging a 1% fee based on assets under management is roughly the industry average and acceptable.

Which one of the following investments trade independently from its net asset value (NAV)? A) UIT B) Closed-end funds C) Open-end funds D) Variable annuity

B) Closed-end funds Mutual funds (open-end funds), unit investment trusts, and variable annuities are priced based on their net asset values. A closed-end investment company share may sell at, above, or below its net asset value since it trades on the stock exchange.

The economic cycle consists of four stages--full recession, early recovery, late recovery, and early recession. Since the market tends to move ahead of the economic cycle, an adviser who believes the economy is in a full recession may advise clients to rotate into what sector? A) Services & utilities B) Cyclicals, such as transports and technology C) Staples and defensive stocks D) Fixed income securities

B) Cyclicals, such as transports and technology In anticipation of changes in the economic cycle, an adviser may advocate sector rotation, in which a client's portfolio holdings are rotated from one or more business sectors into others. If the economy is in full recession, one strategy is to rotate into cyclical stocks that would benefit from a recovering economy, such as industrials, e.g., manufacturers of autos, appliances, or houses, which would experience increased sales in a recovery.

Which of the following is a characteristic of a Money Purchase Plan? A) Employees must make mandatory contributions B) Employers must make mandatory contributions C) Employer contributions are discretionary D) Employees and the employer must make mandatory contributions

B) Employers must make mandatory contributions A Money Purchase Plan is a type of defined contribution plan to which an employer makes mandatory contributions, regardless of the company's profitability. For tax purposes, the employer is able to deduct the contributions.

The rate of return that a mortgage company may earn over the life of a loan to a customer is the: A) Risk-free rate of return B) Holding period rate of return C) Real rate of return D) Expected rate of return

B) Holding period rate of return The return that is earned over the life of an investment and/or a loan is referred to as the holding period rate of return. Since the question asks for the return over the life of the investment (i.e., the loan), the holding period rate of return is the best answer.

Under the Uniform Securities Act, which TWO of the following transactions would be considered a sale? I. The exercise of an option II. A gift of assessable stock III. A stock dividend IV. Lending stock to short sellers A) I and III only B) I and II only C) II and IV only D) I only

B) I and II only Gifts are generally not considered sales. However, since assessable stock may require the person who receives the gift to provide additional money or capital, it is considered a sale. Loans and pledges of securities as well as stock dividends do not constitute a sale if nothing of value is given by the shareholder for the dividend. If an option is exercised, one party to the contract is selling the underlying securities.

Which of the following is/are regulated under the Investment Company Act of 1940? I. Investment companies investing money into other investment companies II. The firm that serves as a mutual fund's custodian and holds its assets III. The minimum rate of return required to remain registered as a fund IV. The performance of the investment company A) I only B) I and II only C) I, II, and III only D) I, II, III and IV

B) I and II only The Investment Company Act of 1940 regulates investment companies, their investment advisers, custodian banks, and distributors. The Investment Company Act of 1940 does not regulate performance and it does not require minimum rates of return in order to maintain registration.

A 35-year-old individual recently changed jobs and doesn't want to pay taxes on the distribution she's due to receive from her former employer's 401(k) plan. She can accomplish this goal by rolling the money over into: I. A Roth IRA II. A traditional IRA III. Another 401(k) plan A) I and II only B) II and III only C) I only D) I, II and III

B) II and III only The individual may roll the distribution over into a traditional IRA or another employer's 401(k) plan and continue to defer taxes. A distribution from a 401(k) may also be rolled over into a Roth IRA, but she's required to pay taxes in the year the distribution is made if she chooses this option.

The Dow Jones Industrial Average is considered an index of: A) Growth stocks B) Large-cap stocks C) NYSE stocks only D) Value stocks

B) Large-cap stocks The Dow Jones Industrial Average (DJIA) is considered one of the most widely quoted measurements of the U.S. equity market. The 30 stocks that comprise the Index are among the largest and most widely held companies in the U.S. The DJIA as well as the S&P 500 Index include companies that are referred to as large-cap. Most, but not all of the stocks, are listed on the NYSE

A client of a registered representative owns a small business. The business produces strong cash flow during the holiday season, but negative cash flow for the rest of the year. This may indicate a need for which of the following choices? A) Tax relief B) Liquidity C) Capital preservation D) Zero coupon bonds

B) Liquidity Since the client may need to have access to capital when the cash flow from his business is negative, the portfolio should contain some investments that are liquid. Given the liquid nature of money-market instruments, they may be suitable investments for a portion of the portfolio

Which risk BEST measures the marketability of a security? A) Systematic risk B) Liquidity risk C) Market risk D) Business risk

B) Liquidity risk Marketability (also referred to as liquidity) represents how easy or hard it is to buy or sell a security. As a result, liquidity risk is the best measure of marketability. Market risk, which is a type of systematic risk, is the risk of loss due to a decline in the entire market. Business risk is a type of non-systematic risk and causes losses due to the poor performance of one business or company.

An advantage of a Coverdell ESA over a 529 plan is: A) No limit on contributors B) More investment options C) Higher annual contributions D) Stronger tax incentives

B) More investment options The maximum annual contribution to a Coverdell ESA is $2,000; however, contributions to a 529 plan are substantially higher. Although there's no annual limit on a 529 plan, contributions that exceed the annual gift limits may be subject to gift taxes. There are income limitations that apply to Coverdell ESA contributors, but not to 529 plan contributors. Qualified distributions from both Coverdell and 529 plan accounts are tax-free. In a 529 plan, investments are not self-directed; instead, investors must choose from a list of investments that are approved by the state in which the plan is created. On the other hand, Coverdell accounts are self-directed (like IRAs) and are not limited to investments which have been approved by the state.

According to the Investment Advisers Act of 1940, when must an access person submit a transaction report? A) Promptly B) No later than 30 days after the end of each calendar quarter C) Within 90 days of the end of the adviser's fiscal year D) No later than 10 days after the end of the calendar quarter in which the transaction was effected

B) No later than 30 days after the end of each calendar quarter The Investment Advisers Act of 1940 requires an access person of an adviser to report his personal securities transactions by no later than 30 days after the end of each calendar quarter.

Although an exempt reporting adviser (ERA) is not required to register, it must still satisfy which of the following requirements? A) Prepare an annual brochure B) Notice file with the Administrator C) Amend its ADV within 90 days if material information changes D) File Form ADV Part 2 with the SEC

B) Notice file with the Administrator Exempt reporting advisers are required to file Form ADV Part 1A with the SEC and must notice file with the Administrator. Any material information changes must be reported promptly. As is the case with other investment advisers, an ERA is required to amend its Form ADV within 90 days of its fiscal year end.

Which of the following securities have no loan value? A) Common stock that are listed on the NYSE B) Options that have nine months or less until expiration C) Corporate bonds D) Preferred stocks that are listed on Nasdaq

B) Options that have nine months or less until expiration Options that expire in nine months or less may not be bought on margin. These contracts have no loan value and, therefore, must be paid for in full. On the other hand, options that have maturities of greater than nine months have a margin requirement of 75% (i.e., customers must pay 75% of the cost and the firm may loan the remaining 25%).

According to modern portfolio theory (MPT), the expected return of an investment is the: A) Standard deviation of gains and losses over the life of the investment B) Possible returns on the investment weighted by the likelihood that return will occur C) Market return on the investment adjusted by the beta of the stock or the portfolio D) Average return including realized and unrealized gains and losses, plus income over a measured time perioda

B) Possible returns on the investment weighted by the likelihood that return will occur MPT defines the expected return of an investment as the possible returns on the investment weighted by the likelihood that return will occur.

Which factor will cause variable annuity payments (contributions) to change from one client to another? A) Gender B) Profession C) Age D) Health

B) Profession Payments into an annuity (i.e., the premiums) are most impacted by an person's profession. High-earning individuals can contribute more than lower earners. During the annuitization phase, the payout from an annuity is driven by the age and gender of the annuity owner

XYZ Financial, Inc. is a registered investment adviser that is affiliated with ABC Company, a broker-dealer. The investment adviser representatives who manage client portfolios for XYZ Financial prefer to use ABC Company to execute securities transactions. Which of the following statements is TRUE? A) This practice is allowed, but is not required to be disclosed if the investment adviser acts in the client's best interest. B) RIAs may execute transactions through affiliated broker-dealers provided they disclose the practice to clients and ensure that the clients receive the best execution possible. C) RIAs may execute transactions through affiliated broker-dealers provided they disclose this practice to clients and do not receive additional compensation from the broker-dealer. D) Using an affiliated broker-dealer is not allowed.

B) RIAs may execute transactions through affiliated broker-dealers provided they disclose the practice to clients and ensure that the clients receive the best execution possible. Although an investment adviser is permitted to execute securities transactions through an affiliated broker-dealer, this practice represents a conflict of interest which must be clearly disclosed to clients. Written disclosure of the conflict is typically made on Form ADV Part 2.

What are structured products? A) An investment trust that manages a portfolio of real estate investments. B) Securities which are created by financial institutions that customize returns and risks to fit the needs of specific investors. C) Contracts that derive their value from the return on an underlying security. D) A contract in which two parties agree to exchange cash flows based on different financial instruments.

B) Securities which are created by financial institutions that customize returns and risks to fit the needs of specific investors. Structured products are securities which are created by financial institutions (e.g., broker-dealers) and are often customized to fit the specific needs of customers. Although structured products are legally created as debt instruments, their rates of return are often linked to equities and derivatives. One of the most popular types of structured products is the exchange-traded note (ETN). Derivatives (e.g., options) are contracts that derive their value from an underlying security. REITs are investment trusts that manage portfolios of real estate investments. Swap contracts are agreements to exchange cash flows based on financial instruments.

An investment adviser representative has recommended a real estate limited partnership to a high net worth client who wants some real estate exposure in his portfolio. While the client is considering the investment, the IAR reads in the local press that the previous development that the general partner sponsored has gone bankrupt. What action must the IAR take? A) The IAR should discuss the situation with a supervisor before taking action B) The IAR must disclose this information to the prospective investor C) The IAR should not do anything without first contacting the general partner D) The IAR does not need to do anything since the event is now public knowledge

B) The IAR must disclose this information to the prospective investor One of the most important factors in evaluating the merits of a limited partnership is the track record of the general partner. The bankruptcy of the previous project is material information that must be disclosed to the investor.

Which of the following statements is FALSE regarding an investment adviser's contract? A) Contracts may not be assigned without customer consent B) The contract may stipulate that the adviser will receive a share of the gains and appreciation that are generated in the account as long as the time period is disclosed to the customer C) Contracts may allow for an adviser to be compensated based on the value of the assets under management between designated dates D) If the investment adviser is a partnership, advisory clients must be notified of any change in partners

B) The contract may stipulate that the adviser will receive a share of the gains and appreciation that are generated in the account as long as the time period is disclosed to the customer The regulators consider sharing in the gains of a customer's account to be a form of performance-based fee. These fees are generally prohibited in advisory contracts unless the customer qualifies for a waiver or exemption based its status (e.g., institutional investors or officers/directors of the firm), net worth, or assets under management. Asset-based fees are not considered performance-based fees if they are calculated based on the value or average value of the assets and not the appreciation

When is a mutual fund's prospectus required to be delivered? A) When a client places a buy order for mutual fund shares B) When a client is solicited to buy mutual fund shares C) At or prior to the confirmation of purchase of mutual fund shares D) Only upon request from the client

B) When a client is solicited to buy mutual fund shares Agents selling mutual fund shares are required to deliver a prospectus when they attempt to sell to prospective investors (i.e., at or before solicitation). In some instances, agents of broker-dealers can use a summary prospectus when selling, but only if the full prospectus is delivered at the confirmation of the sale

As an investment adviser, you are required to record and keep a record of every transaction in a security for a client's account within: A) 20 days of the end of each quarter, excluding direct obligations of the U.S. government B) 10 days of the end of each quarter C) 10 days of the end of each quarter, excluding direct obligations of the U.S. government D) 20 days of the end of each quarter

C) 10 days of the end of each quarter, excluding direct obligations of the U.S. government Under both the Investment Advisers Act and the Uniform Securities Act, investment advisers are required to keep a record of every securities transaction within 10 days of the end of the quarter in which the transaction took place. Transactions in direct obligations of the U.S. government are excluded from this requirement.

When are fees assessed on no-load mutual fund shares? A) Quarterly B) When the shares are redeemed C) Annually D) When the shares are purchased

C) Annually No-load funds cannot assess a front-end or back-end sales charge. This means that investors don't pay sales charges when they purchase or redeem shares. However, no-load funds may charge a 12b-1 fee up to 0.25% of the assets under management. In most cases, 12b-1 fees are assessed annually, which is when investors must pay them.

If an investment adviser makes material changes to its brochure, when does the adviser need to provide a summary of the changes to its clients? A) A summary is not required to be provided B) At the end of the current quarter C) At the adviser's year-end registration renewal D) At the end of the current month

C) At the adviser's year-end registration renewal According to a NASAA model rule, advisers are required to provide, or offer to provide, their clients with a summary of any material changes that have been made to their brochure within 120 days of the year-end. This is completed as a part of the adviser's registration renewal. Please note, during the year, advisers must update their Form ADV promptly (i.e., within 30 days) for any material changes, but the summary of changes is provided at the time of renewal.

A Suspicious Activity Report (SAR) should be filed: A) Only for transactions of more than $10,000 B) For transactions of more than $2,000 C) For transactions of $5,000 or more D) Only for transactions of more than $25,000

C) For transactions of $5,000 or more A firm must file an SAR whenever a transaction (or group of transactions) equals or exceeds $5,000 and the firm suspects any of the following wrongdoing: -The client is violating federal criminal laws. -The transaction involves funds that are related to illegal activity. -The transaction is designed to evade the reporting requirements (structured transactions). -The transaction has no apparent business or other legitimate purpose and the broker-dealer cannot determine any reasonable explanation after examining all the available facts and circumstances surrounding the transaction.

Which of the following statements about barbell strategies is NOT TRUE? A) A barbell strategy is used to take advantage of potential interest-rate changes B) The strategy consists of purchasing bonds with both short and long maturities, but no intermediate-term securities are included C) Gains from the short-term maturities will offset losses in the long-term maturities D) The short-term bonds will provide for quick cash to purchase new bonds upon maturity

C) Gains from the short-term maturities will offset losses in the long-term maturities A barbell strategy consists of buying short-term and long-term bonds, but not intermediate-term bonds. The purchase of long-term bonds allows an investor to capture higher long-term interest rates. The short-term bond provides the opportunity to invest elsewhere if the bond market takes a downturn. There is no guarantee that any money made on the short end of the strategy will offset losses that could occur on the long end of the barbell.

Which of the following is TRUE concerning the private placement of securities being distributed under Rule 506(c) of Regulation D? A) The securities may only be offered to accredited investors. B) The securities may only be sold to no more than 35 non-accredited investors. C) General advertising is permitted, but all investors must be accredited. D) General advertising is prohibited

C) General advertising is permitted, but all investors must be accredited. Under Rule 506(c) of Regulation D, issuers may raise an unlimited amount of capital and they may solicit all types of investors; however, the issuer can only accept accredited investors. In other words, general advertising/solicitation is allowed, but only accredited investors may purchase the securities. Under Regulation D, issuers may also sell securities privately through a 506(b) offering. Two key differences between 506(c) and 506(b) are that 506(b) offerings do not allow for general advertising/solicitation and the issuer may sell to an unlimited number of accredited investors, but no more than 35 non-accredited (yet still sophisticated) investors.

Which TWO of the following choices are differences between exchange-traded funds (ETFs) and exchange-traded notes (ETNs)? I. ETNs carry credit risk that is tied to the issuer that backs the note and II. ETFs do not have issuer credit risk ETFs may be sold short and ETNs may not III. ETF returns are based on the performance of an index and ETNs pay a fixed coupon rate IV. ETNs have a maturity date and ETFs do not A) II and III B) II and IV C) I and IV D) I and III

C) I and IV ETNs are a type of unsecured debt security. This type of debt security differs from other types of bonds and notes because ETN returns are linked to the performance of a commodity, currency, or index, minus applicable fees. ETNs do not usually pay an annual coupon or specified dividend. Similar to ETFs, ETNs are traded on an exchange, such as the NYSE, and may be purchased on margin or sold short. Investors may also choose to hold the debt security until maturity. Only ETNs carry issuer risk that is tied to the creditworthiness of the financial institution backing the note. If the issuer's financial condition deteriorates, it can impact the value of the ETN negatively, regardless of how its underlying index performs.

Which TWO of the following are TRUE regarding credit spreads? I. Credit spreads represent the difference between the yields on various bonds and dividend paying stocks II. Credit spreads represent the difference between yields on various bonds and Treasury securities III. If a corporate bond yields 5.5% and a Treasury bond with a similar maturity yields 4.5% the credit spread is 2% IV. If a corporate bond yields 6% and a Treasury bond with a similar maturity yields 4.5% the credit spread is 1.5% A) I and III B) I and IV C) II and IV D) II and III

C) II and IV A credit spread represents the difference in the yields of various bonds as compared to Treasury securities of similar maturities. If a corporate bond yields 6% and a Treasury bond with a similar maturity yields 4.5%, then the credit spread is 1.5%. Choice (III) is incorrect since the credit spread is 1% (the difference between 5.5% and 4.5%).

Pick TWO statements that are TRUE regarding time-weighted and dollar-weighted rates of return. I. Time-weighted returns allow investors to measure how much money they have earned on their investments. II. Dollar-weighted returns allow investors to compare the performance of two investment advisers. III. Time-weighted returns allow investors to compare the performance of two investment advisers. IV. Dollar-weighted returns allow investors to measure how much money they have earned on their investments. A) II and III B) III and IV C) II and IV D) I and II

C) III and IV Dollar-weighted returns measure the performance of an investor's actual investment over a defined period. Time-weighted returns assume that a fixed-dollar amount was invested and then measure how that amount would have performed over a defined period. Time-weighted averages are often used to compare the performance of mutual fund managers

According to the USA, if an investment adviser wants to charge a fee based on the average value of a client's portfolio, the fee: A) Is always prohibited B) Is always permitted C) Is permitted unless prohibited by the Administrator D) Is prohibited unless permitted by the Administrator

C) Is permitted unless prohibited by the Administrator Asset-based fees are one of the most common methods that investment advisers use to charge their clients. Under the Uniform Securities Act, these types of fees are allowed provided they have stated time periods. Since Administrators may create rules prohibiting any type of fee, it would be incorrect to state that they are always permitted

An individual opened a brokerage account and placed trades on his own. The transactions subsequently generated a 20% return for the individual, but also very large commissions. Is the broker-dealer in violation of industry rules? A) Yes, this is a violation of the broker-dealer's fiduciary responsibility. B) Not if the customer has signed a wavier consenting to the larger commissions. C) No, because the broker-dealer is not soliciting the transactions. D) Yes, due to the very large commissions.

C) No, because the broker-dealer is not soliciting the transactions. Since the individual's trades are unsolicited, the broker-dealer is not in violation of industry rules. If the broker-dealer had recommended or solicited the transactions, then it could be violating the churning rule due to the commissions being unusually large. Broker-dealers are typically not considered fiduciaries; however, investment advisers are always fiduciaries.

Which of the following is NOT included on an order ticket? A) The account number B) The execution price C) The exchange D) The time of execution

C) The exchange Order tickets are records that are created after a customer requests a trade. Once the transaction is executed, order tickets will include the account number, time of execution, and execution price. The exchange on which the trade was executed is not required to be documented on an order ticket

What information is required in order to determine an investment's internal rate of return (IRR)? A) The general market return B) The money supply in the overall market C) The positive and negative cash flows from an investment D) The risk free rate

C) The positive and negative cash flows from an investment The internal rate of return (IRR) is a projected, compounded, annual return on an investment. The IRR is calculated by estimating the present value of all future cash outflows (e.g., purchase price of investment) and cash inflows (e.g., interest, dividends, par value, sale price). The IRR only considers factors that are specific to the investment and not external factors (e.g., risk-free rate, return on the overall market, or economic conditions).

Which of the following statements BEST describes discounted cash flow? A) Purchasing power in the future will have more worth than cash today B) A method used to measure the risk-adjusted return on a bond C) The total value of an investment's anticipated cash flows in today's dollars D) Discounted cash flow uses depreciation and market-adjusted cash flows

C) The total value of an investment's anticipated cash flows in today's dollars Discounted cash flow evaluates each coupon payment and the repayment of a bond's principal at a present value, based on a rate of return. This makes it possible to evaluate a bond's value against the investor's desired rate of return. The sum of each of the discounted cash flows, plus the present value of the bond's principal, determine the total value of the bond. By comparing this value to the current price of the bond, the adviser will be able to determine if the bond is an attractive investment for her client.

According to the efficient market hypothesis, which form of efficiency asserts that using technical analysis in identifying securities which may be undervalued is of no benefit? A) Strong-form efficiency B) Passive-form efficiency C) Weak-form efficiency D) Semistrong-form efficiency

C) Weak-form efficiency Weak-form efficiency asserts that all past market prices are fully reflected in security prices. In that technical analysis attempts to identify patterns in stock price movements in order to predict future price trends, weak-form efficiency believes fundamental analysis should be used in determining if a stock is over or under valued. Semistrong-form efficiency asserts that security prices reflect all publically available information. Thus, analysis of any type does not necessarily result in superior returns as the information is available to investors. Strong-form efficiency asserts that the price of a stock reflects all public and private information, thus no one can consistently outperform the market. Passive-form efficiency is not a form of efficiency.

Which of the following designations is acceptable on a business card? A) "RIA" for an investment adviser that's registered with the SEC B) "IAR" for an individual who has passed the Series 63 and is employed by a federal covered adviser C) "RIA" for an investment adviser that's registered with a state Administrator D) "Investment counsel" for a registered entity whose primary business involves acting as an investment adviser

D) "Investment counsel" for a registered entity whose primary business involves acting as an investment adviser The term "investment counsel" can be used in promotional material as long as a firm's primary business consists of acting as an investment adviser. Using the abbreviations "IAR" and "RIA" are prohibited and misleading because 1) these initials have no generally understood meanings; 2) initials after a name typically indicate a degree or a licensed professional position for which there are certain qualifications; and 3) there are no qualifications for becoming a registered investment adviser. However, using the full term (e.g., registered investment adviser) is permissible. The purpose of such a prohibition is to ensure that investors don't confuse a mandatory registration with a professional certification (e.g., CFA or CPA).

Stephen Gigs is about to retire and is concerned about having enough income to supplement his Social Security retirement savings. He would like to buy a conservative investment that can help offset inflation. Mr. Gigs takes the advice of his agent and purchases Treasury Inflation-Protected Securities (TIPS) with a face value of $100,000 and a coupon rate of 2 3/4%. Six months later, he reads that the CPI is up 3 1/2%. What is the approximate amount of Mr. Gigs' next interest payment? A) $1,375 B) $2,750 C) $3,500 D) $1,423

D) $1,423 The CPI rose 3 1/2% and, therefore, the principal of the TIPS will increase by 3 1/2% ($100,000 + [$100,000 x 3.5%]) = $103,500. Mr. Gigs' interest will be calculated by multiplying the new face amount by the coupon rate of 2 3/4%, then dividing by two since interest is paid semiannually. ($103,500 x 2.75%) / 2 = $1,423.13. Remember, the stated rate is an annual rate and will not change

An adviser is constructing a bond portfolio for a client whose goals are stable income and return of principal. The adviser determines that the appropriate benchmark to compare this portfolio's performance is the Wheyman Intermediate-term Government Bond Index. Which of the following statements is NOT TRUE regarding this decision? A) The client's goals of stable income and return of principal are not guaranteed by the choice of this benchmark. B) Choosing this index implies that mortgage-backed securities are not a large part of the portfolio. C) This portfolio should have low levels of risk to match the benchmark. D) Any returns of this portfolio that exceed the performance of the benchmark are measured by the beta of the portfolio.

D) Any returns of this portfolio that exceed the performance of the benchmark are measured by the beta of the portfolio. When constructing a portfolio, an adviser typically starts by considering the securities in the benchmark and will then determine what additional securities may add value to the portfolio. The benchmark indicates not only the types of securities that should be included in the portfolio, but also the types that should be ignored. In this example, the choice of a government bond index as the benchmark for the client's portfolio is indicative of the fact that the portfolio should not include a large percentage of securities that have a high degree of risk. Since the benchmark is an intermediate-term government bond index, it is expected that it will offer a low return that is in line with the low level of risk that is typically associated with government bonds. Since a benchmark is simply a measuring stick for comparison purposes, choosing this benchmark does not guarantee that the goals will be met and it does not protect against bad investment decisions or market fluctuation. The beta of a portfolio is actually used to compare its volatility to the volatility of the market; it does not measure excess returns above a benchmark (which is measured by alpha). Another important point is that beta is not a measure to be used for fixed-income portfolios.

Which TWO of the following are considered exempt reporting advisers (ERAs)? I. Venture capital advisers II. Private fund advisers with assets under management of less than $150 million III. Family office advisers IV. Private fund advisers with assets under management exceeding $150 million A) I and III B) II and III C) III and IV D) I and II

D) I and II Venture capital advisers and private fund advisers with assets under management of less than $150 million are exempt from registration as an adviser with the SEC and/or state Administrator; however, they must still pay fees and report public information via the IARD/FINRA system.

Under ERISA, the Investment Policy Statement of a qualified plan: I. Defines the roles of the parties involved in the management of the plan II. Identifies specific asset classes to be offered in the plan III. Lists the criteria for the selection and performance requirements for each investment option IV. Requires the fiduciary of the plan to be registered as an IA with the state Administrator A) I, II, III and IV B) I only C) I and II only D) I, II and III only

D) I, II and III only The Investment Policy Statement of a qualified plan does not address the registration requirements or status of the fiduciary. However, under the Uniform Securities Act, an IA has fiduciary responsibility and is exempt from state registration if the plan's assets are at least $1 million and the IA has no place of business in the state.

When selecting a value stock, an agent would look for which of the following characteristics? I. High earnings per share II. Low price/earnings ratio III. Low price to book value IV. High dividend yield A) I and III only B) I, II and III only C) I and II only D) I, II, III and IV

D) I, II, III and IV A value stock is one that tends to trade at a lower price relative to its fundamentals (i.e., dividend yield, earnings per share, sales, price/earnings ratio, market price to book value) and is, therefore, considered undervalued by a value investor. These companies tend to have the following characteristics: high earnings per share, high dividend yield, low price-to-book ratio, and/or low price-to-earnings ratio

Which of the following statements are TRUE regarding a dollar-weighted rate of return? I It may be used to compare the performance of two money managers. II. It is a way of calculating an investor's internal rate of return. III. It takes into consideration the inflows and outflows of cash. IV. It measures the average return that the client's investment earned. A) II and III only B) I, II, and III only C) I and II only D) II, III, and IV only

D) II, III, and IV only Dollar-weighted rates of return are used to calculate a client's internal rate of return and take into account how much the client earned based on the amount of money invested. This method is not considered a fair way to measure the performance of money managers since they have no control over when their clients invest. Time-weighted averages are used to compare the performance of two money managers.

An investment adviser's client is considering acquiring a company for $10 million. The company's expected future cash flows are $2 million in the first year, $4 million in the second year, and $8 million in the third year. Which of the following measures would be most helpful when evaluating this investment? A) Average rate of return B) Estimated payback period C) Future value of current cash flows D) Internal rate of return (IRR)

D) Internal rate of return (IRR) This is really a question about the present and future values of the company. The present value of the company is simply the purchase price of $10 million, while the future values are the cash flows of $2 million, $4 million, and $8 million. The internal rate of return is the rate of return that makes the present value of all cash flows [i.e. $2/(1 + r)1, $4/(1 + r)2, and $8/(1+ r)3] equal to the market value (i.e. $10 million). In the formula, the "r" is the missing IRR. Once the IRR is calculated, the client can use that rate to compare this investment to other investments (e.g., competing companies, bonds, or money market securities).

Which of the following statements is TRUE about indexing? A) It is an active management strategy. B) It is a strategy in which an IA attempts to outperform a specific index. C) It measures the performance of an IA versus an index. D) It may result in a portfolio that does not accurately track the index.

D) It may result in a portfolio that does not accurately track the index. Indexing is a passive, not an active, management strategy. When using this passive strategy, an IA attempts to build a portfolio that will mirror or match the performance of a specific index. However, it is quite possible that the portfolio's actual return may not match the performance of the index. If this is the case, it is referred to as a tracking error

Value investors would be interested in companies that have: A) High price earnings ratios B) Low dividend yields C) High price to book value D) Low price earnings ratios

D) Low price earnings ratios Value investing is a method of identifying securities that are undervalued based on company fundamentals. Value stocks tend to have low stock prices in relationship to their earnings, a higher dividend yield than their industry peers, and, typically, trade at a price closer to or at a discount to the book value than their competitors. Value investors believe that the most undervalued companies should rebound and outperform the market. This, of course, assumes that the company is financially sound.

The Uniform Securities Act authorizes the Administrator to waive the surety bond requirement for a broker-dealer if the firm: A) Is also a registered as an investment adviser B) Is registered with the Securities and Exchange Commission C) Has no disciplinary actions for the preceding 10 years D) Maintains a sufficient level of net capital

D) Maintains a sufficient level of net capital The Administrator may waive a surety bond requirement if a broker-dealer maintains a sufficient dollar amount of net capital.

An issuer of a closed-end fund decided to cover the sales fee for a follow-on offering of shares of its fund. How would the broker-dealer classify the security? A) Half Load B) Load C) Full Load D) No Load

D) No Load Like open-end funds (i.e., mutual funds), closed-end funds are regulated investment companies. Investment companies that don't charge a front-end or back-end load are referred to as "no-load" funds. Mutual funds are considered no-load if they don't have a front-end load, contingent deferred sales charge, or a 12b-1 fee that exceeds .25%. Closed-end funds are also considered no-load if they don't have underwriting fees, commissions, or other offering expenses. Since the fund has covered the sales fee on the sale, the closed-end fund can be referred to as a no-load fund. Closed-end funds are exchange-traded and, as a result, don't have back-end loads and cannot assess 12b-1 fees

The term "layering" refers to: A) The attainment of illicit funds B) The integration of laundered money back into the stream of commerce C) The placement of illegal funds with a financial institution D) The blending of illicit money with legitimate money

D) The blending of illicit money with legitimate money Layering is a term that's associated with money laundering. Layering is done to blend illegal funds with legal funds, then the funds are transferred between accounts to hide where the illegal funds were obtained. Once layering has occurred, money launderers will then integrate the illicit funds back into the stream of commerce (e.g., depositing in a bank account, spending it, etc.)

A bond has a low coupon relative to other bonds with the same maturity and credit rating. Which of the following statements about the bond's price is TRUE? A) The bond's price will be less volatile than bonds with higher coupons. B) The bond's price will have the same volatility as bonds with higher coupons. C) The bond's price will always be greater than bonds with the same credit rating. D) The bond's price will be more volatile than bonds with higher coupons.

D) The bond's price will be more volatile than bonds with higher coupons. If their maturities and credit ratings are similar, bonds with lower coupons will be worth less than bonds with high coupons. For example, a 2% bond will be a less attractive investment than a 10% bond, since the 2% bond pays 8 percentage points less in interest every year. Since bond prices are inversely related to interest rates, low coupon bonds will also have more price volatility. Bonds with low coupons will trade at a premium when interest rates drop below the bond's coupon, and their prices will fall when interest rates rise above the bond's coupon (i.e., their price is volatile). However, if a bond has a high interest rate, it's unlikely that market rates will rise to the bond's coupon. As a result, high coupon bonds will typically trade at a premium and are unlikely to fall below par value (i.e., high coupon bonds have less price volatility).

Approximately 15 years ago, a client signed an agreement that provided his wife with power of attorney over his account. The agreement also stated that, in the event his wife dies, his investment adviser will be named as power of attorney. Which of the following statements about this arrangement is TRUE? A) Investment advisers are never permitted to accept power of attorney from a client. B) This is considered a durable power of attorney. C) This arrangement is prohibited since a person cannot provide two agents with power of attorney. D) The client's wife and IA are considered consecutive agents.

D) The client's wife and IA are considered consecutive agents. Individuals can authorize multiple agents as their power of attorney. If one of the agents only receives their power of attorney after the first agent is incapacitated or deceased, then the agents are referred to as "consecutive." If agents have authority at the same time, they're typically referred to as "co-agents." Although some states don't allow co-agents, consecutive agents are typically permitted.

Modern Portfolio Theory (MPT) defines risk as the: A) Possibility that returns will be less than the rate of inflation B) Possibility of loss of principal C) Slope of the regression line of portfolio returns versus the market D) Variability of expected returns about the mean

D) Variability of expected returns about the mean In MPT, risk is defined as the degree to which investment returns deviate from what was expected or predicted. It is usually measured by the standard deviation of expected returns about the mean (δ), although its square, variance (δ2), is sometimes used

When trading authorization is granted to a third-party for accounts held at an investment adviser, NASAA's model rules state that: A) Written authority is only required if the transactions are executed in a margin account B) Only written authority is required if the firm is already authorized by NASAA to trade on behalf of its clients C) Only verbal authority is required because the firm is limited to exercising time and price discretion D) Written authority is required for third party trading

D) Written authority is required for third party trading Third-party trading authorization must always be in written form. Investment advisers may act in a discretionary capacity based on verbal authorization for up to 10 days, but thereafter written authorization is required.

An investment advisory client's holdings consists of: $ 6,000,000 -- Stock/bonds$ 1,000,000 -- Money-market funds$ 3,000,000 -- Real estate, commodities$10,000,000 -- Total assets Would these holdings be considered a securities portfolio? A) No, because it also contains non-securities. B) Yes, because it contains securities. C) No, because money-market funds are not securities. D) Yes, because more than 50% of the assets are securities.

D) Yes, because more than 50% of the assets are securities. When securities represent a majority of an investor's total assets, the investor is considered to have a securities portfolio. In this question, it is important to recognize that money-market funds are also considered securities. For this client, 70% of her total assets represent securities. When determining the amount of assets under management for an IA, the securities portfolios of its clients are included. The amount of assets under management are disclosed by the IA in Form ADV Part 1.

An individual has recently inherited a life insurance policy. What's the individual's tax liability on the insurance policy's death benefit? A) The proceeds exceeding the cost basis are taxable at the long-term capital gains rate. B) The proceeds exceeding the cost basis are taxable at the individual's ordinary income rate. C) 100% of the death benefit is taxable at the individual's ordinary income rate. D) Zero, since the death benefit from an insurance policy is only taxable to the deceased's estate.

D) Zero, since the death benefit from an insurance policy is only taxable to the deceased's estate. Beneficiaries are NOT required to pay taxes on death benefits from life insurance policies. The death benefit is included in the assets of an estate and could be subject to the estate tax. The death benefit from a non-qualified annuity could be taxable as ordinary income, but only on the amount that exceeds the contributions (i.e., basis).

A father makes a gift of XYZ stock to his daughter. Two years ago, the father purchased the stock for $5,000 and, at the time of the gift, the stock was worth $10,000. If the daughter sells the stock 10 months later for $12,000, what is the tax implication? A) Since the gifted amount is under the gift tax limit, it is a tax-free event. B) A long-term capital gain of $2,000 C) A short-term capital gain of $2,000 D) A long-term capital gain of $7,000

When a person receives a gift of stock, the recipient's cost basis is the donor's cost basis or the stock's current market value, whichever is less. The stock was originally purchased by the father for $5,000, but was then given as a gift to the daughter when its current market value was $10,000. Since the original cost basis ($5,000) was less than the current market value ($10,000), the original cost basis is used to determine the gain or loss when the stock is sold. In this question, the daughter subsequently sells the stock for $12,000; therefore, she has a resulting capital gain. To determine the ultimate tax implication, the daughter's holding period is based on the donor's holding period. Since the donor had held the stock for two years prior to the gift, the daughter's holding period is considered long-term. By using the original cost basis of $5,000 and comparing it to the proceeds of $12,000, the result is a long-term capital gain of $7,000 ($12,000 - $5,000).