Practice Quiz 4 - 64%
Which of the following would be considered an unethical business practice? A) Agents correcting execution orders in their customer's accounts B) Broker-dealers sending retail clients an email 30 days in advance of a change to fees C) Broker-dealers charging larger than ordinary commissions on certain transactions D) Agents exercising discretion in discretionary accounts
A) Agents correcting execution orders in their customer's accounts When a good-faith error is made, ONLY THE FIRM CAN MAKE THE CORRECTION; the regulators are concerned that giving that power to an agent could lead to covering up unethical activity. When the security involved in the trade is thinly traded (inactive), it is customary to charge a higher commission to cover the added expense. Broker-dealers are required to deliver a copy of their fee schedule no later than account opening. When changes are made, notice must be given at least 30 days in advance and may be done electronically (by email or posting on the firm's website).
Investors with a short time horizon most likely will invest in which class of mutual fund shares? A) Class C shares B) Class B shares C) Class A shares, then convert to Class B shares D) Class A shares
A) Class C shares Class C shares may be less expensive than Class A or B shares for investors with a short time horizon. The front-end load on Class A shares and the back-end load on Class B shares makes them unattractive for short-term investors. A shares do not convert to B shares; it goes the other way.
A strategy used by bond investors to mitigate interest rate risk that involves buying bonds with short-term, intermediate- term, and long-term maturities is called A) laddering B) diversifying C) bulleting D) barbelling
A) laddering One builds a laddered portfolio by investing in bonds with maturities ranging from near- to long-term. In this fashion, there will always be some of the portfolio approaching maturity, thus reducing the interest rate risk on that portion.
With respect to the specific commodity that is the subject of the contract, all of the following are standardized parts to an exchange-traded futures contract except A) the market price. B) the time for delivery. C) the quality. D) the quantity.
A) the market price. It is the delivery price which is standardized, not the market price (that is continuously fluctuating). Exchange-traded futures contracts offer standardized quantities and qualities (grade of the commodity) as well as a standardized time for delivery.
A securities analyst's approach is to look at the overall economy and try to forecast which industry will outperform. Then, the analyst searches for those individual companies within that industry that appear to have the best expected return and add those to the recommended list. In so doing, this analyst is using A) the top-down approach. B) the business cycle approach. C) the optimal portfolio approach D) the bottom-up approach.
A) the top-down approach. this is the basic approach of top-down analysis—start with the "big picture" and narrow it down to the most attractive individual stocks.
XYZ Corporation has a beta of 1.0, and ABC has a beta of 1.4. XYZ has returned 12% and ABC 14.8%. Based on this information, ABC had alpha of A) −2% B) 2.8% C) 14.8% D) 2%
A) −2% Alpha is the extent to which a security's performance exceeds (or falls short of) that of the market compared to what would be expected based on its beta. A key to this question is that XYZ's beta of 1.0 equals the beta of the market. A stock with a beta of 1.4 would be expected to perform 40% better in an up market than the market itself. Because XYZ with a beta of 1.0 gained 12%, ABC should return 140% of that or 16.8% (12% × 1.4). With an actual return of 14.8%, ABC underperformed the expected by 2% and that is why it has a negative alpha.
Which of the following statements regarding the alternative minimum tax is TRUE? A) The lesser of the regular tax or the alternative tax is paid. B) The excess of the alternative tax over the regular tax is added to the regular tax. C) The alternative minimum tax is added to the regular tax. D) The tax bracket will determine whether the regular tax or the alternative tax is paid.
B) The excess of the alternative tax over the regular tax is added to the regular tax. The excess of the alternative tax over the regular tax is added to the regular tax amount. The taxpayer does not have the option of paying the alternative tax or the regular tax depending on his tax bracket. The purpose of the alternative minimum tax is to ensure that certain taxpayers pay a tax consistent with their wealth and income.
Which of the following methods of calculating investment returns are discounted cash flow (DCF) techniques? I. Net present value (NPV) II. Holding period return (HPR) III. Internal rate of return (IRR) A) I and III B) II and III C) I, II, and III D) I and II
A) I and III A discounted cash flow (DCF) technique is one that takes into account the TIME VALUE OF MONEY. Holding period return (HPR) is the total of the income cash flows and capital growth earned by an investment during the period for which it is held. It does not take into account the time value of money. Both net present value (NPV) and internal rate of return (IRR) take the time value of money into account.
Limited liability is a characteristic of being an owner of I. a general partnership II. an interest in a limited partnership III. shares of an S corporation IV. a sole proprietorship A) II and III B) III only C) I and IV D) I, II, and III
A) II and III Limited partnerships and any corporate form of ownership offer limited liability. Such is not the case with a general partnership and certainly not the case with a sole proprietorship.
All of the following would be reasons for an employer to choose a nonqualified plan over a qualified plan EXCEPT A) the nonqualified plan provides an immediate income tax deduction for the employer. B) the nonqualified plan provides greater flexibility. C) the nonqualified plan can discriminate in favor of highly compensated employees. D) the nonqualified plan is not subject to ERISA reporting and disclosure requirements.
A) the nonqualified plan provides an immediate income tax deduction for the employer. Nonqualified plans do not provide a tax deduction to the employer until the employee receives the economic benefit as income at some point in the future. They are, however, more flexible because they do not have to comply with ERISA reporting and nondiscrimination requirements.
Under current tax law (2019), how much can a married couple give to their adult son and his wife without incurring a gift tax obligation? A) Unlimited B) $60,000 C) $30,000 D) $15,000
B) $60,000 The current gift tax exclusion (2019) is $15,000 per donor to each recipient. A married couple can give $30,000 to a single individual and qualify for the exclusion. In this case, the married couple can give $30,000 to their son and $30,000totheirdaughter-in-lawwithoutpayinganygifttax.
Which of the following is NOT associated with passive investment management approaches? A) Belief in efficient markets B) The belief that the market can be timed C) Use of index investing D) Belief in the random walk theory
B) The belief that the market can be timed Proponents of passive-management approaches believe in the random walk theory (market movements are unpredictable) and efficient markets (any information that could affect a stock's value is quickly reflected in its price). As a result, they feel it is impossible to consistently beat the market.
Managers of bond portfolios who anticipate an increase in interest rates should A) assume higher risk in the secondary market B) decrease the portfolio duration C) invest in high-yield or junk bonds D) increase the portfolio duration
B) decrease the portfolio duration A bond portfolio manager who anticipates periods of rising interest rates should decrease the duration of a bond portfolio to minimize the price decline. Duration is inversely related to changes in market and coupon interest rates.
The value of a variable annuity during the accumulation period is determined by A) the number of accumulation units owned multiplied by the number of payments made into the account B) the number of accumulation units owned multiplied by the value of each unit C) the total payments made by the evaluation date D) the value of the securities in the general account of the insurance company
B) the number of accumulation units owned multiplied by the value of each unit The value of a variable annuity during the pay-in period is based on the value of the accumulation units multiplied by the number of units the investor owns. The value of a unit is based on the value of the securities held in the separate account, not in the general account of the insurance company.
Which of the following statements regarding preemptive rights is TRUE? A) Common stockholders do not have the right to subscribe to a rights offering. B) Both common and preferred stockholders have the right to subscribe to a rights offering. C) Preferred stockholders do not have the right to subscribe to a rights offering. D) Neither common nor preferred stockholders have the right to subscribe to a rights offering.
C) Preferred stockholders do not have the right to subscribe to a rights offering. Preferred stockholders have a preference as to liquidation and distribution of dividends, but the right to maintain a proportionate interest in the company only applies to common stock.
If general interest rates increase, the interest income of a bond unit investment trust will probably: A) decrease B) increase C) remain the same D) change as soon as the portfolio manager can take advantage of the higher rates now available in the marketplace
C) remain the same Because the portfolio of a UIT is fixed, the income generated by that portfolio will not change. Remember, a UIT does not have a portfolio manager.
Current market interest rates are 6%. A bond with an 8% coupon would be most likely to have a net present value of zero when the bond is A) selling at par. B) called for redemption. C) selling at a premium. D) selling at a discount.
C) selling at a premium. A bond's NPV is most likely to be zero when its IRR is equal to the current market interest rate. In this case, that would be 6%. The only way for a bond with an 8% coupon to have a yield to maturity of 6% is if the bond is selling at a premium.
Which of the following securities are exempt from registration requirements under the Uniform Securities Act? I. Issues of U.S.-based insurance companies authorized to conduct business in the state II. NYSE traded issues III. Issues of nonprofit religious organizations IV. Commercial paper meeting certain requirements A) II, III, and IV B) I and III C) III only D) I, II, III, and IV
D) I, II, III, and IV Securities issued by an insurance company organized under the laws of any state and authorized to do business in that state ARE EXEMPT FROM REGISTRATION. NYSE-listed issues are federal covered, and nonprofit organizations and commercial paper with a maturity of 270 days or less in denominations of at least $50,000 and in the top 3 ratings are also exempt.
Under UTMA, the custodian must be A) appointed by the court. B) a trustee. C) a member of the minor's family. D) an adult.
D) an adult.
An investment adviser representative recommending investments for an IRA should give primary consideration to A) the beneficiary's tax status B) maximum current income C) liquidity D) risk
D) risk Risk is the key consideration in an IRA or other retirement plan. These accounts seek to preserve capital first and then to achieve a reasonable rate of return.
Savant Investment Managers (SIM) has a client with a short position in PQR common stock. The position was initiated at a price per share of $50, and with PQR currently selling at $30 per share, the client is interested in a method that will allow him to protect some of the unrealized profit without an expenditure of funds. His representative at SIM could suggest A) entering a buy stop order at $35. B) buying PQR 35 call options. C) entering a sell stop order at $35. D) entering a buy stop order at $55.
A) entering a buy stop order at $35. Buy stop orders, commonly referred to as "stop loss" orders are designed to halt a loss or protect a gain. These are buy orders placed above the current market that become triggered if it happens that the stock should trade at or through the specified stop price. Buying the call options would also offer the protection, but the question specified no expenditure of funds.
Overnight loans between banks are made at A) the federal funds rate B) the prime rate C) the call loan rate D) the discount rate
A) the federal funds rate When a bank borrows from another bank on an overnight basis, it is at the federal funds rate. When a bank borrows from the Federal Reserve, it does do at the discount rate. The prime rate is charged by the banks to their stronger borrowers, and the call loan rate is what broker-dealers pay on stock market collateral pledged for margin accounts.
Which of the following statements is correct? A) As the correlation coefficient moves from +1 to zero, the potential for diversification diminishes. B) When a risk-averse investor is confronted with two investment opportunities having the same expected return, the investor will take the opportunity with the lower risk. C) The efficient frontier represents portfolios that have the lowest expected return for each level of risk. Theefficientfrontierrepresentsindividual securities
B) When a risk-averse investor is confronted with two investment opportunities having the same expected return, the investor will take the opportunity with the lower risk. It is expected that investors will always choose the lower risk investment if both generate the same return. The other statements are incorrect. As the correlation coefficient declines, the potential for greater diversification increases. Efficient portfolios, not individual securities, lie on the efficient frontier. The efficient frontier contains portfolios with the highest expected return at each level of risk.
Esther Watson has recently been hired by Robinson, Ibbotson, Carlson and Hanson (RICH), an investment adviser registered with the SEC. RICH has offices in 17 states and Esther works in the branch located in State A. If no exemption is available, Esther will have to register as an IAR with... A) the SEC because RICH operates in more than 15 states. B) the Administrators of each of the 17 states. C) the Administrator of State A. D) the FINRA
C) the Administrator of State A. Unless qualifying for an exemption, employees of investment advisers must register as an IAR in any state in which they have a place of business. This is a state-level registration so the SEC or FINRA are not involved in any way.
Your 55-year-old client owns a nonqualified variable annuity. He originally invested $50,000 4 years ago. The annuity has grown to a value of $60,000. If the client, who is in a 30% tax bracket, makes a random withdrawal of $15,000, what will he pay to the IRS? A) $0.00 B) $4,500.00 C) $4,000.00 D) $3,000.00
C) $4,000.00 Because this is a nonqualified annuity (with no tax deduction), the client pays taxes only on the growth portion or, in this case, $10,000. The tax on this amount is $3,000. However, because the client is not yet age 59½ when making the withdrawal, he also pays a 10% tax penalty, or $1,000. This makes a total of $4,000 tax and tax penalty paid on the random withdrawal.
Dan is the owner of a mutual fund that returned him a before-tax return of 15% last year. Inflation is running at an annual rate of 3%, and Dan is in a 27% marginal income tax bracket. What has been Dan's approximate inflation- adjusted after-tax return on the fund over the course of the last year (rounded to the nearest 2 decimal points)? A) 8.76% B) 10.95% C) 7.95% D) 12.00%
C) 7.95% First, compute Dan's after-tax rate of return of 10.95% as follows: .15 × (1 − .27), or .73 = .1095. Then, compute Dan's inflation-adjusted, or real, rate of return by subtracting the 3% inflation rate from his 10.95% after-tax return.
Many investment advisers follow a program of asset allocation. Which of the following categories of assets is most likely classified as an alternative asset? A) Cash B) Callable bonds C) Real assets D) Preferred stocks
C) Real assets Traditional assets in an allocation program include cash, bonds, and stocks, regardless of the adjective used. Alternative assets include 4 major categories: - real assets - hedge funds - private equity - structured products.
Regarding open-end investment companies, which of the following sales charges is based on the NAV per share? A) 12b-1 fee B) Sales load C) Redemption fee D) Commission
C) Redemption fee If the fund has a redemption charge (CDSC), it is based on the NAV per share, not the public offering price (POP). That is, if the client liquidated shares when the NAV was $10 per share and the POP was $10.50, the CDSC would be charged based on the $10 rather than the $10.50. Commission is not a term used with mutual funds. The 12b-1 fee is a charge against overall assets of the fund; it is not considered to be a charge related to the buying or selling of fund shares
A stock that has no ready market is said to have a high degree of A) investment risk B) market risk C) business risk D) liquidity risk
D) liquidity risk A stock that is not readily convertible into cash has a high degree of liquidity risk.
A client with limited assets seeking additional income in retirement would probably find which of the following investment choices to be the least suitable? A) Insured bank CDs B) Treasury bonds C) ETFs D) ETNs
D) ETNs The question describes an individual with a low risk tolerance, so the Treasury bonds and CDs would certainly be considered appropriate. Because ETNs are a debt security backed solely by a SINGLE issuer while an ETF based on a SPECIFIC INDEX of debt securities represents a large group of issuers, they are ONLY SUITED FOR INVESTORS WHO UNDERSTAND and take the risks involved.
The following table shows the individual weightings and probable returns, [E(Rx)], for the three stocks in an investor's portfolio: Stock Weight E(Rx) V 0.40 12% M 0.35 8% S 0.25 5% What is the probable return of this portfolio? A) 8.85% B) 9.55% C) 8.33% D) 9.05%
A) 8.85% Multiplying the weight of each asset by its expected return, then summing, produces: Probable return = 0.40(12) + 0.35(8) + 0.25(5) =8.85%.
Sortel Industries has preferred stock outstanding that pays annual dividends of $3.75 a share. If an investor wants to earn a rate of return of 8.5%, how much should she be willing to pay for a share of Sortel preferred stock? A) $44.12 B) $33.89 C) $31.88 D) $42.10
A) $44.12 This is a middle school math question. It is asking, 3.75 is 8.5% of what number? The computation is: 3.75 ÷ 0.085 = $44.12
Which of the following individuals employed by an investment adviser would be required to be registered as an IAR? A) A chief compliance officer (CCO) who has no sales duties B) The vice president of human resources C) An intern who receives no compensation whatsoever D) The night watchman
A) A chief compliance officer (CCO) who has no sales duties Any individual performing the functions of an investment adviser representative must be so registered. Among those duties is supervisory responsibility, and the CCO has the job of ensuring that the firm and all of its employees follow the rules. Although executive officers are generally automatically registered as IARs, that is only the case when the job function is one involving activities relevant to IARs (and human resources is not one of them).
Which of the following acts requires publicly traded corporations to issue annual reports? A) Securities Exchange Act of 1934 B) Trust Indenture Act of 1939 C) Securities Act of 1933 D) Investment Company Act of 1940
A) Securities Exchange Act of 1934 The Securities Exchange Act of 1934 mandates that public issuers file annual and quarterly reports with the SEC.
Which one of the following option positions would generally command the greatest time value? A) Calls B) LEAPS C) Straddles D) Puts
B) LEAPS LEAPS, the acronym for long-term equity anticipation securities, have expiration dates that can run MORE than 3 years compared with the 9 MONTHS FOR STANDARD OPTIONS CONTRACTS. Because time value is a direct function of the length of the option, the longer the time until expiry, the greater the potential time value.
Although all new accounts must be approved by a designated supervisor before any trading activity may take place, there is one type of account that must be approved by a specially qualified supervisor. That would be A) a margin account B) an options account C) an IRA D) a discretionary account
B) an options account Because trading options (puts and calls) generally involves a higher degree of risk than stocks, bonds, or mutual funds, a designated supervisory person with knowledge about options must approve the account opening.
An S corporation is characterized by A) unlimited personal liability B) more than 100 shareholders C) limited lifetime D) flow-through tax treatment
D) flow-through tax treatment Shareholders of an S corporation have limited liability, are limited to no more than 100 shareholders, and receive flow-through tax treatment.
Insurance agents frequently use a capital needs analysis to help determine the correct amount of life insurance needed by their clients. That analysis would look at all of these EXCEPT A) market volatility B) future earnings C) the inflation rate D) life expectancy
A) market volatility Of these choices, the only one that we cannot in anyway predict is market volatility. We can factor in an estimated inflation rate, project future earnings, and look at the mortality tables to obtain life expectancy. But nothing can project market volatility with any degree of accuracy.
In general, the most passive investment style for a portfolio would be... A) buy and hold. B) indexing. C) contrarian. D) value.
B) indexing. This is a close call between indexing and buy and hold. We believe that the NASAA philosophy on this would be that buy and hold does require some management after the portfolio is set up. That is, some companies go out of business or are merged into other entities or go private and that requires making new decisions. The same can happen with the companies in an index, but the investor doesn't have to make the changes. When you invest in an index, it is sort of like (with credit to Ron Popeil) "set it and forget it". Clearly, the other two choices are not passive in the same way.
A corporate bond that pays interest semiannually has a par value of $1,000, matures in 5 years, and has a yield to maturity of 10%. What is the value of the bond today if the coupon rate is 8%? A) $922.78 B) $1,221.17 C) $1,144.31 D) $1,051.23
A) $922.78 How did we calculate that? We used tool that you won't have available at the test center (a financial calculator), but there is a great tool you will have - common sense. When a bond has a yield to maturity that is greater than its coupon rate, the bond must be selling at a discount and that only leaves one possible answer. The only way to get a 10% return on an 8% bond is to buy it at a price below par.
An agent working for a brokerage firm and his client both live in Illinois, and the agent makes an offer to the client by phone while the client is vacationing in California, which he accepts. The client travels to Texas before returning home and sends payment for the security from there. He makes his payment by sending a check from a money market fund based in Ohio. The Administrators of which of the following states have authority over the sale? I. Illinois II. California III. Texas IV. Ohio A) I and II B) II and III C) II, III, and IV D) I, II, III, and IV
A) I and II Because the offer was made from Illinois to a person in California, the state Administrators of both states have jurisdiction. The state from which payment was mailed and the state in which the checking account or money market fund is based are irrelevant for the purpose of determining an Administrator's jurisdiction.
All of the following would flow through as a loss to limited partners except A) principal repayment on partnership debt. B) interest payments on partnership debt. C) depletion. D) accelerated depreciation.
A) principal repayment on partnership debt. Principal repayments are not an expense for tax purposes. The interest on the debt is an expense and, along with depletion and depreciation expense, does flow through to the limited partners as passive loss.
An investor purchases a Treasury note and the confirmation shows a price of $102.21. Rounded to the nearest cent, the investor's cost, excluding commissions, is A) $1,022.10. B) $1,026.56. C) $102.21. D) $1,022.21.
B) $1,026.56. Treasury notes are quoted in 32nds where each 32nd equals $.3125. The 102 in the quote equals $1,020 and the 21/32 is an additional $6.56 bringing the total to $1,026.56.
Jessica is an investment adviser representative for an SEC-registered investment adviser. She lives in State X and receives a letter from a former college friend requesting a contribution to the friend's political campaign for governor of State Y. As it happens, Jessica's firm provides advisory services to State Y's employee retirement fund and Jessica actively solicits business from other state agencies. Which of the following actions would be permitted to Jessica under the SEC's pay-to-play rule without causing any concerns to her firm? A) Sending a letter to the friend indicating that the rules would not permit her to contribute to the campaign B) Donating a maximum of $150 to the campaign C) Donating a maximum of $350 to the campaign D) Donating a maximum of $250 to the campaign
B) Donating a maximum of $150 to the campaign Jessica's solicitation activities define her as a covered employee. The rule allows covered employees to make contributions of up to $350 per official or candidate per election in which they can vote, or $150 for other elections. Because the friend is running for governor in a state that Jessica cannot vote, the lower limit applies.
Social media can be static or interactive. Examples of static content typically available through social networking sites include all of the following EXCEPT A) profiles B) blogs C) wall information D) backgrounds
B) blogs Blogs are interactive, while the others are static.
The yield to maturity is A) determined by dividing the coupon rate by the current market price of the bond B) the annualized return of a bond if it is held to maturity C) the annualized return of a bond if it is held to call date D) set at issuance and printed on the face of the bond
B) the annualized return of a bond if it is held to maturity The yield to maturity reflects the annualized return of a bond if it is held to its maturity. The computation reflects internal rate of return and is frequently referred to as the market required rate of return for a debt security. The rate set at issuance and printed on the face of the bond is the nominal or coupon rate. Dividing the coupon rate by the current market price of the bond provides the current yield. The return of a bond if it is held to the call date is the yield to call.
All investing carries risk of loss. Some positions have much higher risk than others. Among the riskiest is selling stock short. Which of the following types of orders would you recommend to a short seller as a potential hedge against loss? A) Buy limit B) Sell limit C) Buy stop D) Sell stop
C) Buy stop The risk to a short seller is to the upside (there is, at least theoretically, no limit as to how high the stock's price can go). Remember, a short seller is obligated to buy back the shorted stock. Therefore, we want to place an order that will ENABLE THE CUSTOMER TO PURCHASE THE STOCK BEFORE THE PRICE GOES TOO HIGH. To protect against an increase to the stock's price beyond the point the investor is willing to lose, it is wise to enter a buy stop order at that price. If the stock should reach that price, the order is triggered, a market order is entered, and the short position is closed out. This is why stop orders are usually referred to as stop loss orders; they keep you from losing any more money. A buy limit order is always placed below the current market. That won't help the short seller when the price of the stock rises.
Which of the following statements regarding a $1,000 corporate 8.50% bond offered at 110 is true? A) The bond is a discount bond. B) To determine the bond's current yield, its stated rate must be compared against other fixed-rate investments in the client's portfolio. C) The bond's current yield is calculated by dividing its annual interest by its current market price. D) The bond's current yield is lower than its yield to maturity.
C) The bond's current yield is calculated by dividing its annual interest by its current market price. A bond's current yield is calculated by dividing its annual interest by its current (market) price. In this case, it would be $85 ÷ $1,100. The current yield will be higher than its yield to maturity, which takes into consideration the $100 difference between the purchase price and the par value (a loss of $100). The determination of a bond's yield is unrelated to other bonds. In addition, this bond is selling at a premium (more than $1,000), not at a discount (less than $1,000).
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) training staff to identify and manage conflicts in accordance with firm policies and procedures B) establishing mechanisms to identify conflicts in a firm's business as it evolves C) ensuring that the firm remains solvent for protection of customers and employees alike D) avoiding severe conflicts, even if that avoidance means foregoing an otherwise attractive business opportunity
C) 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.
Writing an option provides all of the following EXCEPT A) income B) limited downside protection when long the underlying asset C) maximum protection against loss D) hedging
C) maximum protection against loss Writing an option provides only limited protection for a long or short position. That protection is limited to the amount of the premium received and is why this is called a partial hedge.
A registered investment adviser hires his friend to act as an adviser solicitor on his behalf. The friend asks if he is required to identify his affiliation with the adviser when contact is made to potential customers. If the adviser says that such disclosure is not required, he is not in violation of provisions of the Investment Advisers Act of 1940, which require disclosure of a relationship between an investment adviser and an investment adviser solicitor, if A) the friend is a client of the adviser's firm B) the friend is an employee of the advisory firm C) the solicitations are for impersonal advisory services D) There are no exceptions
C) the solicitations are for impersonal advisory services Disclosure of the relationship between an investment adviser and a solicitor is required unless the service involves impersonal advisory services only. An example of an impersonal advisory service is a newsletter that makes the same general recommendations to all readers
Each of the following are advantages offered by a nonqualified deferred compensation plan that are not found in a qualified plan EXCEPT A) deferred compensation plans are not subject to most of the requirements of the Employee Retirement Income and Security Act of 1974 (ERISA). B) they are an attractive benefit for highly compensated employees because they're free from the contribution limits. C) they are an attractive benefit to the employer because participation requirements and nondiscrimination restrictions do not apply. D) employer contributions to the plan are not subject to current taxation to the employee.
D) employer contributions to the plan are not subject to current taxation to the employee. Tax deferral is found in both NQDC plans and qualified plans, so there is no advantage that one has over the other. However, NQDC plans have much more flexibility without the burdensome compliance issues with ERISA.
The minimum rate of return that a reasonable investor will accept to acquire an investment (required rate of return) is generally determined by A) the investor's marginal federal income tax bracket B) the investor's previous investment experience C) the Federal Reserve Board (FRB) through its open-market operations D) the current risk-free rate of return plus the risk premium
D) the current risk-free rate of return plus the risk premium Reasonable investors relate return to the level of risk assumed; on Treasury bills, this is considered the risk-free rate. An investor in other than risk-free Treasury bills would require a premium to compensate for the additional risk taken.
Which of the following accurately describes a cease and desist order as authorized by the USA? A) An order by the Administrator to refrain from a practice of business believed by that Administrator to be unfair B) An order issued by a federal agency to a brokerage firm to stop an advertising campaign C) An order issued by a court of competent jurisdiction in the state requiring a business to stop an unfair practice D) An order from one brokerage firm to another brokerage firm to refrain from unfair business practices
A) An order by the Administrator to refrain from a practice of business believed by that Administrator to be unfair A cease and desist order is a directive from an administrative agency to immediately stop a particular action. The order can come from a federal, state, or judicial body; it is not exclusive to any single body. However, because this question is referring to the Uniform Securities Act, we focus on the actions of the Administrator, not a federal agency. Administrators may issue cease and desist orders with or without a hearing. Courts issue injunctions, usually when the cease and desist order is ignored. Brokerage houses cannot issue cease and desist orders to each other.
When analyzing a security's standard deviation, which of the following statements accurately describes observations according to a normal frequency distribution curve? A) Approximately 97.5% of all observations will be within three standard deviations of the mean. B) Approximately two-thirds, or 68%, of observations will be within one standard deviation on either side of the mean. C) Approximately 95.5% of all observations will be within three standard deviations of the mean. D) Approximately 97.5% of all observations will be within two standard deviations on either side of the mean.
B) Approximately two-thirds, or 68%, of observations will be within one standard deviation on either side of the mean. Approximately two-thirds, or 68.26%, of observations will be within one standard deviation on either side of the mean. Approximately 95% will be within 2 standard deviations and approximately 99% will be within 3.
What is the purpose of the Securities Exchange Act of 1934? A) It provides requirements relating to new issues. B) It regulates the persons involved in the secondary market. C) It provides standards among the states. D) It provides policies relating to unethical business practices.
B) It regulates the persons involved in the secondary market. The Securities Exchange Act of 1934 was designed to regulate securities transactions, securities markets, and securities firms that trade in the secondary market. The Securities Act of 1933 was designed to provide regulation in the new issue market. Unethical business practices are covered in NASAA's Statements of Policy on Unethical Business Practices. The Uniform Securities Act provides a model for the states.
Your manager is reviewing the activity in your customer accounts to detect trading irregularities. Among the factors the manager will look for to determine if churning is occurring are... I. the financial resources of the account II. the number of winning trades versus losing trades III. the objectives of the account IV. the marital status of the customer A) I and II B) I and III C) II and III D) II and IV
B) I and III Inspecting an account for churning focuses primarily on comparing account activity to the account's financial resources and objectives. The number of winning versus losing trades does not influence a determination that excessive trading has taken place.
An investment adviser representative, who also receives commissions as an agent at a brokerage firm, has opened an account with a client whose net worth is $200,000. The customer wants the account aggressively traded and wishes the investment adviser to be compensated based on the account's performance. In this account, payment on a performance basis is A) permissible if the customer's net worth is a minimum of $1 million B) not permissible C) permissible D) permissible with approval from the agent's supervisor and written permission from the customer at the time the account is opened
B) not permissible It is not permissible to trade this account on a performance basis; the investment adviser representative must be paid on commission or through a fixed-fee arrangement. Under the Investment Advisers Act of 1940, performance fees are allowed only for clients with a minimum of $1 million invested or a minimum net worth in excess of $2.1 million.
Which of the following mutual funds should an investment adviser representative recommend to a client whose objective is current income with moderate risk? A) Preferred stock fund B) Aggressive growth fund C) Money market fund D) High-yield bond fund
A) Preferred stock fund Preferred stock generates current income in the form of dividends. Aggressive growth funds strive for capital appreciation rather than current income. Money market funds have low yields, not the high yields that an income investor wants. While high-yield bonds provide current income, they entail a high, rather than a moderate, degree of risk.
One of your clients has made plans to get an advanced degree by enrolling in the local community college in three years. At the same time, her child expects to be entering veterinary school. What would you recommend as the most appropriate tool to accumulate funds for both of them? A) Section 529 plans B) UTMA accounts C) Variable annuities D) Coverdell ESAs
A) Section 529 plans A Section 529 plan for each as beneficiary would be most appropriate, largely because the others wouldn't work. The parent certainly isn't a minor so UTMA is out and that makes the Coverdell ESA a non-option because contributions can't be made after the 18th birthday. Variable annuities are retirement vehicles and, with their generally high surrender charges, would not be a suitable recommendation with a three-year time horizon.
The term security would include which of the following? A) Section 529 plans B) Indentures C) 403(b) plans D) Coverdell ERAs
A) Section 529 plans Technically, Section 529 plans are known as municipal fund securities. As such, the rules of the MSRB require delivery of an official statement, sometimes called an offering circular but never referred to as a prospectus. RETIREMENT PLANS ARE NOT INCLUDED in the definition and an indenture is a document specifying the legal obligations of the bond issuer and rights of the bondholders. It is sometimes called the deed of trust, and although it details information about a security, it is not, in itself, a security.
The statement, "Stock prices fully reflect all information from public and private sources," can be attributed to which form of the efficient market hypothesis (EMH)? A) Strong form EMH B) Weak form EMH C) Passive form EMH D) Semi-strong form EMH
A) Strong form EMH This is the definition of the strong form EMH because it includes private information. Private sources include insider information, such as persons holding nonpublic access to information that may impact stock prices. 1. Weak EMH - current stock prices have incorporated all historical market data and historic price trends... 2. Semi-strong EMH - current stock prices reflect all historical price data BUT also reflect data from ANALYZING financial statements/industry/economic outlook. 3. Strong form EMH - security prices FULLY REFLECT all information from both PRIVATE and public sources... There is no such term as passive form EMH.
An investor will likely exercise a put option when the price of the stock is A) below the strike price. B) above the strike price. C) above the strike price plus the premium. D) at the strike price.
A) below the strike price. First of all, we know this investor is long the put. How? Because only those who own options (are long) can decide to exercise. The owner of a put (long put) profits when the stock falls. The put would be exercised when the price of the stock is below the strike price. For example, if this is a 50 put, the investor has the right to exercise and sell the stock at $50 per share. That is a benefit when the market price of the stock is below 50 and the lower the better. Remember the phrase "put down" because a put option becomes valuable to the holder when the market price goes below the exercise (strike) price.
In accordance with the stated provisions of the Investment Company Act of 1940, renewal of an open-end management investment company's investment adviser's contract must be approved by A) majority vote of the fund's board of directors or of the outstanding voting shares, as well as by majority vote of the noninterested members of the board B) FINRA C) the SEC D) the principal underwriter of the fund
A) majority vote of the fund's board of directors or of the outstanding voting shares, as well as by majority vote of the noninterested members of the board When it comes to management investment companies (open-end or closed-end), renewal of the investment adviser's contract is approved annually by the fund's board of directors or a majority vote of the outstanding voting shares. The initial contract must be approved by both the board of directors and a majority vote of the outstanding shares. In both of these cases, initial and renewal, a majority vote of the non-interested (outside) members of the fund's board of directors is also required.
When a will calls for property to be distributed per stirpes, it means that A) the property is divided into as many equal shares as there are surviving children of the designated ancestor and deceased children who left surviving descendants B) the property is divided into as many equal shares as there are surviving children and grandchildren of the designated ancestor C) the property is divided into as many equal shares as there are surviving children of the designated ancestor, with nothing going to surviving descendants of deceased children D) all living descendants of the ancestor receive equal shares in the property remaining after all estate expenses are paid
A) the property is divided into as many equal shares as there are surviving children of the designated ancestor and deceased children who left surviving descendants When a will calls for a per stirpes distribution of assets, it provides that if any named beneficiary predeceases the testator (the maker of the will), surviving children of that individual share in the share that the individual would have received. For example, if the testator had 3 children and 1 of them died first, any children of the deceased would share in their parent's portion (they would split one-third of the estate between them).
Among the advantages of including preferred stock in an investor's portfolio are I. dividends must be paid before any distribution to common stockholders II. a rate of return that is likely to keep pace with inflation III. the opportunity for increased income if the issuer's profits increase IV. a fixed rate of return that is likely higher than that for a debt security offered by the same issuer A) III and IV B) I and IV C) II and III D) I and II
B) I and IV Preferred stock carries a fixed dividend that must be paid before any distribution to common stockholders—hence the name preferred. However, unlike the interest on a debt security, there is no obligation to pay the dividend. Therefore, the yield on a company's preferred stock is invariably higher than that on its debt issues. Disadvantages of owning preferred stock are that the fixed return may not keep up with inflation and, regardless of corporate earnings, the dividend will not change, so there is no hope for increased income.
Howard Robard is an investment adviser representative with Hughes & Company, a state-registered investment adviser having its principal office in State O and offices in States P and D. Howard works out of an office in State P and has 4 retail clients there. In addition, Howard has 25 retail clients in State D, 6 retail clients in State M, and 1 retail client in State O. Howard would be required to register as an investment adviser representative in A) State P. B) States P, D, and M. C) States P, D, M, and O. D) States D and M.
B) States P, D, and M. Individuals working as IARs for state-registered investment advisers must register in any state in which they (the IAR) maintain a place of business as well as any other state in which they serve more than 5 retail clients (the de minimis exemption). With an office in State P, registration is required there, regardless of the number of clients. In both States D and M, the de minimis has been exceeded so registration is required there. The fact that the IA's principal office is in state O has no bearing on Howard and, with only 1 retail client there, he qualifies for the de minimis exemption.
In order to qualify as a REIT, A) at least 90% of the assets must be invested in real-estate related assets. B) at least 75% of the assets must be invested in real-estate related assets, cash, and U.S. government securities. C) a mortgage REIT must have at least 75% of the assets in government-insured mortgages. D) at least 75% of the income must be paid out as dividends to investors.
B) at least 75% of the assets must be invested in real-estate related assets, cash, and U.S. government securities. A REIT must be invested in real estate. By law, at least 75% of a REIT's assets must consist of real estate assets such as real property or loans secured by real property. That 75% can also include cash and U.S. government securities. If it is a mortgage REIT, there is no specific requirement regarding government-insured mortgages. A REIT must distribute at least 90% of its income to investors, not 75%.
Prior to the opening of the securities markets, KAPCO Chemical Corporation reports quarterly earnings per share of $1.50, exceeding analysts' estimates by more than 10%. By the end of the trading session, KAPCO's stock price has fallen by 5%. This would be an example of A) opportunity cost B) market risk C) financial risk regulatory risk
B) market risk Market risk is the uncertainty that a stock's price will move in a manner unrelated to the company's fundamentals. A prime example of this is when earnings go one way and the stock price goes the other. What we are not told in the question is the performance of the stock market. It is likely that the overall market has declined over this period. Financial risk is, as the name indicates, related to financing circumstances. The most common financial risk is when excess leverage has been employed. Another financial risk is lack of cash flow, but nothing in this question indicates that situation.
A Canadian broker-dealer is registered in Province Q. The firm has clients who vacation in several New England states and they would like to continue to do business with them while on their holidays. Under the Uniform Securities Act, A) this would only be permitted if the trades were executed through an affiliated domestic broker-dealer who is licensed in those states B) this is permissible if the broker-dealer is properly registered in Province Q, deals only with existing clients, and registers in each of the states where their clients are vacationing C) the broker-dealer may only accept unsolicited orders from their existing clients while they are vacationing in the United States D) this is permissible only if the broker-dealer is registered with the SEC
B) this is permissible if the broker-dealer is properly registered in Province Q, deals only with existing clients, and registers in each of the states where their clients are vacationing The Uniform Securities Act provides for a form of limited registration for Canadian broker-dealers wishing to do business with their clients who are vacationing or otherwise traveling through the United States. In order to qualify for the limited registration, the BD must be properly licensed in its home province and their only dealing in the states is with an existing client.
Under the terms of the Uniform Securities Act, which of the following is an investment adviser for purposes of state regulatory jurisdiction? A) A commercial bank with a place of business in the state that advises clients on banking matters B) An accountant located in the state who offers general securities advice as an incidental part of his business C) An investment advisory subsidiary of a bank holding company located in the state that manages $20 million in assets D) A federal covered adviser with clients in the state
C) An investment advisory subsidiary of a bank holding company located in the state that manages $20 million in assets A bank holding company's investment advisory subsidiary that manages $20 million in assets is an investment adviser subject to the Uniform Securities Act (USA). Under the language of the USA, a commercial bank is excluded from the definition of investment adviser whereas a bank holding company subsidiary is not. While a federal covered adviser is an investment adviser in practice (that is, it performs the functions of an adviser), it is excluded from the definition of an investment adviser under the USA to avoid duplicate regulation. An accountant located in the state that offers general securities advice as an incidental part of his business is not an investment adviser.
An investment adviser representative is required to make disclosure to the client when I. the IAR, in preparing a recommendation, uses research provided by a third party with whom the IAR is not affiliated II. the IAR recommends a specific insurance policy for the client's overall financial plan, where a commission will be received on that sale III. transactions recommended to a specific client are inconsistent with those for other clients with objectives that are identical to that particular client IV. transactions recommended to the client are inconsistent with those for the IAR's own account A) I and III B) II, III, and IV C) II and IV D) I, II, and III
C) II and IV An investment adviser must provide full disclosure to his client if there would be even a hint of conflict of interest. This will include the case where a recommended product will generate a commission or other source of income to the adviser, as well as full disclosure, if a recommendation is not consistent with the adviser's own activity in his own account. The adviser can use any source of information to create his own analysis, disclosure of source only being required if the adviser uses the product of a third party as the presentation to the client. It would be unusual that all clients with the same objectives would purchase or have recommended for purchase the same securities.
If AAA Investment Advisers has entered into a written discretionary advisory contract with a client, all of the following information must be stated in the contract EXCEPT A) AAA Investment Advisers shall be compensated on the basis of a share in the capital gains exclusive of capital losses B) consent of the client is required for AAA Investment Advisers to assign the contract to another manager or adviser C) AAA Investment Advisers charges 1% annually on the value of assets under management D) AAA Investment Advisers has discretionary authority to make investment decisions on behalf of the client
A) AAA Investment Advisers shall be compensated on the basis of a share in the capital gains exclusive of capital losses AAA Investment Advisers cannot be compensated on the basis of a share in the capital gains without considering capital losses. Performance-based fees are not allowed unless the client meets certain minimum financial standards. Individuals must have a net worth that exceeds $2.1 million or a minimum of $1 million under management with the adviser.
An investor purchasing gold bullion is most likely looking for an investment that is A) cyclical. B) countercyclical. C) exchange traded. D) income producing.
B) countercyclical. Countercyclical assets are those whose prices tend to move in the opposite direction of the overall economy. Historically, the price of precious metals, especially gold (and stock in gold mining companies), moves up when the economy enters the contraction phase and moves in the reverse direction during expansion. Cyclical stocks follow the cycle. There is no "gold bullion exchange". It is a dealer market with bullion dealers all over the world setting their own spreads. A bar of gold does not provide income.
