Unit 5

A 3x leveraged fund priced at $42 tracks an index that is up 2% one day and then down 3% on the next day. What should this fund be approximately priced at following these two volatile days? A) $40.50 B) $45.86 C) $43.18 D) $41.55

A) $40.50 Starting with the $42 purchase price, a 2% increase to the index on Day 1 equals $0.84 up (0.02 × $42 = $0.84). Given the 3x leverage, this would equate to a $2.52 increase on Day 1 (3 × $0.84 = $2.52). At the start of Day 2, the fund would be priced at $44.52 ($42 + $2.52 = $44.52). On Day 2, the index falls by 3%. A 3% decrease in the fund equals $1.34 [0.03 × $44.52 ($1.3356 rounds up to 1.34)]. Again due to the 3x leverage structure of the fund, the $1.34 decrease equates to a $4.02 drop in the fund price (3 × $1.34 = $4.02). Therefore, after the two volatile days, the fund should be priced at approximately $40.50.

One of your clients approaches you and is looking for an investment that will provide ready marketability and income. Which of the following would be the least appropriate recommendation? A) A limited partnership in rental real estate B) A money market mutual fund C) U.S. Treasury notes D) NYSE-listed preferred stock

A) A limited partnership in rental real estate The key is meeting both needs—marketability and income; each of the choices supplies both except the limited partnership. The client could expect income from a direct participation program (DPP) investing in rental real estate, but the liquidity would be missing.

In search of higher returns, many investors have turned to structured products such as structured notes. Your clients need to be aware that these are complex instruments that have which of the following characteristics? (2 answers) A) Credit or default risk because they are unsecured obligations of the issuing institution B) High price transparency C) Limited or no liquidity D) High initial returns that diminish over time

A) Credit or default risk because they are unsecured obligations of the issuing institution C) Limited or no liquidity As unsecured obligations, their safety of these notes is only as good as the financial strength of the issuer, and because these tend to be one-of-a-kind products, they do not have liquidity. A particular hazard of investing in structured notes is that there is a low level of pricing transparency; another concern is that the returns are generally not fully realized until the maturity date.

An investment adviser who is discussing forward contracts with a client would most likely be referring to an investment in: A) an agricultural commodity B) an equity index annuity C) puts and calls D) a diversified portfolio

A) an agricultural commodity Forward contracts are available on commodities, such as agricultural products (e.g., corn, wheat, and soybeans). Puts and calls are options, not forward contracts; although this could be a way to diversify the portfolio, that does not directly answer the question.

With respect to liquidity and potential for diversification, in comparing alternative investments to exchange-traded stocks, the markets for alternative investments are generally: A) less liquid and provide more opportunity for diversification B) less liquid and provide less opportunity for diversification C) more liquid and provide more opportunity for diversification D) more liquid and provide less opportunity for diversification

A) less liquid and provide more opportunity for diversification Alternative investments can provide exposure to unique risks and trading strategies and thus provide good diversification to a stock and bond portfolio. The markets for alternative investments are generally less liquid than most listed stocks.

A high-net-worth client of yours invested $250,000 into an oil and gas limited partnership drilling program for which she received a 10% interest in the project. Unfortunately, after two years of drilling without success, the project was foreclosed with outstanding debt of $4 million. Your client is liable to the partnership's creditors for: A) $400,000 B) $0 C) $250,000 D) $150,000

B) $0 One of the benefits of being a limited partner is that the most you can lose is your investment. Just as it would for a stockholder in a corporation, the concept of limited liability applies. You can lose your entire investment, but you have no liability for debts of the business. This question describes a direct participation program (DPP) that has gone bankrupt (liabilities exceed the assets) and wants to know the share of the $4 million in outstanding debt that is the responsibility of this investor. Even though she owns 10% of the partnership, as a limited partner, she has no liability for any of that debt.

For a customer interested in buying an inverse exchange-traded fund (ETF) tracking the performance of the Standard & Poor's 500 Index, which of the following market views would make that purchase most inappropriate? A) Neutral B) Bullish C) Bearish D) Bullish or bearish

B) Bullish Inverse (short) ETFs are designed to deliver returns that are opposite of the benchmark index they are tracking. Therefore, buying an inverse ETF that tracks the S&P 500 Index at a time when the market outlook is bullish would be most inappropriate. If the index rises with the anticipated bullish market, the fund that delivers returns that are the opposite of the index would fall in value.

The alternative asset investments class is least associated with which of the following characteristics? A) Nonnormal returns B) Efficient pricing C) Diversification D) Illiquidity

B) Efficient pricing Alternative assets are most often characterized by inefficient pricing, providing potential abnormal returns or alpha returns. That is the prime reason for their popularity, especially with institutional investors.

One of your clients calls to tell you that they overheard someone at work talking about investing in NFTs. What do those initials stand for? A) No free ticket B) Nonfungible tokens C) Nutrition and food technology D) Neuroplastic functional training

B) Nonfungible tokens Nonfungible tokens (NFTs) are digital assets that reside as code on a blockchain. The owner of an NFT buys ownership of that particular bit of alphanumeric code associated with whatever has been tokenized. NFTs can be digital representations of artwork, a video, music, or even a tweet. They are not cryptocurrency but are usually paid for with that currency. Each NFT is unique, a one of a kind, making the tokens nonfungible. That means investors can't exchange one NFT for another just like it as they can with dollars or publicly traded securities. Artwork is a good example of something produced as an NFT; the digital copy owned by the investor is the only copy.

A bullish client invests into a 3x leveraged fund based on the S&P 500 Index. If the index should rise by 10%, your client's investment would be expected to: A) increase by 50% B) increase by 30% C) increase by 20% D) decrease by 30%

B) increase by 30% Although it doesn't always work out that way, a 3x leveraged fund should gain in value at a rate 3 times the reference index.

All of the following would flow through as a loss to limited partners except: A) depletion B) principal repayment on partnership debt C) interest payments on partnership debt D) accelerated depreciation

B) 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 expenses, does flow through to the limited partners as passive loss.

It would be correct to state that an inverse ETF: A) is suitable for sophisticated investors with a long time horizon B) utilizes derivatives to achieve its objectives C) moves in tandem with the index being tracked D) is a form of private equity fund

B) utilizes derivatives to achieve its objectives Inverse, or short, ETFs move in the opposite direction of the index being tracked. To achieve their goals, various types of derivatives are used. This type of ETF is used only for short-term investments, rarely as long as a single month. These are registered investment companies, not private.

An investor looking for liquidity would be least likely to consider: A) ETFs B) CEFs C) NFTs D) REITs

C) NFTs NFTs are nonfungible tokens and, because they are nonfungible, their liquidity is limited. CEFs (closed-end funds) and ETFs (exchange-traded funds) are highly liquid. Although there are nontraded REITS, for exam purposes, all REITs are considered to be publicly traded unless something in the question indicates otherwise.

The price of which of the following commodities is most likely to be impacted by weather? A) Lead B) Livestock C) Orange juice D) Gold

C) Orange juice If you ever saw the movie Trading Places with Eddie Murphy and Dan Aykroyd, you would certainly know that weather can have a major impact on the orange crop. Metals are not affected by heat, cold, rain, or snow. Years ago, before heated/air-conditioned barns and other protective devices, livestock would freeze in a bad winter, but that is no longer much of an issue.

Regarding the use of the term direct participation programs, when referring to tax-sheltered investments, which of the following is not a DPP? A) Real estate limited partnership B) Oil and gas limited partnership C) Real estate investment trust D) Equipment leasing limited partnership

C) Real estate investment trust DPPs include any form of business that allows for the direct pass-through of tax consequences to participants. REITs do not allow for the pass-through of losses.

A REIT and a direct participation program are similar because they both: A) pass through losses to investors B) can be described as a limited partnership C) are operated by a centralized management D) are traded actively in the secondary market

C) are operated by a centralized management Both a REIT and a DPP are run by centralized management. A REIT may not pass through losses to its investors, and it is not a limited partnership. A DPP cannot be easily traded in the secondary market.

Which of the following commodities is least likely to be affected by the weather? A) Pork bellies B) Wheat C) Orange juice D) Silver

D) Silver Silver is a precious metal and its price is not influenced by the weather. Crops, such as wheat and oranges, certainly are, and livestock is affected as well.

If an investor was of the opinion that the market was going to have a bad day, to maximize that investor's gains, you might recommend: A) a leveraged ETF B) selling a call option on the S&P 500 Index C) an inverse ETF D) an inverse leveraged ETF

D) an inverse leveraged ETF An inverse ETF should go up if the market goes down. Adding leverage to it means moving by a factor of 2x or 3x, so to maximize the potential gain, we combine leverage to the inverse and suggest the inverse leveraged ETF.

A client who is interested in investing in commodities might look at any of the following except: A) corn B) heating oil C) gold D) debentures

D) debentures Debentures are a security; each of the others is a commodity.

A client invests $100,000 in a commercial real estate venture taking a 10% interest as a limited partner. Unfortunately, the demand for new office space deteriorates and the partnership is unable to meet the mortgage payments. The end result is foreclosure with a net loss of $2 million. This would have the effect of: A) giving the client a passive loss of $200,000 B) requiring the client to pay his share of the loss to the creditors C) a potential claim against the agent who sold the client this program D) giving the client a passive loss of $100,000

D) giving the client a passive loss of $100,000 The most the client can lose is the amount of the investment, in this example, $100,000. Because DPPs are considered passive investments, the loss may only be deducted against passive income. As a limited partner, the loss is "limited" to the original investment. Sure, the client could always make a claim against the agent, but nothing in this question indicates that the agent did anything wrong so that would not be the "best" answer.

Many sophisticated investors have added alternative investments to their portfolios. Benefits in doing so include: A) returns that almost always exceed those of traditional stock and bond investments B) lower expenses than traditional stock and bond investments C) greater regulation than traditional investments such as stocks and bonds D) portfolio diversification

D) portfolio diversification Alternative investments, such as limited partnership vehicles and hedge funds, have a tendency to add diversification to a traditional stock and bond portfolio. Many alternative investments have little or no regulation, and their expenses are typically high. Although many alts offer the opportunity for higher returns, that opportunity is not always realized. Therefore, we cannot make a statement that the returns almost always generate higher returns than traditional investments.

You have a client who wishes to allocate a portion of his funds to investment real estate in an attempt to generate additional income. That goal could be reached by investing in any of the following except: A) real estate limited partnerships B) REITs C) rental real estate D) raw land

D) raw land Raw land does not generate income; it is most often held for future capital appreciation.

An investor owns a 2x leveraged inverse ETF. If the underlying index should decrease in value: A) there is no correlation between the fund and the value of the index B) the fund shares will also decrease in value C) the fund shares will increase in value D) the ETF shares will increase in value by a factor of 2

D) the ETF shares will increase in value by a factor of 2 An inverse, or short, ETF will move in the opposite direction of the underlying index. It is known as a short fund because as the underlying index goes down, the value of the shares increases. Because this is a 2x (2 times) leveraged fund, it will move at a rate that is twice that of the index. Although the choice, "the fund shares will increase in value" is a true statement, it is not the most accurate answer to the question because it ignores the 2x leverage.

Which of the following is a motivation for creating structured products? A) Structured products improve market completeness B) Structured products improve profits for broker-dealers C) Structured products are less expensive for investors to buy and trade D) Structured products reduce costs to issuers

A) Structured products improve market completeness The primary motivation for financial structuring is to increase market completeness. What does that mean? As stated in the LEM, structured products are created to meet a specific need for which there is nothing available in the current market. Creating this structured product is said to be "completing the market." Creating structured products is a cost to issuers. Investors pay fees to access structured products in addition to transaction costs. They may, in fact, improve the structuring broker-dealer's profits, but that is not what NASAA will be looking for as an answer.

One type of alternative investment considered to be a pooled investment vehicle is the exchange-traded note. Exchange-traded notes (ETNs) are which of these? (2 answers) A) Unsecured debt securities B) Unsecured equity securities C) Issued by financial institutions, such as banks D) Insured by the FDIC

A) Unsecured debt securities C) Issued by financial institutions, such as banks Exchange-traded notes are unsecured debt securities issued by financial institutions, such as banks. Their prices can be impacted by changes in the credit rating of the issuer, and they are not insured by the FDIC.

Being a limited partner in a direct participation program is analogous to being: A) a holder of common stock in a corporation B) an agent of a broker-dealer C) a holder of secured corporate debt D) a member of the board of directors of a corporation

A) a holder of common stock in a corporation Limited partners in DPPs are owners of the business in much the same way as common stockholders of a corporation. They assume no management responsibilities simply by virtue of their ownership interest. Similarly, limited partners share the same type of limited liability as corporate shareholders.

One of your clients is considering allocating about 10% of her portfolio to commodities. Her current portfolio is a mix of stocks, bonds, and broad market index ETFs. Relative to her existing portfolio, you would explain to her that the primary benefit of the commodity investment is most likely: A) commodity returns have a low or negative correlation to the other assets in her portfolio B) lower trading costs C) an increase in the reliability of income generated in the portfolio D) increased short-term performance

A) commodity returns have a low or negative correlation to the other assets in her portfolio The returns on commodities exhibit low or even negative correlation with stock and bond returns. This is generally cited as a major advantage to investing in commodities. Commodities do not generate income; there are no dividends or interest paid on them—the investor recognizes a gain or a loss, but no income. In general, allocating a small percentage of the portfolio to commodities should be viewed as a long-term, not short-term, strategy. There is no evidence that trading costs on commodities are lower than on traditional investments. In fact, it seems likely the opposite is true.

Commodity contracts are available on many different types of commodities. One of those types is precious metals. Included in the definition of a precious metal would be all of the following except: A) diamonds B) platinum C) silver D) gold

A) diamonds Diamonds may be more valuable than any of the other choices, but they are not a metal

Among the characteristics of leveraged exchange-traded funds is that: A) leveraged ETFs may be purchased on margin B) they are generally suitable for investors with a long time horizon C) they can only be sold to accredited investors D) leveraged ETFs generally obtain the leverage through bank borrowing

A) leveraged ETFs may be purchased on margin Because an exchange-traded fund is purchased and sold on an exchange, the rules generally applying to all exchange products, such as purchasing them on margin, would apply. Leveraged funds use derivative products to generate the leverage, not bank borrowing. When it comes to suitability, they are for aggressive investors, but there is no requirement that they meet the accredited investor standard. However, the very nature of the product is that it is designed for short-term trading, not long-term trading.

Your client who owns a DPP that generated a $10,000 passive loss for the year could: A) only deduct the passive loss against passive income B) deduct $10,000 against capital gains C) deduct $10,000 against ordinary income D) deduct $3,000 against ordinary income and carry over the rest

A) only deduct the passive loss against passive income Passive losses, such as those generated by limited partnership investments (DPPs), are only deductible against passive income.

One type of alternative investment considered to be a pooled investment vehicle is the inverse exchange-traded fund (ETF). Inverse ETFs, also known as bear or short funds, are managed to: A) perform contrary to a benchmark market index such as the S&P 500 B) outperform a benchmark market index such as the S&P 500 C) be used only by professional traders and market makers D) be profitable only when interest rates are rising

A) perform contrary to a benchmark market index such as the S&P 500 Inverse funds, also known as short or bear funds, try to deliver returns that are the opposite of the benchmark index they are tracking. When they are exchange traded, they can be bought on margin and are priced throughout the trading day like other exchange-traded funds.

In search of higher returns, many investors have turned to alternative investments, such as structured products. Non-exchange-traded structured securities products (SSPs) typically have: A) some form of embedded derivatives B) a place in the portfolio of conservative investors C) moderate liquidity D) FDIC insurance coverage

A) some form of embedded derivatives It is commonplace for SSPs to use derivatives, such as options. There is no insurance coverage and, unless listed for trading such as an ETN, low or no liquidity. These are highly complex products and would not be suitable for the average conservative investor.

One reason for including commodities in an investment portfolio is because they have a high correlation to: A) the inflation rate B) the bond market C) the U.S. dollar D) the stock market

A) the inflation rate Commodity prices tend to have a high correlation with the inflation rate. As inflation goes up, the value of the dollar generally falls. The relationship is inverse, a characteristic of negative correlation. As inflation increases, interest rates invariably do the same, leading to a decrease in bond prices. Stock prices have a random correlation to commodities—generally negative.

The Canadian government is looking to create their own digital coin that will allow them to regulate digital assets safely and securely. What is the name of this developing stablecoin? A) CanadaCoin B) Central Bank Digital Currency C) Bitcoin D) Ethereum

B) Central Bank Digital Currency The key to the answer is that this is an official Canadian government action. A central bank digital currency (CBDC) is a digital currency that is issued and backed by a sovereign government's central bank. Unlike decentralized cryptocurrencies like bitcoin, CBDCs are centrally controlled and regulated by the central bank, such as the Federal Reserve in the United States, which has the authority to issue, distribute, and regulate the supply of the digital currency.

Which of the following is NOT registered with the SEC under the Investment Company Act of 1940? A) Exchange-traded funds B) Exchange-traded notes C) Open-end investment companies D) Unit investment trusts

B) Exchange-traded notes Exchange-traded notes (ETNs) register as debt securities under the Securities Act of 1933.

An investment adviser representative (IAR) has several clients who are interested in adding precious metals to their portfolios. Which of the following is the IAR most likely to recommend? A) Aluminum B) Platinum C) Nickel D) Copper

B) Platinum The only one of these considered a precious metal is platinum. For the exam, there are likely only going to be three precious metals: gold, silver, and platinum. Some students find it easy to remember the list of precious metals by looking at their frequent flyer status. You might be a silver, a gold, or a platinum level, but no airline has a copper, nickel, or aluminum level flyer status. Others look at their credit cards. Perhaps a person has a gold or platinum card but certainly not a card with one of those other metals.

Which of the following is not a feature of owning a limited partnership? A) Legislative risk B) Tax-free income C) Flow-through of income and expenses of a business to the individual limited partner D) An investment managed by others

B) Tax-free income The income from limited partnerships is not tax exempt. An investor, however, may use a tax loss from a partnership to offset the income from another passive investment. In limited partnerships, the investor enjoys the advantages and disadvantages of owning a business without actually having actually manage one. Limited partnerships are vulnerable to legislative changes that adversely impact ownership of such investments.

Which of the following is not a characteristic of owning a limited partnership? A) An investment managed by others B) Tax-free income C) Legislative risk D) Flow-through of income and expenses of a business to the individual limited partner

B) Tax-free income The income from limited partnerships is not tax exempt. An investor, however, may use a tax loss from a partnership to offset the income from another passive investment. In limited partnerships, the investor enjoys the advantages and disadvantages of owning a business without having to actually manage one. Limited partnerships are vulnerable to legislative changes that adversely affect ownership of such investments.

A number of different pooled investment vehicles are included in the term alternative investment. One of them, a synthetic investment instrument that has been created to meet a specific need that cannot be met by a standardized financial instrument, is known as: A) a z-tranche CMO B) a structured product C) an arbitrage D) an inverse fund

B) a structured product Structured products are created as a tool to meet the issuer's debt financing needs when they will result in a lower cost than a standardized financial instrument available in the market place.

An exchange-traded fund whose strategy is to generate performance opposite that of the designated index is called: A) a reverse fund B) an inverse fund C) a leveraged fund D) a hedge fund

B) an inverse fund Inverse ETFs (also called short funds) seek to deliver the opposite of the performance of the index or benchmark they track. There are some who call these reverse funds, but the SEC, FINRA, and NASAA do not use that term. Leveraged ETFs seek to deliver multiples of the performance of the index or benchmark they track. There are leveraged inverse funds, but the term inverse would have to be in the description. Hedge funds are not exchange traded.

Among the differences between an investment in a limited partnership offering and in a corporation is that: A) only corporations are organized to run a business B) limited partnership offerings do not pay dividends; corporations do C) limited partners take a more active role in the management of the enterprise than do stockholders of a corporation D) only corporations issue securities

B) limited partnership offerings do not pay dividends; corporations do One of the key features of a limited partnership investment is the concept of flow-through of operating results. If the business operates at a loss, the limited partner's share of that loss is treated as a passive loss on the investor's tax return. If the business is profitable, the limited partner's share of the profit is treated as passive income. Corporations issue securities, primarily stocks and bonds, while limited partnerships issue units representing the limited partner's interest in the venture. Those units are investment contracts and, as taught in Unit 4, LO4, securities. Limited partners who take an active role in the partnership lose their limited status.

Lisa is considering investing in gold. She owns a portfolio of stocks, bonds, and money market securities. Relative to her existing portfolio, the primary benefit of the gold investment is most likely: A) gold is a renewable resource, so Lisa can profit from the investment for many years B) low correlation between traditional asset returns and gold C) gold values are tied to cyclical industries D) the investment horizon is longer than that of stocks and bonds, balancing the duration of the portfolio

B) low correlation between traditional asset returns and gold The returns on gold and other precious metals exhibit low correlation with stock and bond returns. Investment experts generally cite this as the key advantage to investing in hard assets. Precious metals do not generally follow cyclical industries. Indeed, most look at them as countercyclical investments. The investment time horizon is whatever the investor makes it. Investors can hold stock indefinitely and buy bonds with short or long maturities, depending on portfolio objectives. Gold is not a renewable resource.

Commodity futures contracts are available on all of the following except: A) soybeans B) single-family homes C) industrial metals D) eggs

B) single-family homes Commodity futures contracts are available on metals, both precious and industrial; animal products, such as eggs; and agricultural crops, such as soybeans. Single-family homes are not a tradable commodity.

When a client is interested in investing in commodities, you would expect to discuss: A) museum-quality art B) soybeans, wheat, and corn C) investment-grade coins D) oil-drilling programs

B) soybeans, wheat, and corn Agricultural products, including soybeans and other grains, are popular commodities.

All of the following are features of limited partnership direct participation programs except: A) the limited partners have limited liability B) the limited partners may participate in the management of the partnership C) the general partner controls the business activities of the partnership D) the general partner determines when distributions are made to the limited partners

B) the limited partners may participate in the management of the partnership Should a limited partner assume a management role, there is the danger that the limited liability protection will be lost and that partner will now have the same unlimited liability of a general partner. It is the general partner who manages the program; the limited partner is a passive investor.

Which of the following ETFs would have a negative correlation with the underlying index? A) GHI Small-Cap ETF B) JKL World Equity ETF C) ABC Inverse ETF D) DEF Large-Cap ETF

C) ABC Inverse ETF The purpose of an inverse fund is to move in an opposite direction of the index. That means the returns are negatively correlated. Some inverse funds achieve a -1.0 correlation. All of the others would have a high correlation to the specific index. If the question asked about correlation to the overall market, the answer would be the same—the inverse fund. As far as the other three choices, the highest correlation would generally be the large cap. No definitive statement can be made about the correlation to the overall market of the other two.

An agent must obtain written verification of an investor's net worth for which of the following investments? A) Unit investment trusts B) Real estate investment trusts C) Direct participation programs D) Variable contracts

C) Direct participation programs DPPs require complete financial disclosure because of minimum suitability standards set by the states in which they are sold. REITs, unit investment trusts, and variable contracts do not have specific net worth suitability requirements for investors.

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) ETFs C) ETNs D) Treasury bonds

C) 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, ETNs are only suitable for those who can understand and take the risks involved.

In a limited partnership program, which partners manage the partnership's day-to-day operations and incur unlimited personal liability for the partnership's debts? A) Neither the general partners nor the limited partners B) Both the general partners and the limited partners C) The general partners D) The limited partners

C) The general partners In a limited partnership, the general partners manage the day-to-day operations and incur unlimited personal liability. Limited partners invest money in the partnership and have no liability beyond the amount invested, including commitments made but as of yet unpaid. They are denied a voice in the management of the partnership because having a voice in management could cause them to lose their limited liability status.

One of the benefits of adding precious metals to an investor's portfolio is: A) a high correlation to the stock market B) generous income C) a potential inflation hedge D) low transaction costs

C) a potential inflation hedge Precious metals are traditionally viewed as a hedge against inflation. One of their benefits is that they have a low correlation with the stock market. Transaction costs for precious metals tend to be higher than securities—the dealer spreads can be relatively high. One significant negative is that these investments generate no income.

An alternative investment vehicle that is managed to perform contrary to a benchmark market index such as the S&P 500 is: A) a long put on the index B) an equity-linked note C) an inverse exchange-traded fund D) a leveraged exchange-traded fund

C) an inverse exchange-traded fund Inverse exchange-traded funds (ETFs), frequently referred to as bear or short funds, are designed to move in the opposite direction of the index they are tracking. They can be leveraged, but the term leveraged can also apply to an ETF that goes in the same direction as the index. A put option is not a managed alternative investment.

Investing in commodities could involve investing in any of these except: A) industrial metals B) animals C) consumer durables D) agricultural items

C) consumer durables Commodity contracts are not available on consumer durables such as refrigerators and washing machines. They are available on agricultural items, such as corn, wheat, and soybeans. Likewise, investing in animal items such as cattle and pork bellies is possible. Finally, industrial items—primarily metals such as lead, zinc, and aluminum—are popular investments.

In order to achieve its goals, an inverse ETF uses: A) short selling B) arbitrage C) derivatives and debt D) preemptive rights

C) derivatives and debt An inverse ETF will almost always use derivatives, such as options, and—in the case of a leveraged ETF—will use debt, primarily in the form of margin. Inverse ETFs do not engage in short selling; they are an alternative to selling short a specific index without the unlimited risk potential of the short sale. Arbitrage is used, typically by institutional investors, to take advantage of temporary imbalances between the ETF's net asset value and market price.

In general, an investor wishing to gain economic exposure to commodities would find it easiest to do so by: A) growing the commodity B) buying the commodity directly C) investing in futures contracts D) investing in forwards contracts

C) investing in futures contracts It is generally agreed that using commodity futures is the easiest and most common way to gain economic exposure to commodities. Forwards are more commonly used by producers or users because, unlike futures, most forwards contracts result in the delivery of the actual commodity. Only about 1% of all futures contract positions involve the delivery of the underlying commodity.

One of the benefits of being a limited partner in a direct participation program is that: A) any income generated by the partnership flows through to the limited partner and is treated as a long-term capital gain B) the limited partner can make certain management decisions C) the general partner is the only person liable for the debts of the business D) any losses generated by the partnership flow through to the limited partner and can be used against ordinary income in an amount up to $3,000 per year

C) the general partner is the only person liable for the debts of the business In a DPP, it is only the general partners who have full liability; limited partners are liable only to the extent of their investment plus any future commitments. Limited partners lose their status if they undertake any management responsibility. Losses are passive losses and can be deducted only against passive income, not ordinary income. It is capital losses that are subject to the $3,000 limit. Any income is treated as passive income, and that is taxed at ordinary income tax rates, not the lower capital gains rate.

What is the maximum amount of bitcoin that will ever be in circulation? A) Indefinite number of coins B) 21 billion coins C) 194,425 coins D) 21 million coins

D) 21 million coins The maximum amount of bitcoin that will ever be in circulation is 21 million coins. This is a feature of the bitcoin protocol, which is designed to create a finite supply of the cryptocurrency, which will prevent inflation on BTC.

Which of the following terms best describes ETNs and leveraged ETFs? A) Registered investment companies B) Speculative investments C) Forms of hedge funds D) Alternative investments

D) Alternative investments These are two popular alternative investments. Are they speculative? Yes, but there are many other speculative investments that are not considered alternative investments. The question asks for the best description and, although it might seem like a close call, these are "alts." The leveraged ETF is a registered investment company, but the ETN is not.

Which of the following would not be considered an agricultural commodity? A) Oats B) Soybeans C) Coffee D) Aluminum

D) Aluminum Aluminum is traded as an industrial commodity; all of the others are agricultural.

Your client has turned bearish on the market, but does not have a margin account. Which of the following securities would probably best meet your client's needs? A) An interest rate swap B) A long call option C) A balanced mutual fund D) An inverse fund

D) An inverse fund Those who are bearish wish to profit in a market downturn. Inverse funds are sometimes called short funds because they deliver positive returns when the underlying benchmark declines in value. This client can't sell short because you need a margin account for that.

Which of the following investments is least appropriate for a client primarily concerned with liquidity? A) Bank savings account B) Preferred stock C) Municipal bond mutual fund D) Direct participation program

D) Direct participation program There is little secondary market liquidity for direct participation programs (DPPs). Compared to the other choices, they are the least appropriate for a client seeking liquidity.

If you overheard an analyst referring to an investment's indicative value, the discussion would most likely be about: A) ETFs B) REITs C) TIPS D) ETNs

D) ETNs The calculated value, called the indicative value or closing indicative value for ETNs, is calculated and published at the end of each day by the ETN issuer.

Your customer is asking if either exchange-traded funds (ETFs) or exchange-traded notes (ETNs) might be suitable investments for his portfolio. The customer makes several statements regarding his understanding of the products, but only one of them is accurate. Which is it? A) If I want to sell my shares of an ETF, I have to wait until the next price is calculated to value the portfolio of securities B) ETNs are equity securities because they trade on exchanges C) ETFs have a fixed coupon rate that I should expect to realize when they mature D) ETNs are issued by financial institutions; therefore, I should be concerned about the credit worthiness of the issue)

D) ETNs are issued by financial institutions; therefore, I should be concerned about the credit worthiness of the issue) The only accurate statement is the one expressing that ETNs are issued by financial institutions and, therefore, the credit worthiness of the issuer should be a concerning factor. ETNs are debt instruments, not equity instruments. ETNs have a final payment at maturity based on the return of a single stock, a basket of stocks, or an equity index. Although ETF prices fluctuate based on the value of the securities within the fund portfolio throughout the trading day, they are priced by supply and demand, like all exchange-traded products. They are not forward priced like open-end mutual fund shares are.

A client was reading an offering document for an oil and gas drilling limited partnership program and noticed that one of the features was flow-through benefits. How would you explain this? A) Once the program has paid taxes on its income, the entire remaining balance passes-through to the investors B) Losses generated by the program pass-through to the investor and may be deducted in full against ordinary income C) Investors in the program are assured of a steady flow of income if the drilling is successful D) Rather than being a separate taxable entity, the program's income or losses pass-through directly to the investors

D) Rather than being a separate taxable entity, the program's income or losses pass-through directly to the investors The philosophy behind flow-through is that any income or losses generated by a program of this type (a direct participation program or DPP) flow directly to the investors; there is no tax at the entity level. If there are losses, they may be deducted only against passive income (e.g., income from other partnerships). No assurances can ever be given.

Which of the following is true regarding ETNs? A) As fixed-income investments, they do not have market risk B) They are suitable for conservative investors seeking income C) They are noncallable prior to maturity D) Their value can be impacted by changes in the issuer's credit rating

D) Their value can be impacted by changes in the issuer's credit rating ETNs are unsecured debt obligations carrying credit risk based on the issuer's credit rating. Fixed-income investments have the market risk more commonly referred to as interest rate risk, and they are usually callable. These are sophisticated instruments that are not suitable for conservative investors.

One of your clients expresses interest in purchasing a unique piece of art in digital form. More than likely, the client is referring to: A) a new way to decorate the home B) cryptocurrency C) a way to add liquidity to the portfolio D) a nonfungible token

D) a nonfungible token Nonfungible tokens (NFTs) are digital assets that reside as code on a blockchain. The owner of an NFT buys ownership of that particular bit of alphanumeric code associated with whatever has been tokenized. NFTs can be digital representations of artwork, a video, music, or even a tweet. They are not cryptocurrency but are usually paid for with that currency. Each NFT is unique, a one of a kind, making the tokens nonfungible. That means investors can't exchange one NFT for another just like it as they can with dollars or publicly traded securities. Artwork is a good example of something produced as an NFT; the digital copy owned by the investor is the only copy.

Flow-through is one of the features of: A) variable annuities B) open-end investment companies C) REITs D) direct participation plans

D) direct participation plans Flow-through is the term commonly used to describe that any income or loss generated by a direct participation program flows through to the owner(s). In the case of a real estate investment trust (REIT), the only thing that passes through is income or gains, never losses.

The term digital assets would include all of the following except: A) cryptocurrency B) stablecoins C) nonfungible tokens D) electronic communications such as email

D) electronic communications such as email Although email is a digital form of communication, there is nothing about it that makes it an asset. One cannot invest in someone's emails. The other three items are included in the definition of a digital asset.

An investor owns an inverse ETF. If the underlying index should decrease in value: A) the fund shares will also decrease in value B) the fund shares will increase by a factor of 2 C) there is no correlation between the fund and the value of the index D) the fund shares will increase in value

D) the fund shares will increase in value An inverse, or short, fund will move in the opposite direction of the underlying index. If it were leveraged, then it could move at a rate of 2x or 3x, but nothing in the question mentioned leverage.