Checkpoint exam topic(s)

Question 1

Performance guarantees

Answer 1

Prohibited
- customer cannot lose money

Question 2

Social media

Answer 2

LinkedIn - no endorsements

Question 3

Regulatory issues regarding broker-dealers offering wrap fee programs to existing customers include

Answer 3

concerns that some clients put into the program would be better off paying separately for investment advice, brokerage, and other services offered under the program.

Question 4

To be in compliance with the law, contracts under the USA differ from those under the Investment Advisers Act of 1940 in that under the USA they

Answer 4

are written

federal law does permit oral contracts, whereas the USA requires that all initial and renewal contracts be in writing.

Question 5

Brochure

Answer 5

Whether state or federal covered, unless there have been no material changes, investment advisers must send a brochure to eligible clients within 120 days of the end of the adviser’s fiscal year.

Question 6

An individual who is a proponent of the efficient market hypothesis (EMH) will likely invest in which of the following?

Explain EMH

Answer 6

Index funds

The closer to inside information, the stronger the information is. Anything published in widely read media would be considered very weak. An example of semi-strong would be, “information found when reading a listed company’s financial statements”. An example of strong would be, “overhearing two lawyers discussing an upcoming merger announcement they were preparing”.

Question 7

bond ladder strategy is a relatively easy way to

Answer 7

immunize (protect) a portfolio against interest rate risk

By holding many positions across the yield curve, the individual is diversified in the event that yields behave differently in one part of the curve than in another. The laddered portfolio will generally provide higher (not lower) yields than a portfolio consisting entirely of short-term bonds. Purchasing very long-term and very short-term bonds describes the bond barbell strategy, not the bond ladder strategy.

Question 8

large capitalization investing style

Answer 8

distinguishes between investing in a small-cap company versus a large capitalization company.

Question 9

If the expected return on the market is 20% and the risk-free rate is 4%, a stock with a beta coefficient of 0.8 would have an expected rate of return under CAPM of (AND FORMULA)

Answer 9

CAPM formula = risk-free rate (0.04) plus the product of the stock’s beta (0.8) and the difference between the expected return on the market and the risk-free rate (0.20 – 0.04). In this case, it would be 0.04 + (0.8)(0.16) or 0.04 + 0.128 = 0.168 = 16.8%.

Question 10

Bullet strategy

Answer 10

The least active strategy is the one requiring the lowest level of activity on the part of the investor. The bullet strategy involves investing in bonds at various intervals with all of the bonds maturing at or about the same time (such as when a child is entering college). As such, the only activity is buying bonds every couple of years. Barbell and ladder strategies have bonds maturing at regular intervals, requiring an active role in reinvesting the principal. All three of these require the investor to purchase bonds at different times, but the bullet strategy is the only one not concerned with the mechanics of collecting the matured principal and reinvesting it. Yield curve is not a specific strategy.

Question 11

Bond volatility

If interest rates rise, which bond would see the greatest decrease / decline in market valueL

Answer 11

Longest duration has highest volatility
If similar, the one with lowest coupon is more volatile / impacted

Question 12

Positive alpha

Answer 12

Although we could calculate the alpha, it should be clear that when one portfolio with a beta that is 50% higher than the other outperforms it by 100%, there is positive alpha.

Question 13

discounted cash flow

Answer 13

is nothing more than taking all the money you are scheduled to receive over a given future period and adjusting that for the time value of money (the discount rate).

Question 14

Alpha

Answer 14

is the extent to which a security’s performance exceeds (or falls short of) that of the market compared to what would be expected based on its beta.

Question 15

Duration measures

Answer 15

a bond’s volatility with respect to a change in interest rates. The higher the duration, the greater the change in a bond’s price with respect to interest rate changes.

Question 16

efficient frontier

Answer 16

The purpose of the efficient frontier is to plot the most efficient portfolios. An efficient portfolio is one that offers:

the most return for a given amount of risk or
the least risk for a given amount of return.

Question 17

If the current risk-free rate is 5%, and the expected return from the market is 10%, what return should we expect from a security that has a beta of 1.5?

EXPECTED RETURN

Answer 17

15%

EXPECTED RETURN = risk free + (expected market - risk free) x beta

.05 + .05 x 1.5 = 15%

Question 18

A federal covered investment adviser employs the services of a third-party promoter to solicit business for the firm. The Investment Advisers Act of 1940 would require the solicitor to deliver a copy of

Answer 18

the promoter’s agreement when above the de minimis compensation limit.

Question 19

IRA deduction

Answer 19

7k cap
Anything over 80k you cannot deduct
Full deduction under 73k

Question 20

investment in a qualified plan (or IRA)

Answer 20

1) must be for future use (or else it would be considered a distribution subject to tax)
2) real estate may be used prior to your retirement, but not by “related” parties. These are defined as your spouse and lineal members of your family (ancestor or descendant or their spouse). So, because the parents will be using the property, they are considered prohibited persons.

Question 21

The main disadvantage of a contributory defined contribution pension plan is that

Answer 21

the actual sum an employee will receive at retirement is unknown.

Question 22

A governmental Section 457 plan vs tax exempt 457 plan

Answer 22

must be funded—that is, it must hold plan assets in trusts or custodial accounts for the benefit of individual participants. Conversely, a tax-exempt (nongovernmental) Section 457 plan may not be funded.

Question 23

One of the advantages of using a Section 529 plan rather than a Coverdell ESA to fund higher education is

Answer 23

there is no age limit by which time the funds must be used.

Question 24

ERISA plans

Answer 24

ERISA serves as a basis of rules which protect the beneficiaries and plan participants.

It is permitted for a fiduciary to transfer plan income or assets for the benefit of a plan beneficiary or a plan participant which they are entitled according to the provisions within the plan.

It is not allowable for the fiduciary to transfer or loan plan assets for the benefit of a disqualified person such as the fiduciary of the plan or a person providing services to the plan.

Question 25

Among the benefits of an HSA is

Answer 25

employee contributions to a health savings account (HSA) not used for medical expenses may be invested in a wide variety of securities.

They also have high deductible, not low

Question 26

Under ERISA, all of the following retirement plans must set standards for vesting, eligibility, and funding

Answer 26

Keogh, profit-sharing, and corporate pension plans must meet set standards for vesting, eligibility, and funding under ERISA.

Deferred compensation plans are not qualified plans and may be discriminatory

Question 27

From the standpoint of diversification, which of the following would be considered the most conservative?

Answer 27

Balanced fund - most diversification

Question 28

ISO

Answer 28

if the holding period is satisfied, the gain upon the sale of ISO shares will be a long-term capital gain

upon the exercise of an ISO, income for AMT purposes is created

the exercise of ISOs does not create taxable income

The favorable tax treatment is lost if the shares acquired through the ISO exercise are sold before 1 year from the date of exercise or 2 years from the date of grant (NOT excercise)

Question 29

Interest rate risk applies primarily

Answer 29

to fixed income securities

Question 30

Which of the following are subject to the holding period requirements of Rule 144 of the Securities Exchange Act of 1934?

Answer 30

The holding period requirement of Rule 144 applies to unregistered securities, no matter who the owner is.

Question 31

The Federal Reserve Board has just taken action leading to an increase in interest rates. Which of the following industries is most likely to be affected adversely by this action?

A)
Cyclical industries

B)
Defensive industries

C)
Heavy industries such as steel

D)
Utilities

Answer 31

Utility stocks tend to be interest rate sensitive for two reasons. First, they are typically bought for income portfolios, and, as such, changes to interest rates impact their price. Second, because utilities are typically the most highly leveraged of all industries, an increase in interest rates could substantially increase their debt service costs and thus reduce earnings.

Question 32

How is a foreign private adviser defined in the Dodd-Frank Act?

Answer 32

There are four requirements to be considered a foreign private adviser

Any investment adviser that has no place of business in the United States

Any investment adviser that has, in total, fewer than 15 clients and investors in the United States in private funds advised by the adviser

Any investment adviser that has aggregate AUM attributable to clients in the United States and investors in the United States in private funds advised by the adviser of less than $25 million

Any investment adviser that does not hold itself out to the public in the United States as an investment adviser or acts as an investment adviser to an investment company registered under the Investment Company Act of 1940

Question 33

Additional indicators

Answer 33

The prime interest rate is a lagging indicator.

Nonagricultural employment is a coincident indicator.

New orders is a leading

Question 34

Supply-side economics is the theory of Arthur Laffer, who believed that

Answer 34

heavy taxing and government intervention have a negative effect on the economy.

Question 35

The final step in the approval process of the annual operating budget for the United States is

Answer 35

President of the US

Question 36

A credit spread refers to the difference between

Answer 36

yields of bonds with similar maturities but different ratings

Question 37

The statistical method used to determine the return profile of a security or portfolio that recreates potential outcomes by generating random values based on the risk and return characteristics of the securities themselves is known as

Answer 37

the Monte Carlo simulation

Question 38

Applicants who pass the Series 66 exam after having also passed the Series 7 exam can tell prospects,

Answer 38

“I am a FINRA registered representative and an investor adviser representative.”

The first is as a registered representative with a FINRA member firm. The second is as an agent with that firm, but on the state level. The third is as an IAR with a registered investment adviser. No claims can ever be made implying approval or endorsement of your qualifications. There is no such term as a licensed fiduciary. The IAR registration generally places you in a fiduciary capacity and, under certain conditions, the agent or RR registration can do so as well. Although these are national exams, licensing on a state level is usually required.

Question 39

A computerized mathematical technique that is often used by investment advisers to project future financial outcomes, such as the probability of a client’s funds lasting through retirement, is called

Answer 39

Monte Carlo Simulation

Question 40

A technical analyst who wishes to smooth out the fluctuations of stock market prices would probably chart

Answer 40

100 day moving average

Question 41

Approved can be used when

Answer 41

It can never be used with reference to any regulator commenting on the status of a security or an individual. However, a broker-dealer creating an approved list of securities is not unethical or prohibited as long as it is clear that it is the broker-dealer and not any regulator granting the approval.

Question 42

The goal of modern portfolio theory (MPT) is to construct the most efficient portfolio. An efficient portfolio is one that offers

Answer 42

the least risk for a given amount of return

Question 43

model fee disclosure schedule to help investors better understand the costs involved in doing business with their broker-dealer includes what, and doesn’t include what

Answer 43

It includes disclosure fees

It does not include:
commissions;
markups and markdowns; and
advisory fees for those firms that are also registered as investment advisers.

Question 44

Which of the following investment strategies is used to determine an appropriate allocation based on the long-term goals and risk tolerance of the client?

Answer 44

Strategic,

Question 45

Large cap
Mid cap
Small cap
Micro cap

Answer 45

large-cap: market value between $10 billion and $200 billion;
mid-cap: market value between $2 billion and $10 billion;
small-cap: market value between $250 million and $2 billion; and. micro-cap: market value of less than $250 million

Question 46

IA that uses a website required to do

Answer 46

Maintain a copy of the screens used on its site in the firm’s advertising file.

Place copies of new screens into the firm’s advertising file each time a change is made.

Question 47

material conflicts of interest is true

Answer 47

Advisers must disclose any material conflicts of interest in writing before rendering advice. Material conflicts of interest include any compensation to be received regarding recommendations to the client from other sources in addition to the advisory fee charged and affiliations between the adviser and suppliers of related services or other investment products.

Question 48

Final orders of the Administrator may be appealed to the appropriate court within

Answer 48

60 days

Question 49

Upon the entry of a summary order, the Administrator shall promptly notify all interested parties that it has been entered and of the reasons therefor and that within

Answer 49

15 days of the receipt of a written request the matter will be set down for hearing.

Question 50

If an agent chooses to appeal an Administrator’s order, when must the agent file for review of the order with the appropriate court?

Answer 50

60 days