suitability questions 1-18

You're new client lists income as the primary investment objective for an account with your broker dealer. Which of the following investments would NOT be suitable A: zero coupon bonds B: GNMA gov securities C: corporate debt securities D: corporate preferred shares

A: zero coupon bonds 0 coupon bonds make no payments until maturity and therefore would not be suitable for those with income as an objective. Typically, preferred shares because of the fixed dividend they pay, and corporate or government securities making interest payments would be suitable for investments to meet an objective of income

A couple in their early thirties has been married for 4 years, their disposable income is relatively high, and they are planning to buy a condominium. If they need a safe place to invest their down payment for about 6 months, which of the following mutual funds is the most suitable for these customers A: ABC growth fund B: LMN Cash Reserves money market fund C: XYZ investment grade bond fund D: ATF capital appreciation fund

B: LMN cash reserves and money market fund. Explanation: The clients could lose money with A, C and D. These customers are preparing to make a major purchase within the next few months so they require a highly liquid investment to keep their money safe for a short amount of time. The money market fund best matches this objective

Your customer age 29 makes $42000 annually and has $10000 to invest. Although he has never invested before, he wants to invest in something exciting. Which of the following should you suggest? A: An aggressive growth fund because the customer is young and has many B: A balanced fund because when the stock market is declining the bond market will perform well C: Your customer should provide more information before you can make a suitable recommendation D: A growth and income fund because the customer has never invested before

C: Your customer should provide more information before you can make a suitable Recommendation Explanation: It is necessary to get more information about this customer and his definitions of an exciting investment opportunity before making any recommendations. A suitability and risk tolerance analysis should be performed before a recommendation is made.

If a client is moderately risk averse and has an investment objective of capital preservation, what types and allocation of investments would you recommend for this customer A: a preponderance (majority) of growth stocks and high yield bonds B: A preponderance of growth stocks and limited partnership vehicles C: A mix of investment grade bonds and cash or cash equivalents D: A mix of high yield bonds and cash or cash equivalents

C: A mix of investment grade bonds and cash or cash equivalents An individual with an investment objective of capital preservation should be investing in a mix of investment grade bonds and cash or cash equivalents lower risk capital appreciation vehicles, such as large cap common stock, should also be considered. The other choices noted are too risky for a risk averse investor

Which of the following activities are a registered representatives responsibilities I. Determining the suitability of various investments for individual customers II. Describing the characteristics and benefits of various securities products III. Offering tax advice in assisting customers and completing tax returns IV. Personally holding a customer's securities for a future transaction

I & II A registered representative, in addition to entering orders, is primarily responsible for determining investments' suitability and for explaining different investments to prospective investors

I registered representative is interviewing a new customer, age 27. The customer wants to list capital appreciation as the primary investment objective for the account and as willing to take a moderate degree of risk at this time in his life. the customer also notes concerns about inflation and how it will impact his portfolio over time. which of the following investments is the most suitable A: municipal debt securities B: long term gov bonds C: equities such as common and preferred stock D: corporate debt securities

C: equities such as common and preferred stock explanation: Equities would be The most appropriate investment given the customer's age, capital appreciation investment objective and willingness to accept moderate risk. The remaining answered choices, while each has varying risk characteristics, are not likely to meet the capital appreciation objective

A 27 year old client is in the lowest tax bracket and seeks an aggressive long term growth investment. If his investment adviser representative recommends a high rated general obligation bond the IAR has: A: committed no violation B: recommended a suitable investment C: made an unsuitable recommendation based on the customers needs and objectives D: made an unsuitable recommendation since a muni rev bond would have been more appropriate

C: made an unsuitable recommendation based on the client's needs and objectives explanation: In recommending a conservative, tax exempt investment to this customer, the investment adviser representative has failed to make a suitable recommendation given the client's objectives. Municipal bonds are better suited for individuals and high tax brackets and offer little upside appreciation potential

If a customer is any a low federal income tax bracket and his main investment objective is current income, which of the following securities should the agent recommend? A: city of Milwaukee GO bond B: zero-coupon bond C: US gov bond D: investment grade corporate bond

D: investment grade corporate bond explanation: A is out because the customer is in a low tax bracket. B is out because it doesnt provide income. D us higher yielding and gives more income than C.

Changing any of the following characteristics of the stocks and bonds in an investor's portfolio would likely add diversification except the: A: Industries in which she is investing B: Types of securities C: Issuer's geographic location D: securities' relative prices

D: securities' relative prices Portfolio diversification is rarely achieved by price alone. Geographic diversification disperses risk if growth rates vary in separate parts of the country. Diversifying holdings among industries helps as different economic situations affect some industries more than others. Diversifying types of securities helps as bonds react differently from stocks and real estate to changing economic situations

A customer would diversify his portfolio geographically to avoid which of the following risks? I. adverse economic conditions in a particular region II. legislative changes by state III. decreasing bond prices IV. decreasing stock prices

I & II explanation: Geographic diversification can be used to avoid such risks and economic declines in various regions and changes in legislations at state level. You cannot diversify as to price

A change in which of the following should be indicated in a customer's file? I. name II. educational degree held III. investment objective IV. professional society membership

I & III explanation: All primary information commiss such as name address and social security number and all information that could affect recommendations or a customer's financial situation must be noted immediately in the file. Educational degrees and society memberships do not affect investment recommendations

When making recommendations to new advisories client, which of the following carry the most weight I. The client's risk tolerance II. Past performance of the adviser representatives recommendations III. The client's investment needs and objectives IV. The client's previous investment experience with other advisers

I & III. explanation: Investment objectives and risk tolerance should determine recommendations to an individual advisory client

A registered representative with ABC securities has recently become aware of a new variable annuity. As tax time is approaching comet the representative decides to recommend the variable annuity to all of his customers as an attractive addition to their portfolios the representative should: I. Recommend a variable annuity to all of his clients because the tax advantage almost always results in a greater return II. Recommend a variable annuity to those clients whose needs and objectives match the investment III. Recommend a variable annuity to all of his clients because the performance potential of the subaccounts IV. Not recommend the investment to all of his clients in spite of the tax advantages in additional features

II & IV explanation: there is no "one size fits all". Recommendations may be made only when it is suitable for the customer's needs. Therefore he would not recommend at the variable annuity all of his clients despite the tax advantages

In constructing a profile for your customer, you wish to assemble information on both financial and non financial investment considerations that affect your customer a. Which the following qualify as financial investment considerations I. Your customers tolerance of various forms of risk II. Your customers dependents and their ages III. Your customers liquid networth IV. Your customer's monthly credit card payments

III & IV. explanation: Liquid networth and expenses such as credit card payments involve concrete sums of money and cash flow and thus, are financial. Number of dependents and risk tolerance should be considered regarding suitability and making appropriate recommendations but they are non financial considerations

An investor diversifying a corporate bond portfolio does NOT consider A: domicile of the investor B: maturity C: quality D: issuer

A: domicile of the investor Domicile, or geographic location of the investor, is not relevant in diversifying a corporate bond portfolio. For example it is irrelevant if GM the client is located in Michigan or New Jersey. This could be a factor for municipal bond investors due to the possibility of avoiding state income. A corporate bond portfolio can never be diversified by issuer, quality (rating), domicile of the issuer and maturity

Which of the following investments is most suitable for an investor seeking monthly income? A: money market mutual fund B: zero coupon bond C: mutual fund investing in small cap issues D: growth stock

A: money market mutual fund Explanation: The money market me to a fund is the most suitable investment for investors seeking monthly income. The other securities offer higher long term growth potential but they are not designed to provide a monthly income

As a registered representative, if you are assigned to an existing account that was previously handled by another registered representative who has since left your firm, which of the following actions should you take first A: Verify the account information B: Liquidate the portfolio for immediate reinvestment in stocks you are currently recommending C: Require the customer to sign a trading authorization common naming you as the party with authority D: Suggest the customer by one of the stocks that you are currently recommending

A: verify the account information explanation: The 1st action to take would be to their fi and update the customer's information in order to make a suitable investment recommendation