Brian Lee Missed Exam Topics

Question 1

According to Efficient Market Hypothesis, information based on company financials and economic factors is considered to be:

Answer 1

Semi-strong, if we knew information known to insiders it would be strong. Weak would be knowing the market price, for example.

Question 2

In modern portfolio theory, what is an efficient portfolio set?

Answer 2

Efficient frontier

Question 3

Which two are most associated with a Treasury bond?

Answer 3

All debt instruments are interest rate sensitive and nearly all (except zero coupon bonds) have reinvestment risk. U. S. securities are seen as one of the safest securities in the world.

Question 4

An investor is long 100sh of XYZ. She fears a near-term correction but overall she remains bullish. Which of the following may allow her to profit from this situation?

Answer 4

Sell a call

In hedge strategies, the option always follows the risk direction of the stock, to generate a profit (income), you would then sell the option

Question 5

When disclosing past recommendations…

Answer 5

You must provide all past recommendations, not just those that are ‘relevant’

Question 6

The CEO of XYZ is the trustee for his company’s employee pension fund. He gives instructions to the IAR who manages the
plan to loan the company several thousand dollars to pay off a company bad debt. The IAR should:

Answer 6

Not do as the trustee says because the IAR is a fiduciary.

ERISA prohibits transactions on behalf of a party with interests adverse to the retirement plan.

Question 7

Surrendering a whole life policy is appropriate for all of the following except:
A. Cash
B. Purchasing a paid up term life policy
C. Purchasing a reduced coverage whole life policy
D. Purchasing a non-qualified annuity

Answer 7

Cash

All of these would be a tax free 1035 exchange except taking cash.

Question 8

Which investment is most tax efficient?

A. Corporate bond fund
B. Growth fund
C. Index Fund
d. Government Bond Fund

Answer 8

Index funds are passively managed therefore there is very little trading within the portfolio and therefore very little taxable gains.\

Government bond does NOT equal Muni, must say Muni

Question 9

41. According to the Uniform Securities Act, which of the following is considered a “sale”?

I Giving a security as a bonus
II Making a bona fide loan of stock
III Entering into a contract to sell a security

Answer 9

1 & 3

Loaning or pledging to loan securities is not considered an offer or sale of securities.

The way RICH people avoid paying taxes, they get LOANS as collateral on stocks, and they DON’T pay taxes on loans. They don’t have to pay taxes because it is not considered a sale.

Question 10

An IA hires a solicitor to recruit clients. According to the Investment Adviser act of ’40, what records would the IA be required to keep?

Answer 10

If an adviser solicitor is hired to attract clients, the client is required to be given an adviser solicitor brochure and is the obligation of the IA to maintain records of this disclosure.

Question 11

An IA is a trustee of a trust with two or more beneficiaries. According to the Prudent Investor Rule, which of the following is true?

Answer 11

The Trustee should take into consideration the beneficiaries and act impartially. A trustee must act prudently and follow the stated objective in the trust agreement.

Question 12

Which of these efficient market hypotheses dictates that future performance cannot be based upon historical data?

Answer 12

Strong

A stock’s price currently reflects all known information about the stock which means all historical data is already priced into the stock. This is the strongest form of Efficient Market Hypothesis.

Question 13

Learn efficient market hypothesis better

Question 14

The internal rate of return calculation dictates that the interest earned in a portfolio is reinvested at the:

Answer 14

Required Return

Question 15

Which one of these factors is NOT relevant in determining if someone is an IA?

A. Frequency of Advice
B. Specific or general advice
C. Receives compensation for advice D. Holds themselves out to the public

Answer 15

The definition of an IA is someone in the business, holds themselves out and receives compensation. It does not include how often you give advice.

Think Dave Ramsey isn’t an investment advisor

Question 16

A diverse portfolio would hold tangible assets to address which risk?

A. Inflation
B. Market
C. Risk adjusted return
D. Liquidity

Answer 16

A

A tangible asset, such as gold, is often used as a hedge against inflation.

Question 17

Under the Uniform Securities Act, when an IAR acting in the capacity of trustee of a family trust executes a transaction on behalf of the trust, it is

A. An exempt transaction
B. An exempt security
C. A non-exempt transaction
D. A violation of the trustee’s fiduciary responsibility

Answer 17

C - non exempt

He was acting in CAPACITY of trustee, therefore non exempt.
If he was acting as an IAR to trustee of trust, it would be exempt

Among the list of exempt transactions are those made by fiduciaries, including trustees in bankruptcy, but not other trustees. Therefore, this is a nonexempt transaction. The fact that this is an IAR who is the trustee has no bearing on the question.

Question 18

What of the following best depict/show time weighted return?

Answer 18

The volatility of security holdings

Question 19

A Savings and Loan association, organized in State A and authorized to do business in State B, has an offering of common stock being made in State B. In order for an individual selling the offering to be excluded from the definition of agent in State B, the individual

A. would have to be employed by the Savings and Loan
B. would have to be employed by a broker/dealer registered in the other state C. would have to be employed by a broker/dealer registered in this state
D. could not sell without being an agent

Answer 19

A

Issuing your own as a bank, do not have to be an agent

Included in the USA ‘s list of exempt securities are those issued by any building and loan or similar association organized under the laws of any state and authorized to do business in this state. Therefore, an individual who is employed by the issuer of exempt securities to sell those securities, is excluded from the definition of “agent”.

Question 20

What type of trustee transactions are Non-exempt?

Answer 20

Those specific to bankruptcy
All other trustee transactions should be exempt

Question 21

Explain the difference between annuity payout options:

Answer 21

Straight life period certain
- guaranteed your life, but if you die before period certain ends, then it will pay all of it to beneficiary until period certain ends. The benefit of this is offset to your personal benefit.

Joint Life Survivor
- It will keep paying for the remainder of survivors life

Straight life
- unmodified, meaning it pays out for your life just to you, HIGHEST monthly payment

Question 22

In the course of a bankruptcy, the asset that backed a secured debt is liquidated but it doesn’t pay off all of the debt holders for that particular secured debt. What happens to these debt holders:

Answer 22

They get grouped in with the general creditors

Question 23

An agent, sharing in commissions with another agent, may do so only if

Answer 23

both agents are registered in the same states
both agents are registered through the same or affiliated B/D

Question 24

Your client has won the lottery and is considering whether to take a lump sum payment or receive periodic payments. This an example of

A. Holding period return
B. Time value of money
C. Opportunity cost
D. Risk adjusted return

Answer 24

Time value of money

Receiving a lump sum or taking payments over time concerns the time value of money (“time is money”). It is not a return on investment nor does it involve a decision on an investment.

Holding period return involves decision on investment
Opportunity cost - how much you would make if you did X vs Y
Risk adjusted return - involves product

Question 25

A client enters an order as follows: Sell stop 100 shares of LTC at 45. Following the entry of that order, trades occur in the following sequence: 47; 46; 45.12; 44.97; 45.28; 45.97; 46.05.

More than likely, the client received
A. 45.97
B. 46.05
C. 45.28
D. 44.97

Answer 25

C

It takes two trades to execute a stop order. It first must be triggered at or below 45. It then becomes a market order to sell at the next price.

Question 26

Understand stop & limit sequences

Question 27

Because of liquidity issues involving portfolio holdings, most “country” funds are

Answer 27

Closed end funds

Closed end funds increase the liquidity of purchasing international investments.

Question 28

All of the following are considered economically defensive issues, except

A. A manufacturer of building materials.
B. Retail seller of clothing.
C. Frozen seafood manufacturer.
D. Tobacco products.

Answer 28

A

Housing starts and construction are cyclical industries.

When the market crashes… Are you still gonna get your smokes? Your food? Your clothes? Utilities? #defensive #millenial

Question 29

When comparing exchange-traded funds (ETFs) to mutual funds, some features available in ETFs that are NOT found in the mutual funds would include the ability to:

I correlate to a specific index.
II sell short.
III be bought and sold on margin.
IV represents an entire portfolio, or basket of securities.

Answer 29

2&3

All index funds / mutual funds correlate, the word means moving in sync with one another

Since ETF’s trade on the exchange, they can be treated like any stock such as being purchased on margin or sold short.

Question 30

An agent recommends a tax-free, fixed income security to a customer based on their tax rate. The customer believes another taxable investment would give them a better return. The agent could compute the equivalent taxable yield by

A. Dividing the tax-free yield by the compliment of the investors tax bracket
B. Dividing the taxable yield by the compliment of the investors tax bracket
C. Multiplying the tax-free yield by the compliment of the investors tax bracket D. Multiplying the taxable yield by the compliment of the investors tax bracket

Answer 30

This is asking what the corporate bond yield is

Remember the equation: Muni bond yield / (100% - tax bracket) = corporate bond yield

Solve for corporate bond yield = Muni bond yield / (100% - tax bracket) = corporate bond yield

Already solved for

A IS THE ANSWER

Question 31

Muni & corporate bond yields
Understanding how to interchange the two

Answer 31

Muni bond yield / (100% - tax bracket) = corporate bond yield

Muni tax free yield
Corp bond taxable

THEN JUST USE THIS TO SOLVE FOR IT

Question 32

As an IAR, from which would you recommend to pay debt off when someone dies?

Answer 32

All expenses and assets are handled by the estate.

Question 33

If an adviser solicitor is getting paid from advisory fees, what does he need to do?

Answer 33

An adviser solicitor disclosure must be signed by the client as well as delivery of Form ADV

Question 34

Does an adviser solicitor need to register when getting paid advisory fees?

Answer 34

Compensation for advice requires registration.

Question 35

Board of Directors of XYZ declares a .75/share dividend. What is the first day the stock trades without the right to the dividend?

Answer 35

A dividend is no longer available to investors who buy the stock the day before the Record Date. (Ex- dividend Date)

Question 36

Prior to an IAR making an investment recommendation, they should be concerned with all of these taxes, except:

A. capital gains
B. A.M.T.
C. inheritance
D. sales

Answer 36

D: Investments are not subject to state sales taxes.

Question 37

Your customer is invested in a mutual fund that their IAR recommended and has been reinvesting all of the capital gains and dividends. What is true about distributions?

Answer 37

All distributions, whether reinvested or not, are taxed. That includes all dividends and such.

Question 38

A socially conscience investment company should be most concerned with:

Answer 38

Tobacco, alcohol and gambling investments

Question 39

As a common stockholder, which right do you have?

Answer 39

Stock splits (recapitalization), vote for directors, M&A

Shareholders do not vote themselves a dividend nor do they vote for officers. They may vote for directors, stock splits (recapitalization) or in mergers and acquisitions.

Question 40

If the account holder dies, which of the following accounts would avoid probate?

Answer 40

Assets of the decedent automatically go to a beneficiary in JTWOS and POD accounts and thus avoid probate.

Joint in common typically DOES NOT avoid probate and should one die, distributed by will or according to state laws of intestate succession.

Question 41

What would be a common item to see on a Social Security statement?

A. The amount of taxation that has been paid thus far on one’s soc. Sec. Income
B. The amount of Medicare tax paid
C. An estimate of how much of a disability benefit one would be eligible for
D. What age the individual is eligible to start taking Social Security benefits

Answer 41

Disability benefit if you become disabled is available on your s.s. statement

Shows how much you have paid in taxes and provides an estimate of how much you may receive in benefits when you are eligible.

Question 42

Which of the following best describes a Hedge Fund?

Answer 42

Private securities not generally offered to the public

Question 43

What is the dividend discount model equation?

A customer is looking to invest in an income stock. They are looking for a 6% return so that her children will have enough money to go to college. According to the dividend discount model, to determine the best price to pay in order to achieve her goal she would need to determine.

A. Divide the annual dividend into the required (expected) rate of return = present value (market price needed)
B. Multiply the expected rate by the annual income
C. Multiply the annual income by the present value
D. Divide the annual income by the required (expected) rate of return

Answer 43

D. Divide the annual income by the required (expected) rate of return

The dividend discount model. Income/ rate of return

Question 44

The sale of a policy owner’s existing life insurance policy to a third party for more than its cash surrender value, but less than its net death benefit is known as:

Answer 44

Viatical settlement.

Selling your life insurance at less than the death benefit typically if the policy holder is terminally ill and needs to pay off hospital bills.

Question 45

An alternative trading system where orders can be placed anonymously so that the identity of the entity placing the order, along with the volume and price for the transaction, is unknown to the general investing public is generally referred to as

Answer 45

Dark Pool, An anonymous trading system.

Question 46

A couple has owned their home for 25 years. They paid $150,000 for it. They sold it after 25 years for $750,000. Their taxable capital gain is:

Answer 46

$100,000

$250,000 is exempt. $500,000 for married filing jointly

Question 47

What qualified plan is available for an employee of a tax-exempt company?

Answer 47

403b’s are used by school employees, non-profits and religious organizations.

Question 48

What non-qualified deferred compensation plan available to certain government employees (including state and local workers, police officers, firefighters, and some teachers), as well as highly compensated employees of non-profit organizations.

Answer 48

457b

Question 49

What is a KOEGH plan available for

Answer 49

tax-deferred retirement plan available to income earning self-employed individuals and unincorporated businesses, such as sole proprietorships and LLCs.

Question 50

Which is not a risk of owning T-Bills?

Answer 50

Liquidity, it is almost as liquid as cash

Question 51

If an auditor found a company to be involved in creative accounting, what language do they need to
write on the letter?

Answer 51

An adverse note means the auditor suspects there are some misstatements with the financial report.

Question 52

According to Keynesian Economic Theory, what rises when aggregate demand goes down.

Answer 52

Unemployment rises when demand goes down.
Unemployment decreases when demand goes up.

Question 53

On a balance sheet, retained earnings are treated as:

Answer 53

Equity

Question 54

U.S. companies do business with companies overseas. If the US $ strengthens, what area is LEAST affected?

Answer 54

If the U.S. $ increases in value, exports would decline and imports would increase which would be beneficial to international companies.

Question 55

What’s the best analytical method of finding why it’s better to invest dollars today vs. in the future?

Answer 55

Discounted cash flow analysis attempts to figure out the value of an investment today, based on projections of how much money it will generate in the future.

Question 56

All of the following pay periodic interest except

Answer 56

Zero coupon bonds ALSO KNOWN AS: Treasury Strips

Question 57

What is a CMO security

Answer 57

A collateralized mortgage obligation (CMO) refers to a type of mortgage-backed security that contains a pool of mortgages bundled together and sold as an investment.

Question 58

An investor purchases an XYZ October 50 call option with a premium of $0.75 per contract and a $20 commission. What is the total cost to the investor?

Answer 58

$95

Premiums on options are based on 100 underlying shares. Therefore, $0.75 times 100 + $75. Plus the $20 commission.

Question 59

Which of the following accounts gives the beneficiary immediate ownership?

A. A 529 college savings plan
B. A Coverdell plan
C. A 529 pre-paid college plan
D. A Uniform Gift to Minors Account

Answer 59

All contributions to an UGMA are irrevocable and are owned by the minor.

Question 60

When an investment has marketability risk, it has?

Answer 60

Liquidity risk

Marketability is the ability to liquidate the investment in the market.