Weighted Mock Exam #1
Which of the following would have to register as an investment adviser under the Uniform Securities Act? A) A retired aeronautical engineer who charges a nominal fee for holding seminars on opportunities in aerospace stocks B) A trust company C) An economics professor who occasionally gives a lecture to business groups about the stock market D) An accountant who advises clients about investments as an incidental part of services
A) A retired aeronautical engineer who charges a nominal fee for holding seminars on opportunities in aerospace stocks Excluded from the definition are banks, publishers of general paid circulation publications (newspapers or magazines), investment adviser representatives, and certain professionals (lawyers, accountants, engineers, teachers) if the advice is incidental to their profession and no additional compensation is charged. In the case of the engineer, the advice is not incidental and is being given for compensation. U1LO3
Issuance of which of the following would most likely increase the leverage in a company's capital structure? A) Bonds B) Warrants C) Preferred stock D) Common stock
A) Bonds Leverage is the use of borrowed money. This is reflected in a company's debt-to-equity ratio. Of these choices, the only one that is borrowed money is the bonds. U9LO1
Which of the following analyze corporate financial statements and trends in sales and income? A) Fundamentalists B) Chartists C) Technicians D) Market timers
A) Fundamentalists Fundamental analysts obtain information from corporate financial statements, as well as other relevant sources. Technical analysts review market charts, while fundamental analysts are concerned with the earnings ability of corporations derived from corporate financial statements. U12LO6
Which of the following are characteristics of negotiable jumbo CDs? I. Issued in amounts of $100,000 to $1 million or more II. Typically pay interest on a monthly basis III. Always mature in 1 to 2 years with a prepayment penalty for early withdrawal IV. Trade in the secondary market A) I and IV B) II and III C) II and IV D) I and III
A) I and IV Negotiable jumbo CDs are issued for $100,000 to $1 million or more and trade in the secondary market. Most jumbo CDs are issued with maturities of 1 year or less. Being negotiable, there is no prepayment penalty. These CDs generally pay interest on a semiannual basis, not monthly. U13LO13
Which of the following would not be unlawful for an investment adviser under the Uniform Securities Act? A) Including in the contract a clause that if the contract is terminated ahead of the scheduled termination date, there will be no refund of prepaid fees B) An owner of a majority of the stock in the IA pledging that stock as collateral to a bank for a personal loan C) Failing to notify the Administrator that the adviser has custody of a client's securities or funds, even though the Administrator has no rule that prohibits such custody D) Signing an investment advisory contract that did not outline the compensation arrangements
A) Including in the contract a clause that if the contract is terminated ahead of the scheduled termination date, there will be no refund of prepaid fees Investment advisory contracts must outline compensation provisions and indicate the amount to be refunded, if any, if the contract is terminated. Nothing in the USA requires that there be a refund, only that the terms must be disclosed. The Uniform Securities Act also requires investment advisers to notify the Administrator if they have or will have custody of customers' funds. The USA considers that a pledge of a majority interest in an IA is considered an assignment of the IA's contracts. U6LO4
An investor signed a letter of intent to purchase $50,000 worth of Sky-High Mutual Fund. At the end of 13 months, he had only invested $48,000 in the fund. Which of the following is TRUE? A) The fund will liquidate shares to meet the additional sales charge. B) He has 90 days to invest the additional $2,000 for the breakpoint. C) There are no additional requirements; he will receive the breakpoint. D) He must sign a new letter for the $2,000 to receive the breakpoint.
A) The fund will liquidate shares to meet the additional sales charge. An investor has only 13 months to meet a letter of intent commitment. Once that period of time has elapsed, the investment company is entitled to a refund of the discount it had originally given the investor. This is accomplished by liquidating a sufficient number of shares to cover the additional sales charge to be imposed. U14LO4
Which of the following would NOT be considered evidence of custody of a client's funds or securities? A) The investment adviser has discretionary authority over the client's account. B) The adviser writes checks on the client's account to pay for client's securities. C) Client funds and securities are kept at a qualified custodian. D) The client makes a partial purchase, and the broker-dealer holds the securities until full payment is made.
A) The investment adviser has discretionary authority over the client's account. "Custody" means possession (even temporary possession) of a client's funds or securities. It includes authority over a client's bank account for any type of disbursement, but does not include the acceptance by the adviser of prepaid advisory fees or discretionary authority. U7LO2
Savant Investment Managers (SIM) has a client with a long position in PQR common stock. The position has an average cost per share of $30, and with PQR currently selling at $50 per share, the client is interested in a method that will allow her to protect some of the unrealized profit without an expenditure of funds. Her representative at SIM could suggest A) entering a sell stop order at $45. B) buying PQR 45 put options. C) entering a sell stop order at $55. D) entering a buy stop order at $45.
A) entering a sell stop order at $45. Sell stop orders, commonly called "stop loss" orders, are designed to halt a loss or protect a gain. These are sell orders placed below the current market that become triggered if it happens that the stock should trade at or through the specified stop price. Buying the put options would also offer the protection, but the question specified no expenditure of funds. U22LO6
If you had expectations of high inflation, you would A) increase equity exposure and reduce fixed income exposure B) increase fixed-income exposure and reduce tangible asset exposure C) increase fixed-income exposure and reduce equity exposure D) increase fixed-income exposure and reduce commodity exposure
A) increase equity exposure and reduce fixed income exposure Rising inflation will reduce real returns on fixed-income investments, so you would want to reduce that exposure. Equities, tangible assets, and commodities tend to increase along with the inflation rate. U11LO1
An investment adviser whose primary business is the rendering of investment advice providing investment supervisory services is entitled to use the term A) investment counsel B) financial planner C) pension consultant D) senior adviser
A) investment counsel The term investment counsel may only be used by those advisers whose primary function is the rendering of investment advice with individual continuous monitoring of the accounts. U1LO1
In addition to the normal required filings, an investment adviser who maintains custody of client funds and/or securities will be required to complete A) Form ADV-W B) Form ADV-E C) Form ADV Part 1 D) Form ADV Appendix 1
B) Form ADV-E The Form ADV-E (E for Examination) is completed by every investment adviser who maintains custody of client assets. Then, the form is used by the independent accountant who performs the surprise annual examination of the adviser's records. The accountant is the one who submits the ADV-E to the SEC (or the state, if appropriate). U7LO2
Which of the following are features of Class C mutual fund shares? I. Typically charge no front-end load II. Typically charge a front-end load III. Typically impose lower CDSCs than Class B shares for a shorter period IV. Typically convert to Class A shares after they are held for a defined period A) I and IV B) I and III C) II and III D) II and IV
B) I and III Class C shares generally have the following features: no front-end sales charge, lower CDSCs than Class B shares for a shorter period, and no conversion to Class A shares regardless of how long they are held. Because of these features, Class C shares may be less expensive for investors with shorter investment horizons. They may be more expensive for investors who plan to hold their shares for a long time, because the level load never discontinues. U14LO4
The business cycle has expanded, peaked, and contracted. The current economic activity could best be described as a trough. Which of the following would most likely be found in the trough? I. A high rate of inflation II. A low rate of inflation III. A high rate of unemployment IV. A low rate of unemployment A) II and IV B) II and III C) I and IV D) I and III
B) II and III A trough is the latter stage of a recession. Unemployment is higher than normal, and with a lesser demand for goods and services, the inflation rate is low. U8LO2
A registered investment adviser has been investigated by the Administrator for fraudulent misrepresentations purportedly made to several clients. If the IA is found to have been in violation of the Uniform Securities Act, this may result in I. a $10,000 fine per violation II. a receiver being appointed over the adviser's assets III. a prison term of 5 years per violation IV. the requirement that the investment adviser make restitution to the victims A) I and III B) II and IV C) III and IV D) I and II
B) II and IV The Administrator may appoint a receiver over the investment adviser's assets and require the IA to make restitution to the victim. The maximum fine for a violation of the USA is $5,000, and the maximum prison term is 3 years. U5LO4
If a customer's chief concern is to shelter as much of his portfolio earnings from tax as possible, which of the following securities would be most suitable? A) Money market instruments B) Municipal GOs C) Treasury receipts D) High-yield bonds
B) Municipal GOs The interest on municipal GOs is exempt from federal income tax and perhaps state income tax, depending on the investor's residency. U19LO5
Which of the following statements regarding an agent's registration is most accurate? A) If the broker-dealer with which that agent is registered should have its registration revoked, the agent may continue to do business only with existing clients and may not acquire any new ones until registered with an active broker-dealer. B) Revocation of the registration of that agent's broker-dealer will result in cancellation of that agent's effective registration. C) Registration of a broker-dealer in a specific state automatically registers all the firm's agents in that state as well. D) If the broker-dealer with which that agent is registered should have its registration revoked, the agent's license will be held by the Administrator and the agent will be required to register with an active broker-dealer within 30 days.
B) Revocation of the registration of that agent's broker-dealer will result in cancellation of that agent's effective registration. The registration of an agent is not effective during any period when he is not associated with a particular broker-dealer registered under the Uniform Securities Act. Therefore, when the broker-dealer's registration is revoked, the agent's license is no longer in effect. The Administrator does not "hold" licenses. Agents must register in each state in which they wish to do business; there is no automatic registration other than for certain officers and partners when the firm first registers. U3LO5
Long Range Planning (LRP) is a covered investment adviser doing business in all 50 states. Fred Fergus is an IAR with LRP and splits his time between an office in State A and State D. Fred has retail clients as follows: 16 clients in State A 12 clients in State B 6 clients in State C 4 clients in State D Fred would have to register as an IAR in A) States B and C B) States A and D C) States A, B, and C D) States A and C
B) States A and D In the Investment Advisers Act of 1940, it states that "no law of any State requiring the registration, licensing, or qualification as an investment adviser or supervised person of an investment adviser shall apply to any person that is registered under section 203 as an investment adviser, or that is a supervised person of such person, except that a State may license, register, or otherwise qualify any investment adviser representative who has a place of business located within that State." Therefore, when employed by a covered adviser, the only time that state registration is required is when the individual functioning as an IAR has a place of business in the state. Had this been an IAR with a state-registered adviser, registration in all of the states would have been required (the de minimis would not cover State D because there is a place of business there). U2LO3
A portfolio manager who is engaging in rebalancing on a semiannual basis is most likely using which portfolio management style? A) Buy and hold B) Strategic asset allocation C) Tactical asset allocation D) Active asset allocation
B) Strategic asset allocation At least annually, and sometimes more frequently, a portfolio manager who follows strategic asset allocation will examine the relative proportion of the selected asset classes and, based on market performance, rebalance the portfolio to bring it back to its ideal. Active (also called tactical) asset allocation attempts to time the market and doesn't pay the same amount of attention to proportionate holdings as does strategic asset allocation. By its very nature, buy and hold can go years without a portfolio change. U20LO3
Which of the following would be of least interest to a chartist? A) The advance/decline line B) The relationship between the current market price of an issuer's common stock and most recently reported earnings per share C) The volume of shares traded during the past month D) The short interest
B) The relationship between the current market price of an issuer's common stock and most recently reported earnings per share A chartist is interested in the volume of shares traded, and the short interest for that particular stock. The advance/decline line is another technical indicator. The price-to-earnings ratio is used in fundamental as opposed to technical (charting) analysis. U12LO6
All of the following statements concerning the EMH are correct EXCEPT A) the weak form of market efficiency involves market data, whereas the semi-strong and strong form involves the assimilation of all public and private information, respectively. B) investors usually react slowly to new and random information pertaining to all currently available security market information. C) the efficient market hypothesis states that securities markets are efficient, with the prices of securities reflecting their current economic value. D) an efficient market is one in which the prices of securities quickly and fully reflect all currently available security market information.
B) investors usually react slowly to new and random information pertaining to all currently available security market information. The efficient market hypothesis (EMH) posits that an efficient market is one in which the prices of securities quickly and fully reflect all currently available security market information. Therefore, there is little chance that an investor can "beat the market." The weak form uses historical market data, such as price and volume movements; semi-strong involves financial information, which is publicly available; strong involves inside information. But, according to adherents, none of that really helps. U20LO10
All of the following are characteristics typical of a money market fund EXCEPT A) its net asset value normally remains unchanged B) it has a high beta and is safest in periods of low market volatility C) it is offered as a no-load investment D) the underlying portfolio consists of short-term debt instruments
B) it has a high beta and is safest in periods of low market volatility A money market fund has almost no price volatility, because the underlying portfolio consists of low-beta instruments, and the fund is deliberately managed for low beta (see the Glossary of Terms if you are not familiar with beta). U14LO10
You have a 45-year-old client wishing to save for retirement. The client does not have a great deal of investment sophistication and inquires about the risks you have exposed him to by placing the majority of his portfolio in listed common stocks. You would respond that one risk he should not concern himself with is: A) systematic risk B) liquidity risk C) inflation risk D) business risk
B) liquidity risk A portfolio of listed common stocks will have little to no liquidity risk because listed shares are easily traded. Even though common stock tends to offer protection against inflation, there is no assurance that the portfolio will keep pace with the rising cost of living. U11LO2
Knowing the average maturities would be most important when doing a cash flow analysis on A) REITs B) mortgage-backed securities C) common stock D) preferred stock
B) mortgage-backed securities Mortgage-backed pass-through securities pass through interest and principal payments to their investors. The rate at which the cash flows are generated depends, among other things, on the rate at which the mortgages mature. U13LO12
An investment adviser should develop an investment policy based on the needs and objectives of the client. When the client is a business entity structured as a general partnership, the investment policy would have to consider A) the mean requirement of the wealthiest and the poorest partner B) the objectives of all the partners on a collective basis C) the liability of the general partner D) the number of limited partners
B) the objectives of all the partners on a collective basis Because all income and gains pass through to the partners, and because there is unlimited personal liability for all general partners, we must examine the objectives of each of them to determine proper suitability. U19LO2
A fundamental analyst researching a stock is concerned with all of the following EXCEPT A) capitalization ratio B) volume of shares traded C) the stock's market price as a multiple of the company's earnings D) management efficiency
B) volume of shares traded A fundamental analyst is concerned with the economic climate, the inflation rate, how an industry is performing, a company's historical earnings trends, how it is capitalized, and its product lines, management, and financial statement ratios, such as the P/E ratio. A technical analyst is concerned with trading volumes or market trends and prices. U12LO6
An investment is made of $10,000. At the end of the year, $500 in nonqualifying dividends has been received and the value of the investment is $10,500. If the investor is in the 30% tax bracket, the after-tax yield is A) 5.0% B) 8.5% C) 3.5% D) 6.5%
C) 3.5% The only return (as far as yield is concerned) is the $500 of dividends. Remember, nonqualifying dividends do not "qualify" for the 15% rate. Subtracting 30% for taxes leaves $350 which, when divided by the $10,000 initial cost, is an after-tax yield of 3.5%. If the question had asked about total return, then the $500 unrealized profit would have been included, although there would have been no tax on it. U23LO2
Which of the following would be considered unethical under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers? A) An investment adviser representative receives an order to buy XYZ stock from an advisory client and simultaneously recommends that another advisory client sell that stock in an agency cross transaction. B) An investment adviser varies the annual fee based upon each client's assets under management, charging less for those with higher balances and more for those meeting the account minimum. C) A loan is made to an investment adviser representative by one of her clients who happens to be the chief loan officer where she maintains her principal banking relationship. D) An investment adviser discloses in its brochure that, from time to time, it may sell securities recommended to clients directly out of the firm's inventory.
C) A loan is made to an investment adviser representative by one of her clients who happens to be the chief loan officer where she maintains her principal banking relationship. It is an unethical and prohibited business practice for investment advisers and their representatives to borrow money from clients who are not in the business of lending money. In this case, the loan officer is the one who is doing the lending, not the bank. IAs are permitted to base their fees on the amount of assets under management, generally charging a lower percentage to those with higher balances. IAs are permitted to act as principals in recommended trades, but appropriate disclosure must be made. In an agency cross transaction, a recommendation may be made to either, but not both, parties to the trade. U7LO4
Ineligible investments in an IRA would include all of the following EXCEPT A) cash value life insurance B) stamps C) American Silver Eagles D) Kruggerands
C) American Silver Eagles A limited group of coins, especially the "eagles" minted by the U.S. Treasury Department, are eligible for investment in an IRA. The South African Gold Krugerrand is the world's first modern bullion gold coin and remains one of the most popular gold coins ever minted, but is not eligible for investment in an IRA. No form of life insurance is, and collectibles, such as stamps, are also ineligible. U24LO1
Which of the following statements under the Investment Company Act of 1940 is TRUE? A) Mutual funds must file semiannual reports with the SEC. B) Mutual funds furnish financial reports to shareholders at least annually. C) Holding companies are not included in the definition of an investment company. D) Investment companies are prohibited from owning more than 5% of another investment company's shares.
C) Holding companies are not included in the definition of an investment company. The Act lists three different types of investment companies: 1. face-amount certificate companies, 2. unit investment trusts (UIT's) and 3. management companies. Holding companies, business entities that invest in other companies for the purpose of management control, are not included in the definition. The limit on investment in another investment company's shares is 3%, not 5%. Section 30(d) of the act requires semiannual reports from the fund to its shareholders and an annual filing with the SEC. U14LO1
Which of the following statements about balance sheets are TRUE? I. Balance sheets provide a snapshot of a company's financial position on a given date. II. Balance sheets represent the relationship between a company's assets, liabilities, and stockholders' equity. III. Balance sheets provide a record of a company's earnings over a given period. A) II and III B) I, II, and III C) I and II D) I and III
C) I and II A balance sheet shows a company's assets, liabilities, and stockholders' equity on a specific date. The financial statement that reflects a company's operating activities and earnings over a period of time is the income statement. U9LO1
The Uniform Securities Act contains a number of security exemptions. The Act empowers the Administrator to revoke the exemption for which of the following? I. Any security listed or approved for listing upon notice of issuance on the Nasdaq Stock Market; any other security of the same issuer which is of senior or substantially equal rank; any security called for by subscription rights or warrants so listed or approved; or any warrant or right to purchase or subscribe to any of the foregoing II. Any security issued by any person organized and operated not for private profit but exclusively for religious, educational, benevolent, charitable, fraternal, social, athletic, or reformatory purposes, or as a chamber of commerce or trade or professional association III. Any investment contract issued in connection with an employees' stock purchase, savings, pension, profit-sharing, or similar benefit plan if the Administrator is notified in writing 30 days before the inception of the plan IV. Any security issued by and representing an interest in or a debt of, or guaranteed by, any bank organized under the laws of the United States, or any bank, savings institution, or trust company organized and supervised under the laws of any state A) I and IV B) I and II C) II and III D) III and IV
C) II and III Under the USA, the Administrator can revoke any transaction exemption, except those involving federal covered securities. When it comes to revoking a security's exemption, the only 2 where the Administrator has to power to do so are those issued by nonprofit organizations and in connection with an employee benefit plan. U4LO3
If a federal covered adviser's fiscal year ends on October 31, 2017, it must file its annual updating amendment to its Form ADV no later than A) March 30, 2018 B) February 28, 2018 C) January 29, 2018 D) December 31, 2017
C) January 29, 2018 The annual updating amendment to Form ADV must be filed within 90 days of the adviser's fiscal-year end. U1LO5
An individual with $100,000 to invest will require these funds in 6 months for the purchase of a house. In which of the following circumstances did the agent act CORRECTLY? A) The agent convinced the client to invest in a real estate partnership as a hedge against the rise of real estate values until the client purchases the house. B) The agent convinced the client to invest in an IPO on the basis of its high-growth prospects. C) The agent convinced the client to invest in a Treasury bill on the basis of its safety. D) The agent convinced the client to purchase a $100,000 lump sum annuity on the basis of its security and backing by an insurance company.
C) The agent convinced the client to invest in a Treasury bill on the basis of its safety. Investment in a Treasury bill is the only suitable investment among the choices listed. Purchase of annuities and a real estate partnership are long-term investments not suitable to an individual who wants to invest funds on a short-term basis. Although an IPO may be liquid, it is not suitable for short-term funds earmarked for the purchase of a house because there is too much risk to the principal. U19LO6
In general, a broker-dealer will disclose any changes to its fee schedule A) to the Administrator and then to the clients B) when requested by the client C) by notifying clients of the change in advance D) within 30 days following the change
C) by notifying clients of the change in advance Most broker-dealers disclose fee changes at least 30 days in advance, and there is no requirement whatsoever to notify the Administrator. U6LO1
All of the following practices are unethical under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents EXCEPT A) using deceptive or misleading advertising or sales presentations B) backdating a customer's records to save the client a substantial amount of income tax C) charging higher commissions than normal for executing thinly traded foreign securities D) effecting any transaction in a security that involves no change in beneficial ownership
C) charging higher commissions than normal for executing thinly traded foreign securities It is not an unethical practice to charge higher commissions for trades that are difficult to execute, such as trading a thinly traded foreign security. The other activities are unethical business practices prohibited by the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents. U6LO1
It is not uncommon to find financial planners who use their home as the base of their operations. When a financial planner who works from home is also registered as an agent of a broker-dealer, she must A) not use personal computers to store client information B) ensure that her office is separate from her living quarters C) have cybersecurity policies and procedures in place to protect customer data D) not remain open during hours when the broker-dealer is closed
C) have cybersecurity policies and procedures in place to protect customer data Cybersecurity policies and procedures are necessary for the broker-dealer to protect customer data in the firm's offices, and an agent's office at home is nothing more than an extension of the firm's office. As long as adequate cybersecurity measures are taken, a personal computer may be used. There are no restrictions on when the agent can use her home office to meet with clients, nor are there restrictions on where the office can be located within her home. U7LO7
The present value of a dollar A) is the amount of goods and services it will buy in the future at today's rate price level B) cannot be calculated without knowing the level of inflation C) indicates how much must be invested today at a given interest rate, to equal a specific cash value in the future D) is equal to its future value if the level of interest rates stays the same
C) indicates how much must be invested today at a given interest rate, to equal a specific cash value in the future The present value of a dollar will indicate how much must be invested today at a given interest rate, to equal a cash amount required in the future. U10LO1
If general interest rates increase, the interest income of a bond unit investment trust (UIT) will probably: A) change as soon as the portfolio manager can take advantage of the higher rates now available in the marketplace B) increase C) remain the same D) decrease
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. U14LO7
You are viewing 2 securities to place in a client's portfolio. Security A has an expected return of 12%, and Security B has an expected return of 16%. If you were to place 25% of the portfolio into Security A with the balance going into Security B, the probable return of the portfolio is A) 14% B) 18% C) 7% D) 15%
D) 15%
An investor owns a common stock that has been paying a dividend at an annual rate of $2.00. If the investor buys 100 shares of the stock at $50 and sells it 3 months later for $52, the approximate annualized rate of return is A) 4% B) 5% C) 12% D) 20%
D) 20% Annualized rate of return is computed by taking the investor's total return and annualizing it. In this case, the investor had $2 of appreciation and $0.50 (1 quarter) in dividends. Total return of $2.50 divided by the $50 cost is 5%. But, that is for 3 months − 1 quarter. Multiply that by 4 to get the annual rate. U23LO2
The value of which of the following would be least likely to be impacted by changes in interest rates? A) A laddered bond portfolio B) A U.S. Treasury bond issued 25 years ago with a 30-year maturity C) A convertible preferred stock D) A bank CD maturing in 5 years
D) A bank CD maturing in 5 years This question is dealing with interest rate (or money-rate) risk. That risk refers to the inverse relationship between the price of fixed-income investments and interest rates. That is, when interest rates go up, the price of fixed-income securities falls (and vice versa). However, this risk only affects investments that are marketable (those with a fluctuating market price). Bank CDs are nonnegotiable (we're not referring to the negotiable jumbo CDs with a maturity of 1 year or less) and, as a result, will not fluctuate in price, regardless of changes to interest rates. In this case, interest rate risk is eliminated. That is one of the reasons why the exam's first choice for capital preservation is insured bank CDs. Will a laddered bond portfolio reduce interest rate risk? Yes, but it will not eliminate it. Is a convertible preferred (or bond) less subject to changes in interest rates than one without the conversion feature? Yes, but the risk is still there. Does a 30-year T-bond with 5 years remaining to maturity have a short duration and, therefore, a reduced interest rate risk? Yes, but the price of the bond will still be affected by changes in the market interest rates. U13LO13
Which of the following would probably be an acceptable hedge clause under SEC interpretations? A) "It is understood that we will expend our best efforts in the supervision of the portfolio, but we assume no responsibility for action taken or omitted in good faith if negligence, willful or reckless misconduct, or violation of applicable law is not involved." B) A hedge clause that seeks to limit liability to acts done in bad faith or pursuant to willful misconduct but also explicitly provides that rights under state or federal law cannot be relinquished C) "Kapco Advisers shall not be liable for any loss or depreciation in the value of the account unless it shall have failed to act in good faith or with reasonable care." D) A clause that limits the investment adviser's liability for losses caused by conditions and events beyond its control, such as war, strikes, natural disasters, new government restrictions, market fluctuations, or communications disruptions
D) A clause that limits the investment adviser's liability for losses caused by conditions and events beyond its control, such as war, strikes, natural disasters, new government restrictions, market fluctuations, or communications disruptions A clause containing provisions that are beyond the IA's control is acceptable because such a clause does not attempt to limit or misstate the adviser's fiduciary obligations to its clients. U6LO1
Which of the following is NOT correct regarding the capital asset pricing model (CAPM)? A) The stock risk premium is the inducement necessary to entice the individual to invest in a particular stock. B) CAPM does not consider unsystematic risk. C) The market risk premium is the incentive required for the individual to invest in the securities market. D) CAPM uses standard deviation as a measure of market risk.
D) CAPM uses standard deviation as a measure of market risk. CAPM accounts for the impact of systematic risk (as measured by beta) only and does not take into consideration unsystematic risk, which is assumed to have been diversified away. U20LO8
Which of the following would NOT constitute custody of a client's account under the Investment Advisers Act of 1940? I. Client prepayment of $1,000 of advisory fees, 6 months in advance II. Having temporary custody of a client's securities III. Depositing client funds in bank accounts accessible by the investment adviser A) II only B) I, II, and III C) II and III D) I only
D) I only "Custody" means possession (even temporarily) of a client's funds or securities. It includes authority over a client's bank account for any type of disbursement, but it does not include the acceptance by the adviser of prepaid advisory fees. U7LO2
A feature of which of the following business entities is limited liability for owners, as well as flow-through of income? A) C corporation B) Sole proprietorship C) General partnership D) Limited partnership
D) Limited partnership Limited partnership interests offer both flow-through of income (or loss) along with limited liability. The general partnership has full liability, as does the sole proprietorship. C corporations have limited liability, but no flow-through. U18LO3
Margin is borrowing money from a broker-dealer to buy a stock using the investment as collateral. In many cases, the brokerage firm then uses that collateral for a loan from a bank. Which of the following account documents authorizes the firm to pledge the customer's stock? A) The credit agreement B) The securities pledge agreement C) The loan consent agreement D) The hypothecation agreement
D) The hypothecation agreement The hypothecation agreement gives permission to the broker-dealer to pledge a customer's margin securities as collateral. The firm hypothecates customer securities to the bank, and the bank loans money to the broker-dealer on the basis of the loan value of these securities. The credit agreement contains the terms of the loan, including the method of computing interest on the borrowed money. The loan consent agreement, granting permission to the broker-dealer to lend out the customer's securities, is optional. U22LO2
A pension plan administrator hires an investment adviser to oversee the investment decisions of the plan. The adviser's primary responsibility is to which of the following? A) The adviser B) The plan sponsor C) The pension plan administrator D) The plan
D) The plan The adviser's primary fiduciary responsibility is to the plan itself. By maintaining proper fiduciary responsibility to the plan, the interests of the participants of the plan are protected. U24LO5
A 61-year-old wanting to take a lump-sum distribution from his Keogh will A) incur a 50% penalty tax B) be taxed at long-term capital gains rates C) incur a 10% penalty tax D) be taxed at ordinary income rates
D) be taxed at ordinary income rates The distribution described here would be taxed as ordinary income. A 10% penalty tax would apply if the individual were under age 59½. U24LO2
An investor is considering the purchase of some bonds to diversify his portfolio. If he should decide to purchase Treasury STRIPS instead of Treasury Bonds, his major risk would be A) purchasing power risk B) credit risk C) reinvestment risk D) interest rate risk
D) interest rate risk Treasury STRIPS are zero-coupon bonds and, as such, have a longer duration than those paying semiannual interest. The longer the duration, the greater the interest rate risk. Because both are guaranteed by the U.S. government, there is no credit risk. Both have the same purchasing power risk, and there is no reinvestment risk with a zero-coupon bond. U13LO11