66 Flashcards
a tips bond is issued in the principal amount of $1,000, paying 3.5%. over the security’s 5 year term, the inflation rate is 4%. what is the amount of the final semiannual interest check?
17.50. $1,000 X 102% ten times = $1,219 X 3.5% and then divide by 2 equals 17.50.
how are unit values and cash values computed in a variable life separate account valuation?
unit values are computed each day. cash values are a monthly computation.
ERISA covers?
private employee pension plans
what is the sharpe ratio?
is used to measure risk-adjusted returns.
what kind of investment is tax exempt to a corporation?
municipal bond interest
in which asset allocation program is most likely that commission expenses will have a significant impact on portfolio performance?
tactical
one way in which internal rate of return (IRR) differs from most computations is that..
it takes into consideration the time value of money
investing the same amount at regular intervals is the formula method of investing known as?
dollar cost averaging
a growth investor looks for stocks with?
above average price to earnings ratio
a value investor looks for stocks with?
low PE ratios and high dividend yields
when an investor’s original value is subtracted from the ending value, and then has the income received over that time period added to it which is then divided by the original cost, the result is?
holding period return
a firm whose exclusive business is placing client’s assets into model portfolios is considered a?
investment cousel
what types of business have an income tax filing due date of march 15th?
multiple LLC electing to be treated as a corporation
s corporation
what type of industry is most exposed to regulatory risk?
public utilities
a limited liability company is..
a company with tax consequences similar to a partnership
what would most likely limit the amount of interest earned on an index annuity?
the cap rate
what is found on an order ticket?
account number, execution price, time of order entry, time of execution or cancellation, and terms and conditions of the order.
why are “country” funds organized as closed-end funds?
because it is often difficult to liquidate the foreign securities to get their value into the U.S.
an investment of $1,000 made ten years ago is now worth $4,000. using the rule of 72, the approx compounded annual rate of return is?
14.40%
the investment has quadrupled in 10 years. using rule of 72, we know how to compute the rate of return when an investment doubles. the on has doubled every 5 years. dividing 72 by 5 years gives us an appx rate of 14.4%.
what would be a fitting description of an alternative investment?
DPP and Hedge funds
which investment generally carries the least reinvestment risk?
newly issued stock in a small, over the counter growth corporation
what kind of investment typically has the lowest volatility?
a money market fund
an application to register securities may be filed under the USA by who?
- broker/dealer acting on behalf of the issuer
- person on whose behalf the offering is made
- issuer
risk management tools would include?
beta
sharpe ratio
standard deviation
if one were analyzing mutual funds, the one with the highest standard deviation would most likely be what kind of fund?
small-cap fund
a mutual fund would have net redemptions when..
the number of shares being liquidated by investors exceeds those being purchased.
a well-diversified investor following a rebalancing portfolio strategy in a rising market will most likely..
sell part of the stock in the portfolio
a strategy that seeks to maintain a constant ratio of a portfolios original investment allocation would be?
portfolio rebalancing
what are the three components of modern portfolio theory?
capital asset pricing model
feasible set
efficient set
what is the def of future value?
what will an investment made today at a given rate be worth at some point in the future?
what factors must be taken into consideration with future value?
- initial capital
- time capital will remain invested
- anticipated rate of return
what is the def of present value?
how much needs to be given today at a given rate to equal specific value at a point in the future.
what factors must be taken into consideration with present value?
- future goal
- time to reach goal
- anticipate rate of return
rule of 72 rule
appx formula for doubling investment
72 / return percentage = years to double
72 / number of years = percentage return needed to double
IRR
internal rate of return
- the discount rate that results in a net present value of zero for a series of future cash flows.
- yield to maturity of a bond reflects IRR
net present value
difference between an investment’s present value of future revenues and its cost.
- used by corps to determine feasibility of capital investments
- positive NPV desirable
time weighted returns
used to evaluate the performance of portfolio managers
dollar weighted returns
used to evaluate the individuals account performance
total returnom
gains + income = total return
after-tax return/yield
pretax return x (1.00-tax rate) = after tax return
inflation adjusted return / real rate of return
received rate - inflation rate = inflation adjusted return
holding period return
gain received / original investment
annualized return
time value x (gain received / original investment)
efficient market hypothesis
all investors have equal access to the same market information
-cant beat market (throw darts)
three forms of EMH
weak form-info everyone knows
semi-strong form-info available with some effort
strong form-info available to insiders, still no benefit
monte carol simulation
runs hundreds or thousand of trials based on varying factors and measures the probability of meeting specific objectives based on varying conditions.
-predicting sustainability
dividend discount model
a method used to value the common stock of a company that is based on present value of the expected future dividends
dividend growth model
a method to value the common stock of a company on the basis of assumed constant growth of dividends in the future
mean
arithmetic mean- simple average
geometric mean-always lower
median
the middle number
mode
the most frequently occurs number
range
distance from top to bottom
modern portfolio theory
diversify by using securities with a low or negative correlation, thereby reducing portfolio volatility
positive coorelation
two securities move in similar directions
negative coorelation
two securities move in opposite directions
standard deviation
measures volatility of investment compared with its own past returns
systematic risk is measured by?
beta
standard deviation measures?
total risk (systematic and nonsystematic risk)
alpha measurements
comparing actual returns to expected returns
positive alpha is good and outperforming expectations
sharpe ratio
measures risk adjusted return
(actual return-risk free return) / standard deviation = sharpe ratio
higher the better
duration
measures volatility of bonds by weighing the time the bond interest take to pay for the bond
market risk
systematic - measured by beta
- risk that overall market will affect individual securities adversely regardless of company’s circumstances
- cannot be diversified away
business risk
(nonsystematic)
- risk that a business will perform poorly as a result of specific characteristics of company or industry in which it operates.
- can be diversified away
interest rate risk
(systematic)
-risk that a change in interest rates will affect a security adversely
inflation risk
(purchasing power) (systematic)
- erosion of a dollar’s buying power
- fixed dollar investments are affected the most
- TIPS offer protection
which of the following quantitative tools is used to measure risk-adjusted returns? correlation sharpe ratio beta standard deviation
sharpe ratio
sharpe ratio
used to measure risk-adjusted returns.
formula methods of investing that involve selling equities in rising markets and buying them in falling markets would include?
constant dollar plan
constant dollar ratio
a mutual fund would have net redemptions when..
the number of shares being liquidated by investors exceeds those being purchased
the tactical approach to the asset allocation review process ..
intentionally deviates from the normal asset mix to take advantage of market opportunities
rule 482
describes a from of allowable mutual fund advertising, commonly referred to as an omitting prospectus.
what is the standard benchmark used to measure the “risk-free” rate of return?
90-day treasury bill
if there are material changes to a brochure, a copy must be sent to customers when?
within 120 days of the end of the fiscal year
An investment adviser representative is looking for a suitable investment for a client. The IAR wishes to find something that will offer an attractive return commensurate with its systematic risk. The choices have been narrowed down to Security C and Security L and the selection will be based on alpha. C has a beta of 1.0 and earned 13% while L has a beta of 0.8 and earned 10.1%. The alpha of Security L is:
-.3
Alpha is obtained by comparing how a security actual performed to the performance one would have expected based upon its beta. A beta of 1.0 is used to indicate the expected volatility of the overall market. Because Security C has a beta of 1.0, its 13% return matches that of the “market”. With a beta of .8, one would expect Security L to produce a lower return, but how much lower? Its return should be 80% of the “market” or, in this case, 80% of 13% which computes to 10.4%. However, its actual return fell short of that by 0.3% giving it a negative alpha of 0.3. Had its actual return been 10.7%, it would have had a 0.3 positive alpha. Although this question doesn’t ask it, based upon the criteria given, the IAR would have selected Security C.
when would a preorganization subscription be an exempt transaction?
no more than 10 subscribers
no commissions paid (directly or indirectly)
what does a fund with net redemptions mean?
- less money coming in than is going out.
- fund’s manager is going to have to sell securities.
describe a prudent investor
someone who invests with reasonable care, skill, and caution.
what does a fund with net redemptions mean?
- less money coming in than is going out.
- fund’s manager is going to have to sell securities.
describe a prudent investor
someone who invests with reasonable care, skill, and caution.
what does a fund with net redemptions mean?
- less money coming in than is going out.
- fund’s manager is going to have to sell securities.
describe a prudent investor
someone who invests with reasonable care, skill, and caution.
what does a fund with net redemptions mean?
- less money coming in than is going out.
- fund’s manager is going to have to sell securities.
describe a prudent investor
someone who invests with reasonable care, skill, and caution.
what does a fund with net redemptions mean?
- less money coming in than is going out.
- fund’s manager is going to have to sell securities.
describe a prudent investor
someone who invests with reasonable care, skill, and caution.
what does a fund with net redemptions mean?
- less money coming in than is going out.
- fund’s manager is going to have to sell securities.
describe a prudent investor
someone who invests with reasonable care, skill, and caution.
positive margin
profits exceed interest cost
a person is not?
a minor
dead person
or someone declared mentally ill
name the things that are NOT securities
retirement plans non-variable insurance collectibles commodities condos used as personal residence currencies
a security registered by qualification becomes effective when?
after an active review of registration info and n the day ordered by the administrator
what are the common exempt transactions?
isolated non issuer transaction
unsolicited orders
transactions with institutions
transaction between issuer and underwriter
transactions by fiduciaries
private placements (10 or fewer offers in a year)
who notifies admin if a IAR leaves a state covered and fed covered IA?
state- only the IA
federal- only the iAR
snowbird rule?
provides an exemption from registration when dealing with vacationing clients. subject to 30 day rule for change of residence
how long do BDs and IAs have to keep records?
BDs-3 years
IAs- 5 years
when must a civil suit be filed under USA?
within 3 years of alleged infraction or 2 years from discovering the violation. FED law is 1 year from discovery
right of rescission
is the offer to return a customers money, when a sale has taken place in violation of the USA. clients have 30 days to accept or reject
stop order
used t stop registration of securities issue.
can be appealed within 60 days in court
cease and desist
used to halt activities of a person
no need for prior hearing.
summary action
admin may summarily suspend the reg of any person or security as long as a hearing is granted within 15 days.
LATE
lawyers, accountants, teachers, engineers
IAs exercising discretion need?
10,000 net worth or a surety bond (USA)
iA maintain custody of customer accounts need?
35,000 net worth or a surety bond (USA)
rule on use of third-party research reports?
if it is distributed, attribution must be given.
it if is used as the basis for the IAs report, no mention is necessary
form ADV
requires info on how adviser will be compensated.
form ADV-E
annual financial examination of an IA completed by the IA and submitted by an independent accountant
term insurance
is pure protection and has no cash value
whole life insurance
guaranteed cash value with policy loans
universal life insuracne
has flexible premiums - insufficient payments could cause policy lapse
variable life insurance
guaranteed minimum death benefit
cash value based on sub account performance
minimum 75% loan after 3 years
exchange privileges
types of derivatives
options, futures, and forwards
forwards
not standardized and do not trade on exchanges
futures
are standardized and trade on exchanges
limit order
an order that instructs BD to buy or sell at a certain price
buy stop order
used to stop losses by persons with short position. can accelerate the direction of a bull market.
sell stop order
used to stop losses by persons with long position. can accelerate the direction of a bear market.
investing in a fixed dollar amount on a regular basis and purchasing at different prices
dollar cost averaging
investor looks for stocks that trade at higher PE ratios. Earnings momentum is important.
growth
investor looks for stocks that are cheaper and trading at low PEs. higher dividends
value
investor thinks majority is wrong, so does opposite of what most investors are doing
contrarian
done periodically to bring a portfolio back to target allocation percentages
rebalancing
someone who attempts to profit by finding the best performing sectors of the economy and buying stocking in that sector.
top-down analyst
attempts to profit by identifying individual companies that will outperform other in the industry.
bottom-up analyst
placed in a portfolio to reduce inflation risk
tangible assets
clients in need for cash in the near term should invest in?
money market instruments, like T-bills
simple trusts must do what?
distribute all income each year
the grantor of the trust can also be what?
trustee and beneficiary
sole proprietors file taxes on?
schedule C
who files taxes on a Schedule K-1?
LLCs, limited partners, and shareholders in S corps
C corps report income on what?
Form 1120
one dying without a will has estate handled by?
an administrator in intestacy
size of a small cap
300 million to 2 billion
size of a mid cap
2 billion to 10 billion
size of a large cap
over 10 billion
tracking small cap securities is done by measuring against the?
Russell 2000
tracking mid cap securities is done by measuring against the?
S&P 400
tracking large cap securities is done by measuring against the?
S&P 500
section 28e of the securities exchange act of 1934 provides what?
a safe harbor for research and brokerage services provided in exchange for directed transactions.
