Weighted Mock Exam #3

Under the NASAA Model Rule on Custody Requirements for Investment Advisers, if an investment adviser has custody of customer funds and securities, how often must the adviser send the customer a statement of account activity? A) Quarterly B) Monthly C) Annually D) Within 3 business days after any transaction

A) Quarterly An investment adviser in possession of customer assets must send a statement to the customer every 3 months (quarterly). The statement must list the customer's securities and all account transactions since the last statement date. U7LO2

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

D) ABC Large-Cap Growth Fund; DEF Long-term Investment Grade Bond Fund; GHI Money Market Fund In order to qualify for the safe harbor under 404(c), the portfolio selections must include at least 3 different asset classes, such as equity, debt, and cash equivalent. All equities or all debt won't qualify. U24LO5

An investor interested in investing in sovereign debt would most likely purchase A) bonds backed by gold sovereigns. B) bonds issued by the Bank of the United States. C) European Central Bank debt issues. D) Sweden 2.5s of 2032.

D) Sweden 2.5s of 2032 Sovereign debt refers to bonds and other debt instruments issued by a specific country. The European Central Bank manages the currency of the 19 countries who have adopted the Euro. There is no such thing as the Bank of the United States and gold sovereigns are coins - they are not used to back debt. U13LO7

To be in compliance with the Investment Company Act of 1940, it is permissible for the portfolio manager of an open-end investment company to buy all of the following securities EXCEPT A) high-yield bonds B) shares of other mutual funds C) call options D) stock on margin

D) stock on margin The Investment Company Act of 1940 generally prohibits mutual funds from making purchases on margin. There are exceptions to this rule, such as in the case of hedge funds. A fund is not prohibited from buying options or low-quality bonds. A mutual fund may invest in other mutual funds so long as it does not acquire more than 3% of the outstanding shares of the other fund. U14LO1

Which of the following investment strategies is used to determine an appropriate allocation based on the long-term goals and risk tolerance of the client? A) Strategic asset allocation B) Top-down fundamental analysis C) Tactical asset allocation D) Efficient market allocation

A) Strategic asset allocation In strategic asset allocation, once the allocation is determined, it remains relatively constant until some change to the investor's objectives occurs. Periodically, the portfolio is re-balanced to reflect any changes in market conditions. U20LO3

Issuance of which of the following would most likely increase the leverage in a company's capital structure? A) Warrants B) Bonds C) Preferred stock D) Common stock

B) Bonds Leverage is the use of borrowed money. This is reflected in a company's debt-to-equity ratio. Of these choices, the only one that is borrowed money is the bonds. U9LO1

An agent registered in one state may solicit business in another state, provided A) the agent's firm is properly registered in the other state B) both the agent and the employing broker-dealer are properly registered in the other state C) the agent was previously registered with a different firm in the other state D) the agent applies for registration in the other state

B) both the agent and the employing broker-dealer are properly registered in the other state An agent holding registration in one state may solicit and/or transact business in another state only if registered in that state and the employing broker-dealer is also registered in that state, unless an exemption is available. U3LO5

When an investor owns a convertible security where, upon conversion, the account value would remain the same, it is considered that the convertible and the common are selling at A) the nominal yield B) equivalent value C) the arbitrage level D) parity

D) parity Parity means equal (i.e same). When one could convert the security and realize the same value, it is said that both are at parity. U13LO9

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

D) 70% large-cap stock fund, 20% balanced fund, 10% money market fund This question is dealing with 2 different time horizons. First we have the short-term of 6 months for the home down payment, so she'll need capital preservation and liquidity. That is accomplished with the money market fund. Then, being 30 years old, she has a long-term time horizon that necessitates investing for growth and inflation protection. That is where the 70% in large-cap securities is the most appropriate asset allocation for her. The 20% in the balanced fund helps keep the overall risk level on the moderate side. One point to remember is that municipal bonds (or municipal bond funds) will never be the correct investment choice unless the question states that the client is in a high tax bracket or is looking for tax-free income. U19LO6

According to NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following is unethical? A) Borrowing funds for personal use from a client that is a bank B) Omitting nonmaterial facts in a presentation to an advisory client about a recommended investment C) Exercising discretion with regard to the time or price of an order without written authorization from the client D) Recommending a certain limited partnership investment to all clients

D) Recommending a certain limited partnership investment to all clients Recommending an investment without determining its suitability to each client is considered unethical. When the same investment is recommended to all clients, it is called a blanket recommendation and almost always raises the suitability question. Time and price are not considered to be discretion, so no written authority is needed. While borrowing from clients is usually prohibited, that rule is suspended when the lender is a person in the business of lending money, such as a bank or a broker-dealer. Omitting nonmaterial facts is permissible when recommending securities to a client; the material facts must be disclosed. U7LO4