Greenlight 1 Flashcards
An investor is long 1,000 bushels of wheat that she purchased for 50 cents per bushel. What's the investor's gain or loss if the price of wheat has dropped to 45 cents per bushel? QID: 1518470Mark For Review A A gain of $5,000 B A loss of $5,000 C A gain of $50 D A loss of $50
A loss of $50
Since the investor went long and the price went down, she will be losing money. She bought the wheat for $0.50 per bushel (50 cents = $0.50) and the price is now $0.45; therefore, she has lost $0.05 per bushel. Since the position is 1,000 bushels, the total loss is $50 (1,000 bu. x $0.05 loss) which will be realized if the position is sold.
According to the Uniform Securities Act, in which TWO of the following cases is an investment adviser exempt from sending clients a written disclosure document under the Brochure Rule?
The adviser’s clients are only investment companies.
An adviser provides impersonal advisory services to online subscribers that cost $250 per year.
An investment adviser has no office in the state.
The adviser’s clients are select institutional investors.
QID: 1518434Mark For Review
A
I and II
B
I and IV
C
II and III
D
II and IV
I and II
According to the Uniform Securities Act, an investment adviser must satisfy the Brochure Rule and provide its clients or prospective clients with a disclosure document (usually Form ADV Part 2). Exceptions to this rule are made available if the adviser’s only clients are investment companies or for contracts which involve impersonal advisory services that cost less than $500.
Portfolio A has a standard deviation of 3.50%, while Portfolio B has a standard deviation of 2.75%. How are these portfolios related to one another?
QID: 1518509Mark For Review
A
Portfolio B has more risk than Portfolio A.
B
Both portfolios have more risk than the market.
C
Portfolio B will always underperform Portfolio A.
D
Portfolio A has more risk than Portfolio B.
Portfolio A has more risk than Portfolio B.
Standard deviation is the amount that a portfolio’s (or asset’s) returns will deviate from its historical average. In the Modern Portfolio Theory (MPT), standard deviation is used as a measure of a portfolio’s risk. If a portfolio has a higher standard deviation, its indicative of a portfolio with greater risk. Although riskier portfolios and stocks will outperform safer ones over the long-term, safer portfolios will often perform better than riskier ones (e.g., during a recession).
An investment adviser maintains its home office in State A and is also registered there. State A has a minimum financial (net worth) requirement of $70,000. The firm intends to open an office and provide advisory services in State B, which has a minimum financial requirement of $80,000. Is any action required for the adviser to open the office in State B?
QID: 1518453Mark For Review
A
Yes, it must increase its net worth by $10,000.
B
Yes, it must increase its net worth to $150,000 to cover the requirements of both states.
C
No, it is only required to satisfy the requirement of its home state.
D
Yes, it must post a $10,000 bond to cover the additional requirement of State B.
No, it is only required to satisfy the requirement of its home state.
According to the Uniform Securities Act, an investment adviser’s minimum financial requirement is set by the state in which the adviser maintains its principal place of business. No other state may impose higher requirements than the adviser’s home state. For that reason, this adviser is only required to satisfy the $70,000 requirement of its home state (State A).
A client purchases a TIPS with a 2% coupon and, over the course of the year, the CPI increases by 1%. Which of the following statements is TRUE?
QID: 1518419Mark For Review
A
The client will earn 2% on a fixed principal amount.
B
The client will earn 3% on an adjusted principal amount.
C
The client will earn 3% on a fixed principal amount.
D
The client will earn 2% on an adjusted principal amount.
The client will earn 2% on an adjusted principal amount.
Treasury Inflation-Protected Securities (TIPS) are U.S. government securities whose principal is inflation-adjusted based on the Consumer Price Index (CPI). With TIPS, the rate of interest is fixed, but the principal amount on which the interest is paid will be inflation adjusted. Since it is the principal that is adjusted for inflation, the return (in this example) is consistently 2% of the principal amount; however, the principal may be higher or lower than par due to the adjustments for inflation. At maturity, investors receive either the par value or the adjusted principal value, whichever is greater. TIPS are typically purchased as protection against inflation or purchasing-power risk.
Two friends are starting their own business and are trying to decide whether to organize this new business as an S Corporation or a general partnership. What is a significant advantage of an S Corporation compared to a general partnership? QID: 1518491Mark For Review A Favorable tax treatment B Limited liability C More transparency D Fewer start-up costs
Limited liability
If they form a general partnership, both partners are fully liable for the partnership’s debts. (Limited partners are not fully liable; however, the question gives no indication that one of the partners will be a limited partner.) In an S Corporation, the owners are not fully liable for the company’s debts—they have only limited liability. As for choice (a), both entities receive favorable federal tax treatment. Since both business entities are pass-through vehicles for tax purposes, all losses and profits are passed through to the owners.
Assuming an expected rate of return, a specific holding period, and a sum to be invested, an IAR is able to determine an investment's: QID: 1518467Mark For Review A Present value B Discount rate C Future value D Internal rate of return
Future value
The future value of an investment is based on the present value of the amount invested, using a discount rate each year, and doing so over a given period of time. The assumption is that the annual return is reinvested at the same rate, or is compounded over the given time period, thereby resulting in a future value that exceeds the present value.
Which of the following choices is a characteristic of equity-indexed annuities?
QID: 1518508Mark For Review
A
A guaranteed minimum rate of return that is equal to the value of the underlying index
B
A rate of return that varies with the value of the underlying index
C
A rate of return that is determined by the subaccounts selected by the contract owner
D
A standardized rate of return that is set annually by the National Association of Insurance Companies (NAIC)
A rate of return that varies with the value of the underlying index
In an equity-indexed annuity, the insurance company guarantees the contract owner a minimum rate of return. However, the guaranteed return is never as high as the return of the actual index. The insurance company usually guarantees that the investor will receive most of her premium payments back plus a fixed return based on current interest rates. The investor’s ultimate return may be higher than the minimum guaranteed rate depending on the performance of the index to which the contract is linked (choice [b]).
An agent represents a broker-dealer that is headquartered in State A, but has offices in numerous states. The Administrator of State B has revoked the broker-dealer’s registration, causing the firm to close that office. One of the agent’s clients has moved to State B and the agent wants to continue to do business with her. According to the Uniform Securities Act, which of the following statements is TRUE?
QID: 1518445Mark For Review
A
This is acceptable provided the broker-dealer no longer maintains a place of business in the state and the agent conducts business with existing clients who are not residents of the state.
B
This is acceptable provided the agent’s registration is in effect in State B.
C
This is not acceptable if the broker-dealer no longer has a place of business in the state.
D
This is not acceptable and neither the broker-dealer nor any of its agents may conduct business in State B.
This is not acceptable and neither the broker-dealer nor any of its agents may conduct business in State B.
A semi-retired IAR works for an investment adviser that is located in State A, but she intends to spend the winter months in her second home in State B. The IAR put the addresses of both her office in State A and her home address in State B on her business cards since she intends to continue servicing her clients that reside in State A over the winter months. If the investment adviser does not have an office in State B, which of the following statements is TRUE?
QID: 1518426Mark For Review
A
Neither the IAR nor the investment adviser need to be registered in State B since they are only doing business with clients whose residence is in State A.
B
Both the IAR and the investment adviser need to be registered in State B since the IAR’s residence in State B is considered an office and it is listed on her business card.
C
The IAR needs to register in State B, but the investment adviser does not.
D
The investment adviser needs to register in State B, but the IAR does not since neither she nor her clients are residents of the state.
Both the IAR and the investment adviser need to be registered in State B since the IAR’s residence in State B is considered an office and it is listed on her business card.
Asset A has a correlation of +0.95 with Asset B. The assets: QID: 1518488Mark For Review A Move in opposite directions B Are uncorrelated C Move in the same direction D Are less risky than the overall market
Move in the same direction
Correlation is the degree to which two assets or investments move in the same direction. The highest possible correlation is +1.00. Therefore, if two assets have a correlation of +0.95, they will move in the same direction most of the time. Assets with correlation approaching -1.0 will move in the opposite direction. A correlation of 0 means that the two assets are uncorrelated and don’t move in predictable patterns with one another.
A resident of State A buys a 4% general obligation bond offered by State B. The investor is in the 30% federal tax bracket and State A imposes a 5% tax. What is the bond's taxable equivalent yield? QID: 1518425Mark For Review A 13.33% B 5.20% C 5.71% D 9.00%
5.71%
4%/100-30 =
4%/70% = 5.71
Which of the following is a risk-adjusted return? QID: 1518512Mark For Review A Alpha B Beta C Internal rate of return D Standard deviation
Alpha
The difference between an investment’s expected return (as indicated by its hypothetical position on the Security Market Line) and its actual return is considered its alpha. An investment’s alpha is also referred to as its risk-adjusted return. Some analysts believe that stocks with positive alphas represent buying opportunities, while negative alphas are signals to sell. Alpha is also used to evaluate the performance of portfolio managers. Managers whose portfolios show positive alphas are considered to be adding value with their management skills.
The investment adviser of the ABC Fund typically invests a high percentage of the fund's assets in growth stocks, but has recently turned bearish on the market. Which TWO of the following strategies should be utilized based on the IA's bias? Buy puts on the growth stocks Buy calls on the growth stocks Increase cash levels in the portfolio Decrease cash levels in the portfolio QID: 1518487Mark For Review A I and III B II and III C II and IV D III and IV
I and III
A Nasdaq listed company is offering 1,000,000 shares of common stock in State A. The Administrator in State A may:
Not require registration of the stock in State A.
Require the issuer to perform notice filing.
Require the issuer to pay a fee.
Investigate the underwriter for possible fraud in connection with the offering.
QID: 1518421Mark For Review
A
I and III only
B
I and IV only
C
II and III only
D
II and IV only
I and IV only
Securities that are listed on a national exchange (e.g., Nasdaq, NYSE, or AMEX) are referred to as federal covered securities and, therefore, are not required to be registered at the state level. Additionally, if the federal covered security is listed on an exchange, the state may not require the issuer to pay a fee, submit a notice filing, or provide a consent to service of process. However, the state Administrator may investigate any broker-dealer (including the underwriter) that participates in the offering for fraud or deceit and file an enforcement action if it is warranted.
The former CEO of a public company whose stock trades on the NYSE has recently retired. He liquidates his holdings in the company by selling his shares privately and intentionally withholds material information about the company. Shortly after the sale, the company files for bankruptcy. The state Administrator wants the former CEO prosecuted for fraud in court. Which of the following statements is TRUE?
QID: 1518486Mark For Review
A
Since the company is listed on the NYSE, it is a federal covered security and exempt from state registration; therefore, the state Administrator has no jurisdiction.
B
The Uniform Securities Act does not contain any provisions which related to fraudulent actions that are committed by non-securities professionals.
C
Since the securities were sold privately without the participation of a registered broker-dealer, the Administrator has no jurisdiction.
D
The antifraud provisions of the Uniform Securities Act apply to any person conducting a sale of securities, regardless of the registration status.
The antifraud provisions of the Uniform Securities Act apply to any person conducting a sale of securities, regardless of the registration status.
During the first quarter of the year, XYZ common stock paid a $1 dividend, but the stock's price fell from $50 per share at the beginning of the quarter to $48 per share at the end of the period. Based on the quarterly results, what is the stock's annualized total return? QID: 1518469Mark For Review A 8% B 2% C -2% D -8%
-8%
A security’s total return takes into account the cash flow from dividends or interest, plus appreciation or minus depreciation, and divides by the original value. In this case, during the first quarter, the stock paid a $1 dividend, but its price fell by $2. To determine the quarterly return,
$1 + (-$2) ÷ $50 = -2%. To annualize the return, the -2% quarterly return is multiplied by four, which equals a -8%.
What is the name of the process by which an investor calculates the sum of the present values of projected cash flows to determine the fair market value of an investment? QID: 1518501Mark For Review A Discounted cash flows B IRR C CAPM D Net present value
Discounted cash flows
When an investor takes an investment’s future cash flows (e.g., dividends or interest payments) and calculates their present value, she is using discounted cash flow analysis. The process is referred to as discounting since the present value formula takes the future value and divides by the time value of money term, i.e., (1+r)t. Net present value takes the process a step further by subtracting the actual market price of an investment by the fair market value that is found in the discounted cash flow analysis.
The difference between a corporation's current assets and its current liabilities is the: QID: 1518484Mark For Review A Cash flow B Current ratio C Working capital D Liquid assets
Working capital
Current Assets - Current Liabilities = Working Capital
An individual wants an insurance contract that will accumulate a market-competitive return on the cash value in her contract, but she also wants the ability to pay fixed premiums. She should buy a: QID: 1518450Mark For Review A Variable life policy B Whole life policy C Term life policy D Universal life policy
Variable life policy
A variable life insurance policy charges level premiums, but allows for the possibility of achieving higher returns than offered by a whole life policy.
When is a mutual fund’s prospectus required to be delivered?
QID: 1518506Mark For Review
A
When a client places a buy order for mutual fund shares
B
When a client is solicited to buy mutual fund shares
C
At or prior to the confirmation of purchase of mutual fund shares
D
Only upon request from the client
When a client is solicited to buy mutual fund shares
Agents selling mutual fund shares are required to deliver a prospectus when they attempt to sell to prospective investors (i.e., at or before solicitation). In some instances, agents of broker-dealers can use a summary prospectus when selling, but only if the full prospectus is delivered at the confirmation of the sale.
If an adviser inadvertently receives client funds and/or securities, it can avoid the implication that it is maintaining custody of the assets by returning them to the sender within: QID: 1518474Mark For Review A Three business days of receiving them B Three calendar days of receiving them C Seven business days of receiving them D Seven calendar days of receiving them
Three business days of receiving them
Which of the following fee structures is NOT permitted for broker-dealers that offer investment advisory services to retail customers?
QID: 1518511Mark For Review
A
Commissions for each trade and a separate fee for each research report that is sent to the customer
B
A fee based on a percentage of the profits of the account
C
An initial set-up fee, a fee based on the assets under management, and commissions for each trade
D
Commissions and service charges
A fee based on a percentage of the profits of the account
Fees that are based on the percentage of profits in the customer’s account are generally not permitted.
A broker-dealer is registered and intends to sell stock from its own account to a client. Which of the following statements is TRUE?
QID: 1518416Mark For Review
A
Prior to the completion of this transaction, the firm must notify its client that it is acting in a principal capacity.
B
Prior to the completion of this transaction, the firm must notify its client that it is acting in a principal capacity and then obtain the client’s written consent.
C
The firm is able to charge a markup as well as collect a commission for the execution of the trade.
D
After the completion of this transaction, the firm must disclose that it acted in a principal capacity
After the completion of this transaction, the firm must disclose that it acted in a principal capacity
After a broker-dealer executes a transaction in a principal capacity, the firm is required to disclose its capacity on a confirmation statement. Firms that act in a principal capacity are able to charge a markup.
