Missed Quiz 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 12%, and a particular stock's beta is 0.8 with a correlation coefficient of 0.60, the expected return would be... A) 10.0% B) 7.2% C) 9.6% D) 11.6%
C) 9.6% The formula for this computation is as follows: 12% (the return on the market is a beta of 1.0) minus the risk-free rate of 2%, or 10%. Then, multiply that by the beta of this stock (0.8) to arrive at 8%. That is, the stock should return 8% above the risk-free rate of 2%, or 10%. The correlation coefficient is not relevant to this computation.
Early in the year, an investor purchased shares of the GEMCO Fund at $10.40 per share when the net asset value per share was $9.53. Just before the last trading day of the year, this investor liquidated the position at $10.60 per share when the net asset value per share was $10.77. From this, you can discern that GEMCO Fund is... A) a unit investment trust B) an open-end investment company C) a closed-end investment company D) a face-amount certificate company
C) a closed-end investment company It is only the closed-end investment company where shares trade at a premium or discount to the NAV per share.
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) Complex trust B) Simple trust C) Charitable lead trust D) Charitable remainder trus
A) Complex trust Only a complex trust allows the two features that she requires. Simple trusts may not make charitable contributions, and they 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 is the risk that diminishes through portfolio diversification? A) Unsystematic risk B) Systematic risk C) Interest rate risk D) Purchasing power risk
A) Unsystematic risk Unsystematic risk (diversifiable risk) is the risk that is eliminated when the investor builds a well-diversified portfolio. Interest rate risk and purchasing power risk are examples of systematic (nondiversifiable risk).
A type of fraud using social media where the fraudsters pretend to be member of a group, sometimes using respected leaders of the group to spread the word about the scheme is known as... A) affinity fraud B) ethnic fraud C) relationship fraud D) group fraud
A) affinity fraud This is a classic definition of how affinity fraud operates. Although it is frequently aimed at ethnic groups, there is no such term as ethnic fraud.
Which of the following is NOT a characteristic of hedge funds? Hedge funds... A) are privately organized and generally unlisted. B) use leverage, short positions, and concentrated positions. C) invest in private securities, real assets, derivatives, and structured products. D) offer managers high fixed fees.
A) are privately organized and generally unlisted. Hedge funds tend to attract the top managers because they offer performance-based fees, which vary based on fund performance.
If your client's entire investment portfolio consists of his company's employee stock ownership plan and stock in the company acquired under the executive stock option program, the client's portfolio is most exposed to... A) business risk B) inflation risk C) interest rate risk D) market risk
A) business risk Because the client's investment (and indeed his employment) is entirely invested in his employer's stock, his portfolio is disproportionately exposed to business risk. Should the company experience a business or industry setback, the portfolio could suffer substantial losses. There are a large number of historical examples where this has happened (frequently wiping out retirement savings).
Prohibited business practices under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents would NOT include... A) sharing in the profits and losses in a client's account without making a financial contribution to the account B) sharing commissions with an agent of a nonaffiliated broker-dealer C) borrowing money for graduate school tuition from a client who happens to be the agent's father D) making specific investment recommendations to the group attending a free lunch seminar
A) sharing in the profits and losses in a client's account without making a financial contribution to the account Unlike the FINRA rule, agents may share in the profits and losses in a client's account without making a financial contribution; all that is required is consent of the client and the employing broker-dealer. The so-called free lunch seminars are typically promoted as educational and, in any case, how can the agent make specific recommendations to a group without having suitable information on each attendee? Borrowing money from a client, regardless of the purpose, is not permitted unless the lender is in the business of lending money. Sharing commissions with an agent licensed with the same or affiliated broker-dealer, but not one with which there is no affiliation, is permitted.
As an incentive to encourage clients to invest in a particular stock recommended by the broker-dealer, clients are told that anytime within 6 months after the purchase date, they may sell the stock back to the firm at original cost plus interest at the state's legal rate. This would be... A) a violation of the antifraud provisions of the Uniform Securities Act B) a prohibited guarantee against loss C) a right of rescission D) an offer that could only be made to accredited investors
B) a prohibited guarantee against loss Offering to buy back a stock at its original cost, even without paying interest, is a prohibited guarantee against loss. Rescission is only when there was something improper about the sale. Technically, this offer is not a case of fraud and, in any event, we must always select the answer that best addresses the question—in this case, a guaranteed price.
If a customer would like to open a custodial UGMA or UTMA account for his nephew, a minor, the uncle can... A) be custodian for the account only if he is also the minor's legal guardian B) open the account and name himself custodian C) open the account, but he needs a legal document evidencing the nephew's parents' prior approval of the account D) open the account provided the proper trust arrangements are filed first
B) open the account and name himself custodian The donor may name himself the custodian of an UGMA or UTMA account. No documentation of custodial status is required to open an UGMA account, and the custodian is not required to be the minor's legal guardian.
Which of the following is required to register in a state under the Uniform Securities Act? A) A broker-dealer who has no place of business in the state and whose only clients in the state are limited to insurance companies, banks, and broker-dealers B) ABC State Bank, which provides investment advice in its branches throughout the state C) An investment adviser who has a place of business in the state and whose only clients in the state are insurance companies, banks, and broker-dealers D) An investment adviser who has no place of business in the state and communicates with only 5 advisory clients in the state for the year
C) An investment adviser who has a place of business in the state and whose only clients in the state are insurance companies, banks, and broker-dealers Because the investment adviser has a place of business within the state and is acting as investment adviser in the state, it must register, regardless of the fact that the only clients are financial institutions. Notice that the state registration rules are different for broker-dealers and investment advisers. Banks are exempt from registration as broker-dealers or as investment advisers, as are investment advisers with no place of business in the state and fewer than 6 clients in the state in a 12-month period (de minimis standard).
Pontourny Advisory and Investment Services (PAIS) is a federal covered investment adviser. Its principal office is in State X. PAIS also maintains branch offices in States Y and Z. Brenda is the manager of the branch office in State Y. Some of the individuals being supervised by Brenda have clients in States X and Y, and others have clients in States Y and Z. Brenda must register as an IAR in... A) States Y and Z B) States X and Y C) State Y D) States X, Y, and Z
C) State Y Those who supervise the activities of investment adviser representatives are themselves defined as IARs. An IAR representing a federal covered investment adviser need only register in the state or states in which she (the IAR) has a place of business. There is nothing in this question to suggest that Brenda has a place of business anywhere other than in State Y, where her branch office is located. Remember, when it comes to federal covered advisers, registration of their IARs is dependent on the IAR's place of business, not the location of their clients.
Under the USA, all the following statements regarding the registration of agents are true EXCEPT... A) a nonresident agent can solicit business in another state only if the agent and the broker-dealer are registered in that state B) if an agent resigns and affiliates with another broker-dealer, both firms and the agent must notify the Administrator C) if a broker-dealer's registration is revoked by a state, it has no effect on the agent's registration D) an agent can only sell securities that have been registered in a state or that are exempt from registration
C) if a broker-dealer's registration is revoked by a state, it has no effect on the agent's registration If a broker-dealer's (or investment adviser's) registration is revoked by a state, the registrations of all its agents (or IARs) are suspended. That is, those individuals can no longer function in a registered capacity until they register with another active firm.
The owners' equity portion of a corporation's balance sheet would contain all of the following except... A) Treasury stock. B) paid-in capital. C) preferred stock. D) net income.
D) net income. Net income is only found on the income statement. The other three are part of stockholders' equity (net worth). Treasury stock is company stock that has been issued to the public and then re-acquired by the issuer (the company). It appears as a negative number so it reduces the net worth (owners' equity). Note, even though the Treasury stock reduces the owner's equity, the question is asking for the items you would see in the owners' equity section on the balance sheet and, if it exists, it would appear there as a deduction.
According to North American Securities Administrators Association's (NASAA) Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents, which of the following practices is NOT unethical? A) An agent sold shares at a price less than authorized by a client. B) Within the first 10 days of a client's initial transaction, an agent accepted oral discretion and purchased securities on behalf of the client. C) To protect the client in a declining market, an agent sold all shares in the client's account when the client had only authorized the sale of 30% of the shares. D) An agent of a broker-dealer exercised discretion in deciding the time that a sale took place during the trading day without expressed written discretionary authority.
D) An agent of a broker-dealer exercised discretion in deciding the time that a sale took place during the trading day without expressed written discretionary authority. An agent of a broker-dealer may exercise discretion in deciding the time or the price at which a sale takes place during the trading day without express written discretionary authority. Such action is not unethical because time and price are not considered true discretion. An agent may not exercise discretion over the number of shares to be sold without prior written discretionary authority. Oral discretion is only permitted for investment advisers and their representatives (never broker-dealers or agents) during the first 10 business days after the initial discretionary transaction in the account.
In this industry, many words have similar meaning. Which of the following choices consists of a pair which are NOT properly considered synonyms? A) Inflation risk—purchasing power risk B) Liquidity risk—marketability risk C) Interest rate risk—money rate risk D) Financial risk—market risk
D) Financial risk—market risk Financial risk is an unsystematic risk; generally, the concern that an issuer will be unable to meet its debt obligations as they come due. It could be paired with either credit risk or default risk. Market risk is a systematic risk.
Under the Securities Exchange Act of 1934, which body regulates the extension of credit for nonexempt securities? A) The New York Stock Exchange B) The Comptroller of Currency C) The SEC D) The Federal Reserve Board
D) The Federal Reserve Board The Securities Exchange Act of 1934 empowered the Federal Reserve Board (FRB) to set margin requirements and regulate the use of credit to purchase securities. The FRB determines what issues may be purchased on margin and what percentage of the purchase price must be deposited by the purchaser.
One problem facing agent and client alike is determining how much life insurance is necessary to meet future needs. One tool that is useful for making that determination is... A) a mortality table B) a premium purchase analysis C) a statement of beneficiary needs D) a life insurance capital needs analysis
D) a life insurance capital needs analysis A life insurance capital needs analysis takes into consideration the future needs of the insured and family and then factors in how much needs to be filled in by life insurance.
Which of the following statements is an accurate description of dollar cost averaging? A) An investor averages the costs of his shares purchased and then enters limit orders to purchase additional shares at the average price. B) An investor invests a set amount of money each interval to buy more shares when the prices are low and fewer shares when prices are high. C) An investor buys the same number of shares each interval, averaging his purchase prices over time. D) An investor sells shares when the market rises and buys shares when the market declines in order to average his costs.
B) An investor invests a set amount of money each interval to buy more shares when the prices are low and fewer shares when prices are high. Dollar cost averaging involves investing a set amount of money each interval. If the market fluctuates, the client will buy more shares when the prices are low and fewer shares when prices are high. The result of this is a lower average cost per share than average price paid. An investor who sells shares when the market rises and buys shares when the market declines is not dollar cost averaging, but using another system, such as a constant ratio or constant dollar plan. An investor who averages the cost of the shares purchased and then enters limit orders to purchase additional shares at the average price is not engaged in a dollar cost averaging program. In dollar cost averaging, the same dollar amount is invested each interval.
Which of the following is NOT considered to be in the business of investment advising? A) A person who prepares reports about securities in general B) Insurance agents who discuss the merits of whole life insurance verses nonsecurities financial instruments and who receive commissions on the sale of life insurance only C) A financial planner who provides advice on many types of financial instruments, including securities, and receives commissions on the sale of life insurance D) An insurance agent who provides investment advice regularly, but such advice represents a small portion of her business
B) Insurance agents who discuss the merits of whole life insurance verses nonsecurities financial instruments and who receive commissions on the sale of life insurance only Please note that this question is not asking "who is an investment adviser?" It is asking about one of the 3 prongs - being in the "business". The insurance agent who discusses the merits of whole life insurance does not sell investment advice or securities, only insurance policies. The insurance agent does not hold herself out as an adviser nor does she provide advice on securities. If a person advertises as one who provides investment advice or engages in providing investment advice or analyses on a regular basis (even if not the person's principal business activity), the person is considered in the business of giving investment advice. If the person receives any compensation that represents a clearly definable charge, commission, or fee for such advice (whether paid separately or not), she is considered in the business. If the person engages in other financial activities in connection with the advice, it cannot be used to avoid the business standard.
When a stock has a beta of less than 1, this indicates that... A) it will have a high level of systematic risk B) it will, on average, give a return below that of the market C) it will have a high level of unsystematic risk D) it will, on average, give a return in excess of that of a stock with a beta of greater than 1
B) it will, on average, give a return below that of the market Beta tracks a stocks co-movement with the overall market. Because the "market" has a beta of 1.0, any stock with a lower beta will generally not have price movement equal to the market. Beta is a measurement of systematic risk, and low-beta stocks have less than high beta ones. Beta has no relationship to unsystematic risk.
Under the Securities Exchange Act of 1934, the SEC may suspend all trading on an exchange... A) under no circumstances B) only with prior notification to the president of the United States C) only if it has cause to believe that such suspension is necessary to prevent criminal violations that are about to occur on the exchange D) for 10 days, in its discretion
B) only with prior notification to the president of the United States To suspend all trading on an exchange, the SEC must first notify the president of the United States. The SEC may summarily suspend trading in any nonexempt security for up to 10 days without prior notice.
An investor purchases a 30-year zero-coupon corporate bond. The bond was issued by a Fortune 500 company. Her investment is subject to all of the following risks except A) purchasing power risk. B) reinvestment risk. C) default risk. D) interest rate risk.
B) reinvestment risk. Zero-coupon bonds are not subject to reinvestment risk because there is nothing to reinvest. However, they are subject to purchasing power, interest rate, and default risk.
Under the Uniform Securities Act, the state Administrator may by order deny, suspend, or revoke an investment adviser's registration for... A) lack of experience as an investment adviser B) violation of another state's securities laws within the last 10 years C) conviction for a securities-related misdemeanor more than 15 years ago D) conviction for a non-securities-related felony more than 15 years ago
B) violation of another state's securities laws within the last 10 years A violation of any state or federal securities or commodities law within the last 10 years is grounds for denial, suspension, or revocation of registration by order. This means that no hearing is required. Convictions are grounds for administrative action only if they occurred within the past 10 years. Lack of experience is not sufficient cause for revoking or denying registration.
An investor decides to make monthly investments into the KAPCO Growth Fund. Each month, the investor purchases 10 shares of the fund. Over a 4-month period, the investor accumulated 40 shares at the following prices: Month 1 - $10 Month 2 - $8 Month 3 - $12 Month 4 - $10 If, instead of purchasing 10 shares per month, the investor had invested $100 per month... A) the investor would have paid slightly more in the second case. B) the investor's cost basis would be the same. C) the investor would have acquired 40.833 shares instead of 40 shares. D) the investor would have acquired 40 shares in either case.
C) the investor would have acquired 40.833 shares instead of 40 shares. This shows the benefit of dollar cost averaging. This investor purchased 40 shares at a total cost of $400 or an average of $10 per share. If $100 per month had been invested instead, the total would have been the same $400, but the number of shares acquired would have been 40.833. In the first month, $100 divided by $10 = 10 shares. In the second month, $100 divided by $8 =12.5 shares. In the third month, $100 divided by $12 = 8.333 shares, and in the fourth month, $100 divided by $10 = 10 shares. That is a total of 40.833 shares instead of 40 shares; a better deal for the investor. With a total cost of $400 and 40.833 shares, the cost basis per share is slightly less than $9.80 per share instead of $10 per share.
Which items change when a company pays a cash dividend? i. Working capital ii. Total assets iii. Total liabilities iv. Shareholders' equity
ii and iii From an accounting standpoint, once a corporation declares a cash dividend, it becomes a current liability on the company's balance sheet. When that dividend is paid, cash, a current asset, is decreased by the amount of the dividend. Payment of the dividend removes it from the balance sheet as a current liability. Therefore, there is no change to the company's working capital (current assets minus current liabilities) because they are both reduced by the same amount. The total assets (of which cash is one) and the total liabilities (of which the dividend payable is one) both decrease. Because assets and liabilities are changed by an identical amount, there is no change to shareholders' equity (net worth).
