Exam 1 Flashcards
Measure of Risk
Standard Deviation
Measure of diversifiable risk
Alpha
Measure of non-diversifiable risk
Beta in the Capital Asset Pricing Model
Facilitates U.S. investment in the stock of foreign corporations. When the foreign securities are deposited in a U.S. bank based in that country, a receipt for those securities is issued and traded in the U.S. as if it were the foreign security itself.
American Depositary Receipts (ADRs)
Major disadvantage of a C Corporation is that
Shareholders (owners) are taxed twice. Must first pay taxes at the corporate level. Shareholders must then pay personal income taxes on any income they receive from the corporation in the form of dividends
Currency risk is particularly ____ for short-term investors
Acute (present or experienced to a severe or intense degree)
The possibility that changes in exchange rates between currencies will undermine the value of foreign investments for U.S. investors
Currency Risk
If an investment advisor’s only client is a private fund (hedge fund) that has less than $150M in AUM that has 100 or fewer investors, what is their registration requirement?
They are an exempt reporting advisor (ERA) and are not required to register with the SEC, but must notice file with the state Administrator(s) and pay a fee
A form of asset allocation that is based on the belief that markets are NOT efficient and that market timing can be beneficial. For example, an investor who believes that interest rates are going to rise soon might reduce the number of fixed-income securities in his portfolio
Tactical asset allocation
A person who believes that the markets are _________ _______ is more likely to use a passive approach to investing, such as strategic asset allocation or indexing. Some proponents of the ______ ______ hypothesis do believe that fundamental analysis can be a useful tool in identifying investments that will outperform the market.
inherently efficient (the efficient market hypothesis)
When bond prices fall, what will happen to the yield-to-maturity and the yield-to-call?
They will both rise
_____ investments offer tax breaks that mutual funds cannot offer. One of the largest tax breaks is the interest deductions on loans
Real estate
An investment adviser representative has been given a client’s username and password in order to access her brokerage account. The client wants the IAR to have the ability to execute trades and withdraw cash to pay the client’s bills. Does this constitute discretion?
Yes, since the IAR is able to withdraw funds and execute trades
Involves an analysis of a company’s financial statements (i.e. balance sheets and income statements) in order to make investment decisions.
Fundamental analysis
Uses pricing trends and patterns to make investment decisions.
Technical analysis
Involves projections of future cash flows (e.g. corporate earnings, bond interest payments) and uses the present value formula to discount them back to their present value
Discounted cash flow modeling
Return calculation that eliminate biases caused by the inflow or outflow of investor money. It is often used to compare the performance of money managers.
Time-weighted
Return calculation that provides a better idea of how an individual investor has done over time by eliminating the biases caused by superior performance in one year or inferior performance in another.
Dollar-weighted
U.S. govt bonds would not be subject to which risks?
Credit risk or currency risk, unless the investor had purchased them with foreign currency
Do passive asset allocation strategies alter a portfolio in anticipation of an economic event?
No - active asset allocation strategies do
Buyers of which option have the right to buy stock at the strike price?
Calls
Buyers of which option have the right to sell stock at the strike price?
Puts
An IA may charge a client an investment advisory fee for rendering investment advice while receiving compensation for effecting securities transactions related to such advice
Only if disclosed to the client
Par
$1000
What are the steps to find what price per share common stock would be trading to be at parity with the bond?
- Find the conversion ratio
- Determine the value at which the stock must be trading to be equal to the current market value of the bond (bond’s value / parity price of the stock)
Price at which both the bond and the aggregate value of the stock are equal
Parity
What are the characteristics of growth companies?
Low dividend payout ratios, high research and development expenses, and high price-earnings ratios, as well as more volatile stock prices
Which of the following is a right that’s provided to owners of preferred stock?
The right to receive a dividend if the payment is approved by the board of directors
What is the main difference between futures contracts and forward contracts?
Future contracts may be offset (bought or sold) whereas in a forward contract, both parties involved in the contract must agree before the contract may be bought or sold
The yield for a zero-coupon is based on
The purchase price relative to face value - they do not pay interest on a semiannual basis; instead, they’re sold at a discount from their par value
What happens if a put option is exercised?
The seller of a put will be required to buy back the underlying stock at an agreed-upon price
A client’s federal adjusted gross income (AGI) consists of her ______
Taxable income
ex: salary, tips, bonuses, dividends, and corporate bond interest
Municipal bond interest is tax-free and not included in a person’s AGI
If the economy is experiencing rising inflation, this will generally lead to:
A decrease in bond prices
Rising inflation will usually lead to the FRB increasing short-term rates. This increase in rates will cause outstanding bond prices to decrease
What is a disadvantage of investing in a C Corporation?
Shareholders pay tax on income that was already taxed to the company
What metric would allow a financial professional to calculate the fair market price of a bond?
Discounted cash flow
What is a form of systematic risk and cannot be avoided by securities investors?
Market risk
Explicitly recognizes the need for diversification. Investing 100% of a portfolio in anything is rarely wise
Prudent investor standards
The major advantage of an S Corporation versus a C Corporation is than an S Corporation
May elect to be treated like partnerships for federal tax purposes
Which two types of risks are not associated with options and derivatives contracts?
Reinvestment risk and purchasing-power risk
Is an internet investment advisor subject to registration with the SEC?
Yes
What investment is not permitted in a 401(k) plan?
Real estate
What is an example of an exempt transaction under the Securities Act of 1933?
Reg. D - also considered a private placement and represents a federal exempt transaction
Why is a municipal bond not suitable to be in an individual retirement account (IRA) ?
IRAs offer tax-deductible contributions and deferral of taxes on gains, interest, and dividends until the owner takes a withdrawal. Interest on a municipal bond is tax-free , so other bonds would be more suitable
When considering investments in various mutual funds, an IA may recommend an emerging markets fund as a means of
Diversifying investments in various funds
EM funs invest in companies of countries that are moving out of their economic development phase and into a more growth-oriented stage in their development
What non-qualified deferred comp plan can be offered to managers of a govt agency?
457
How do you calculate the mkt capitalization of a company?
Multiply number of outstanding shares by the current mkt price of the shares
What is considered a small cap company?
If it has the mkt cap between 300M and 2B
What life insurance policy is best suited for investors with low income?
Term life - they do not accumulate chase value and have the lowest premiums
What type of order may a customer use to protect profits or limit losses in current positions?
Stop order
What does a leverage ratio measure?
The amount of additional debt that an issuer can assume
What does a liquidity ratio measure?
The amount of additional debt that a business can afford to issue
What securities are most likely used to create asset-backed securities?
Home equity loans, credit card receivables, auto loans, or student loans
Asset backed securities (ABS) are bonds which are backed by a pool of assets. They are similar to collateralized mortgage obligations (CMO), but ABS are secured by a pool of loans that don’t include mortgages.
What information is required in order to determine an investment’s internal rate of return (IRR)?
The positive and negative cash flows from an investment
According to the USA, the Administrator may require federal covered advisers to
Give notice or notice file in any state where they transact business with six or more individual retail clients
When would a variable annuity be most suitable for a client?
When the client wants capital appreciation or growth over a long period
What does an inverse ETF do?
Moves in the opposite direction of the benchmark or index to which they’re linked, making them considered derivatives
What are the differences between exchange-traded funds (ETFs) and exchange-traded notes (ETNs)?
ETNs carry credit risk that is tied to the issuer that backs the note and ETFs do not have issuer credit risk
ETNs have a maturity date and ETFs do not have
What are the advantages of a limited liability company (LLC) compared to an S Corporation?
A simpler managerial structure
Can investment advisers market themselves using abbreviations?
No
What are examples of digital assets?
Cryptocurrency, stablecoins, non-fungible tokens (NFTs)
A blockchain is a method of recording ownership of digital assets - not a digital asset
What is a characteristic of a Money Purchase Plan?
Employers must make mandatory contributions
What does not impact the value of a bond?
An increase in the company’s dividend payment
According to NASAA’s Model Rule on IAR continuing education (CE), how many credit hours of continuing education must an IAR complete each year?
Six credit hours related to products and practices and six credit hours related to regulatory and ethics (three of which must specifically cover ethics)
In a declining market, the type of order that would potentially contribute to the decline is a
Sell stop
A corporation’s shareholders must vote for
Stock splits
What is true regarding investment advisory contracts?
Under USA, IA contract must be written
Under IAA of 1940, IA contracts are not required to be written
What is not a characteristic of futures contracts?
Most of the contract’s terms are set by the buyer and seller
The buyer of a futures contract cannot be forced to take delivery of
What’s a benefit of establishing a general partnership compared to establishing an S-corporation?
General partnerships don’t require incorporation with the state
It is most beneficial to the holder of a call if the price of the underlying security is
Rising
A stock that is traded on the NYSE has a high P/E ratio, a low dividend payout ratio, and a high level of retained earnings, what type of stock is it?
Growth
An equity-indexed annuity is suitable for which of the following clients?
A person who needs a minimum guaranteed return with the potential for a greater return than CDs offer
What is true regarding the causes of inflation?
Demand-pull inflation occurs when the demand for money increases and pulls interest rates higher, causing inflation
Cost-push inflation occurs when the cost of financing the national debt increases, causing rising interest rates and inflation
If the net present value of an investment is greater than 0
The current market value is less than the discounted cash flows
What method of crediting an equity indexed annuity’s returns is based on the index value over a specified period?
Point-to-point
Which of the following is the best explanation of the difference between progressive and regressive taxes?
Regressive taxes will result in lower income individuals paying proportionately more in taxes than higher income individuals
A federal covered adviser must
Register with the SEC and file form ADV
What is accurate regarding a sports representative?
In certain cases, a sports and entertainment representative who provides advice about investments is considered an investment adviser
87 of 140
Your client dies and leaves a sizable investment portfolio. Within two weeks of his death, the executor of his estate presents the proper documentation to you. She has you sell off the decedent’s portfolio, investing the proceeds in money-market instruments in anticipation of the distribution to the heirs of the estate. The value of the holdings declines substantially in the period between his death and their sale. For estate tax purposes, the assets will be valued
At the time of death
The amount of money an issuer receives in a stock offering in excess of the part value is recorded on the balance sheet as
Capital surplus
In order for an individual to be eligible for a Health Savings Account (HSA) the individual must be
Covered under a high deductible health plan (HDHP)
An investor has heard conflicting reports about the success of a company’s latest products. The investor is unsure of the direction in which the stock’s price will move, but wants to take an option position. Which option strategy should be recommended?
Buy a call and buy a put on the stock
