Qbank exam 9/2/18

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

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

Under the Investment Advisers Act of 1940, an adviser's registration usually becomes effective how many days after it is filed? A) 30 days. B) 45 days. C) 10 days. D) 20 days.

B) 45 days. In the absence of any denial order or pending proceedings, registrations of federal covered investment advisers (and broker-dealers) will become effective on the 45th calendar day after the date of filing (the date received in the SEC's office). The SEC may specify an earlier date.

Under the Uniform Securities Act, the Administrator has the power to deny, suspend, or revoke the registration of an issue if it is in the public interest and: the issuer discloses in the prospectus that there is virtually no chance that the company's business model will be successful and investors should anticipate losing their entire investment. the Administrator of another state has revoked the issue's registration. an officer of the registrant has been convicted of a securities related crime. the prospectus contains misstatements of nonmaterial information. A) I and III. B) II and III. C) II, III and IV. D) I and II.

B) II and III. If the Administrator of another state has revoked an issue's registration, the USA considers that just cause for denial in this state. Conviction of an officer of the issuer for a crime related to the securities industry will invariably lead to denial or revocation. Disclosure that the company is not expected to be successful is not a cause for denial; all that is required is full disclosure. Misstatements of material information would be cause for action by the Administrator, but nonmaterial, by definition, does not impact an investor's decision-making process.

The Investment Advisers Act of 1940 provides for a general exclusion from its definition of investment adviser for all of the following EXCEPT: A) a lawyer who provides investment advice as an incidental part of his practice. B) an agent for an athlete who gets paid for providing investment advice to the athlete. C) a trust company. D) a publisher of a major national newspaper.

B) an agent for an athlete who gets paid for providing investment advice to the athlete. Any person in a business or profession, such as an agent for an athlete, that does not have an exclusion from the definition of an investment adviser under the Investment Advisers Act of 1940 and who meets the three-pronged test described in Release IA-1092 is an investment adviser.

The capital asset pricing model (CAPM) is an investment theory that serves as a model for A) pricing securities based on their total risk B) pricing securities based on their systematic risk C) pricing securities based on their unsystematic risk D) measuring the correlation between a security and the overall market

B) pricing securities based on their systematic risk Under the CAPM, securities are priced based on their systematic risk only, as this risk cannot be eliminated through diversification. The expected return of a security or portfolio is calculated by adding the rate on a risk-free security to a risk premium multiplied by the asset's systematic risk.

Under both state and federal law, there are a number of exclusions from the definition of investment adviser. Which of the following would not qualify for an exclusion? A) A CPA who gives high-tax bracket clients a chart showing the tax equivalent yield of municipal bonds. B) An economist who teaches a course in fundamental analysis at a local community college. C) A publisher of a newsletter that is paid to make reports to be used in the sale of specific securities. D) A personal injury attorney who recommends that clients consult with a Certified Financial Planner for advice on how to deal with the large settlements they receive.

C) A publisher of a newsletter that is paid to make reports to be used in the sale of specific securities. Although there is an exclusion for publishers, it must be of general and regular circulation and not be the recipient of compensation from the issuers of any securities covered.

If two agents of a broker-dealer agree to work together as a partnership in soliciting business and they agree to split commissions, this practice is: A) permitted only if a principal of the firm audits the partnership's financial performance. B) in violation of the Uniform Securities Act's prohibition against sharing in the profits of an account. C) permitted. D) permitted, but only with the prior written consent of the affected clients.

C) permitted. There is nothing in the USA that prohibits agents registered with the same broker-dealer from forming a partnership to conduct business or solicit clients. Under the USA, a principal of the firm need not audit the financial performance of such an arrangement. It is considered an unethical business practice for agents who are not licensed with the same or affiliated broker-dealers to share commissions.

The statute of limitations for criminal offenses under the USA is: A) two years. B) three years. C) ten years. D) five years.

D) five years. Remember the sequence 5-5-3: 5-year statute of limitations, $5,000 maximum fine, and imprisonment for up to three years.

A Canadian broker-dealer is registered in Province Q. The firm has clients who vacation in several New England states and they would like to continue to do business with them while on their holidays. Under the Uniform Securities Act: A) this is permissible only if the broker-dealer is registered with the SEC. B) the broker-dealer may only accept unsolicited orders from their existing clients while they are vacationing in the U.S. C) this would only be permitted if the trades were executed through an affiliated domestic broker-dealer who is licensed in those states. D) this is permissible if the broker-dealer is properly registered in Province Q, deals only with existing clients, and registers in each of the states.

D) this is permissible if the broker-dealer is properly registered in Province Q, deals only with existing clients, and registers in each of the states. The Uniform Securities Act provides for a form of limited registration for Canadian broker-dealers wishing to do business with their clients who are vacationing or otherwise traveling through the United States. In order to qualify for the limited registration, the BD must be properly licensed in its home province and they're only dealing in the states is with an existing client.

A bond is paying $100 per year in annual interest and is selling at par. If the discount rate is 10%, the net present value is A) the same as the coupon B) positive C) negative D) zero

D) zero A bond paying $100 in interest per year has a coupon rate of 10%. Whenever the coupon rate is equal to the discount rate, the NPV is zero. That is, the present value of a bond paying 10% interest when the current market rate is demanding a 10% interest rate is the bond's par value (as is the case with this bond).

KAPCO Advisers is registered as an IA with the SEC. Their only office is in New Jersey and all IARs are registered there. IAR Jones has ten clients who reside in Ohio; IAR Cohen has six clients who live in Kentucky; and IAR Brown has three clients who are Georgia residents. In addition, Brown conducts a quarterly presentation at the Augusta National Golf Club where he discusses current market developments. The seminar is restricted to Club members only. Which of the following is CORRECT? Jones must register in OH. Cohen must register in KY. Brown must register in GA. Because all three are registered in the state where KAPCO maintains its principal office, no further registrations are necessary for these IARs.

III only. Under Section 203A of the Investment Advisers Act of 1940, any IAR with a federal covered adviser who has no place of business in a state is not required to register in that state, even when the number of clients the adviser has in a state exceeds the de minimis level. Holding a public seminar on a quarterly basis in the same location would be considered having a place of business in Georgia (even though attendance is limited to Club members only - they are still members of the general public).

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

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

A speculator, believing that a drought in the Midwest will lead to a weak corn crop, would probably A) take a short position in corn futures B) take a long position in corn forwards C) take a long position in orange juice futures D) take a long position in corn futures

A weak corn crop means a shortage in the supply. That will lead to an increase in prices. When one is speculating that prices will go up, the best position is a long one. So, why not the long forwards? Those who purchase forwards contracts anticipate accepting delivery of the asset. This individual is merely speculating and has no interest in taking physical possession of the commodity and paying for transportation, silage, and insurance until the commodity is sold. If the person in the question had been a user of corn (a cereal maker, for example), then the forward contract would have been a better choice.

An agent working for a brokerage firm and his client both live in Illinois, and the agent makes an offer to the client by phone while the client is vacationing in California, which he accepts. The client travels to Texas before returning home and sends payment for the security from there. He makes his payment by sending a check from a money-market fund based in Ohio. The Administrators of which of the following states have authority over the sale? Illinois. California. Texas. Ohio.

B) I and II. Because the offer was made from Illinois to a person in California, the state Administrators of both states have jurisdiction. The state from which payment was mailed and the state in which the checking account or money-market fund is based are irrelevant for the purpose of determining an Administrator's jurisdiction.

A 68 year-old client of yours indicates that he is interested in changing the portfolio mix of his IRA to become largely invested in noninvestment grade bonds. You would probably infer from this that the client: A) is now in a lower tax bracket. B) is risk averse. C) has insufficient retirement savings. D) has recently come into a large inheritance.

C) has insufficient retirement savings. Most studies have indicated that seniors with insufficient retirement savings attempt to compensate by being tempted to reach for higher yields to maximize retirement income without full consideration of the increased risk that comes along with the possibility of higher returns.

Wealth Funders and Associates (WFA) is a state-registered investment adviser organized as a partnership. The firm has had 5 equal partners since its inception. However, with the retirement of 1 of the partners and the need for additional capital, WFA has added 3 new partners. As a result of this activity, WFA A) shall notify clients of the change to the partnership within a reasonable time B) is considered to have assigned client contracts and must obtain their consent C) shall renew its registration promptly D) will now be required to register with the SEC

A) shall notify clients of the change to the partnership within a reasonable time It is unlawful for an investment adviser to enter into, extend, or renew any investment advisory contract unless it provides that the investment adviser, if a partnership, shall notify its clients of any change in the membership of the partnership within a reasonable time after the change. If the investment adviser is a partnership, no assignment of an investment advisory contract is considered to result from the death or withdrawal of a minority of the members of the investment adviser who have only a minority interest in the business of the investment adviser, or from the admission to the investment adviser of one or more members who, after admission, will be only a minority of the members and will have only a minority interest in the business. In this example, the new members will represent 3/7 of the partnership—a minority interest.

Which of the following meet(s) the compensation test for defining investment advisers under SEC Release 1A-1092? Subscription payments received by the publisher of an investment newsletter, available by subscription only, that provides impersonal securities related advice. An insurance agent sells a life insurance policy and receives a commission on that sale. As a result, the agent agrees to provide advice on structuring the insured's investment portfolio at no additional cost. Your next-door neighbor recommends the purchase of a certain security from his broker, which you eventually do. A) I, II and III. B) I and II. C) I only. D) II only.

B) I and II. Compensation may take the form of, but is not limited to, fees, payments for subscriptions, salaries, or commissions. The regulators know that the insurance agent would not be so quick to give the investment advice were there not a large insurance commission being earned and, therefore, that is considered to be compensation for rendering investment advice. Because the newsletter is not a publication of general interest or with general circulation (you can't pick it up at a newsstand), it does not qualify for the publisher exclusion. Nothing in the neighbor's advice involves compensation.

Which of the following statements are TRUE? The Uniform Securities Act is not the actual law of any state or territory of the United States. The National Securities Markets Improvement Act of 1996 requires states and the federal government to have identical registration requirements. The state securities Administrator has responsibility for the enforcement and administration of a state's securities law. A) I, II and III. B) I and III. C) I and II. D) II and III.

B) I and III. The Uniform Securities Act is not the actual law of any state or territory. Rather, it is model legislation that states use as a guide in drafting their own securities laws. Those laws give the responsibility to the state Administrator for enforcement and administration of those laws. The NSMIA's purpose is to eliminate dual registration, not to require identical laws.

Which of the following is NOT a type of diversification that is achieved by investing in international equities? A) Asset class. B) Currency. C) Style. D) Geographic.

C) Style. Following a value or a growth style, or using a buy-and-hold strategy, is independent of the continent of domicile of the issuer. Investing in different countries diversifies investments among various currencies, other than the client's domestic currency. Different geographic areas have different types of industries whose performance may vary on the basis of regional resources. International equities are considered another asset class for purposes of asset allocation in one's portfolio.

Which of the following investments generally carries the least reinvestment risk? A) Staggered-maturity certificate of deposit (CD) strategy. B) Rental real-estate limited partnership. C) Municipal bond unit investment trust making monthly distributions. D) Newly issued stock in a small, over-the-counter growth corporation.

D) Newly issued stock in a small, over-the-counter growth corporation. In order to have reinvestment risk, there must be something to reinvest. Newly issued stock in a small, over-the-counter growth company is unlikely to pay dividends that need to be reinvested and, therefore, is not subject to reinvestment risk. Rental real estate partnerships pass rental income along to limited partners (investors) who must reinvest such distributions at current rates. These distributions are subject to reinvestment risk at current interest rates. The monthly distributions from the municipal unit trust must be reinvested at current interest rates which may be lower than the interest rate provided by the trust. The proceeds from the staggered maturities of the certificates of deposit must be reinvested at current rates. If current rates are lower than those of the matured CDs, reinvestment risk lowers the investor's return.