K65 SE - 01/18

Each of the following terms is commonly found in modern portfolio theory EXCEPT A) the feasible set B) the capital asset pricing model C) the efficient set D) the internal rate of return

D) the internal rate of return Internal rate of return (IRR) is not a component of modern portfolio theory as are the other 3 terms. U20LO8

Under adverse market conditions, it is not unusual for mutual fund investors who had been investing on a regular basis to cease or reduce their level of financial commitment. This can have the effect of A) net redemptions B) reducing the NAV of the fund as the demand for new shares wanes C) reducing the operating expense ratio of the fund D) a reduction in the fund's net operating income due to a reduction in sales charges received

A) net redemptions In adverse market conditions, not only do some investors stop putting money in, they liquidate their holdings. If new sales fall while liquidations rise, the effect could be net redemptions. The NAV is not affected by supply and demand, and if anything, the expense ratio would rise because some of the expenses would remain the same but would be shared by fewer assets. Mutual funds do not receive the sales charges—they go to the underwriter. U14LO10

On June 20, 2016, an investor in the 30% marginal federal tax bracket acquired a growth stock paying no dividend for $10 per share. On June 22, 2017, the investor sold the stock for $20 per share. Presuming capital gains rates are 15%, the investor's after-tax rate of return is closest to A) 85% B) 200% C) 100% D) 70%

A) 85% Although the stock grew at a 100% rate of return (by doubling), the investor must pay capital gains tax on the investment at 15%, and the investor realizes an after-tax rate of return of approximately 85%. Because the investor held the stock for more than 1 year, the sale is taxed at a favorable capital gains rate rather than at the investor's ordinary income tax rate. U23LO2

Keogh Plans are qualified plans intended for those with self-employment income and owner-employees of unincorporated businesses or professional practices filing a Form 1040 Schedule C with the IRS. Which of the following statements relating to Keogh Plans is NOT true? A) A former corporate employee who decides to become self-employed may not rollover any distributions from a qualified corporate plan into a rollover IRA if he has created a Keogh Plan. B) Owner-employee businesses and professional practices must show a gross profit in order to qualify for a tax-deductible contribution. C) A participant in a Keogh Plan may also maintain an IRA. D) The maximum allowable contribution to a Keogh Plan is substantially higher than that for an IRA.

A) A former corporate employee who decides to become self-employed may not rollover any distributions from a qualified corporate plan into a rollover IRA if he has created a Keogh Plan. Rollovers are permitted into an IRA regardless of any plans maintained. Tax-deductible contributions are not allowed unless there is potentially taxable income against which to deduct. Anyone with earned income may have an IRA, regardless of participation in another qualified plan, and the Keogh Plan contribution limits are much higher than those for an IRA. U24LO2

An investor is looking for a packed product that can provide rental income as well as potential capital gains. You would most likely recommend A) an equity REIT. B) a mortgage REIT. C) a growth mutual fund. D) a GNMA pass-though.

A) an equity REIT. When you see "rental," you immediately think of renting real estate. Of the two basic types of REITs, an equity REIT is the one that owns property. Rental income is received from the users of those properties. As an owner of real estate, there is always potential to sell the property for a gain. Think of the difference between an equity REIT and a mortgage REIT as the difference between a stock and a bond. A stock offers the possibility of income through dividends and a bond through interest. But, it is only the stock (equity) where there is a real potential for capital gain. U14LO9

Tamika is an investment adviser representative with Financial Engineers, LLC, a covered investment adviser. The firm uses an investment policy statement to help design financial plans for their clients. One of Tamika's current clients plans to purchase a new boat 7 months from now. When using the IPS, this would be considered A) an investment constraint B) a capital need C) an investment goal D) a financial objective

A) an investment constraint Investment constraints are obstacles or restrictions that must be met in order to meet objectives. In this case, we are dealing with a liquidity constraint—in 7 months, cash will be necessary to make the purchase. U19LO5

An agent is using social media to try to build her business. If her Facebook page allows for followers to "like" her, that would be considered A) interactive content B) static content C) illegal content D) misleading content

A) interactive content One of the things that differentiate interactive content from static content is the ability for persons other than the originator of the content to have access. Posting a like to a Facebook page is an example of this. U6LO5

Under NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, which of the following statements regarding the distribution of reports prepared by 3rd parties that are not affiliated with the adviser is TRUE? A) An adviser is prohibited from basing recommendations on work that is wholly the product of someone else's efforts. B) An adviser may use a report prepared by someone else if the source of the report is disclosed. C) An adviser need not disclose the author of any outside 3rd-party report unless the client asks. D) An adviser is required to disclose any source of information used in making recommendations to clients.

B) An adviser may use a report prepared by someone else if the source of the report is disclosed. An adviser is not prohibited from providing clients with reports prepared by others, but when this is done, the adviser must disclose the true source of the report. However, the disclosure requirement does not apply to the research an adviser uses in rendering investment advice. U7LO4

When the USA refers to unsolicited orders, which of the following is TRUE? A) Under certain conditions, an Administrator may prohibit a broker-dealer registered in the state from accepting any unsolicited orders. B) Unsolicited orders are defined as exempt transactions under the USA. C) A client may not purchase, at his own initiative, securities trading in the secondary market if the agent is otherwise prohibited from soliciting the order. D) If the order ticket is appropriately marked, the Administrator may not challenge a broker-dealer's assertion that the order was unsolicited.

B) Unsolicited orders are defined as exempt transactions under the USA. A client has the right to buy or sell whatever she may desire. The issue becomes who initiates the trade. An unsolicited transaction may be executed by an agent if it is the client who asks for the trade. The trade ticket should be marked as unsolicited. The state securities Administrator has the right to seek verification from the client that the trade was, in fact, unsolicited. The security involved in the trade can be one that is nonexempt and unregistered in the state. U4LO3

An investor reading the open-end investment company section of today's The Wall Street Journal sees that Bull in the Teashop Fund has a NAV of $10.65 and an offering price of $11.15. He knows that he would have received which of the following if his redemption order had been received by the fund prior to yesterday's market close? A) $10.65, less commission B) $10.65 C) $10.65, less redemption fee, if any D) $11.15, less redemption fee, if any

C) $10.65, less redemption fee, if any An investor redeeming his shares will receive the NAV less any redemption fee that may be described in the prospectus. Investors redeeming through the fund are not charged a commission. U14LO4

KapCo Balance Fund has a NAV of $9.50 and POP of $10. Over the past 12 months, it distributed dividends totaling $.75 and capital gains totaling $1.00. What is KapCo's current yield? A) 10% B) 17.5% C) 7.5% D) 7.9%

C) 7.5% This question gives you excess information. The first point is that capital gains are not included in calculation of a mutual fund's current yield. You must also remember that the NAV is not involved. The calculation is: $0.75 (annual dividend) = 7.5%$10.00 (POP) U23LO2

Under SEC regulations, publicly-traded (reporting) companies are required to file all of the following except A) Form 10-Q. B) Form 10-K. C) Form 13F. D) Form 8-K.

C) Form 13F. Form 13F is used by money managers who manage equity portfolios with at least $100 million in equity securities. The other choices are forms that are filed as appropriate with the SEC by companies whose securities are registered with the SEC. U9LO3

GEMCO Securities, a registered broker-dealer, has a policy of hiring unpaid interns from top business schools. GEMCO is currently the lead underwriter on a new issue and has assigned three of its interns to specific tasks. One is doing entering the data as indications of interest are received, the second is calling clients to offer to deliver their prospectus via email instead of mail, and the third is calling clients to describe the new issue and accept indications of interest. Which of the interns would need to register as agents? A) Because they are not being compensated, none of the interns need to register. B) The second and third interns would be required to register. C) Only the third intern would have to register. D) All of the interns would need to register.

C) Only the third intern would have to register. When an individual representing a broker-dealer contacts clients to obtain indications of interest for a new securities offering, that person is performing a function requiring registration as an agent. Employees of a broker-dealer, permanent or temporary, compensated or not, do not have to register if their only function is clerical or administrative. Compiling data is clerical and following up with clients to determine how they wish to receive documents for a purchase they've already made is simply an administrative task. U3LO5

Among the advantages of forming an S corporation rather than a C corporation for a new business enterprise is A) the ease in raising substantial amounts of capital. B) shareholders' losses are limited to the amount of their investment C) any losses flow through to the investors D) unlike the C corporation, which is limited to 100 investors, there is no such limit for an S corporation

C) any losses flow through to the investors An S corporation offers the benefit of flow-through of both income and losses (losses being a particular benefit for a start-up because they usually take some time to become profitable). It is the S corporation rather than the C corporation that is limited to 100 investors. Both offer the benefit of limited liability. The C corporation is superior for raising large amounts of capital. U18LO3

During an economic downturn, one would expect to see A) manufacturer's inventories to decline B) a rising CPI C) higher unemployment D) bond prices fall

C) higher unemployment When the economy enters the contraction portion of the business cycle, employers cut costs by letting employees go, thus increasing the number of unemployed persons. With less money in the economy, the CPI will generally remain level or even decline. Manufacturing sales will slow, so their inventories will rise as it takes longer to move product and we can expect a reduction in interest rates, which will cause bond prices to rise. U8LO3

Which of the following statements regarding derivative securities is NOT true? A) Derivative securities can be sold on listed exchanges or in the over-the-counter market. B) An option contract's price fluctuates in relationship to the time remaining to expiration as well as with the price movement of the underlying security. C) An option contract is a derivative security because it has no value independent of the value of an underlying security. D) An owner of a put has the obligation to purchase securities at a designated price (the strike price) before a specified date (the expiration date).

D) An owner of a put has the obligation to purchase securities at a designated price (the strike price) before a specified date (the expiration date). An owner of a put has the right, not the obligation, to sell, not purchase, a security at a designated price (the strike price) before a specified date (the expiration date). Although this exam deals exclusively with listed equity options, there are options traded in the OTC market. Two of the factors affecting the market price of an option (its premium) are the length of time until expiration (the longer the time, the greater the time value) and whether or not the option has intrinsic value (the difference between the stock price and the market price). U16LO3

Interest rates are declining. An analyst would be most likely to state that the business cycle is in which stage? A) Peak B) Trough C) Expansion D) Contraction

D) Contraction It is during periods of economic contraction that interest rates tend to decline. They tend to rise during expansions. U8LO2

As appropriate to the scale and complexity of a firm's business, elements of an effective practice framework for managing conflicts of interest include all of the following EXCEPT A) avoiding severe conflicts, even if that avoidance means foregoing an otherwise attractive business opportunity B) training staff to identify and manage conflicts in accordance with firm policies and procedures C) establishing mechanisms to identify conflicts in a firm's business as it evolves D) ensuring that the firm remains solvent for protection of customers and employees alike

D) ensuring that the firm remains solvent for protection of customers and employees alike Managing conflicts of interest does not take into consideration making enough money to remain solvent. U6LO1

KPT, Inc., is preparing to report its net income for the past year. An increase in which of the following causes a decrease in the reported net income? I. Tax rate II. Cash dividend III. Interest charged on bank loans

I and III Higher taxes mean less net income. Interest charged on loans is an expense item; increasing it lowers operating income. Dividends are paid out of retained earnings and have no effect on the net income the company reports. U9LO1

When performing a capital needs analysis for a client, factors to be considered would include I. the client's projected earnings II. the projected inflation rate III. projected market volatility IV. the client's age

I, II, and IV A capital needs analysis is used to help determine the proper amount of life insurance that will provide for the family's needs in the event of premature death of the primary breadwinner. The agent would factor in the client's projected earnings until retirement and, in order to do that, would need to know the current age. In addition, to be sure to allow for enough to keep up with the rising cost of living, the projected inflation rate is needed. However, market volatility does not impact the analysis because the amount of the selected death benefit will remain constant, regardless of changes to the market. U19LO5

Which items would change if a company declared a cash dividend? I. Working capital II. Total assets III. Total liabilities IV. Shareholders' equity

I, III, and IV The key word is "declared." Liabilities increase when a dividend is declared, and total assets decrease when it is paid. A declared dividend (but not yet paid) would increase current liabilities (and would therefore decrease working capital). It would increase total liabilities (this is a pending obligation) and reduce shareholders' equity because retained earnings would be decreased by the dividend. Total assets would not be affected until the dividend is actually paid. U9LO1