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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.
35. Which of the following is NOT true regarding the net present value?
a) It is used to calculate holding period return.
b) It works best for long-term investments.
c) It considers profits and losses from a today’s value perspective.
d) It expresses the future value of an investment in today’s dollars.
C
The Net Present Value (NPV) is the future value of an investment expressed in today’s dollars. The net present value considers the future cash flows from a today’s-value perspective. The net present value only considers cash flows but not profits and losses.
36. Mortality risk fees and operating expense risk fees are designed to
a) Pay state taxes owed by the insurance company.
b) Protect the contract holder from rising premium costs.
c) Protect the insurance company by offsetting unexpected costs.
d) Protect the annuitant against losses in the separate account.
C
These fees are deducted from the separate account to protect the insurance company against unexpected increases in operating costs and against annuitants who outlive their expected mortality.
37. Persons who are found guilty of insider trading violations are subject to all of the following penalties EXCEPT
a) Treble charges.
b) Imprisonment.
c) FINRA fines.
d) Civil lawsuits.
C
FINRA fines can only be assessed against FINRA members and their associates. All other violators may be subjected to any of the other penalties listed.
38. The SEC specifically requires which part of Form ADV to be written in “plain English”?
a) ADV Part 1
b) ADV Part 2A
c) Both Part 1 and Part 2
d) None of the above
B
Part 2A or a written brochure containing the information in Part 2A must be delivered to clients, and therefore must be written in narrative form in plain English.
39. DDI had a very good fourth quarter with a total return on its common stock of 39% for the year. Stan owns 500 shares of DDI and is in the 20% tax bracket for the year. Inflation was a modest 4% last year as well. What was Stan’s real return on his DDI investment?
a) 31%
b) 124%
c) 35%
d) 28%
C
Real return is an inflation-adjusted return; therefore, Stan had a 35% return (39% total return minus 4% inflation = 35% real return). Stan’s 20% tax bracket is irrelevant when determining real return.
40. A client buys a BAT July 40 put and sells a BAT April 40 put. The client would profit if this spread position
a) Narrows.
b) Expires.
c) Widens.
d) Narrows, then widens.
C
The option position is a calendar or horizontal spread. As in all spreads, one option leg is important and is netted against the other, less important leg. July has more time value than April. The April leg was sold. The spread is debit. Debit spreads benefit from premium widening.
41. In a custodian account, the responsibility for tax liabilities from dividends, interest income, and capital gains belongs to the
a) Custodian.
b) Minor.
c) Minor’s parents or guardians.
d) All of the above.
B
Tax liabilities belong to the minor in a custodian account.
42. Which of the following best describes the efficient market hypothesis?
a) Inefficiencies result from arbitrage opportunities.
b) Markets become more efficient over time.
c) Markets are efficient; no one can gain an advantage by using analysis or trends.
d) Inefficiencies are temporary.
C
In its purest interpretation, the efficient market hypothesis says that markets are efficient and no one can gain advantage by using analysis or trends.
44. For employers to keep pace with growing population, the benchmark for non-farm payroll growth is
a) 150,000 new jobs a month.
b) 125,000 new jobs a month.
c) 100,000 new jobs a week.
d) 225,000 new jobs a quarter.
B
For employment to keep pace with our growing population, the benchmark for non-farm payrolls is 125,000 new jobs a month. This is considered a coincident indicator.
45. A convertible preferred is convertible at $20 per share. The stock is currently selling on the market at $120. Which of the following are correct statements is correct?
a) The common stock must be selling at $24 to be at parity with the preferred stock.
b) The common stock must be selling at $20 to be at parity with the bond.
c) The preferred stock’s conversion ratio is 1:6.
d) It makes sense to convert at $22.
A
The conversion ratio is the par value of the preferred stock divided by the conversion price, or in this case, 1:5. It identifies the number of common shares received upon conversion. The parity price of the common stock is determined by dividing the conversion ratio into the market value of the preferred stock, or 120/5 = $24. It only makes sense to convert at a price above the parity price.
46. A security in which the payment of principal, interest, and/or dividends is assured is called a(an)
a) Non-issuer transaction.
b) Non-assessable security.
c) Guaranteed security.
d) Assessable security.
C
A guaranteed security is one in which the payment of principle, interest, and/or dividends is assured.
49. Which of the following is FALSE regarding a client’s risk tolerance?
a) The risk tolerance factor is more important when an investor has control over the purchase and sale of the investment.
b) The risk tolerance associated with the investment is a non-financial consideration of an investment risk.
c) A 65-year-old retiree will have a higher risk tolerance than a 40-year-old professional.
d) It determines the investor’s degree of tolerance of negative changes in the portfolio.
C
Risk tolerance might be defined as the degree of uncertainty that investors can tolerate with regards to a negative change in the value of their portfolio. An investor’s risk tolerance typically varies according to age, investment experience, income requirements, and financial goals among other factors.
50. If an investor owns 150 shares of XYZ Corporation and the stock splits 3-for-2, how many additional shares will he own after the split?
a) 75
b) 100
c) 150
d) 225
A
The question asks about the number of additional shares, not the total number of shares. The investor would own 75 additional shares after the 3-for-2 stock split or a total of 225 shares. To calculate the new number of shares, multiply 150 by 3/2, which equals 225. To arrive at the additional number of shares: 225 – 150 = 75. Remember that when there is a stock split, the total number of shares increases and the price per share decreases.
