Investment Recommendations and Strategies Flashcards

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1
Q

An RR has identified four investment options for a customer, who is a senior. Which investment option would be considered the most appropriate?
[A] U.S. Government bonds
[B] Deferred variable annuity
[C] U.S. savings bonds
[D] Zero-coupon bonds offered at a deep discount

A

[A] U.S. Government bonds

A deferred variable annuity would not be appropriate for a senior investor because it is a “deferred” investment program designed for a younger or middle-aged investor. U.S. savings bonds would not be appropriate for senior investors because the owner will receive the interest at maturity only. Zero-coupon bonds are volatile and also provide an investment return at maturity only.
Among the investment options, U.S. Government bonds would be the most appropriate investment for the senior investor because the bonds pay interest semi-annually and are low risk.
Ch.20 Sec.2

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2
Q

An existing client comes into the office to discuss her portfolio. The client’s risk tolerance is currently mid-level and she discusses her desire to add some diversification to her portfolio during the meeting. Her primary investment objective is total return with as much tax advantage as possible. Which of the following would be the MOST appropriate recommendation by the registered representative in this case, considering the information given?

[A] The rep should advise the client to split the allocation of the portfolio 50/50 between corporate bond issues and municipal bond funds that are specific to the client’s state of residence.
[B] The rep should advise the client to split the allocation of the portfolio 50/50 between equity mutual funds and corporate bond mutual funds.
[C] The rep should advise the client to use an asset mix of 50% corporate bond mutual funds, 25% cash and cash equivalents, 7.5% municipal bonds, 7.5% equity securities, 10% sector ETFs.
[D] The rep should advise the client to use an asset mix of 50% municipal bond mutual funds, 45% equities and the remainder in cash and cash equivalents.

A

[D] The rep should advise the client to use an asset mix of 50% municipal bond mutual funds, 45% equities and the remainder in cash and cash equivalents.

The client’s primary goal is listed as total return with tax advantages. The client is also looking to add some diversification and has mid-level/moderate risk tolerance. Here, the total return would be achieved using the equities and the tax advantages would be gained with the municipal bond fund. The client also gets additional diversification from the broad municipal bond fund, rather than a limited amount of geographic diversification with a state-specific muni bond fund. Pure corporate debt and equities would provide no tax advantages.
Ch.20 Sec.2

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3
Q

A fellow RR receives a call from one of their clients. The client has been considering the purchase of DEF Corporation common stock for some time and enters an order for 1,000 shares of DEF when the market price is $55 per share and receives an execution at that price. Toward the end of the trading day, the client calls back and states that they have changed their mind on the purchase. DEF is now trading at $51 per share. Which of the following actions or statements would be MOST appropriate by your fellow RR?

[A] The RR should offer to purchase the stock back from the client at the original purchase price of $55 per share since the original order has already been executed.
[B] The RR should transfer the shares to an account where the client wishes to purchase the shares and simply label that execution with the original time of execution on this customer’s confirmation.
[C] The RR should inform the client that the execution has already taken place and the stock is currently owned by the client at $55 per share, so further action will require further instruction.
[D] The RR should mark the transaction as an error and cancel the original trade in the client’s account.

A

[C] The RR should inform the client that the execution has already taken place and the stock is currently owned by the client at $55 per share, so further action will require further instruction.

If a client enters an order to buy and it is executed, the client owns the stock. The client cannot “change their mind” once an order is entered and executed. Further action would require an order be entered to sell the stock and the sale would take place at the current market price or a limit price if specified by the customer and reached in the market.
Ch.20 Sec.2

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4
Q

A registered representative has been strongly recommending to all of his customers that they sell out of conservative issues and buy certain highly speculative issues. Under FINRA Rules:

[A] This is allowed because profit possibilities increase.
[B] This practice is prohibited since there is a high probability that the recommendation will not be suitable for some of the customers.
[C] This is allowed provided the customer can bear the risk of the investment.
[D] This is allowed only in connection with high-pressure telephone sales campaigns.

A

[B] This practice is prohibited since there is a high probability that the recommendation will not be suitable for some of the customers.

This would never be allowed for all clients.

Ch.20 Sec.1

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5
Q

When a portfolio is established which consists of 90% equities and 10% money market instruments would be most appropriate for which of the following investors?

[A] an investor wanting preservation of capital and current income
[B] a married couple with three children in or nearing college
[C] a couple in their retirement years
[D] a single 28 year old with sizable income and assets

A

[D] a single 28 year old with sizable income and assets

A young single person with substantial assets and income would be interested in the growth and appreciation they could receive from a portfolio heavily weighted in equity securities (stocks)
Ch.20 Sec.1

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6
Q

An RR solicits a new customer with a recommendation to buy Eagle’s Nest Inc, trading at $1.75. The customer is interested and also states that she has invested in stocks before. She is considering buying 10,000 shares. Which statement best describes the RR’s action?

[A] The RR should have obtained the customer’s investment profile before concluding the recommendation is suitable.
[B] The RR handled the customer properly as she indicated that she has experience investing in stocks and is interested in the stock.
[C] Given this is a new customer, the RR should have recommended a 1,000 share purchase now and consider further purchases only if the stock performs well.
[D] This is a low-priced security so the RR should have recommended the purchase of more than 10,000 shares given the customer’s expressed interest.

A

[A] The RR should have obtained the customer’s investment profile before concluding the recommendation is suitable.

The customer is interested in the stock and is considering purchasing Eagle’s Nest shares but no account yet has been opened. The RR must obtain the customer’s financial and investment profile so he can open the account and then decide if this recommendation is suitable for the customer. The customer states she has previous stock investing experience, but we do not have any more details, like types of stocks, the customer’s current investment holdings or whether the customer understands the risks of investing in low-priced securities.
Ch.20 Sec.3

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7
Q

A broker’s recommendation to purchase a speculative security on the basis that its price will triple in six months is not fraudulent if

[A] delivered a prospectus to the customer prior to execution of the purchase.
[B] delivered a prospectus to the customer with the confirmation of the purchase.
[C] made representations based on statements contained in the prospectus.
[D] RR never makes the recommendation

A

[D] RR never makes the recommendation

Registered Representatives are never allowed to make predictions of what the future will bring regarding any security recommended.

Ch.20 Sec.1

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8
Q

One of your clients is seeking safety, stability, income, and principal protection for his portfolio. Which of the following would be the MOST appropriate investment choice for this client?

[A] Government Bonds
[B] Preferred Stock
[C] Common Stock
[D] Municipal Bonds

A

[A] Government Bonds

When an investor’s investment objective includes “safety,” generally, the first recommendation to the client would be Government securities because the principal and interest are guaranteed by the federal government and the U.S. has never defaulted on any of its debt.
Ch.20 Sec.2

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9
Q

If a customer retires at age 70, his investment objectives would probably be which of the following?

[A] Capital gains
[B] Long-term growth of capital
[C] Current income and preservation of capital
[D] High yields obtainable in junk bonds

A

[C] Current income and preservation of capital

During retirement an investors objectives generally become preservation of capital and income.
Ch.20 Sec.2

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10
Q

Recently the economy has been in a downturn and one of your clients has been sustaining some losses. Although your client feels that over time things will recover, she asks for your advice about what she could do now to balance out her portfolio. One recommendation you could make to her would be that she move part of her portfolio into

[A] Common Stocks of Gold and Silver Mining Companies
[B] Blue Chip Common Stocks
[C] Growth Stocks
[D] No change, but hold tight until the economy recovers

A

[A] Common Stocks of Gold and Silver Mining Companies

Consider that when the economy is in a downturn that normally means that the market value of common stocks would also be in a downturn. This investor wants to invest in something that will “balance” her portfolio, therefore, of the choices offered, the best answer is countercyclical stocks which include the common stock of gold and silver mining companies.

Keep in mind that the value of precious metals generally moves in the opposite direction of economy. You would not recommend that the investor invest in more blue chip or growth stocks because the market value of those securities would be expected to move down the economy. Because the investor has asked for a recommended action to balance her portfolio, you would not tell the client to “hold tight” until the economy recovers
Ch.20 Sec.2

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11
Q

During a discussion with a client to determine investment objectives, a client indicates a strong desire to preserve capital. The client also would like to see some current income from their investments. Which portfolio recommendation would BEST suit this customer’s stated investment objectives?

[A] The RR recommends a portfolio comprised of an equal mix of junk bonds, highly-rated municipal bonds, and 30-year corporate bonds.
[B] The RR recommends a portfolio comprised of money market funds, short-term debt instruments issued by the Treasury and federal agencies, and T-Bills.
[C] The RR recommends a portfolio comprised of equity securities such as common and preferred stock, as well as a mutual fund focused on large-cap growth stocks.
[D] The RR recommends a portfolio comprised of an international mutual fund, investments in real estate investment trusts, and individual securities issued by foreign corporations.

A

[B] The RR recommends a portfolio comprised of money market funds, short-term debt instruments issued by the Treasury and federal agencies, and T-Bills.

An investor that wants current income and preservation of capital would choose investments that are short and mid-term in nature and focused in government securities and money market instruments. A customer who mentions preservation of capital is interested in safety. The government securities may not provide the highest level of current income, but they provide current income and the highest level of safety in terms of preservation of capital.

Ch.20 Sec.2

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12
Q

A customer has $90,000 to invest which he will need in about three years to pay educational expenses for his son. All of the following would be appropriate for the customer EXCEPT:

[A] Treasury Bills
[B] Equity Securities
[C] Money Market Funds
[D] Zero Coupon Bonds maturing in three years

A

[B] Equity Securities

All choices except equity securities would be appropriate - when you invest in stock, the market value of the stock could decline to zero and the investor would have lost the money needed for their child’s education.
Ch.20 Sec.1

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13
Q

Which of the following would be most important for an RR when determining a suitable recommendation for a client?

[A] The customer’s investment goals and risk tolerance
[B] How many siblings the customer has
[C] Information the RR has learned about the customer from the person who referred the customer to the RR
[D] Whether or not the customer is married and has a college education

A

[A] The customer’s investment goals and risk tolerance

To determine the suitability of a particular investment for a particular customer, the registered representative MUST consider the customer’s investment objectives, financial condition, risk tolerance, and personal situation which usually includes marital status. The RR does not have to consider the customer’s education, which eliminates that option as the correct answer, whether the customer has siblings or information obtained from independent sources, such as the person who made the referral.
Ch.20 Sec.1

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14
Q

Normally the older the investor, the greater percentage of assets are placed in which of the following?

[A] equity securities
[B] options
[C] fixed income securities
[D] growth funds

A

[C] fixed income securities

Older investors are generally interested in safety of principal and income which means they should consider Bonds (fixed income securities).
Ch.20 Sec.1

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15
Q

The son of an 82 year old man who is a long time customer submits an options agreement requesting uncovered option writing and a margin agreement for his father’s account. The agreements are signed by the son on behalf of the father and is accompanied by a durable power of attorney. The father has no previous options or margin trading experience. What should the BOM do in this situation?

[A] Approve the opening of the account based on the documents submitted
[B] Not approve the opening of the account since a power of attorney may not be used for uncovered option writing
[C] Refuse to open the account unless a court order is obtained
[D] Not approve the opening of the account and advise the RR that writing uncovered options is unsuitable for this customer’s account

A

[D] Not approve the opening of the account and advise the RR that writing uncovered options is unsuitable for this customer’s account

Writing uncovered options and buying or selling on margin are very risky investment strategies. They are unsuitable for an 80 year old customer with no prior experience in options or margin trading. Although the account agreements and durable power of attorney appear to be in order and his son may do the actual trading in the account, the 80 year old customer remains liable for losses in the account and the suitability test must be applied to the father’s circumstances, not the son’s circumstances.
Ch.20 Sec.1

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16
Q

A registered representative has thoroughly researched a wide variety of sector funds and has found one that he believes has a very high potential for growth. The RR may recommend the fund to

[A] customers whose primary investment objective is safety of principal.
[B] any high net worth customers.
[C] customers with experience in sector fund investments.
[D] customers whose primary investment objective is diversification.

A

[C] customers with experience in sector fund investments.

Recommendations to customers must be suitable for each individual customer. Of the choices listed, the best choice is to make the recommendations to customers with previous experience in sector funds, because the recommendation would be most suitable for such investors and because these investors would have experience with the risks associated with such investments. No single investment would be suitable for ALL clients. Along those same lines, just because an investor has cash to invest, this does not make a recommendation suitable. If a customer has the investment objective of safety of principal, or diversification the sector fund would be unsuitable.
Ch.20 Sec.1

17
Q

An investor’s investment objective is income. He is long 100 shares of ABC, a dividend paying stock. The last sale of the stock was $50.25. As a hedge, the investor is also short a July 50 call on ABC. The last sale of the call was $0.50. ABC declares a $0.75 a share dividend. A suitable recommendation to the investor would be to

[A] write another short call on ABC before the ex-date.
[B] close the existing short call on ABC before the ex-date.
[C] buy a call on ABC on the ex-date.
[D] sell the ABC stock.

A

[A] write another short call on ABC before the ex-date.

The investor is long 100 shares of ABC and on the ex-date the price of the ABC stock will decline by the amount of the dividend ($0.75) to $49.50. At that time, the short call that the investor owns will be “out of the money” and the chance of it being exercised is reduced/low. Since the investor’s investment objective is “income,” the best choice would be to short another Call on ABC to take in the premium income.
Choices B & C would require that the investor buy back the call or buy another call which means money going out, so those are not correct.
Choice D is not correct because if the investor sells the stock, the investor would lose the dividend income.
Ch.20 Sec.1

18
Q

A middle-aged client calls to discuss her portfolio. The client has a current objective of capital appreciation and has seen wide fluctuations with the market over the past 10 years of investing. The client expresses an interest in achieving more safety and stability in her portfolio, but wishes to maintain at least a moderate amount of capital appreciation. The client should

[A] maintain her portfolio of stocks and begin to write covered call options against the stock to provide more income to the portfolio.
[B] consider restructuring their portfolio, investing in a balance of blue-chip stocks and highly-rated convertible bonds.
[C] sell off the contents of their portfolio and purchase shares of a growth fund to achieve greater diversification and safety.
[D] liquidate the stock positions currently held in the portfolio and should invest all of the proceeds in US Treasury Securities with varying maturities.

A

[B] consider restructuring their portfolio, investing in a balance of blue-chip stocks and highly-rated convertible bonds.

An objective of safety, stability, and some capital appreciation would involve an asset mix of safe stocks and potentially some debt securities.
Convertible bonds provide an opportunity for a safer investment with participation in capital appreciation on the equity side.
Maintaining a portfolio with an objective of capital appreciation and adding options may carry more risk for the investor, even with covered calls.
A growth fund would not necessarily add safety or stability, outside of the potential of more diversification. US Treasury Securities would add safety and stability, but would not provide the potential for capital appreciation.
Ch.20 Sec.2

19
Q

A retired person with $200,000 to invest states that “current income” is her main investment objective. Which of the following would be most suitable?

[A] High yield bonds and growth stocks
[B] Municipal bonds, U.S. Government bonds and corporate bonds
[C] Balanced, small-cap stocks and mid-cap stocks
[D] Limited partnerships, global stocks and gold

A

[B] Municipal bonds, U.S. Government bonds and corporate bonds

The portfolio that includes municipal, government and corporate bonds which all pay interest to investors semi-annually and would satisfy the “current Income” requirement. Because the customer is retired government bonds and municipal bonds are more appropriate because they are safer investments
Ch.20 Sec.2

20
Q

An investor asks an RR for his opinion on the purchase of 500 shares of a very closely held stock. The investor thinks it has good near term investment potential. He should be advised that

[A] A thin market for such a stock is a major risk factor.
[B] Closely held companies have low growth potential.
[C] He would have no voice in the company’s affairs.
[D] He should not buy stock in a closely held company.

A

[A] A thin market for such a stock is a major risk factor.

If a customer asks a registered representative for their advice on the purchase of shares of a very closely held company, the registered representative should advise the customer that a thin market for such a stock is a major risk factor.
Ch.20 Sec.1

21
Q

When a portfolio is established which consists of 50% bonds, 10% equities and 40% money market instruments it would be best suited for which of the following investors?

[A] a single 45 year old investor who owns his own small business
[B] a couple nearing retirement
[C] a young married couple investing in their 3 year old child’s college fund
[D] a single 25 year old with sizeable income and assets

A

[B] a couple nearing retirement

A couple nearing retirement would be most interested in preservation of capital and income which would cause the portfolio to be heavily weighted in Bonds and light on equity securities.
Ch20. Sec.1

22
Q

After using reasonable diligence to develop a customer profile, a broker recommends a suitable investment to a customer. The FINRA suitability rule requires all of the following of this recommendation EXCEPT that it:

[A] Be in the best interest of the customer
[B] Apply to customers only, not potential customers
[C] Be documented if it is complex and/or a potentially risky investments
[D] Be in the best interest of the Broker-dealer.

A

[D] Be in the best interest of the Broker-dealer.

The FINRA Suitability Rule (Rule 2111) requires (1.) that the recommendation be in the customer’s best interest, (2.) that the rule apply to customers, not potential customers and (3.) that the recommendation be documented for complex and/or potentially risky securities or investment strategies. The recommendation does not have to be in the best interest of the broker-dealer.
Ch20. Sec.3

23
Q

One of your clients is seeking safety, stability, income, and principal protection for his portfolio. Which of the following would be the MOST appropriate investment choice for this client?

[A] Government Bonds
[B] Preferred Stock
[C] Common Stock
[D] Municipal Bonds

A

[A] Government Bonds

When an investor’s investment objective includes “safety,” generally, the first recommendation to the client would be Government securities because the principal and interest are guaranteed by the federal government and the U.S. has never defaulted on any of its debt. Ch20. Sec.2

24
Q

Didi is a new client who has no children and lives by herself. She has $100,000 to put towards an investment. She is relatively new to investing but is willing to take on some risk. Didi’s main objective is appreciation and being able to magnify the performance of her investments. She is not concerned with liquidity. Which of the following is the best investment recommendation to meet this goal?

[A] Common stocks purchased in a margin account
[B] Treasury bonds
[C] Limited Partnerships
[D] Non-convertible bonds issued by a blue-chip company

A

[A] Common stocks purchased in a margin account

Didi is looking for appreciation and is willing to take on risk to magnify her appreciation, so recommending common stocks purchased on margin would be the best recommendation. Treasury bonds are safe investments that offer interest income and would not be suitable for someone looking for appreciation. Limited partnerships would be for an investor looking for tax deductions and write offs. Non-convertible bonds do not have the ability to convert to common stock, and therefore would offer limited opportunities for magnifying appreciation.
Ch20. Sec.2

25
Q

The consensus of most analysts on Wall Street is that the market is entering a very favorable period. A broker-dealer is planning a major sales effort to recommend small growth companies to all of its customers. Which of the following is true?

[A] This is allowable under FINRA Rules without any restrictions.
[B] This is allowable provided all of the trades are immediately initialed by a FINRA principal.
[C] This practice is inherently inconsistent with FINRA Rules.
[D] The wholesale recommendation of certain types of securities to all of its customers is allowed since most of the analysts are bullish.

A

[C] This practice is inherently inconsistent with FINRA Rules.

Small growth companies would not be suitable for all of the broker-dealer’s customers, therefore making that blanket recommendation would violate the FINRA Rules.
Ch20. Sec.1

26
Q

It would be MOST important to discuss the risk of loss of principal and fluctuations in payments from investing in mutual funds with an investor who is switching to mutual funds from which of the following portfolios?

[A] An account focused in speculation in options and small-cap stocks
[B] An account focused in blue-chip stocks and bonds
[C] An account focused in corporate bonds
[D] An account focused in US Treasury Bills and Certificates of Deposit

A

[D] An account focused in US Treasury Bills and Certificates of Deposit

Though it would be important to discuss the risks of a mutual fund with all investors, it would be MOST important to discuss these risks with investors who may not be familiar with them. For investors who are switching from an account that is focused in US Treasury Bills and Certificates of Deposit, the agent MUST discuss the additional risks that are taken when investing in a mutual fund, versus the securities listed. A fund will have a higher risk of fluctuations and potential loss of principal, as well as less-dependable payout in the form of dividends and capital gains distributions.
Ch20. Sec.1

27
Q

An RR has a client who is 28 years old and has saved up $25,000 with her spouse for a down payment on a home. They haven’t found a home yet so they decide to invest their funds with an expectation of a strong return until they find the right place. All of the following statements about the clients’ investment goal are true EXCEPT:

[A] Because the couple intends to buy soon, their options for investing the money are limited.
[B] Because they are seeking a return on their investment, capital appreciation would be the major investment objective.
[C] Because they will need the money for the down payment, safety and preservation of principal are the major investment considerations.
[D] Because the couple intends to buy soon, a high level of liquidity is necessary for whatever investment they choose.

A

[B] Because they are seeking a return on their investment, capital appreciation would be the major investment objective.

The couple plans to buy soon, so even though they are seeking a higher level of return than that which they would achieve in a savings account, the couple’s main investment objective is safety and preservation of capital. It would not be capital appreciation. Also, because of their intention to buy in the near future, the couple limits available investments and requires a high level of liquidity so they can get a hold of the money quickly once they find the desired property.
Ch20. Sec.2

28
Q

A client lists their primary investment objective as liquidity. An RR believes that investments in municipal securities are best suited for this client. With the primary investment objective of the client in mind, which of the following would be the MOST attractive feature in relation to recommendations of municipal securities by the RR to this client?

[A] The market price of a particular municipal security exceeds the par value of the security by a sizeable amount.
[B] The market price of a particular municipal security is well below the par value of the security.
[C] The security has a maturity that takes place within the next year.
[D] The security has a call premium that currently exceeds the market price.

A

[C] The security has a maturity that takes place within the next year.

When an investor is primarily concerned with liquidity, the primary consideration would be the maturities of securities held within the portfolio. Short-term maturities are generally more liquid, so here, the muni bonds with the maturities within the next year would be most attractive to this investor.

Ch20. Sec.2

29
Q

Ch20. Sec.

A

Ch20. Sec.