Practice Tests 10/7
An investor purchases two PMJ Dec 16 calls at $.85. If the commission charge is $8, the total cost is
$178 $.85x100 = $85 x 2 contracts = $170 +$8 commission ==$178
An investor invests a total of $30,000 and creates a portfolio of 3 different stocks placing 1/3 of his investment into each security. From his holding in Company A, he receives a dividend of $600; from Company B, a dividend of $500; and from Company C, no dividend. One year later, A has increased by 20%, B by 10%; and C has remained the same. What is this investor's total return on this portfolio?
13.67% total income was $1,100 and the appreciation was $3,000 (20% of $10,000 = $2,000 and 10% of $10,000 = $1,000). That is a total return of $4,100 on an investment of $30,000, or 13.67%
Registration statements for securities A) may be amended after their effective dates as to the amount of securities issued, provided that underwriting fees and the initial offering price have not changed B) expire on December 31 of each year and must be renewed if further sales are to be continued C) are effective for at least 2 years from their effective dates, or longer if the securities are still under distribution by the underwriters D) need not be filed with the Administrator if the securities are only sold in one state.
A) may be amended after their effective dates as to the amount of securities issued, provided that underwriting fees and the initial offering price have not changed
An analyst is viewing a subject company's financial statements. She notices that the company has current assets of $20 million, fixed assets of $50 million, and total liabilities of $45 million (of which $10 million is considered long-term). This company's debt-to-equity ratio is A) 28.6% B) 40% C) 22.2% D) 64.3%
A) 28.6% Total capitalization is the company's net worth (assets minus liabilities) plus the long-term debt. In this example, the net worth is $70 million minus $45 million, or $25 million. Adding the long-term debt of $10 million results in total capital of $35 million. Divide the $10 million by that $35 million to arrive at 28.57%.
What is the procedure by which federal covered securities, registered under the Investment Company Act of 1940, file their offerings with state securities Administrators? A) Federal covered securities need not file with state securities Administrators B) Notice filing C) Coordination D) Qualification
A) Federal covered securities need not file with state securities Administrators
The Affray Compassionate Finance Company (ACFC) is offering $100 million of 150-day commercial paper for sale in State L. The paper is available in minimum denominations of $100,000 and has been rated AA by a leading rating organization. Who of the following would be required to register as an agent in State L in order to legally sell this security in the state? A) An agent of a broker-dealer registered in the state. B) An investment adviser who recommends this security to clients. C) An employee of the Affray Compassionate Finance Company who receives a 1% commission on sales. D) Because this security is exempt from registration, offers and sales can be made without registration as an agent.
A) an agent of a BD registered in the state
Foster Advisers operates as an investment adviser that is registered in a state where the Administrator, by rule, prohibits investment advisers from holding custody of client funds and securities. This means that Foster Advisers may not A) have physical custody over its clients' monies and certificates B) manage client accounts on a discretionary basis C) refer clients to an affiliated broker-dealer D) examine customers' stock certificates
A) have physical custody over its clients' monies and certificates
If a customer's portfolio is heavily invested in common stock mutual funds, what is the customer's greatest risk? A) Loss of principal B) Loss of diversification C) Changes in interest rates D) Loss of liquidity
A) loss of principal
Mark is a client of Gibraltar Investment Advisers. Gibraltar sells its investment advisory business to Alpha advisers. Which of the following best describes Mark's relationship to Alpha? A) Mark may become a client of Alpha if he chooses to do so. B) Mark may not become a client of Alpha. C) Mark is automatically a client of Alpha. D) The investment advisory contract Mark made with Gibraltar continues with Alpha.
A) mark may become a client of alpha if he chooses to do so
Under the Uniform Securities Act, all of the following must be disclosed in an investment advisory contract EXCEPT A) other states in which the adviser is registered B) a provision prohibiting the adviser from being compensated based on a share of capital gains C) the manner in which the advisory fee will be computed D) a provision prohibiting the adviser from assigning the contract without client consent
A) other states in which the adviser is registered
An investor purchases a single premium deferred index annuity with an initial premium of $200,000. Soon after the purchase, the investor receives a statement from the insurance company showing an initial balance of $210,000. The most likely reason for the $10,000 increase is A) this is a bonus annuity. B) the underlying index has had outstanding performance. C) the insurance agent's commission was added to the account. D) the insurance company paid a dividend.
A) this is a bonus annuity
A working group convened by NASAA has developed a model fee disclosure schedule to help investors better understand the costs involved in doing business with their broker-dealer. The template has broker-dealers disclosing which of the following fees? A) Markups and markdowns B) Account closing fees C) Commissions D) Advisory fees
B) Account closing fees
Angela, a wealthy client of yours, has constructed her portfolio with individual common stocks that closely match the weighting of the S&P 500 index. In so doing, Angela has significantly reduced her A) default risk B) business risk C) systematic risk D) market risk
B) Business risk
If a 65-year-old woman of substantial means is seeking income and preservation of capital, which of the following should you recommend? A) Small-cap fund, mid-cap fund, government bond fund B) Government bond fund, corporate bond fund, municipal bond fund C) Aggressive growth fund, mid-cap fund, growth and income fund D) Large-cap fund, small-cap fund, government bond fund
B) Government bond fund, corporate bond fund, municipal bond fund
One of the most important definitions found in the Investment Company Act of 1940 is that of "investment company." Included in that definition are all of the following EXCEPT A) management investment companies B) REITs C) face-amount certificate companies D) unit investment trusts
B) REITs
When Felicity died, she left her estate, including her IRA, to her daughter, Courtney. Because of her financial circumstances, Courtney decided to abjure the inheritance. This would lead to her A) accepting the estate B) disclaiming the IRA C) becoming the executrix of the estate D) contesting the estate
B) disclaiming the IRA
State laws provide for exclusions from the definition of investment adviser. Which of the following persons is specifically excluded under the Uniform Securities Act? A) Economists whose advice is strictly incidental to their professional activity B) Investment adviser representatives C) Broker-dealers receiving special compensation D) Bank subsidiary offering investment advice
B) investment adviser representative
The price of which of the following will fluctuate most with a change in interest rates? A) Common stock B) Long-term bonds C) Money market instruments D) Short-term bonds
B) long term bonds
Securities of a nonexempt corporate issuer that are not registered with the SEC may only be registered with the Administrator in which of the following ways? A) Coordination B) Qualification C) Notification D) Condemnation
B) qualification
When attempting to construct the optimal portfolio, the investment adviser is looking to obtain A) the maximum return in the shortest time period. B) the maximum return for the least risk. C) returns that fall within the efficient frontier curve. D) the maximum return with the greatest risk.
B) the maximum return for the least risk
A taxpayer's marginal tax rate is A) the rate of tax paid on margin account interest B) the rate of taxation on any additional taxable income received C) generally lower than the effective tax rate D) the rate of tax paid on total taxable income
B) the rate of taxation on any additional taxable income received
nder NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, an investment adviser may NOT borrow money from which of the following clients? A) A finance company not affiliated with the adviser B) A broker-dealer not affiliated with the adviser C) A federal covered investment adviser not affiliated with this adviser D) A bank not affiliated with the adviser
C) A federal covered investment adviser not affiliated with this adviser
Which of the following is a method for determining the internal rate of return to an investor based on cash flow in and out of the portfolio? A) Dollar cost averaging B) Time-weighted return C) Dollar-weighted return D) Discounted cash flow
C) Dollar-weighted return
A nonqualified plan designed to provide additional retirement benefits limited to a select group of management or highly-compensated employees is called A) a defined benefit plan. B) a defined contribution plan. C) a SERP. D) a payroll deduction plan.
C) a SERP
Which of the following statements regarding ERISA and qualified plans is correct? A) ERISA only applies to defined benefit pension plans. B) ERISA requires the fiduciary to invest for maximum gain under the prudent person rule. C) Qualified plans must meet the requirements of ERISA. D) ERISA regulations are primarily focused on the income tax aspects of qualified plans.
C) qualified plans must meet the requirements of ERISA
A technical analyst (chartist) with a long position in a particular stock would most likely enter a sell stop order below that stock's A) resistance level B) previous high C) support level D) 200-day moving average
C) support level
If an index annuity has a participation rate of 80%, it means A) the investor's account will participate in 80% of the gains and losses of the index. B) the investor's account will be charged with 80% of the amount lost by the index. C) the investor's account will be credited with 80% of the growth of the index. D) the investor's account will never be less than 80% of the initial investment.
C) the investor's account will be credited with 80% of the growth of the index.
A wealthy client wishes to endow her favorite charity with a lump-sum gift that, with an assumed rate of return of 4% per annum, will provide $2,500 per month in perpetuity. What amount does the client need to deposit? A) $75,000 B) $100,000 C) $1,000,000 D) $750,000
D) 750,000 $2500x12 = $30,000 per year 30,000/4% = $750,000
There are a number of different ways in which a business may be structured. For tax purposes, which form is taxed on its income? A) S corporation B) LLC C) General partnership D) Sole proprietorship
D) Sole proprietorship
Which of the following indexes represents the largest portion of the domestic stock markets? A) Russell 2000 B) MSCI EAFE C) Standard & Poor's 500 D) Wilshire 5000
D) Wilshire 5000
A benefit of waiting until the age of 70 to claim Social Security benefits is that A) Medicare benefits are increased. B) the income tax rate is reduced once the claimant reaches 70. C) a higher percentage of the monthly benefit is exempt from income taxes. D) benefits are increased by 8% for each year from the full retirement age.
D) benefits are increased by 8% for each year from the full retirement age
Included in the definition of derivative would be all of the following EXCEPT A) futures B) rights C) options D) leveraged ETFs
D) leveraged ETFs
It would be correct to state that an inverse ETF A) is a form of private equity fund. B) moves in tandem with the index being tracked. C) is suitable for sophisticated investors with a long time horizon. D) utilizes derivatives to achieve its objectives.
D) utilizes derivatives to achieve its objectives.
An applicant for registration as an investment adviser discloses on Form ADV that it plans to use palm readers to help determine investments most suitable for their clients. Under the Uniform Securities Act, the Administrator A) may deny applications only on the basis of the limitations of the law B) will probably turn to the SEC for guidance C) is empowered to deny this application D) will request that the applicant furnish past performance records to determine whether this method of investment analysis has merit
A) may deny applications only on the basis of the limitations of the law
Riley, as an investor, prefers to be on the lower end of the efficient frontier. We would expect to see which of the following risk and return combinations? A) High risk and low return B) Low risk and low return C) Low risk and medium return D) Low risk and high return
B) low risk and low return
Under current regulations, registration with the SEC is optional for all of the following investment advisers EXCEPT A) Grand Visions Advisers, a sole proprietorship with $104 million in AUM B) Employee Benefit Specialists, Inc., a pension consultant with $225 million in AUM C) CEF Investment Managers, LTD., a partnership managing a small registered closed-end investment company traded on the OTC Bulletin Board D) Midwestern Asset Managers, LLC, with $53 million in AUM, required to register in 17 states
C) CEF Investment Managers, LTD., a partnership managing a small registered closed-end investment company traded on the OTC Bulletin Board
An investor owns five DEF call options with a strike price of $40. The options are European style. If the holder exercises, the cost will be A) zero because European options are exercisable only at expiration. B) $4,000. C) $20,000. D) $2,000.
C) $20,000 500x$40
A customer buys a 5% bond at par. The bond is callable in 5 years at par and matures in 10 years. Which of the following statements is TRUE? A) YTC is lower than YTM. B) Nominal yield is higher than either YTM or YTC. C) YTC is the same as YTM. D) YTC is higher than YTM.
C) YTC is the same as YTM
John owns a nonqualified, tax-deferred annuity. When he retires, what will be the tax consequences of his annuity payments? A) His annuity payments are partly taxable as capital gain and partly taxable as ordinary income. B) His annuity payments are all taxable as ordinary income. C) His annuity payments are tax free. D) His annuity payments are partly taxable and partly tax-free return of capital.
D) His annuity payments are partly taxable and partly tax-free return of capital.
The chief financial officer (CFO) of a company approaches an investment adviser representative who happens to be the trustee of the corporation's qualified plan requesting a loan from the plan to help the company meet some short-term obligations. Which of the following would be the appropriate action to be taken by the IAR? A) With sufficient collateral, the loan may be made. B) The IAR is prohibited from making this loan if it is not a part of the asset allocation model used in the plan's investment policy statement. C) The IAR is permitted to meet any reasonable request from the CFO of the employing company. D) The IAR is prohibited from making this loan because of his fiduciary responsibility to the plan.
D) The IAR is prohibited from making this loan because of his fiduciary responsibility to the plan.
All of the following would be prohibited practices under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers EXCEPT A)using a testimonial in an advertisement B)maintaining custody of a customer's funds and securities without notification to the Administrator C)charging fees that were higher than customary, but offering a performance guarantee to compensate for the higher fees D)accepting an order from a client's spouse shortly after receiving a written trading authorization
D) accepting an order from a client's spouse shortly after receiving a written trading authorization
A working group convened by NASAA has developed a model fee disclosure schedule to help investors better understand the costs involved in doing business with their broker-dealer. The template has broker-dealers disclose all of the following fees EXCEPT A) interest on debit balances in margin accounts B) the cost of overnight delivery services C) safekeeping of customer funds and securities D) markups and markdowns on trades done as a principal
D) markups and markdowns on trades done as a principal
Which of the following is required for a preorganization subscription to be an exempt transaction? A) There may be no more than 15 subscribers. B) Prior notification of intent to incorporate must be given to the Administrator. C) Full payment has been made. D) No commission has been paid.
D) no commission has been paid
Under SEC Release IA-1092, a financial planner would not be considered an investment adviser when A) there is an up-front fee charged for creating a comprehensive financial plan, even when the plan is not put into place B) he is a licensed insurance agent and credits the commission earned on the sale of insurance policies included in a comprehensive financial plan against the fee charged for the plan C) he does financial planning as part of offering a wrap fee program as a licensed agent of a broker-dealer D) the extent of his planning is limited to wills, estates and trust creation
D) the extent of his planning is limited to wills, estates and trust creation
Under the Uniform Securities Act, a consent to service of process must accompany which of the following? I. An agent's application for renewal of registration II. A civil complaint against a broker-dealer III. An agent's initial registration application
III only
One way in which universal life and variable life are similar is that both A) are considered securities B) permit loans against the cash value C) have a fixed minimum cash value D) have flexible premiums
B) permit loans against the cash value
An investor would have to pay the alternative minimum tax when A) there are tax-preference items reported on the tax return B) the investor has received income from a limited partnership C) it exceeds the investor's regular income tax D) the investor's capital gains exceed 10% of total income
C) it exceed the investor's regular income tax
Which of the following is NOT a characteristic of hedge funds? Hedge funds A) invest in private securities, real assets, derivatives, and structured products. B) are privately organized and generally unlisted. C) use leverage, short positions, and concentrated positions. D) offer managers high fixed fees.
D) offer managers high fixed fees
Under ERISA Section 404(c), plan participants must be able to reallocate plan assets A) annually B) daily C) once every week D) once every 3 months
D) once every 3 months
A client has invested $25,000 into a variable annuity which has grown to $150,000 over the accumulation period. At age 60, the account is liquidated. The tax treatment of the withdrawal would be A) partly ordinary income and partly capital gains depending on the length of time the variable annuity was in force. B) capital gains tax on $125,000. C) ordinary income tax on $125,000 with a 10% tax penalty. D) ordinary income tax on $125,000.
D) ordinary income tax on $125,000.
When an Administrator issues a final order, an agent subject to the order may I. obtain a review of the order in an appropriate court of law II. request that additional evidence be presented to the court III. request a hearing 90 days after the final order IV. not appeal a court's decision
I and II
Under the Securities Act of 1933, which of the following are exempt securities? I. Securities issued by the U.S. government, government agencies, and any state or municipality II. Any security issued by a religious, educational, charitable, or not-for-profit institution III. Any security issued by a federal or state bank, savings and loan association, building and loan association, or similar institution IV. Any interest in a railroad equipment trust
I, II, III, IV
Under federal law, an application for becoming an associated person of a broker-dealer would be denied for an individual A) convicted of a felony 122 months ago B) accused of a securities-related felony 110 months ago C) who is not a citizen of the United States D) pleading no contest to a misdemeanor involving a financial matter 65 months ago
D) pleading no contest to a misdemeanor involving a fianncial matter 65 months ago
Under the Uniform Securities Act, a state-registered investment adviser whose only office was in State N would NOT have to register in State O if its only clients were A) 6 or fewer retail clients B) trust companies C) complex trusts D) individual accredited investors
B) trust companies
An individual who has passed the NASAA examination for registration as an investment adviser representative may begin soliciting advisory clients A)immediately B)when informed by the investment adviser that the representative's registration is effective C)when informed by the Administrator that the representative's registration is effective D)within 48 hours
B)when informed by the investment adviser that the representative's registration is effective
Which of the following statements regarding IRAs are CORRECT? I. One may have both a Roth IRA and a traditional IRA, contributing the maximum to each one. II. One may have both a Roth IRA and a Roth 401(k) contributing the maximum to each one. III. Both traditional IRAs and Roth 401(k) plans have RMDs at age 70½. IV. If one is a participant in a Roth 401(k) plan, the earnings limits are waived for opening a Roth IRA.
II and III
Profit Partners, LLC (PPL), a federal covered investment adviser, sends correspondence regarding its past performance to prospective retail clients in State A. PPL does not maintain a place of business and is not registered in State A. Because PPL is soliciting for new business there, the Administrator of State A A) would be able to bring a claim against PPL for soliciting without being properly registered in the state. B) would have no jurisdiction over PPL because the firm is a federal covered investment adviser. C) would be able to bring a claim against PPL for showing past performance in a communication with prospective clients. D) would be able to bring a claim against PPL if it was discovered that the antifraud provisions of the Uniform Securities Act had been violated.
D) would be able to bring a claim against PPL if it was discovered that the antifraud provisions of the Uniform Securities Act had been violated.
Which of the following would be an agent as the term is defined in the Uniform Securities Act? I. An individual representing a registered broker-dealer in the sale of securities to the general public II. An assistant to the president of a broker-dealer who accepts orders from clients on behalf of the senior partners III. A subsidiary of a major commercial bank registered as a broker-dealer that sells securities to the public IV. An issuer of nonexempt securities registered in the state and sold to the general public
I and II
Under NASAA Model Rule on Custody Requirements for Investment Advisers, which of the following are violations of the requirements for advisers who have custody of client securities or funds? I. An adviser deposits client funds into its own bank account, making a careful record of the amount of funds belonging to each client. II. An adviser allows a CPA to make an unscheduled audit of all client securities and funds in the adviser's custody. III. Once a year, an adviser sends each client a report on the securities and funds in the adviser's custody.
I and III
NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers states that it would be considered an unethical business practice for an investment adviser to charge an unreasonable advisory fee. In which of the following cases would it be likely that the Administrator would find the adviser's compensation to be unreasonable? I. An adviser's fee schedule is not competitive with other advisers in the same general area offering essentially the same services. II. In addition to charging a fee based on assets under management, the adviser also charges commissions on any securities transactions he effects. III. The adviser charges the same hourly fee, regardless of the amount of the specific client's assets under management. IV. The fee is projected to consistently be more than the expected return in the portfolio.
I and IV
NASAA holds that the most important duty of an investment adviser is the disclosure of all information relating to the relationship between an adviser and a client. As far as the topic of compensation is concerned, which of the following must be disclosed? I. Transaction-based compensation, such as commissions on recommended securities II. 12b-1 trails on no-load mutual funds in the client's portfolio III. Expenses reimbursed by third-party sources IV. Compensation-sharing arrangements between the investment adviser and its representatives
I, II, III
Under the USA, which of the following statements regarding the withdrawal of an IAR's registration is TRUE? I. The withdrawal automatically becomes effective 90 days after filing. II. If disciplinary action is initiated within 30 days after filing, the automatic effective date may be delayed. III. The Administrator may institute disciplinary proceedings within one year after the effective date of the withdrawal.
II and III
Becky Biggins has an executive position with a large corporation that covers her under its defined benefit pension plan. This year, Becky's salary will top $235,000. Becky has no dependents and wishes to maximize funds that she can accumulate for her retirement. Becky could I. not open a traditional IRA II. open a traditional IRA but would not be able to deduct her contributions III. open a Roth IRA IV. not open a Roth IRA
II and IV
Which of the following would be prohibited practices under state securities law? I. Soliciting orders for exempt securities II. Making recommendations on the basis of nonpublished analysts' reports III. Failing to inform a client of unusually high commissions because the client does not complain IV. Failing to obtain prior written authority for orders from a third party
III and IV
