Series 66 Exam Questions
The capital asset pricing model (CAPM) is used by many to assess the expected return of a security. If the current risk-free rate is 2%, the current return on the market is 10%, and a particular stock's beta is 1.5 with a standard deviation of 3.2, the expected return would be
14% The formula for this computation is as follows: 10% (the return on the market is a beta of 1.0) minus the risk-free rate of 2% or 8%. Then, multiply that by the beta of this stock (1.5) to arrive at 12%. That is, the stock should return 12% above the risk-free rate of 2%, or 14%. The standard deviation is not relevant to this computation.
An investor purchases a 6% callable senior lien mortgage bond at par. Exactly two years later, the bond is called at $102½. The investor's total return is
14.5%. Total return consists of income plus gain. Buying this bond at par and having it called at $102½ results in a $25 gain. With a 6% coupon, there will be four semiannual interest payments of $30 in a two-year holding period. Adding the $25 + $120 = $145 total return on an investment of $1,000 which = 14.5%. Please note that the question didn't ask for the annualized rate of return. That would be approximately 7.25% per year.
With regard to the keeping of records, the Uniform Securities Act states that investment advisers must keep records for
5 years, the first 2 in the principal office of the adviser For state-registered investment advisers, records must be kept for a total of 5 years. For the first 2 of those years, they must be located in the principal office of the adviser.
An investment adviser must meet the net worth requirements of the Administrator. When doing the computation, which of the following assets would be included?
A sofa in the reception area For purposes of this Rule, the term "net worth" means an excess of assets over liabilities. But net worth does not include the following as assets: goodwill, franchise rights, patents, copyrights, marketing rights, and all other assets of intangible nature; home, home furnishings, automobile(s), and any other personal items not readily marketable in the case of an individual; advances or loans to stockholders and officers in the case of a corporation; and advances or loans to partners in the case of a partnership. So, what's the deal with the sofa? Because the choice specifically says that it is in the reception area, we must assume that it is not a "home" furnishing, rather one in the office and those are not excluded assets
Dividend growth model
A stock valuation model that deals with dividends and their growth, discounted to today
One of the most significant features of the UPIA is the ability of a trustee to delegate investment decisions to a qualified third party. Delegation is permitted as long as the fiduciary to whom the powers are delegated
acts with skill and caution. The UPIA specifically uses the terms, skill and caution, when describing the actions of the fiduciary. Other components of the UPIA state that, rather than viewing individual securities, the overall effect on the entire portfolio is considered.
Under certain conditions, the Uniform Securities Act provides that an Administrator may require a minimum net worth standard be met by an investment adviser. Which of the following would be an allowable asset in the computation of an investment adviser's net worth?
Accounts receivable
In which of the following cases is the exemption from registration with the SEC not based on the value of assets under management?
An investment adviser that acts as an adviser solely to 1 or more venture capital funds.
A company has paid a dividend every quarter for the past 20 years. If the stock's price has fallen dramatically over the past quarter, but the dividend has remained the same, it may be concluded that
Current dividend yield is income dividend divided by price. If the price of a stock decreases and the dividend remains the same, dividend yield will increase.
Technical analysis
Studying historical stock prices and volume
Market Capitalization
The number of outstanding shares multiplied by the current market price per share and has nothing to do with the companys dividend policies
Which of the following statements best defines inflation risk?
The uncertainty that the value of an investor's assets will decrease as measured by real dollar purchasing power
The common stock of companies within which industry sector would be most adversely affected by an increase in the general level of interest rates?
The utilities industry Utilities are generally very heavily funded with debt. If interest rates go up, their new debt will be at higher interest rates, causing lower earnings available for common stocks.
Which of the following are features of Class C mutual fund shares?
Typically charge no front-end load Typically impose lower CDSCs than Class B shares for a shorter period
The term "private fund", as defined under federal and state law, would not apply to
a leveraged ETF.
An investor is of the opinion that the recent bull market has run its course, and she wants to protect her portfolio consisting largely of equities with a market cap of less than $1 billion. Her best choice would be to
buy puts on the Russell 2000. When a bull market runs out of steam, a decline usually follows. The best way to protect her positions is purchasing a put option on a benchmark that represents her holdings. Because this investor's portfolio is so heavily invested in small-cap stocks, the appropriate benchmark for hedging would be the Russell 2000.
The Administrator may require which of the following from a federal covered adviser?
copy of the IA's Form ADV a filing fee
The exchange privilege offered by open-end investment companies allows investors to
exchange shares of one open-end fund for another in the same fund family at a net asset value basis Exchange privileges allow an investor to convert the value of shares held in one fund for those of an equal value in the same family.
In order to compute an investor's after-tax return on a corporate bond, all of the following are necessary EXCEPT
inflation rate The after-tax return is computed by taking the total return (appreciation plus income) and taking the investor's tax rate into consideration. The inflation rate is necessary for the inflation-adjusted or real rate of return.
USAAdvisers is registered in 10 Midwest states. Regarding financial requirements, USAAdvisers must meet those of
the state in which its principal office is located Unlike broker-dealers, investment advisers register with either the SEC or the state(s), but never both. Therefore, we know this must be a state-registered adviser not under the jurisdiction of the SEC. Under the Uniform Securities Act, when it comes to financial requirements, bonding, recordkeeping, and so forth, as long as the adviser meets the requirements of the state in which the principal office is located, the other states have no further claim.
Which of the following employer-sponsored plans is NOT covered by ERISA?
Deferred compensation Deferred compensation plans are not ERISA-covered plans; that is what gives them greater flexibility than a covered plan.
Fundamental analysis
Earnings potential and risk associated with a particular firm
Form PF must be filed by
SEC-registered advisers with at least $150 million in private fund assets under management
Searching Out New Growth (SONG) is a venture capital fund. As such, all of the following statements are true EXCEPT
SONG must have less than $150 million in assets in the fund Although venture capital funds are included in the general definition of private funds, unlike the private equity fund, there is no ceiling on the size of the fund before the adviser loses the exemption. Advisers to VC funds are exempt from registration. The funds themselves do not register with the SEC under the Investment Company Act of 1940 (and don't register with the states as well). These investments do not offer ready liquidity.
Registration with the SEC as an investment adviser would be required for a person who
acts as the investment adviser to an investment company registered under the Investment Company Act of 1940
All of the following are potential benefits of high frequency trading (HFT) except
greater trading opportunities for the small investor. With HFT, it is the smaller investors who lose out because they don't get access to the information as quickly.
As interest rates rise, the opportunity cost of holding cash
increases At higher interest rates, the opportunity cost of holding cash increases, and firms and households will desire to hold less cash and more interest-bearing financial assets.
The time value of money is part of the computation for
the internal rate of return One of the unique features of IRR is that it is a compounded rate using the time value of money.
The procedure for entering an order to purchase a security for the account of a customer is to complete an order ticket. Which of the following would be found on an order ticket?
Account number, execution price, time of order entry, time of execution or cancellation, and terms and conditions of the order Customer name and/or address would never be on an order ticket and that knocks out three of the choices.
Which of the following is not a market cap-weighted index?
Dow Jones Industrial Average The Dow Jones Industrial Average is a price-weighted index. All other options are market cap-weighted indexes.
When computing a company's quick ratio, which of the following assets is NOT counted?
Inventory The formula for the quick ratio takes the quick assets (all current assets other than inventory) and then divides that by the current liabilities. Or, it takes all of the current assets, subtracts the inventory, and divides the remainder by the current liabilities.
If a federal covered adviser's fiscal year ends on October 31, 2017, it must file its annual updating amendment to its Form ADV no later than
January 29, 2018 The annual updating amendment to Form ADV must be filed within 90 days of the adviser's fiscal-year end.
Long-Term Financial Solutions, Inc. (LTFSI), a federal covered registered investment adviser, files a Form ADV-W indicating the business is closing. It is being acquired by another federal covered adviser, Gold and Sylver Advisers, LLC. Which of the following statements is correct?
LTFSI is responsible for ensuring that a copy of the LTFSI corporate charter is preserved for at least 3 years after the acquisition.
A margin account could be opened for which of the following?
Partnership There is no legal reason why a partnership (or other business structure) cannot open a margin account. A margin account could never be opened for retirement accounts, Coverdell ESAs, and UTMA/UGMA accounts.
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?
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 rebalanced to reflect any changes in market conditions.
According to the Investment Advisers Act of 1940, the SEC must either grant investment adviser registration or begin proceedings to determine whether registration should be denied within how many days of filing?
The SEC is required by the Investment Advisers Act of 1940 to either grant an adviser registration or begin proceedings to determine whether the registration should be denied within 45 days of application.
Under the Uniform Securities Act, if no denial or proceedings are pending, when does an investment adviser registration become effective?
When the Administrator so orders, but not to exceed 30 days Registrations become effective at noon on the 30th calendar day after the date of filing if there are no denial orders or pending proceedings.
A Schedule K-1 would be received by an individual with an ownership interest in all of the following except
a C corporation. C corporations pay tax on their earnings; the other business types listed here flow through the income to their owners. The owner's share of income (or loss) is reported to them on the Schedule K-1. A shareholder in a C corporation who receives dividends will have that reported on a Form 1099.
A foreign private adviser is defined in the Dodd-Frank Act as any investment adviser that
has no place of business in the United States. has, in total, fewer than 15 clients and investors in the United States in private funds advised by the adviser. has aggregate AUM attributable to clients in the United States and investors in the United States in private funds advised by the adviser of less than $25 million.
All of the following statements regarding universal life insurance are correct EXCEPT
premiums are fixed for the life of the policy The single most distinguishing characteristic of universal life is the fact that premiums are flexible and not fixed.
In search of higher returns, many investors have turned to alternative investments, such as structured products. Non-exchange-traded structured securities products (SSPs) typically have
some form of embedded derivatives It is commonplace for SSPs to use derivatives, such as options. There is no insurance coverage and, unless listed for trading such as an ETN, low or no liquidity. These are highly complex products and would not be suitable for the average conservative investor.
Under the NASAA Model Rule on financial requirements for investment advisers, investment advisers who have custody of customer funds are usually required to have a net worth in the amount of
$35,000
The Zxion Corporation has just distributed a 7½ to 1 split of its common stock. Prior to the split, Zxion had EPS of $15, the market price of Zxion common stock was $225 per share, and the price of its $75 par preferred stock was $82.50. As a result of the split, the price-to-earnings (P/E) ratio is now
15 x 1. A stock split does not change the P/E ratio because both the stock's price and its earnings decline by the same proportion. In this question, after the 7.5 to 1 split, the market price will drop to $30 per share ($225 ÷ 7.5) and the earnings per share are now $2 per share ($15 ÷ 7.5). That 30:2 is still a 15-to-1 P/E ratio.
Richard purchased a 30-year bond for 103½ with a stated coupon rate of 8.5%. What is the approximate yield to maturity for this investment if Richard receives semiannual coupon payments and expects to hold the bond to maturity?
8.24% No calculation is necessary here. Why not? Because anytime a bond is purchased at a premium over par (103½% is a premium), the YTM must be less than the nominal (coupon) rate. There is only one choice lower than 8.5%. It isn't about your computational skills; it is about your understanding the relationship between prices and yields.
According to the Investment Advisers Act of 1940, which of the following statements regarding Part 2 of Form ADV are TRUE?
A balance sheet must be submitted if the adviser collects prepaid fees of more than $1,200, 6 or more months in advance. It may be used to satisfy the brochure requirements of the act. An investment adviser required to register with the SEC under the Investment Advisers Act of 1940 must submit its Form ADVs to the SEC. In some cases, the Form ADV will also be filed with the state Administrator, but that is state law, not a federal requirement. A balance sheet must be submitted with Part 2 if the adviser receives "substantial" prepayments of fees. Part 2 may be used as an investment adviser's disclosure brochure to clients.
On last year's annual updating amendment filed with the SEC, Alpha Investment Advisers indicated that it had more than $140 million in assets under management. Due to a reduction in the size of the firm, this year's annual updating amendment shows that assets under management have fallen to the $75 million level and are expected to remain there. Which of the following actions are required for Alpha?
Withdraw from SEC registration within 180 days of the adviser's fiscal year-end If an adviser reports on its annual updating amendment that it has less than $90 million under management and it is not otherwise eligible to register with the SEC, it must withdraw from SEC registration within 180 days of the adviser's fiscal year-end by filing Form ADV-W. The adviser could consult the securities departments of states in which it maintains offices or conducts business to determine the appropriate state registration requirements.
An investment adviser sends a notice offering a research report she has recently prepared to a group of 25 new members of the local Lions Club. Under the NASAA Model Rule on recordkeeping for investment advisers, the firm must keep a copy of the notice along with
a memorandum describing the list and its source If an investment adviser sends any notice, circular, or other advertisement offering any report, analysis, publication, or other investment advisory service to more than 10 persons, the investment adviser shall not be required to keep a record of the names and addresses of the persons to whom it was sent, except if the notice, circular, or advertisement is distributed to persons named on any list, then the investment adviser shall retain with the copy of the notice, circular, or advertisement a memorandum describing the list and its source.
An investment adviser to a private fund wishes to qualify for the exemption offered under the Uniform Securities Act when the fund has no more than 100 investors. In order to qualify,
every investor must have either at least $1 million in assets managed by the investment adviser, or a net worth, excluding the value of the primary residence, in excess of $2.1 million The 100 or less investors is technically known as advising a 3(c)(1) issuer. In that case, all the investors must be qualified buy meeting the net worth or assets managed by the adviser as stated. The $5 million is the requirement under federal law for an adviser seeking the federal exemption for a 3(c)(7) fund, which is not limited to 100 investors. Conviction of a felony within the past 10 years, not 12, will generally make one a "bad actor" and cause the exemption to be forfeited. Private fund advisers must keep the AUM under $150 million, not $110 million.
Currently, registration with the SEC is mandatory (not optional) for any investment adviser managing a registered investment company (open or closed-end). It is optional for:
pension consultants once their AUM reach $200 million; small and mid-size advisers who would be required to register in 15 or more states; and those advisers with at least $100 million in AUM, but not $110 million in AUM.
One of the exemptions from registration under state and federal law applies to investment advisers to private funds. One characteristic of all private funds is that
they are not registered as investment companies Private funds lose that distinction if they become registered as investment companies under the Investment Company Act of 1940. It is the adviser to a private fund who has a limitation on the amount of AUM, not the fund. In some cases, specifically when using the 3(c)(7) exemption, there is no limit to the number of investors. In many cases, the advisers to these funds, although exempt from registration, are considered exempt reporting advisers and must file a Form ADV Part 1 answering most of the questions on the Form.
