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A mutual fund portfolio returned 3.5%, it has a beta of 1.5, and its benchmark index returned 3%. The alpha of the portfolio is.. A (-1.5). B (-1). C 1.5. D 2.
B
To calculate alpha multiply, the return of the benchmark index by the beta. The difference between the product and the portfolio return is the alpha: 0.03 x 1.5 = 4.5%, 3.5% - 4.5% = -1.
An investment adviser is NOT required to deliver a brochure when providing
a) Advice to a client when the adviser does not have custody of the client’s assets.
b) Impersonal investment advice for less than $500 per year.
c) Investment advice to an individual with a net worth in excess of $2 million.
d) Investment advice to an institutional investor.
B
Advisers are not required to deliver a brochure if they enter into a contract with an investment company or for impersonal investment advice or if an adviser charges less than $500 a year.
If the yield curve is inverted, I. Short-term yields are less than long-term yields. II. Short-term yields are higher than long-term yields. III. Investors are lengthening maturities in their portfolios. IV. Investors are shortening maturities in their portfolios.
a) I and II
b) I and III
c) II and III
d) II and IV
(C) In an inverted curve, short-term rates are temporarily higher than long-term rates. Because of the inverted curve’s uncertainty, investors move from short-term to long-term yields.
6. XYZ stock is quoted at $45.20 X $45.25. How much is the spread?
a) $0.05
b) $0.50
c) $5.00
d) $50.00
A
The spread is the difference between the bid and ask; $45.25 - $45.20 = $0.05.
7. Any adviser that wants to exercise discretionary authority over a client’s account must do which of the following? I. Have written authorization from the client. II. Have approval to exercise such control by the administrator. III. File a Form ADV with the Securities Administrator. IV. Post a bond in the amount of the client’s account value.
a) I and II
b) I and III
c) II and III
d) II and IV
B
Any investment adviser that wishes to exercise discretionary authority over a client’s account must have authorization from the owner of that account, approval for such authority from the broker/dealer (not the administrator), and file a Form ADV for the account with the Securities Administrator.
8. Which of the following types of trusts provide the greatest tax benefits?
a) Revocable trusts
b) Insurance trusts
c) Irrevocable trusts
d) Testamentary trusts
C
Trusts may be established as either revocable or irrevocable; however, the greatest tax benefits are given to irrevocable trusts. Since this type of trust holds title to the assets, property in the trust bypasses probate, which in turn reduces estate taxes and administrative fees.
9. In order to comply with FinCEN’s anti-money laundering initiative, broker/dealers are required to
a) Have each employee fingerprinted.
b) Have the AML program approved by FINRA.
c) Designate an AML compliance officer.
d) Test the program internally with in-house staff.
C
As part of a broker/dealer’s responsibility to comply with AML initiatives, it is required to appoint a qualified AML compliance officer who must administer the AML program and ensure that all employees are aware of their duties. In addition, the broker/dealer must establish policies, procedures and internal controls based on an in-house risk assessment, provide ongoing training for employees, and have the program independently tested on a regular basis.
10. To calculate the after-tax yield on an investment, an investor takes the return on investment and multiplies that number by the
a) Current FED funds rate of return.
b) Reciprocal of the investor’s tax bracket.
c) Number of years the investment was held.
d) Investor’s current tax bracket.
B
The after-tax yield is calculated by multiplying the investor’s return by the reciprocal, or complement, of the investor’s tax bracket. The reciprocal is equal to 100% - tax rate %.
12. An investment adviser has identified what he perceives to be an excellent investment opportunity for some of his clients. He made calls to the selected clients and told them that he believes that the investment will have over 12% return this year and recommended they invest. Which of the following is true concerning the adviser’s statement?
a) This is considered an example of an adviser doing performance research which is part of the advisory services contract.
b) Such statements may not be made since they imply a specific performance of a security for which advice is being given.
c) The adviser may not make this kind of statement to his clients unless it is part of a portfolio of investments and not a single security.
d) The adviser has not violated any provisions of securities law as he was only stating an opinion and not giving formal advice.
B
An adviser may not make any statement that implies a specific performance of a security for which advice was given. An adviser may not guarantee a specific result based on advice given for a portfolio of investments.
13. When an agent of a broker/dealer files for state registration, the agent’s registration
a) Becomes effective in 30 days, unless the state administrator approves the registration earlier.
b) Becomes effective in 60 days, unless the state administrator notifies the broker/dealer that it is effective earlier.
c) Is effective immediately.
d) Becomes effective in 60 days.
A
When an agent applies for registration in a particular state, the registration becomes effective 30 days later unless the broker/dealer receives notification from the administrator that the agent is properly registered within the state before the 30-day period has elapsed. The administrator will contact the broker/dealer and not the agent directly.
14. An agent hears a rumor that a large corporation will be launching a hostile takeover on a competitor. Based on the rumor, the agent liquidates all his clients’ positions. Which of the following is true?
a) This action is prohibited.
b) The agent must let the clients know they are selling based on a rumor.
c) As long as the agent informed his supervisor prior to the trades his actions are allowed.
d) None of the above is true.
A
Using hearsay to liquidate a position is a prohibited act. The agent should inform his supervisor but could not act on the rumor.
15. Buy 100 shares of ABC at 40 and sell an ABC April 45 call for 2. What is your maximum loss?
a) $3,800
b) $4,000
c) $4,200
d) $4,500
A
Purchase price of stock $40 - $2 premium received = $38 X 100 = $3,800.
16. Jennifer is saving for her first home. She plans to buy in about eight years. Which of the following investments is probably most appropriate?
a) Tax-free money market fund
b) Money market mutual fund
c) Investment grade, medium maturity corporate bonds
d) Growth stocks
C
Jennifer’s intermediate time frame is best served by high quality debt instruments. A money market mutual fund has a lower yield, and its added safety is appropriate for shorter time frames. Growth stocks are appropriate for a long time horizon of 10 years or more.
18. Dollar cost averaging plans have which of the following features? I. They are voluntary plans. II. They entail purchasing the same number of shares each period. III. Investors are penalized for missing subsequent investment periods. IV. The investor’s personal share cost will be lower than the share price over the period.
a) I and II
b) I and IV
c) II and III
d) III and IV
B
Dollar cost averaging is a voluntary investment plan with systematic investments of a fixed dollar amount at regular intervals, usually monthly or quarterly. There is no penalty to the investor for failure to make additional investments.
19. ACE Financial is a registered investment adviser that accepts prepayment fees in excess of $500. ACE’s chief compliance officer notices on Tuesday that the firm’s capital has fallen below the minimum requirement. What steps must the officer take? I. Cease doing business until he can bring the net capital back to the required level; II. Inform the administrator of the deficiency by the end of business on Wednesday; III. File a report with the administrator by the end of business on Thursday; IV. Report the deficiency to FINRA by the end of business on Tuesday
a) I, II, III and IV
b) I and IV
c) II and III
d) II only
C
If the adviser’s net worth falls below the minimum requirement and it has taken prepayment fees, the adviser would be required to inform the state administrator by the end of the next business day, which would be Wednesday in this situation. Additionally, the adviser must file a report with the state securities administrator by the following business day, in this case Thursday.
20. The following are prohibited practices under the Uniform Securities Act (USA) EXCEPT
a) Soliciting excessive trading to increase commissions.
b) Failing to disclose all known facts in a transaction.
c) Effecting private securities transactions for customers.
d) Commingling customer funds with agent funds.
B
Failing to disclose all known facts is not a violation; the violation occurs from withholding material facts. Churning, commingling funds with customers
’
funds, and effecting private security transactions are all prohibited under the Act.
21. If an investor cannot specifically identify redeemed shares, IRS assumes that reporting will be on the basis of
a) First-In, First-Out.
b) Determined on a case by case basis.
c) Average cost.
d) Last-In, First-Out.
A
IRS assumes the First-In, First-Out accounting method when shares cannot be specifically identified.
23. If you own securities that represent an undivided interest in a fixed portfolio, with which type of investment company are you invested?
a) Closed-end management company
b) Face amount certificate
c) Unit Investment Trust
d) Open-end management company
C
The Unit Investment Trust (UIT) portfolio remains fixed for the life of the trust.
25. Which best describes the Federal Funds Rate?
a) Daily average rate of largest central banks
b) Daily average rate of reserve member banks
c) Weekly average rate of reserve banks
d) Weekly average rate of yield auctions of member banks
B
The Federal Funds Rate is overnight (daily) borrowings by Fed reserve member banks.
26. Vera is an agent at Dewey Securities. Vera’s church is selling bonds to finance a new sanctuary. Vera helps sell her church’s bonds on weekends. Which of the following is true? I. She may deduct a reasonable hourly rate as a charitable deduction on her taxes. II. She is guilty of selling away, which is grounds for termination and is a violation of the USA. III. She may sell the bonds with her employer’s permission. All Vera’s trades must be run through her employer’s books. IV. She may not sell the bonds under any circumstances.
a) II and III
b) II and IV
c) I and III
d) I and IV
A
Selling the bonds without the employer’s permission is selling away, which is a violation of the USA. In this example, if Dewey consents, Vera may sell the bonds, but all of her trades must be recorded on Dewey’s books.
27. Anita received equal quarterly 25 cent dividends on her Kabob stock last year. In addition, her shares appreciated from $20 to $27. Which of the following is true?
a) Anita will be taxed on $1 per share.
b) Anita will be taxed on $8 per share.
c) If Anita participates in a DRIP, she will pay no taxes on the reinvested dividends.
d) Anita will be taxed on $7.25 per share.
A
Anita will be taxed on last year’s dividend distributions whether she receives them or automatically reinvests through a dividend reinvestment program. Anita is not taxed on the appreciation (unrealized gain) until she sells her shares and realizes the gain.
29. An agent’s deliberate omission of a fact in a securities transaction constitutes fraud I. If a reasonable person would base a decision on the omitted information. II. Only if the information given was known to be true. III. Only if the offering is a new issue of a security. IV. If the information is relevant to an investment decision.
a) I and II
b) I and IV
c) II and III
d) II and IV
B
Omission of material information constitutes fraud if a reasonable person would make a decision based on the information, regardless if the offering was a primary offering or secondary market transaction.
32. An investor doubles her money by selling a security which she owned for eleven months. She will be
a) Taxed at a preferential capital gains rate.
b) Exempt from tax if she donates the proceeds to a nonprofit organization.
c) Taxed at her ordinary income tax rate.
d) Exempt from tax if this was a municipal bond.
C
Because she held the investment for 1 year or less, the gain is short term, subject to tax at ordinary income rates.
34. A firm is acting in the capacity of a broker and receiving a commission. The firm is performing as
a) A principal.
b) An agent.
c) An investment adviser.
d) A dealer.
B
A firm that brokers and charges a commission is acting as an agent.