Unit 14: Types of Risk and Required Disclosures

An investor is long 500 shares of DEFG common stock, short 200 shares of DEFG common stock, and short 300 shares of DEFG 5% preferred stock. A tender offer for DEFG common shares is announced. Under SEC rules, this investor is permitted to tender A) 300 shares. B) 500 shares. C) 0 shares. D) 800 shares.

A) 300 shares.

When market interest rates are rising, the market price of which of the following securities would probably be affected the most? A) ABC Gas and Electric, a regulated public utility B) GHI Money Market mutual fund C) JKL Corporation adjustable-rate preferred stock D) DEF Technologies, a cybersecurity firm

A) ABC Gas and Electric, a regulated public utility

Fairweather Securities Corp. (FSC), a registered broker-dealer, has invited several IARs from Econometric Advisory Services (ESA), a registered invested adviser that directs transactional business to FSC, to a seminar featuring a disquisition on current economic trends being presented by a leading economist. It would be permitted for FSC to cover which of the following expenses? A) Registration fees for the seminar B) Travel and transportation fees, but not the seminar fee C) Registration fees for the seminar plus travel expenses D) None of these; because ESA directs commission business to FSC, it would be an unethical business practice for FSC to pay any portion of the expenses

A) Registration fees for the seminar

All of the following risks are considered diversifiable except A) purchasing power risk. B) default risk. C) liquidity risk. D) sovereign risk.

A) purchasing power risk.

A prospect is heavily invested in the common stock of an employer's company, ABC, relative to other investments. The stock has performed well over the last 15 years and the prospect is very happy with the investment. After reviewing financial and nonfinancial criteria, you have determined that A) selling a portion of ABC and using the proceeds to purchase mutual funds will reduce his nonsystematic risk. B) he should begin to liquidate the ABC stock using the FIFO accounting method. C) because ABC has performed well over a 15-year period, he should keep the stock but sell it if inside information indicates a fall in value is imminent. D) owning too much ABC stock has increased credit risk to an unacceptable level.

A) selling a portion of ABC and using the proceeds to purchase mutual funds will reduce his nonsystematic risk.

Section 28(e) of the Securities Exchange Act provides a safe harbor for certain soft dollar compensation extended from broker-dealers to investment advisers. Which of the following is most likely to be included in that safe harbor? A) Meal expenses to attend an investment seminar sponsored by the broker-dealer B) Customized software designed to give clients access to asset allocation programs C) Use of vacant office space in the broker-dealer's facilities D) Desks remaining after the broker-dealer redesigned its office

B) Customized software designed to give clients access to asset allocation programs

When investing in securities, there are many potential risks. When recommending a specific security to clients, a member firm A) must have a reasonable belief that the recommended security will outperform the overall market. B) may disclose the existence of a control relationship between the firm and the subject company if it is material. C) must disclose the existence of a control relationship between the firm and the subject company. D) may follow the dictum of caveat emptor.

C) must disclose the existence of a control relationship between the firm and the subject company.

An investor who purchases 20-year Aaa rated corporate zero-coupon bonds would be least concerned with A) purchasing power risk. B) interest rate risk. C) reinvestment risk. D) default risk.

C) reinvestment risk.

A customer is very concerned about investments that may not keep pace with inflation. He asks which securities would have the least exposure to inflation risk. Which of the following would be the best answer? A) Cash B) Preferred stock C) Fixed annuity D) Common stock

D) Common stock