Practice Test 1

Question 1

Investment Advisors are required to keep record of every security transaction within 10 days of the END OF QUARTER that the transaction took place EXCEPT in the case of:

Answer 1

direct obligations of the US Government

Question 2

What is the rate of return that makes the PRESENT value of all cash flows equal to the market value?

Answer 2

Internal Rate of Return (IRR)

Question 3

Trading on margin requires a deposit of

Answer 3

50% of the MARKET VALUE of the security

Question 4

Prior approval is not required for every order but it IS REQUIRED for

Answer 4

NEW ACCOUNTS; prior to executing the first order

Question 5

Customer confirmations must disclose

Answer 5

1. the SETTLEMENT DATE of the trade
2. the CAPACITY in which the BD is acting
3. the amount of COMMISION to be received by the BD for executing an agency transaction

Question 6

When performance-based fees are allowed (exception granted), what disclosure must be made in writing?

Answer 6

That the ARRANGEMENT may cause the adviser to RECOMMEND STRATEGIES that encourage a client to take GREATER-THAN-NORMAL risks

Question 7

Administrators may require federal covered investment advisors (IA) to NOTICE FILE if transacting business with

Answer 7

the federally covered IA transacts business with more than FIVE (5) non-institutional clients over a 12-month period.

Question 8

Individuals are NOT considered agents if they only represent the issuer in

Answer 8

EXEMPT transactions

Question 9

A statistical term used to tell how tightly a set of values is clustered around the average, it’s a measure of dispersal or variation and provides a good indication of volatility.

Answer 9

Standard deviation

Question 10

Upon a sale of a primary residence what amount of gains are excluded from taxation for clients filing single or joint tax returns

Answer 10

$250,000 filing single
$500,000 filing jointly
FIVE years prior to the sale of the home the client must have occupied the home as a primary residence for a minimum of two years

Question 11

Which non-qualified deferred compensation plan are available for LOCAL government and employees of non-profits

Answer 11

457

Question 12

Debt instruments that have less than one year until maturity

Answer 12

Money market securities

Question 13

Investment advisory contracts must provide:

Answer 13

1. All FEES and SERVICES provided
2. A FORMULA computing the advisory fee
3. The TERMS of the contract
4. The amount of PREPAID FEES to be RETURNED in the event of an EARLY TERMINATION of the contract
5. No assignment of the contract will be made without the CONSENT of the client
6. Whether the contract grants DISCRETIONARY power to the advisor
7. The fee for managing equity securities may be HIGHER than for FIXED-INCOME securities

Question 14

What are securities created by financial institutions that customize returns and risks to fit the needs of specific investors?

Answer 14

Structured products

Question 15

Two characteristics of funds of hedge funds:

Answer 15

1. typically required to register with the SEC (although hedge funds don’t)
2. Have higher management fees than hedge funds

Question 16

According to modern portfolio theory, EXPECTED RETURN is

Answer 16

the sum of the weighted average of an investment’s return.

Multiply the return by the likelihood of that return and then add the totals.

20% x 25% = 5%
5% x 50% = 2.5%
-10% x 25% = -2.5%

5%+2.5%-2.5% = 5%

Question 17

If an agent of a BD does not receive PERMISSION to effect a private security transaction it is called

Answer 17

selling away

Question 18

What does the Investment Company Act of 1940 regulate?

Answer 18

1. Investment companies
2. Investment advisors
3. Custodian banks
4. Distributors

Question 19

What does the Investment Company Act of 1940 NOT regulate?

Answer 19

1. performance
2. does not require minimum rates of return in order to maintain registration

Question 20

Investors concerned about social values may invest in

Answer 20

1. green energy and fosil fuels such as solar panels and wind turbines
2. civil and human rights (pharmaceutical companies)

Question 21

Investors concerned about social values with NOT invest in

Answer 21

1. Oil
2. Gas
3. Weapons

Question 22

Technical analyst use

Answer 22

price TRENDS which may be based on average prices that are recalculated daily (ie moving averages)

Question 23

Investing in BONDS expose investors to

Answer 23

interest-rate risk and inflation

Question 24

This federal (SEC) exemption is available for securities that are sold within the borders of one state and does not apply to the USA therefore requiring to register in an intrastate offering

Answer 24

RULE 147

Question 25

BD (and their agents) are required to notify their clients of

Answer 25

any unusually excessive fees or fees out of the ordinary

Question 26

Under ERISA, what 3 things are included in the Investment Policy Statement of a qualified plan:

Answer 26

1. defines the roles of the parties involved in the management of the plan
2. Identifies specific asset classes to be offered in the plan
3. Lists the criteria for the selection and performance requirements for each investment option

Question 27

Under the USA, an administrator who requires the posting of a surety bond may

Answer 27

1. accept cash
2. accept securities
3. use discretion as to whether the type of securities and the amount of the deposit are appropriate

Question 28

How is the Dow Jones weighted?

Answer 28

price weighted

Question 29

How is the S&P500 weighted?

Answer 29

capitalization weighted

Question 30

Which non-qualified deferred compensation plan are available for local government EXECUTIVES

Answer 30

457(b)