Final Exam 11 Flashcards
If an investment adviser representative is reviewing a client's IRA portfolio, she would be most concerned with the inclusion of which of the following investments? QID: 1507381Mark For Review A ADRs B Municipal bonds C Shares of a growth fund D Shares of an REIT
Municipal bonds
Although it is not prohibited to place municipal bonds in an IRA, a review of the appropriateness must be performed. Since an IRA is a tax-deferred account, the tax-exempt nature of the municipal bond loses its effectiveness. Instead, the placement of a higher yielding investment is more suitable.
What's a benefit to establishing a business entity as an LLC rather than as a sole proprietorship? QID: 2101115Mark For Review A Owners can protect their personal assets B Tax treatment is the same as for corporations C Ease and simplicity of establishment D The investor has greater control
Owners can protect their personal assets
In the formula Pn = P0(1 + r)n, P0 represents:
QID: 1507066Mark For Review
A
The standard deviation
B
One million dollars in U.S. currency
C
The anticipated original investment amount
D
The returns in excess of expected returns
The anticipated original investment amount
The formula Pn = P0(1 + r)n is used to calculate the future value of money. P0 represents the anticipated original investment (at Year 0). Pn represents what an investment will be worth at some point in the future when the effects of compounding are taken into consideration, n represents the number of compounding periods, and r represents the rate of interest.
What's the best indicator of a successful mutual fund? QID: 2101121Mark For Review A Tenure of the manager B The returns of the portfolio over the previous year C The fund's expense ratio D The turnover rate in the portfolio
Tenure of the manager
An investor purchased a 6%, A-rated, corporate bond at par value. After one year, the bond’s total return is actually 6.50%. The most likely reason for this is:
QID: 1507060Mark For Review
A
The credit rating of the bond was lowered, which increased the bond’s yield
B
Market interest rates increased to 6.50% for A-rated issues
C
The investor’s payment of accrued interest at the time of purchase lowered his effective return
D
Interest rates have decreased
Interest rates have decreased
The formula for calculating a bond’s total return is interest received, plus appreciation, minus any depreciation, divided by the original cost of the investment. Since the 6% bond was originally purchased at par, but now has a total return of 6.5%, it is indicative of the bond’s value having increased. Based on the inverse relationship between bond prices and interest rates, a bond’s value will increase as market interest rates decrease.
What’s an advantage of a non-qualified retirement plan over a qualified retirement plan?
QID: 2100432Mark For Review
A
Contributions grow on a tax-deferred basis.
B
Contributions are pre-tax, reducing the investor’s gross income.
C
It can be discriminatory.
D
It has a zero-cost basis.
It can be discriminatory.
Contributions made to non-qualified retirement plans are not tax-deductible (i.e., they’re funded after-tax). Although some non-qualified retirement plans allow contributions to grow on a tax-deferred basis (e.g., 457 plans), this is not always the case. However, non-qualified plans are not required to be offered to all employees (i.e., they may be discriminatory), which is the main advantage for an employer.
Which trust is the most expensive for a trustee to manage?
QID: 2100460Mark For Review
A
A trust that has several young children as beneficiaries.
B
A trust which has adult beneficiaries.
C
A trust which is created for the privacy of the grantor.
D
A trust which is created for the medical expenses of a beneficiary.
A trust that has several young children as beneficiaries.
As it relates to trusts, when children are the beneficiaries, it can be assumed that the trust will need to be managed for a longer period and will incur more costs. The other choices will most likely be closed in a shorter period and be less expensive for the trustee to manage
Which of the following can time-weighted return be used to evaluate?
QID: 2101109Mark For Review
A
The return on the market that exceeds the risk-free rate of return
B
The rate of return an investor will earn if he holds a bond until it matures
C
Comparing the performance of portfolio managers
D
The discount rate that will make future cash flows equal to the present market value of an investment
Comparing the performance of portfolio managers
Time-weighted return is used to evaluate the performance of money managers. Time weighted return minimizes the impact of investor deposits and withdrawals, which cannot be controlled by the manager.
An investor purchases a bond that was quoted in terms of its yield-to-call. The best outcome for the investor is: QID: 2101125Mark For Review A Holding the bond until it's called B Selling the bond after one year C Holding the bond until it matures D Selling the bond immediately
Holding the bond until it matures
Which of the following advisers are exempt from registration under the Investment Advisers Act of 1940?
QID: 1507075Mark For Review
A
U.S. government securities advisers
B
Advisers to charities and non-profit organizations
C
Advisers to investment companies
D
Domestic advisers that have fewer than 15 clients
U.S. government securities advisers
The IA Act of 1940 provides an exemption for advisers that limit their advice to U.S. government securities. Note, there is no de minimis exemption for domestic advisers. However, there is a de minimis exemption for foreign advisers that have fewer than 15 clients and (1) have no place of business in the state, and (2) have less the $25 million in aggregate assets under management that are attributable to U.S. investors.
Which formula is used to perform discounted cash flow analysis for a bond? QID: 2101069Mark For Review A Present value B Future value C Duration D Yield-to-maturity
Present value
Discounted cash flow analysis is a method for estimating the current market price of a bond, project, or business. Discounted cash flow analysis involves estimating or projecting future income (i.e., cash flows) and discounting them back to their present value using the present value formula. Duration measures a bond’s risk relative to interest rates and the yield-to-maturity measures a bond’s rate of return.
An agent has been given the login and password for a client’s account. The client has provided written authorization for the agent to login and place trades in the client’s account. This activity is considered:
QID: 2101114Mark For Review
A
Acceptable, provided the authorization was filed with the Administrator.
B
Acceptable, provided the broker-dealer’s policies allow for it.
C
Unacceptable, since it likely violates the terms of service of the broker-dealer’s online account access system.
D
Unacceptable, since it’s strictly prohibited under the Uniform Securities Act.
Unacceptable, since it likely violates the terms of service of the broker-dealer’s online account access system.
Since the agent is logging into the website using the client’s credentials, it’s impossible to determine which transactions were entered by the agent and which were entered by the customer. Since broker-dealers cannot identify whether trades were fraudulent, they prohibit the sharing of usernames and passwords in their terms of service.
How do mutual funds report annual returns? QID: 2100439Mark For Review A Arithmetic mean B Total Return C Beta D Net Asset Value (NAV)
Total Return
Mutual funds are required to disclose their returns to their shareholders using the Total Return formula. The NAV is the price of a mutual fund, not a measure of return. Arithmetic mean is simply an average, while beta measures the systematic risk of an investment.
An advisory client believes that the economy is heading into recession. Which of the following is the most appropriate strategy in anticipation of a market decline? QID: 1507359Mark For Review A Buying index calls B Selling index puts C Selling index futures D Buying index futures
Selling index futures
Selling stock index futures is a bearish strategy which may be used by a speculator or a hedger. The other strategies that are listed are bullish and are not appropriate for an investor who anticipates a market decline.
Jack purchased 100 shares of XTRO at $20. After nine years, he gave the shares to his nephew Sam when the fair market value of XTRO was $16 per share. Sam held the stock for seven months and then sold the shares for $23 per share. What's the tax consequence for Sam? QID: 1507382Mark For Review A Short-term capital gain of $300 B Long-term capital gain of $300 C Short-term capital gain of $700 D Long-term capital gain of $700
Long-term capital gain of $300
If securities are received as a gift, any tax implication is delayed until the securities are subsequently sold. To determine capital gains, the recipient’s cost basis will either be the donor’s original cost or the fair market value (FMV) at the time of the gift (i.e., dual basis). At the time of the gift, if the securities have appreciated (i.e., FMV > donor’s cost), the recipient will always use the donor’s original cost as her basis. This is the way that most gifts will work. However, in this question, the securities have fallen in value at the time of the gift (i.e., $16 FMV < $20 donor’s cost). As a result, the cost basis is dependent on the sales price. If the sales price was above the donor’s cost (i.e., $23 sales price > $20 donor’s cost), then the donor’s cost will be used as the cost basis. In addition, the donor’s holding period will be used to determine whether there’s a long or short-term holding period. If the sales price was less than the FMV (e.g., $5 sales price < $16 FMV), then the FMV will be used as the cost basis. In addition, the holding period begins one day after the gift is made.
When the beta for a portfolio is 1.0, the portfolio return is 12%. What's the alpha if the portfolio now has a beta of 1.4 and the actual return is 18.8%? QID: 1507385Mark For Review A \+6.80 B -6.80 C \+2.00 D -2.00
+2.00
A portfolio’s alpha is calculated by taking the actual return (which is 18.8% for this question) and subtracting the expected return. A portfolio’s expected return is found by taking the beta and multiplying by the return on the market (i.e., the S&P 500). Although this question doesn’t indicate the return on the market, it does indicate that the expected return is 12% when the beta is 1.0. Since the market has a beta of 1.0, it can be assumed that the return on the market is 12%. Therefore, the expected return on the portfolio is 16.8% (Beta of 1.4 x 12% return on the market). Ultimately, the Alpha is +2% (18.8% actual return - 16.8% expected return).
Which of the following can be included in an investment advisory contract?
QID: 1507389Mark For Review
A
A clause which indemnifies the adviser from any wrongdoing
B
A statement indicating that the IA guarantees performance against a benchmark and, if it is not met, the IA will surrender its fee for that year
C
The fact that conflicts may exist, without disclosing the details of those conflicts
D
That the IA is entitled to a portion of all of its clients’ profits
A statement indicating that the IA guarantees performance against a benchmark and, if it is not met, the IA will surrender its fee for that year
Within the contracts that IAs establish with clients, they are prohibited from inserting provisions that would make them blameless for misdeeds (indemnifying clauses), failing to disclose conflicts of interest, and summarily taking a portion of a client’s profits. However, IAs are permitted to structure a contract in such a way that if they do not perform at a given level, they will not earn some of their advisory fee. In this case, they would receive a base fee and a performance adjusted fee; or simply sacrifice some of their fee due to inferior performance. This arrangement is referred to as a fulcrum fee. Although this fee structure is available to advisers in the mutual fund business, it is rarely used.
How does an Administrator determine whether excessive trading has occurred in a customer’s account?
QID: 2101118Mark For Review
A
The client’s financial situation
B
The frequency of unsolicited trades in the account
C
The suitability of solicited trades in the account
D
The suitability of unsolicited trades in the account
The suitability of solicited trades in the account
Churning or excessive trading is a prohibited activity. To determine whether churning has occurred, regulators typically examine the suitability of solicited trades (i.e., those which were recommended by agents of a broker-dealer). Unsolicited trades are executed at the client’s own volition, without advice from an agent of a broker-dealer, and are irrelevant for churning determination.
A client purchased orange juice futures at $1.70 per pound. Two months later, if orange juice has increased to $1.95, the client has: QID: 1507361Mark For Review A A gain of $.25 per pound B No realized gain or loss C An option to buy at $1.70 D An obligation to deliver at $1.70
No realized gain or loss
This is a tricky question. Since the question does not indicate that the contract has been closed out, there is no realized gain or loss. However, if the client sells, closing out the position, she would realize a profit if orange juice is trading above $1.70.
Jake purchased a corn futures contract at $1.20 per bushel. At the end of the contract, if the price of corn has fallen to $1.10 per bushel, which of the following statements is TRUE? QID: 1507362Mark For Review A Jake makes delivery. B Jake takes delivery. C The contract expires worthless. D Jake neither takes delivery nor makes delivery.
Jake takes delivery.
As the purchaser of the contract, Jake has an obligation to take delivery. On the other hand, the party that initially sold the contract has an obligation to make delivery.
A TIPS is issued at par and has a coupon of 4.0%. What's its principal value if the CPI increases 3%? QID: 2100444Mark For Review A $1,040 B $40 C $1,030 D $1,070
$1,030
TIPS are bonds that are issued by the U.S. Treasury and are designed to protect investors from inflation. When inflation rises, as measured by the Consumer Price Index (CPI), the principal on a TIPS bond will increase by the same amount that the CPI rises. In this question, the bond started with a par (principal) amount of $1,000. If the CPI increases by 3%, the new principal amount is $1,030 ($1,000 x 3% = $30, and $1,000 + $30 = $1,030).
What type of investment analysis uses financial data that's specific to one issuer to make investment decisions? QID: 2100434Mark For Review A Discounted cash flows B Odd lot theory C Fundamental analysis D Technical analysis
Fundamental analysis
Fundamental analysis involves an analysis of a company’s financial statements (i.e., balance sheets and income statements) in order to make investment decisions. Conversely, technical analysis uses pricing trends and patterns to make investment decisions. Discounted cash flow modeling 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.
A client invests $10,000 into Company A, $10,000 into Company B, and $10,000 into Company C.
— Company A’s stock paid a $200 dividend and dropped 20%.
— Company B’s stock paid a $600 dividend and rose 5%.
— Company C’s stock paid no dividend and rose 7%.
What is the client’s total return?
QID: 1507371Mark For Review A -2.9% B 0% C 8% D 22%
0%
Using the total beginning value of all investments, $30,000, the total ending value is $29,200, and the total annual earnings of $800, the client’s total return may be calculated.
29,200 - 30,000 + 800 / 30,000 = 0%
There has been no change in the total value (i.e., the total return is zero) since the decrease in total market value is offset by the amount received in investment income.
What is the motivation behind setting up an UTMA account? QID: 1507399Mark For Review A To fund higher education B To provide gifts to the child/owner C For tax savings D To reduce the estate of the donor
To provide gifts to the child/owner
Due to the popularity of 529 plans, the effectiveness of custodian accounts has diminished. Any of the earnings that are generated in an UTMA are subject to taxation. The primary purpose for establishing a UTMA is to provide gifts of cash and/or securities for a child’s future benefit.
Value investing is: QID: 2100433Mark For Review A Risky because it's contrarian B Safe because value companies are unlikely to go bankrupt C Safe because value companies are profitable D Risky because it's always bearish
Risky because it’s contrarian
How is surrender value calculated? QID: 2101122Mark For Review A Face value minus surrender value B Death benefit minus surrender charges C Value at maturity D Cash value minus surrender charges
Cash value minus surrender charges
