Practice Test 10

Question 1

What must be included in an investment advisory contract?

Answer 1

A statement that defines the length of time that the services are contracted for.

Question 2

Another phrase for no-loan:

Answer 2

no margin

Question 3

What securities have a no-loan value:

Answer 3

Options that have 9 months or less until expiration.

Question 4

An assumption that investors are RISK-AVERSE and want to take the LOWEST risk possible in order to obtain a GIVEN RATE of return.

Answer 4

Modern Portfolio Theory

(don’t put all your eggs in one basket)

Question 5

Three components of Modern Portfolio Theor (MPT)

Answer 5

1. Expected return
2. Standard deviation
3. Correlation

Question 6

The historical return on the investment weighted by the historical likelihood that the return will occur.

Answer 6

Expected Return

Question 7

The way MPT measures the risk of an investment by quantifying how much an investment’s returns deviate from the historical average.

Answer 7

Standard Deviation

(the more spread apart the historcal returns, the higher the standard deviation and riskier the investment.)

Question 8

A graph of optimal portfolios according to Modern Portfolio Theory

Answer 8

Efficient Frontier

Question 9

When a firm is an adviser to a REGISTERED INVESTMENT COMPANY, who must the firm register with?

Answer 9

Federally with the SEC

Question 9

How do you get paid on the following securities:

ETF:
Stock:
Mutual Funds:
Fixed Income securities:

Answer 9

ETF: COMMISION

Stock: COMMISION

Mutual Funds: SALES CHARGE

Fixed Income securities: MARK UP-MARK DOWN

Question 9

What are the three opinions an auditor can have on an issuer’s balance sheet and income statement? Which on is the best and why?

Answer 9

1. Qualified
2. Adverse
3. Unqualified

Qualified means a section was questioned.

Adverse means the auditor believes the finances are untruthful.

Unqualified means there were no reservations.

Question 9

The result of an IAR sending unencrypted emails with personal identifying information.

Answer 9

A TRAINED IAR may face punishment.

A IA that did not train or failed to supervise may be PENALIZED.

Question 10

A federal (SEC) covered adviser must register in every state in which they…

Answer 10

have an OFFICE.

Question 11

Investment advisers cannot make reference to past recommendations unless they…

Answer 11

offer to provide ALL the recommendations the adviser has made in the last year (or two years)

Question 12

An adviser is permitted to store records on:

Answer 12

1. microfilm
2. micro fiche
3. electronic storage as long as the disks are tamper-evident (write once, read many)

Question 13

Once investment that trades independently from it’s NAV since it trades on an EXCHANGE

Answer 13

CLOSED-End Funds

Question 14

A partner of an investment adviser that manages investments in several discretionary accounts.

Answer 14

SUPERVISED PERSON

Question 15

Storing records on the CLOUD is permitted as long as:

Answer 15

1. Documents are accessible within 24 hours to the SEC or state.
2. Method of storing records is disclosed on Form ADV

Question 16

What is BOOK VALUE

Answer 16

The acquisitions cost of an asset MINUS depreciation or amortization.

Question 17

Who can participate in a private 457 plan?

Answer 17

Non-Governmental employees who are:
- members of a UNION
- hospital workers
- employees of charitable organizations

Question 18

Define TIME-weighted return.

Answer 18

returns that eliminate biases caused by the inflow or outflow of INVESTOR MONEY; often used to compare the performance of MONEY MANAGERS.

Question 19

Define DOLLAR-weighted return.

Answer 19

returns that provide a better idea of how an INDIVIDUAL investor has done over TIME by eliminating the biases caused by superior performance in one year or inferior performance in another.

Question 20

Calculating an advisory fee can be done by calculating…

Answer 20

2% of the average DAILY value of the account of the last THREE MONTHS.

(how fees are calculated must be disclosed in the brochure.)

Question 21

When is it permitted to publish testimonials? (3 points)

Answer 21

1. testimonial is shows as they originally appeared on an independent third party social media site
2. are unedited
3. the IA or IAR has no direct or indirect influence or control over the site

Question 22

Three characteristics of a Coverdell Education Savings account:

Answer 22

1. Contributions are limited to $2,000 annually
2. Taxpayers with income above a stated level are not allowed to make contributions
3. Withdrawals are generally tax-free if used for educational purposes

Question 23

Who may be charged performance based fees?

Answer 23

QUALIFED CLIENTS: institutional or retail client with at least $1.1 million AUM or net worth in excess of $2.2 million

or

Executives, a partner or a knowledgeable employee of the adviser.

Question 24

What is Form ADV-E used for?

Answer 24

Must be submitted by an independent accountant, not an adviser, within 120 days after completion of a surprise audit WHEN ADVISER HAS CUSTODY OF CLIENT FUNDS OR SECURITIES.

Question 25

When is a firm EXEMPT from registering with a STATE?

Answer 25

Firm has 5 or fewer clients in a state in which it has NO office.

or

Banks, TRUST companies, INSURANCE companies and employee benefit plans

Question 26

What is one action that should not be performed within Benchmark Portfolio Management?

Answer 26

reweighting a benchmark portfolio regularly. This action would not effect the actual performance on the benchmark and if it is done to make the portfolio appear to perform better, it would be unethical or likely fraudulent.

Question 27

How does the DEATH BENEFIT keep up with INFLATION within a Variable Life Insurance policy?

Answer 27

The earnings int he subaccount are added to the guaranteed minimum death benefit each year.

If the subaccount performs poorly, the death benefit may go down but never lower than the guaranteed minimum amount.

Question 28

What risk is being reduced by investing in tangible assets such as precious metals (gold) or real estate?

Answer 28

INFLATION

Question 29

An investor is considered to have a securities portfolio when:

Answer 29

The MAYORITY (more than 50%) of total assets are SECURITIES.