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66 - Final Topics > Final #3 > Flashcards

Final #3 Flashcards

1
Q

The holder of a call has ________ gain potential

A

Unlimited

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2
Q

What is the FINRA rule that must be adhered to before a client can give discretionary authority to investment advisers?

A

FINRA requires a written power of attorney before discretionary trades can be accepted

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3
Q

What is the NASAA rule that must be adhered to before a client can give discretionary authority to investment advisers?

A

NASAA allows verbal discretion to be exercised, as long as the written power of attorney is obtained from the customer within 10 business days

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4
Q

Establishing the structure of a portfolio to meet specific financial goals is called:

A

Strategic allocation

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5
Q

The market capitalization of a company is the:

A

number of common shares outstanding times the price per share

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6
Q

What is a “laddering” strategy?

A

When constructing a bond portfolio, “laddering” the portfolio means that the portfolio is structured with short-term; intermediate term; and long-term investments. As the short-term bonds mature, the proceeds are reinvested either in new bond categories, depending on anticipated movements in interest rates (active strategy)

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7
Q

What is a “barbell” strategy?

A

A barbell strategy is a similar to a ladder strategy, but uses only short term and long term bonds (the 2 ends of the barbell)

This is an active strategy

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8
Q

What is the difference between the NASAA and IA Act of 1940 regarding custody rules?

A

Under NASAA, if an IA accepts $500 of prepaid advisory fees (or more), 6 months or more in advance , then the adviser is considered to have taken custody of client funds.

Under IA of 1940, the amount is $1,200 (fed covered)

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9
Q

What is the formula for dividend yield on a stock?

A

Annual Dividend Income / Market share Price

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10
Q

What is the Monte Carlo Simulation?

A

A computer simulation that allows one to evaluate the impact of changes in multiple variables simultaneously on the expected performance of an investment over a specified time frame

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11
Q

Monte Carlo simulation analyzes potential portfolio returns achieved based upon what varying factors?

A

I. Interest rates
II. Inflation rates
III. Equity returns

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12
Q

What are the allowable deductions from a taxable state?

A
  1. Funeral and administrative expenses
  2. Claims against the estate
  3. State death taxes
  4. Mortgages against real property owned by the estate
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13
Q

An IA has developed a proprietary trading system that has doubled the fees of the S and P. Other advisers that offer similar services charge an annual advisory fee equal to 5% of AUM. This adviser wishes to charge an annual fee equal to 10% of AUM since he believes his process is superior. Can he?

A

No. Fees charged by an investment adviser must be comparable to the fees charged by other advisers that offer similar services. Since other advisers that provide similar services charge a fee equal to 5% of assets annually, a 10% annual charge is excessive.

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14
Q

What are the capitalization thresholds for stocks used by S and P?

A
  • Micro Cap: Less than $300 million
  • Small Cap: $300 million to $1 billion
  • Mid Cap: $1 billion to $5 billion
  • Large Cap: Over $5 billion
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15
Q

Under the Investment Advisers Act of 1940, a person is “in the business” of giving investment advice if he or she is compensated for what 3 things?

A
  1. Recommendations of securities
  2. Analyses of securities
  3. Reports about specific securities
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16
Q

What are some of the key assumptions of the Capital Asset Pricing Model (CAPM)?

A
  • Investors are risk averse and are rational, seeking a higher return for taking on greater risk
  • Investors do not consider taxes when making investment decisions
  • All investors hold securities for the same time period
  • There are no transaction costs
  • All investors have access to the same market information
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17
Q

What is one way that one can differentiate open end and closed end funds?

A

If a sales charge is in place, it is for an open end (mutual) fund.

Closed end management companies are not sold with a sales charge

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18
Q

What is capital stock?

A

Capital stock is a term for the original capitalization of the company - the stock sold to the public from which the company received its initial capital injection to start business.

19
Q

What is a a value stock?

A

Stock of a mature company that sells at a low “multiple” of earnings and that pays a good dividend is considered a good “value” - hence the name “value” stock

20
Q

To register as an AGENT, the administrator can require what 3 things?

A
  1. Agents may have to post a surety bond
  2. An agent may have to post a surety bond
  3. An agent may have to pass a qualifying examination
21
Q

What is included in the Investment Policy Statement? (IPS)

A
  • recommended allocations among differing asset classes
  • strategies used for selecting specific stocks in the equity portion of the portfolio
  • expected returns and range of these returns
  • strategies used for “tactically” timing the market when choosing specific investments within each class
22
Q

What are the registration requirements for investment advisers whose only clientele is insurance companies?

A

The investment adviser is exempt from registration in the state of residence of the insurance company as long as it is not physically located in that State

23
Q

The IA Act of 1940 excludes from registration any adviser that renders advice only on _____________.

A

U.S. Government Securities

Note that there is no exclusion given to advisers who only give advice about municipal or foreign securities.

24
Q

Regulation SP applies to customer information that is sourced from anywhere EXCEPT

A

Public resources, such as a telephone book

25
Q

An investment adviser is permitted to borrow money from?

A

Persons who are in the business of lending money (banks and broker dealers) in an arm’s length transaction.

It makes no difference if the bank or broker-dealer is affiliated with the investment adviser.

26
Q

What is the advantage/purpose of a family limited partnership?

A

Family limited partnerships are set up primarily to protect family assets from creditors. The main benefit is that these family assets can be transferred over time to the children at a lower tax basis, since, in theory, they have “lost” value (because they are no longer marketable). This structure can allow parents to gift assets to children yearly with minimal or no gift tax.

27
Q

What is the termination benefit in a family limited partnership account?

A

The “termination benefit” refers to the distribution of remaining partnership assets when the partnership is dissolved. The remainder beneficiary receives this

28
Q

True or False: Acceptance of prepaid fees is not the same as taking custody of customer funds or securities.

A

True

29
Q

Under the Uniform Securities Act, an advertisement for advisory services published in a local newspaper is an offer in what states?

A

Only in the State where the newspaper is published.

30
Q

What is the order of payment of creditors in a corporate liquidation?

A
  1. Secured creditors
    1a. (Wages and Salaries payable)
  2. Unsecured creditors
  3. Preferred Stockholders
  4. Common Stockholders
31
Q

What type of income is a RELP considered?

A

Passive Income

32
Q

What type of income is a REIT considered?

A

Portfolio income

33
Q

To be defined as a diversified management company, a fund can hold no more than what percentage of a single issuer’s voting stock?

A

10%

34
Q

To be defined as a diversified management company, a fund can hold no more than what percentage of assets invested in a single issuer?

A

5%

35
Q

To be defined as a diversified management company, a fund can hold no less than what percentage of its assets invested in securities?

A

75%

36
Q

A Business Continuity and Succession Plan must provide, at a minimum, for:

A
  • Protection, backup, and recovery of books and records
  • Alternate means of communicating with customers, key personnel, employees, vendors, service providers and regulators
  • Office relocation in the event of loss of a principal place of business
  • Assignment of duties to qualified persons in the event of death or unavailability of key personnel
  • Minimizing service disruptions and client harm that could result from a significant business disruption
37
Q

An adviser that takes custody must file a copy of its surprise audit results with the State Administrator within:

A

120 days of completion of the examination

38
Q

The Dividend Discount Model values common stock based on the:

A

Net present value of anticipated future dividend payments

39
Q

Who can be the beneficiary of a trust?

A

A grantor, trustee, or beneficiary

40
Q

A customer is selling some of his previously purchased shares. If specific identification is not used, the shareholder must use what method of withdrawal by default?

A

FIFO

41
Q

If a broker-dealer buys out another broker-dealer, what filing fees must be paid to the State?

A

No additional filing fee is required

42
Q

A customer has $6,000 of capital gains and $10,000 of capital losses. How much loss is deductible from this year’s tax return?

A

$3,000

Only $3,000 of net capital losses can be deducted in a tax year, so $1,000 of the loss is carried forward to the next tax year.

43
Q

Customers must exercise their right of rescission within how many days of written notice by the offerer?

A

30 days

44
Q

An investment adviser can hold all of its customer securities in a single brokerage account without identifying the individual customers to the brokerage dealer in an:

A

Omnibus account

66 - Final Topics (6 decks)

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