Client Investment Recommendations & Strategies
John and Jane have a net worth of $20,000 and total assets of $150,000. If their revolving credit and unpaid bills totals $8,000, how much are their total liabilities? A) $122,000. B) $138,000. C) $150,000. D) $130,000.
Your answer, $138,000., was incorrect. The correct answer was: $130,000. The balance sheet formula is assets − liabilities = net worth. Therefore, $150,000 − liabilities = $20,000, where liabilities = $130,000. Did you answer $122,000? That is the amount of the liabilities other than the revolving credit, but that is not what the question is asking for.
Sally Sherman purchased 100 shares of Chocolate Manufacturers Corporation for $19 per share on February 12. She received a 10% stock dividend on May 18. She sold all of her CMC at $13 per share in June of the same year. What were her tax results? A) $470 short-term loss. B) $575 long-term gain, $105 short-term loss. C) $575 long-term loss. D) $575 short-term loss; $105 long-term gain.
Your answer, $575 long-term gain, $105 short-term loss., was incorrect. The correct answer was: $470 short-term loss. Sally paid $1,900 for 100 shares and sold 110 shares for $1,430 (13 at 110). Because the transactions all took place in less than a year, the transaction was a short-term loss.
What is the total return on a bond that cost an investor $950, was sold for $1,000, and paid $50 in interest payments? A) 10.50%. B) 5%. C) The return cannot be determined from the information supplied. D) 10%.
Your answer, 10.50%., was correct!. Total return is the sum of all payments ($50) plus the capital gains ($50) divided by the cost ($950). In this case, 50 + 50 ÷ 950 = .10526 or 10.5%.
XYZ Corporation has a beta of 1 and ABC has a beta of 1.4. XYZ has returned 12% and ABC 18.8%. Based on this information ABC had alpha of A) 6.8% B) 18.8% C) 4.8% D) 2%
Your answer, 18.8%, was incorrect. The correct answer was: 2% Alpha is the extent to which a security's performance exceeds (or falls short of) what would be expected based on its beta. A stock with a beta of 1.4 would be expected to perform 40% better in an up market than one with a beta of 1.0. Because XYZ with a beta of 1.0 gained 12%, ABC should return 140% of that or 16.8% (12% x 1.4). With an actual return of 18.8%, ABC beat the expected by 2% and that is its alpha.
As a general rule, loans from a 401(k) plan must be repaid within how many years? A) 5 years. B) 10 years. C) 20 years. D) 15 years.
Your answer, 20 years., was incorrect. The correct answer was: 5 years. Most loans from a 401(k) plan are required to be repaid within 5 years. This rule does not apply to loans taken for a home purchase.
If the return on Treasury bills is 3% and the equity risk premium is 4%, the expected equity returns should be: A) 1%. B) 12%. C) 4%. D) 7%.
Your answer, 4%., was incorrect. The correct answer was: 7%. The expected return on an equity investment is the risk-free (for example, T-bill) rate of return added to the equity risk premium (3% + 4% = 7%).
Charley Dearborn is a CFP who is also registered as an IAR with a federal covered investment adviser. Charley's primary focus is on developing comprehensive financial plans for his clients. After analyzing their financial situation, which of the following individuals would most likely receive a recommendation from Charley to purchase term life insurance? A) A 25-year-old single associate professor at an Ivy League university. B) A 60-year-old spouse of a corporate executive. C) A 75-year-old widow. D) A 35-year-old physician with 3 children.
Your answer, A 60-year-old spouse of a corporate executive., was incorrect. The correct answer was: A 35-year-old physician with 3 children. The advantage of term life is that it provides large amounts of protection for a relatively low premium for those under ages 45-50. On the basis of the information given, the 35-year-old physician with three children would appear to have the greatest income replacement needs in the event of premature death. Although it is possible that the spouse of the corporate executive might need extensive life insurance for estate purposes, that need might not arise for many years and, at age 60, term insurance starts to get very expensive.
If a portfolio manager wished to reduce inflation risk, which of the following would be most appropriate to add to the portfolio? A) Tangible assets. B) Preferred stock. C) Annuities. D) AAA bonds.
Your answer, AAA bonds., was incorrect. The correct answer was: Tangible assets. Tangible assets, such as real estate, precious metals, and other commodities, tend to keep pace with inflation. Fixed dollar investments do not.
Frank and Joe Hardy have formed Hardy Investigative Services, (HIS), with each owning 50% of the stock in the company. HIS is organized as an S corporation. Unless receiving an extension, the Form 1120S is due A) April 15 B) 90 days after the end of their fiscal year C) January 15 D) March 15
Your answer, April 15, was incorrect. The correct answer was: March 15 All business returns, with the exception of sole proprietorships, partnerships, and LLC's (including multiple member LLCs that do not elect to be treated as corporations), are due 2½ months after the end of the year (always a calendar year for businesses other than a C corporation).
Your daughter is getting married and, to celebrate, you give her fiancé a beautiful watch that you purchased for $5,575. What are the tax consequences of this gift? A) Anything over the FINRA gift limit of $100 per person per year would be considered taxable. B) The fiancé would have to report this as ordinary income. C) Because they are not yet married, the fiancé is not actually a family member, so a gift tax would be levied. D) No tax
Your answer, Because they are not yet married, the fiancé is not actually a family member, so a gift tax would be levied., was incorrect. The correct answer was: No tax This very nice gift falls well within the annual exclusion, so no gift tax would be levied. As far as FINRA or the states, first of all, there is no indication that he is a client; and, even if so, the rules do permit gifts without concern for the $100 limit in a circumstance like this.
When constructing a portfolio, one of the goals is to increase diversification. Which of the following pairs offers the most diversification? A) U.S. equity securities and foreign equity securities. B) Large-cap stock/blue-chip stock. C) Corporate debentures/convertible bonds. D) Municipal GO bonds and long-term U.S. Treasury bonds.
Your answer, Corporate debentures/convertible bonds., was incorrect. The correct answer was: U.S. equity securities and foreign equity securities. Diversification is generally accomplished by adding securities that don't have a high degree of correlation. Large-cap and blue-chip are essentially the same thing. Most convertible bonds are debentures. Only in the case of domestic and international stocks will we find a low correlation.
In order to be in compliance with SEC reporting rules, a company will typically file a Form 10-Q how many times during its fiscal year? A) One. B) Two. C) Four. D) Three.
Your answer, Four., was incorrect. The correct answer was: Three. The Form 10-Q is used for quarterly financial reporting. However, even though there are four quarters in an accounting year, only three forms are filed. Why? Because the Form 10-K, the annual report, takes the place of the 4th quarterly report.
Rank the following from highest to lowest yield when a bond is trading at a premium. Current yield. Nominal yield. Basis or yield to maturity. A) I, II and III. B) III, II and I. C) II, I and III. D) I, III and II.
Your answer, I, II and III., was incorrect. The correct answer was: II, I and III. Trading at a premium indicates that current interest rates are lower than when the bonds were issued. The nominal (coupon) yield is the highest, followed by the current (annual income) yield, then the yield to maturity (basis).
Which of the following investment activities are acceptable for a fiduciary acting under the prudent expert rule? Purchasing AAA rated debentures. Purchasing a growth mutual fund. Purchasing new issues of an AAA rated issuer. Writing covered calls on dividend-paying stocks. A) I, II, III and IV. B) I and II. C) II and III. D) II and IV.
Your answer, I, II, III and IV., was correct!. The prudent expert rule permits a fiduciary to invest in securities that a prudent expert might buy. These investments are nonspeculative, low-to-moderate risk, and likely to be considered prudent if they are used in a way consistent with modern portfolio theory (MPT).
Which of the following concerning a money purchase pension plan are TRUE? All employees must contribute to the plan. Voluntary employee contributions are optional. Employer contributions are required. Employer contributions are optional. A) I and IV. B) I and III. C) II and III. D) II and IV.
Your answer, II and III., was correct!. A money purchase pension plan is a defined contribution plan established by the employer, thereby making the contributions mandatory. Employee participation by making voluntary contributions to the plan is optional. Employees who contribute to the plan usually contribute a percentage of their income.
William and Kat, a married couple, are advisory clients of yours. Each of them is employed and covered by a qualified plan. Which of the following statements are CORRECT? Employees covered by a qualified plan are not eligible to open Roth IRAs. Employees covered by a qualified plan are eligible to open Roth IRAs. Distributions from a qualified plan may be rolled over into a Roth IRA. Distributions from a qualified plan may not be rolled over into a Roth IRA. A) II and IV. B) I and III. C) II and III. D) I and IV.
Your answer, II and III., was correct!. Eligibility for a Roth IRA is not affected by participation in a qualified plan, and effective January 2008, distributions may be rolled over into a Roth.
Which of the following investors are eligible to establish an IRA? Independently wealthy individual whose sole source of income is $125,000 per year in dividends and interest. Law student who earned $1,200 in a part-time job. An individual who earned $3,500 last year selling encyclopedias but whose spouse is covered by a company profit-sharing plan. Property owner whose income is solely from rent charged on family dwellings he owns. A) I and IV. B) II and III. C) II and IV. D) I and III.
Your answer, II and IV., was incorrect. The correct answer was: II and III. An individual may contribute 100% of earned income up to a maximum allowable dollar limit, whichever is less. Interest and dividend income is portfolio income and rent is passive income, not earned income.
Which of the following statements regarding Coverdell Education Savings Accounts are TRUE? After-tax contributions of up to an indexed maximum per student per year are allowed. Contributions may not be made for students past their 18th birthday. If the account value is not used for educational purposes, it can be rolled over into a traditional IRA. Distributions are always taxable. A) I and II. B) I and III. C) III and IV. D) II and IV.
Your answer, III and IV., was incorrect. The correct answer was: I and II. Coverdell Education Savings Accounts allow after-tax contributions of up to $2,000 per student, per year, for children until their 18th birthday. If the accumulated value in the account is not used by age 30, the funds must be distributed and subject to income tax and a 10% penalty, or rolled over into a different Coverdell ESA for another family member.
One of your clients is in the process of forming a new business venture with a friend and is considering whether to operate as a partnership or a C corporation. Among the advantages of operating as a partnership are: ease of dissolution. ease of raising additional capital. flow-through of income or loss. limited liability. A) II and IV. B) III and IV. C) I and II. D) I and III.
Your answer, III and IV., was incorrect. The correct answer was: I and III. Unlike a C corporation, operating income or losses of a partnership flow through directly to the partners. There are several easy ways to dissolve a partnership. However, they do not offer the limited liability protection of a corporation. The corporate form of business is generally the most suitable for raising additional capital.
Which of the following statements regarding Coverdell ESAs and QTPs is NOT correct? A) Coverdell ESAs are designed to offer tax benefits to those individuals who wish to save money for a child/grandchild's higher education expenses. B) If a portion or all of the withdrawal from a QTP is spent on anything other than qualified higher education expenses, the owner/contributor will be taxed at her own tax rate on the earnings portion of the withdrawal. C) QTPs are extremely useful tools that provide significant tax savings, allow for substantial investments for a child's education and provide a tool for avoidance of gift and estate taxes if used correctly. D) Coverdell ESAs currently permit up to $5,000 in annual contributions, whereas QTPs allow large contributions reaching as high as $250,000 and above.
Your answer, If a portion or all of the withdrawal from a QTP is spent on anything other than qualified higher education expenses, the owner/contributor will be taxed at her own tax rate on the earnings portion of the withdrawal., was incorrect. The correct answer was: Coverdell ESAs currently permit up to $5,000 in annual contributions, whereas QTPs allow large contributions reaching as high as $250,000 and above. Coverdell ESAs currently permit up to $2,000 in annual contributions, whereas QTPs (Section 529 Plans) allow large contributions reaching as high as $250,000 and above.
Which of the following is a benefit to an employee of a business offering a safe harbor 401(k) using a non-elective formula? A) The employer is required to contribute on the employee's behalf. B) It guarantees that highly compensated employees do not get more of an employer match than non-highly compensated employees. C) The employees are guaranteed the ability to consult an investment adviser. D) The plan is free from the top-heavy testing requirements.
Your answer, It guarantees that highly compensated employees do not get more of an employer match than non-highly compensated employees., was incorrect. The correct answer was: The employer is required to contribute on the employee's behalf. A safe harbor 401(k) with a non-elective formula is one in which the employer must contribute a minimum of 3% of each employee's earnings, whether or not the employee participates in the plan. Furthermore, those contributions are immediately vested. As a result, these plans offer a safe harbor from being tested for being top heavy, but this is a benefit for the employer, not the employee.
There are provisions in the IRS Code which allow certain forms of business to avoid being subject to income tax on the business level. The list would include all of the following EXCEPT: A) limited partnership. B) LLC. C) S corp. D) sole proprietorship.
Your answer, LLC., was incorrect. The correct answer was: sole proprietorship. In the case of a sole proprietorship, the owner reports any income on his personal Form 1040, Schedule C. The other entities do not pay tax themselves - any income flows through to the members (LLC), stockholders (S corp) and partners (ltd. Partnership).
When are estate taxes due? A) Nine months after death. B) Six months after valuation. C) Nine months after valuation. D) Six months after death.
Your answer, Nine months after valuation., was incorrect. The correct answer was: Nine months after death. Estate taxes are due nine months after death. The taxes are based on either the value at death or the alternative valuation six months after death.
Carol is opening an investment account with her agent and will be expected to disclose all of the following items of financial or personal information EXCEPT her: A) educational background. B) age. C) annual income. D) investment experience.
Your answer, annual income., was incorrect. The correct answer was: educational background. When an agent opens accounts on behalf of a broker/dealer, she is required to ask each applicant to disclose date of birth, and will request annual income, and net worth, as well as investment experience. Disclosure of educational background is not typically sought.
In the banking industry, the term POD refers to an account similar to the TOD designation used by broker-dealers. An old, but sometimes still used term to describe this kind of account is A) Totten trust B) Demand deposit account (DDA) C) Revocable trust D) Passbook savings account
Your answer, Revocable trust, was incorrect. The correct answer was: Totten trust The name comes from a 1904 decision in a New York case called In re Totten. The court ruled that someone could open a bank account as a trustee for another person, who had no right to the money until the account owner died. The account owner is the trustee, in control of money that will eventually go to the trust beneficiary, and could change beneficiaries as desired. But whether the arrangement is called a Totten trust or a POD account, the result is the same.
Which of the following statements regarding Roth IRAs is NOT true? A) There is no age limit on making contributions to Roth IRAs. B) Roth IRAs have higher contribution limits than traditional IRAs. C) Roth IRAs do not have required distributions. D) Distributions prior to age 59½ may be subject to penalty.
Your answer, Roth IRAs have higher contribution limits than traditional IRAs., was correct!. An individual with earned income may choose to have either or both a traditional and a Roth IRA (as long as he falls within the Roth's income limitations). The maximum contribution under current regulations is $5,500 (+ $1,000 catch-up for those age 50 or older) and can be split however desired so long as no more than a total of $5,500 ($6,500 with catch-up) is contributed.
A professional tennis player comes to you seeking advice on setting up a trust. She is interested in giving to charity and also wants discretion as to when income is distributed to the beneficiaries, her parents. Which trust do you advise she use? A) Charitable remainder trust. B) Complex trust. C) Simple trust. D) Charitable lead trust.
Your answer, Simple trust., was incorrect. The correct answer was: Complex trust. Only a complex trust allows the two features which she demands. Simple trusts may not make charitable contributions, and provide no discretion on income distribution. The two types of charitable trusts mentioned provide no ongoing discretion as to when income is distributed or who the beneficiaries are.
Which of the following securities is most suitable for an investment adviser representative to recommend to a 26-year-old customer opening an IRA? A) Growth stock mutual fund. B) Put options. C) Municipal bond fund shares. D) Term insurance contract.
Your answer, Term insurance contract., was incorrect. The correct answer was: Growth stock mutual fund. Growth stocks provide potentially long-term returns suitable for a retirement account. An individual opening a new IRA won't have sufficient funds to properly diversify other than by purchasing shares of an investment company. IRA distributions are 100% taxable, which makes the investment in tax-exempt securities unsuitable. Insurance is not permitted in an IRA account and speculative options are inappropriate.
The separate account sub-accounts chosen by the purchaser of a variable life insurance policy have had outstanding performance over the past 15 years. There would generally be no tax implications in which of the following situations? A) A loan is taken equal to 95% of the policy's cash value B) The policy is surrendered C) The death benefit is paid D) There is a cash withdrawal in excess of the cost basis
Your answer, The death benefit is paid, was incorrect. The correct answer was: A loan is taken equal to 95% of the policy's cash value Funds obtained from a policy loan are not considered taxable income (same as any loan - you owe the money). If the amount received at policy surrender is greater than the cost basis, the excess is taxed as ordinary income. The same is true with the withdrawal. Although the death benefit will always be free of income tax, it could be subject to estate tax.
The common stock of companies within which industry sector would be most adversely affected by an increase in the general level of interest rates? A) The food industry. B) The electronics industry. C) The utilities industry. D) The clothing industry.
Your answer, The utilities industry., was correct!. 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.
If a new client has $200,000 to invest and wants to retire in 15 years, which of the following client information is least necessary for an adviser to recommend a suitable investment program? A) The age of the client. B) Tolerance toward risk. C) The amount of income he requires for his retirement years. D) Current income and cash flow requirements.
Your answer, Tolerance toward risk., was incorrect. The correct answer was: Current income and cash flow requirements. While current income and cash flow requirements are ordinarily important considerations, in this question we are being asked about the investment of a lump sum, not periodic additional investments. The amount of income required will determine the types of investments and how they must be structured in order to achieve the retirement income desired. The client's age is necessary to determine the time horizon. That is, if the client is currently 35 and wishes to retire at age 50, the money will have to last a lot longer than if we are dealing with a 55-year-old who wishes to retire in 15 years at 70. A client's tolerance toward risk is among the most important non-financial considerations in determining investment suitability.
The two general categories of investment objectives are income and capital growth. An investor primarily seeking income would be least interested in which of the following? A) Capital gains. B) A stock paying a high dividend. C) Interest. D) U.S. treasury bonds.
Your answer, U.S. treasury bonds., was incorrect. The correct answer was: Capital gains. Capital gains is an example of capital growth. An investor who is primarily interested in generating income will be less interested in the potential capital gains provided by an investment than its potential interest and dividends.
Buying stocks with high PE ratios normally reflects which of the following investment styles? A) Growth. B) Turnaround. C) Special situations. D) Value.
Your answer, Value., was incorrect. The correct answer was: Growth. The purchase of stocks with high PE ratios represents a growth investment style. Growth-oriented investors will pay for high PE ratios. Value investment style is associated with the purchase of low PE stocks or stocks trading below their intrinsic value.
When an investor's original value is subtracted from the ending value, and then has the income received over that time period added to it which is then divided by the original cost, the result is: A) internal rate of return. B) expected return. C) holding period return. D) annualized return.
Your answer, annualized return., was incorrect. The correct answer was: holding period return. This is the method of computing holding period return.
A 61-year-old wanting to take a lump-sum distribution from his Keogh will: A) incur a 50% penalty. B) be taxed at ordinary income rates. C) incur a 10% penalty. D) be taxed at long-term capital gains rates.
Your answer, be taxed at ordinary income rates., was correct!. The distribution described here would be taxed as ordinary income. A 10% penalty would apply if the individual were under age 59-½.
The statistical method used to determine the return profile of a security or portfolio that recreates potential outcomes by generating random values based on the risk and return characteristics of the securities themselves is known as the A) capital asset pricing model (CAPM) B) Monte Carlo simulation C) optimal portfolio D) efficient market hypothesis
Your answer, capital asset pricing model (CAPM), was incorrect. The correct answer was: Monte Carlo simulation This is the basic definition of the Monte Carlo simulation.
One of the quantitative measurements of investment performance is total return. In performing this computation, it would not be necessary to know: A) income received during the period. B) capital growth during the period. C) length of time the investment was held. D) purchase price.
Your answer, capital growth during the period., was incorrect. The correct answer was: length of time the investment was held. The computation of total return is the sum of all income plus capital growth divided by the original purchase price. It is not a function of time, so the holding period is not required.
Under Modern Portfolio Theory (MPT), all portfolios that can be constructed from a given set of stocks is referred to as the A) correlation coefficient B) capital market line C) efficient set D) feasible set
Your answer, capital market line, was incorrect. The correct answer was: feasible set A feasible portfolio is defined as a portfolio that an investor can construct given the assets available. The feasible set is the collection of all feasible portfolios. Once we have the feasible set, we can select the efficient set (the most return for a given amount of risk, or the least risk for a given amount of return).
An IAR is comparing an investment in two securities by computing the net present value of each. The available funds for investment are $20,000. The NPV of choice A is $21,223 while that of choice B is $18,946. Based on this information, it would be correct to state that A) choice B would result in a capital gain B) choice B would result in an increase in present wealth if held to maturity C) choice A would result in a capital loss D) choice A would be the more attractive choice
Your answer, choice A would result in a capital loss, was incorrect. The correct answer was: choice A would be the more attractive choice Anytime the NPV is higher than the cost of the investment, you will have made a profitable investment. Therefore, purchasing choice A would result in an increase to the investor's present wealth.
In the field of portfolio management, there are a number of different management styles. One of those styles involves committing additional capital to the market when others are reducing their exposure, or eliminating positions while others are increasing theirs. This style is generally referred to as: A) active. B) value. C) contrarian. D) growth.
Your answer, contrarian., was correct!. The contrarian style of portfolio management takes positions opposite those of the market as a whole. They are buying when others are selling and selling when others are buying.
A corporation is considering a substantial capital expenditure for new equipment. Using the net present value (NPV) technique, the corporation will consider this investment to be acceptable if the net present value of the investment is: A) less than its after-tax return. B) less than zero. C) greater than zero. D) equal to zero.
Your answer, greater than zero., was correct!. The net present value (NPV) of an investment is the difference between the present value of the investment's cash inflows and the amount of the investment outlay. An investment is acceptable only if the net present value is greater than zero-that is, if the present value of the expected returns is greater than the amount of the investment outlay.
Under the net present value (NPV) method of evaluating investments, an investment is acceptable if the present value of the expected returns is: A) equal to zero. B) greater than zero. C) less than zero. D) greater than the risk-adjusted return.
Your answer, greater than zero., was correct!. Under the net present value (NPV) approach, an investment is acceptable only if the present value of the expected returns is greater than the amount of the investment outlay. In other words, an investment is acceptable if the net present value is greater than zero.
If an individual makes a withdrawal from her IRA at age 52, she pays no penalty tax if she: A) used the funds for her nephew's college tuition. B) is disabled. C) had no earned income that year. D) has retired.
Your answer, had no earned income that year., was incorrect. The correct answer was: is disabled. An individual may withdraw from an IRA before the age of 59½ without a penalty tax in the case of death or disability. Funds may be withdrawn without penalty for qualified education expenses for immediate family members, but that does not include nieces and nephews.
When a security purchased on margin suffers a decline in market value, it may cause the equity in the account to fall to a level such that additional funds are required under the terms of the margin agreement between the client and the broker/dealer. The term that describes the request by a broker/dealer rather than an SRO for more money is: A) margin call. B) regulation T call. C) house call. D) sell-out.
Your answer, house call., was correct!. When the account value drops to a certain level, SRO rules require a maintenance call. When the broker/dealer sets that level more stringently (above that of the SRO), it is known as a house call. A margin call and Regulation T call are the same thing - the initial call for funds when purchasing on margin. A sell-out occurs when the maintenance (or house) call is not met.
If a new joint tenants with rights of survivorship account is opened by two related individuals, all of the following statements are true EXCEPT A) mail may be sent to either party (with the permission of each party) B) orders may be given by either party C) in the event of death, the decedent's interest in the account goes to the other party D) checks may be drawn in the name of either party
Your answer, in the event of death, the decedent's interest in the account goes to the other party, was incorrect. The correct answer was: checks may be drawn in the name of either party While either party may enter an order, any money or securities delivered out of the account must be in the names of both owners.
In order to compute a client's realized holding period return, it is not necessary to know A) value at the end of the holding period B) paper profits C) income received during the holding period D) original investment
Your answer, income received during the holding period, was incorrect. The correct answer was: paper profits The question is asking for realized return. That means that we ignore paper profits, (just another term for unrealized gain).
A customer's portfolio has a beta coefficient of 1.1. If the overall market increases by 10%, the portfolio's value is likely to: A) decrease by 10%. B) increase by 10%. C) increase by 11%. D) decrease by 11%.
Your answer, increase by 11%., was correct!. A beta of 1.1 means the portfolio is considered to be 1.1 times more volatile than the overall market. If the market is up 10%, the portfolio with a beta of 1.1 is likely to be up 11%.
You have a client who wishes to manage his own portfolio of individual stocks. The simplest style for him to follow would be: A) buy and hold. B) core. C) indexing. D) tactical.
Your answer, indexing., was incorrect. The correct answer was: buy and hold. When it comes to individual stocks, nothing is simpler than buy and hold. If the client wished to have the simplest overall portfolio and didn't want to manage things, then indexing would be the answer.
With regard to margin accounts, all of the following are accurate statements EXCEPT A) maintenance margin is the amount required under SRO rules when the equity in a margin account falls below a predetermined level B) initial margin is the amount required under Regulation T when a security is purchased on margin C) a mixed margin account is one in which there are both long and short positions D) margin accounts employ less leverage than cash accounts
Your answer, initial margin is the amount required under Regulation T when a security is purchased on margin, was incorrect. The correct answer was: margin accounts employ less leverage than cash accounts The main purpose of a margin account is to use leverage (borrowed money). There is no leverage at all in a cash account (no borrowing is permitted).
An investment advisory firm tracks its performance against the S&P 400. From this, you could determine that this firm concentrates on A) Nasdaq securities B) mid-cap securities C) large-cap securities D) small-cap securities
Your answer, large-cap securities, was incorrect. The correct answer was: mid-cap securities The S&P 400 is known as the mid-cap index.
All of the following statements concerning Qualified Tuition Programs for educational funding are correct EXCEPT A) a college savings plan is a type of QTP where the owner of the account contributes cash to the account so that the contributions can grow tax deferred B) control over the account passes to the student/beneficiary once withdrawals commence C) prepaid tuition plans are plans where prepayment of college tuition is allowed at current prices for enrollment in the future D) unless there is a change in beneficiary. assets in the QTP may be moved from the plan of one state to the plan of another as frequently as once per 12 months
Your answer, prepaid tuition plans are plans where prepayment of college tuition is allowed at current prices for enrollment in the future, was incorrect. The correct answer was: control over the account passes to the student/beneficiary once withdrawals commence One of the advantages of QTPs (Qualified Tuition Programs, better known as Section 529 Plans) is that the owner-contributor is always in control of the program. Without a change in beneficiary, plan "rollovers" are limited to once per 12 month period.
A measurement of investment return that takes the time value of money into consideration is A) holding period return B) internal rate of return (IRR) C) real rate of return D) risk-adjusted rate of return
Your answer, real rate of return, was incorrect. The correct answer was: internal rate of return (IRR) The internal rate of return compounds returns and takes into consideration the time value of money. Real rate of return considers the inflation rate and risk-adjusted return is another way of stating the Sharpe Ratio.
Form 8-K must be filed by: A) registered broker/dealers. B) registered domestic issuers. C) registered foreign issuers. D) registered investment advisers.
Your answer, registered domestic issuers., was correct!. Form 8-K filings are required for domestic issuers, registered under the Act of 1933, to report newsworthy events to the SEC. Foreign Issuers, as well as broker/dealers and investment advisers, are exempt from having to file.q
According to the efficient market hypothesis, information found when reading the Wall Street Journal would be considered A) semi-strong form market efficiency B) strong-form market efficiency C) weak-form market efficiency D) random walk
Your answer, strong-form market efficiency, was incorrect. The correct answer was: weak-form market efficiency The closer to inside information, the stronger the information. Anything published in widely read media would be considered very weak.
A client needs emergency cash for 30 days. All of the following are acceptable sources EXCEPT: A) term life insurance. B) using credit card access checks. C) taking a premature distribution from an IRA. D) margin loan from a broker/dealer.
Your answer, taking a premature distribution from an IRA., was incorrect. The correct answer was: term life insurance. Term life insurance has no cash value. Withdrawals from an IRA incur no tax or penalty if 100% of the funds are replaced within 60 days.
Your married client has an AGI of $105,000 per year and is covered by his employer's defined benefit pension plan. When inquiring about opening a Roth IRA, you would respond that A) the client could open the Roth IRA without any restriction B) the client's earnings exceed the Roth limits so the plan could not be opened C) one cannot be a participant in a qualified plan and a Roth IRA at the same time D) the client could open a Roth, but depending on future earnings, might not be able to deduct all of the annual contribution
Your answer, the client could open a Roth, but depending on future earnings, might not be able to deduct all of the annual contribution, was incorrect. The correct answer was: the client could open the Roth IRA without any restriction As long as a married couple's AGI does not exceed $191,000 (for 2014, or $191,000 for 2015), a Roth IRA can be opened without any restrictions. Contributions are never deductible.
When analyzing a specific common stock, the expected return is: A) computed using the Sharpe ratio. B) the average of a probability distribution of possible returns. C) the extent to which the net present value exceeds the internal rate of return. D) the projected annual dividend divided by the current market price.
Your answer, the extent to which the net present value exceeds the internal rate of return., was incorrect. The correct answer was: the average of a probability distribution of possible returns. The expected return is computed by taking the probability of each possible return outcome and multiplying it by the return outcome itself. For example, if you knew a given stock had a 40% chance of earning a 10% return, a 40% chance of earning 20%, and a 20% chance of earning -10%, the expected return would be equal to 10%, as illustrated below: = (0.4) (0.1) + (0.4) (0.2) + (0.2) (-0.1); = .04 + .08 = .12 − .02; = 0.10; and = 10%. You will not have to do this calculation on the exam, but you should know the concept.
All of the following factors would be considered if an investor was trying to minimize the market risk of investing in a particular stock EXCEPT: A) the earning power of the company. B) the price behavior of the stock. C) the period of time the investment can be held. D) the timing of the purchase of the stock.
Your answer, the period of time the investment can be held., was incorrect. The correct answer was: the earning power of the company. The earning power of the company is not a measurement of the stock market (market risk), while the other factors here are. That is a fundamental strength and protects against business or financial risk. Market risk tends to be a technical factor and anytime the words time, price, volume or charts are used, it's technical.
As part of a severance package, an officer of a large corporation has the choice of accepting a $50,000 lump-sum payment or 5 annual payments of $12,000 each. The difference in the amounts can be explained by: A) inflation risk. B) the time value of money. C) credit risk. D) purchasing power risk.
Your answer, the time value of money., was correct!. The officer can take $50,000 today or can choose to receive 5 annual payments of $12,000 each. The implicit rate that discounts the value of 5 payments of $12,000 to a present value of $50,000 is the internal rate of return of these payments; the difference is accounted for by the time value of money.
Mrs. Beech, age 52, as the sole survivor of her mother, recently inherited, among other assets, an IRA. After the account was distributed to her, she dutifully rolled over 100% of the account value into a new rollover IRA. As a result, Mrs. Beech A) should have left the funds in her mother's IRA, because she is not yet 59 ½ B) will only be liable for the 10% premature distribution penalty C) will be able to avoid taxation on the distribution until she begins to take distributions from the rollover IRA D) will have to declare the entire IRA value as ordinary income
Your answer, will only be liable for the 10% premature distribution penalty, was incorrect. The correct answer was: will have to declare the entire IRA value as ordinary income When an IRA is inherited, other than from a spouse, the only way to avoid a reportable distribution is to do a trustee-to-trustee transfer. Because Mrs. Beech received the distribution, the normal rollover rules do not apply. However, Mrs. Beech will not have to pay the 10% penalty.