Readiness Exam #1 Flashcards
When is an investment adviser representative allowed to place a trade based upon verbal discretion? I. Never; II. Anytime, as long as the client provides written discretionary authority within 10 days; III. Anytime, as long as it related to timing and price; IV. Anytime, as long as the client specifies the type and quantity.
(A) II, III & IV
(B) II only
(C) IV only
(D) II & III
Chose B
An investor purchased 10,000 shares of stock at $20 per share. The current market price is $35 per share. What type of order could the investor enter to protect profits should the market price fall to $32 or lower?
(A) Buy stop
(B) Sell stop
(C) Stop limit
(D) Buy limit
chose b
An investor purchased 10,000 shares of stock at $20 per share. The current market price is $35 per share. What type of order could the investor enter to protect profits should the market price fall to $32 or lower?
(A) Buy stop
(B) Sell stop
(C) Stop limit
(D) Buy limit
chose b
Under the Uniform Securities Act, the Administrator may do all of the following EXCEPT
(A) Hold a witness in contempt of court for failure to appear.
(B) Revoke a previously allowed exemption.
(C) Issue a stop order to revoke the effectiveness of a registration statement.
(D) Issue a cease and desist order without a prior hearing.
A
The Administrator has broad powers, including the issuance of stop orders, cease and desist orders, and the revocation of previously allowed exemptions. For example, the state’s private placement rule states that new securities sold privately are exempt transactions if no more than 10 offers are made. If the issuer makes 11 offers, the Administrator could revoke the exemption. However, only a judge can hold a witness in contempt.
All of the following are financial ratios EXCEPT
(A) Debt-to-equity ratio.
(B) Price/earnings ratio.
(C) Current ratio.
(D) Quick ratio.
B
Define an “ACCREDITED INVESTOR”
The term refers to INSTITUTIONAL INVESTORS and certain Wealthy Investors who are eligible to participate in REGULATION D PRIVATE PLACEMENTS.
Examples Include:
- ) Banks
- ) Insurance Companies
- ) Registered Investment Companies
- ) Any TRUST with total assets of $5,000,000+
- ) Individuals or Individuals AND their Spouse with $1,000,000
- A registered investment advisor is NOT an Accredited Investor
An institutional investor includes all of the following EXCEPT
(A) Mutual funds.
(B) An insurance company.
(C) A pension plan.
(D) An accredited investor.
D
An accredited investor is a person or organization that has a significant level of net worth, financial knowledge, and investment experience. Accredited investors include individuals with a minimum net worth of $1,000,000, a minimum annual income exceeding $200,000 in each of the previous 2 years and expected this year, or $300,000 in joint income. Accredited investors do not include investment advisers or investment advisory companies. While many institutional investors (such as banks, insurance companies, and investment companies) are considered to be accredited investors, an accredited investor need not be an institutional investor.
Diversification can almost entirely eliminate which of the following types of risk?
(A) Systematic
(B) Market
(C) Interest rate
(D) Nonsystematic
D
Define SECTOR FUNDS
What is a Sector Fund
A sector fund is a fund that invests solely in businesses that operate in a particular industry or sector of the economy. Sector funds are commonly structured as mutual funds or exchange-traded funds (ETFs).
BREAKING DOWN Sector Fund
Sector funds allows investors to take targeted bets on the appreciation potential of a particular industry category. Certain sectors may offer high growth potential due to economically driven investing catalysts. Sector investing can also be part of a broad portfolio strategy with certain sectors offering characteristics applicable for specific portfolio allocations.
A sector fund will have portfolio constraints requiring the portfolio manager to choose investment securities for the fund that fall within the fund’s targeted objective. Sector funds offer the advantage of diversification through multiple holdings in a portfolio. However, overall sector funds will have idiosyncratic risks that affect the entire portfolio due to their targeted sector exposure.
Some sectors and sector fund investing categories may require greater due diligence than others. Certain sectors are also typically associated with market cycles. Consumer cyclical stocks, for example, include companies involved in automotive, housing, entertainment, and retail activities. These companies and market sub-sectors do well when an economy is growing. Consumer staples stocks including companies involved in home utilities, food, beverage, and household items production are known to be more stable through all types of market cycles.
Which of the following is/are considered to be passive investments? I. Unit investment trusts; II. Sector funds; III. Index funds
(A) III only
(B) I, II & III
(C) I & II
(D) I & III
D
A nurse in a nonprofit hospital who is planning for retirement should consider which of the following?
(A) Deferred compensation plan
(B) Tax-deferred annuity
(C) IRA
(D) 403(b) plan
D
Under the Uniform Securities Act (USA), if an investment adviser goes out of business, what happens to their records?
(A) They must be returned to each respective client.
(B) They must be destroyed.
(C) They must be returned to the state Administrator.
(D) They must be kept by the investment adviser for the required retention period.
D
A municipal bond was issued in the customer state of residency with a par value of $1,000 and a nominal rate of 6.5%. If the investor is in a 25% federal tax bracket and a 10% state tax bracket, the investor’s after-tax yield would be approximately
(A) 6.50%.
(B) 23%.
(C) 85%.
(D) 88%.
A
Which of the following is taxable to the recipient?
(A) Life insurance proceeds
(B) Child support
(C) Alimony
(D) Gifts
C
Under the Securities Exchange Act of 1934, in which of the following cases is an investment adviser exercising investment discretion? I. The adviser determines what securities should be purchased for an account after the client sets specific investment objectives. II. When the market price of a stock is $100 per share, the client tells the adviser to sell it if it drops another $10 per share. When the price falls to $90 per share, the adviser sells it without further consultation with the client. III. The client tells the adviser to purchase growth mutual fund shares and leaves the choice of the fund to the adviser.
(A) I & III
(B) II & III
(C) I, II & III
(D) I & II
A
A trustee managing a trust in accordance with the Prudent Investor Act will be evaluated regarding fiduciary duties on which basis?
(A) On the performance of individual transactions versus the S&P 500
(B) Each individual transaction
(C) On the performance of the entire portfolio as a whole
(D) On individual transactions and the entire performance
C
There are two fiduciary standards governing the prudence of the individual investments selected by a fiduciary – the Prudent Investor Act and the Prudent Man Rule. The Prudent Investor Act, which was adopted in 1990, reflects a modern portfolio theory and total return approach to the exercise of fiduciary investment discretion. This approach allows fiduciaries to utilize modern portfolio theory to guide investment decisions and requires risk versus return analysis. Therefore, a fiduciary’s performance is measured on the performance of the entire portfolio rather than on individual investments.
To find future value, all of the following information is needed EXCEPT the
(A) Interest rate.
(B) Rate of inflation.
(C) Present value.
(D) Holding period.
B
Define the “Sharpe Ratio”
is used to help investors understand the return of an investment compared to its risk. The ratio is the average return earned in excess of the risk-free rate per unit of volatility or total risk.
Subtracting the risk-free rate from the mean return allows an investor to better isolate the profits associated with risk-taking activities. Generally, the greater the value of the Sharpe ratio, the more attractive the risk-adjusted return.
The Sharpe ratio is a measurement of
(A) The relationship of reward to risk.
(B) Volatility.
(C) Standard deviation.
(D) Risk-free return.
A
Which of the following securities are exempt from the SEC registration and disclosure requirements of the Securities Act of 1933? I. Securities issued by the United States or any U.S. territory; II. Securities issued by a state or political sub-division of a state; III. Securities issued by a common carrier (such as a railroad) subject to the Interstate Commerce Act; IV. Securities issued by banks and savings institutions
(A) I & II only
(B) II & IV only
(C) I, II, III & IV
(D) I only
C
Define STANDARD DEVIATION
The standard deviation is a statistic that measures the dispersion of a dataset relative to its mean and is calculated as the square root of the variance. It is calculated as the square root of variance by determining the variation between each data point relative to the mean. If the data points are further from the mean, there is a higher deviation within the data set; thus, the more spread out the data, the higher the standard deviation.
Standard deviation is a statistical measurement in finance that, when applied to the annual rate of return of an investment, sheds light on the historical volatility of that investment. The greater the standard deviation of securities, the greater the variance between each price and the mean, which shows a larger price range. For example, a volatile stock has a high standard deviation, while the deviation of a stable blue-chip stock is usually rather low.
Standard deviation is used to measure
(A) Risk.
(B) Time.
(C) Internal rate of return.
(D) Volatility.
D
Under NASAA’s Model Regulations for Investment Advisers and Federal Covered Advisers, to which of the following clients would it be unethical for an adviser who is not a lending institution to lend money? I. A bank affiliated with the adviser; II. Another investment adviser with whom the lending adviser has no affiliation; III. A business not affiliated with the adviser whose financial statements have been audited by the adviser’s CPA.
(A) I, II & III
(B) I & II
(C) I & III
(D) II & III
D
The question asks for clients to whom it would be unethical for the adviser to lend money. An adviser who is not a lending institution may lend money to a client only if the client is an affiliate of the adviser.
If the expected return on assets decreases, the net present value will
(A) Double.
(B) Increase.
(C) Decrease.
(D) Remain the same.
B
Return on assets tells an investor how much profit a company generated for each $1 in assets. Often, a company will do an analysis to determine whether to invest additional capital into the purchase of a new asset. If the expected return of assets should decrease, then the net present value will increase. At a discount rate of zero, the net present value of an investment is just the total cash inflows minus the cash outflows of a project. Thus, the highest net present value will occur when the discount rate is zero. As the discount rate increases, the net present value decreases.
Under Prudent Investor Rules, the trustee must do which of the following?
(A) Manage the trust for the benefit of the beneficiaries
(B) Disclose all transactions that present a conflict of interest to the beneficiaries
(C) Maintain a fixed list of securities in the portfolio
(D) Give preference to securities with special meaning to the beneficiaries
A
Which of the following is taxable?
(A) Gifts
(B) Automatic reinvestment of mutual fund distributions
(C) Qualified distributions from a Roth IRA
(D) Life insurance proceeds
B
All of the following are true regarding business entities EXCEPT
(A) LLCs, S corporations, partnerships, and some trusts distribute K-1s to their owners showing their flow through of profits and or losses.
(B) A sole proprietorship may be owned by more than one person.
(C) To add a partner to a partnership, the subscription agreement must be signed.
(D) An LLC has members.
B
A qualified plan defers which of the following?
(A) Unemployment taxes
(B) Social Security taxes
(C) Income taxes
(D) Medicare taxes
C
Under the Uniform Securities Act (USA), which of the following is an exempt security?
(A) Variable annuity issued by an insurance company
(B) Stock of a European corporation
(C) Small-cap NASDAQ listed security
(D) Shares of an open-end mutual fund
D
Define a SIMPLE IRA/PLAN
A SIMPLE IRA is a retirement savings plan that most small businesses with 100 or fewer employees can use. “SIMPLE” stands for “Savings Incentive Match Plan for Employees,” and “IRA” stands for “Individual Retirement Account.” Employers can choose to make a 2% retirement account contribution to all employees or an optional matching contribution of up to 3%.
Employees can contribute a maximum of $13,500 annually in 2020; the maximum is increased periodically to account for inflation. Retirement savers age 50 and older may make an additional catch-up contribution of $3,000, bringing their annual maximum to $16,000.
KEY TAKEAWAYS
A SIMPLE IRA, or Savings Incentive Match Plan for Employees, is a type of tax-deferred retirement savings plan.
SIMPLE IRAs are easy to set up, and they can be a good option for small businesses.
They have some drawbacks, and businesses that can afford to set up other plans might consider it.
If a small corporation with only 15 employees wants to set up a qualified retirement plan that allows both the employer and the employees to contribute, an adviser should recommend a
(A) Profit sharing plan.
(B) SIMPLE plan.
(C) Tax-sheltered annuity.
(D) Defined benefit pension plan.
B
To reduce a client’s exposure to systematic risk in his stock portfolio, an adviser should consider which of the following?
(A) Beta
(B) Diversification
(C) Standard & Poor’s and Moody’s ratings
(D) Price/earnings ratios
A
Beta is a measure of a portfolio’s volatility as compared to the volatility of the overall market. Since systematic risk is risk associated with the overall market, lowering the client’s beta relative to that of the market should lower his or her exposure to market risk. Diversification, safety ratings, and price/earnings ratios should be considered when evaluating unsystematic risk, which is the risk associated with a particular issuer’s securities.
Retained earnings are also known as
(A) Earning before dividends.
(B) Gross profit margin.
(C) Earnings before income taxes.
(D) Undistributed net income.
D
If an investor had $1,000 to invest in a 2-year CD that paid 5% interest a year but instead used the money to pay for a vacation, what was the investor’s opportunity cost?
(A) $50
(B) $100
(C) $1,050
(D) $1,100
B
If interest rates in the economy go down, which of the following is true regarding outstanding bonds?
(A) The current yield will be the same as the nominal yield.
(B) The yield to maturity will be higher than the nominal yield.
(C) The current yield will be higher than the nominal yield.
(D) The yield to maturity will be lower than the nominal yield.
D
If interest rates in the economy go down, bond prices will go up in the secondary market. This causes their yields to go down. On a premium bond (one selling for more than par), the yield to maturity will be lower than both the current yield and the nominal yield.
Which of the following factors creates the U.S. debit balance in the balance of trade account? I. More exports than imports; II. A weak dollar; III. A strong dollar; IV. More imports than exports.
(A) I & IV
(B) III & IV
(C) I & II
(D) II & IV
B
Under the Investment Advisers Act of 1940, which of the following statements is FALSE regarding advisory contracts?
(A) The contract must provide for the client’s notification if a change in partners occurs in an advisory firm organized as a partnership.
(B) A waiver (hedge clause) of the adviser’s compliance with any provisions of the law is considered valid if willingly signed by the client.
(C) The contract must provide for assignment only with the client’s consent.
(D) The contract must provide that no compensation to the adviser will be based on capital gains.
B
If a customer enters a buy stop order at 50 and the market trades that follow are 48, 49, 50, 51, and 52, the order will most likely be executed at
(A) 48
(B) 49
(C) 50
(D) 51
D
Assuming suitability has been established, an investment adviser who elects to purchase the same stock for several of their discretionary customers should allocate the shares based upon
(A) Random order.
(B) A formula that works the same for all customers.
(C) The size of their portfolios.
(D) Their seniority with the firm.
B
If a broker/dealer firm hires an agent to sell an issuer’s new securities, the agent represents
(A) The issuer.
(B) FINRA.
(C) The broker/dealer firm.
(D) The broker/dealer firm and the issuer.
C
Although an agent may represent an issuer or a broker/dealer, if it is the broker/dealer who hires the agent to sell the securities, the agent represents the broker/dealer. An issuer who hires an agent to sell its own securities would not need to hire a broker/dealer since an agent may represent an issuer as well.
A small number of people who want limited liability as well as personal tax advantages might set up a/an
(A) Real estate investment trust
(B) General partnership
(C) S corporation
(D) C corporation
C
An individual has recently joined an investment advisory firm and wishes to order new stationery and business cards. She is a financial professional in the principal business of rendering investment advice for a fee through offering investment supervisory services. Under the Investment Advisers Act of 1940, which of the following terms is appropriate for this individual to use on her business card?
(A) Investment expert
(B) Registered investment adviser (RIA)
(C) Investment adviser representative
(D) All answer options are incorrect.
C
The Investment Advisers Act of 1940 requires which of the following persons who manage assets of $110 million to register with the SEC? I. A person who advises only five clients over a 12-month period, all of which are investment companies (mutual funds); II. A person who advises clients in several states in regard to investments in precious art and antiques; III. A person who advises clients in several states with regard to investing in U.S. government securities; IV. A person who advises clients who reside only in one state about investing in corporate bonds and common stock trading on the NYSE.
(A) II & III
(B) III & IV
(C) IV only
(D) I & IV
D
Assuming the same amount was invested, which type of plan would generate the most taxable income?
(A) Nonqualified deferred annuity
(B) Nondeductible traditional IRA
(C) 403(b) tax-sheltered annuity
(D) Roth IRA
C
Since all contributions to a 403(b) tax-sheltered annuity are made with before-tax dollars, the participant has a zero cost basis in the plan. Upon distribution, both the contributions and the earnings will be taxable as ordinary income. All of the other choices present in this question are funded with after-tax dollars and there are either no taxes due upon qualified distribution (Roth IRA) or only the earnings will be taxable (nonqualified deferred annuities and traditional IRAs funded with after-tax dollars).
The best measurement of investment performance over a period of time is
(A) Holding period return.
(B) Inflation-adjusted return.
(C) Total return.
(D) Annualized return.
D
Holding period return is the total return on an investment over a variable time period. Converting holding period return to annualized return makes rates of return easier to compare.
Define BALANCE OF PAYMENTS
The balance of payments (BOP) is a statement of all transactions made between entities in one country and the rest of the world over a defined period of time, such as a quarter or a year.
The balance of payments (BOP), also known as balance of international payments, summarizes all transactions that a country’s individuals, companies and government bodies complete with individuals, companies and government bodies outside the country. These transactions consist of imports and exports of goods, services and capital, as well as transfer payments, such as foreign aid and remittances.
Which of the following is used to measure the cost of goods and services consumed in the United States?
(A) Consumer price index
(B) Balance of payments
(C) Current account
(D) Capital account
A
Under the Investment Advisers Act of 1940, federal covered investment advisers must amend their Form ADV each year by filing an annual updating amendment within
(A) 90 days after the end of their fiscal year.
(B) 60 days after the end of their fiscal year.
(C) 60 days after the end of their calendar year.
(D) 90 days after the end of their calendar year.
A
Federal covered advisers are those who must register with the SEC (such as those who advise mutual funds). They must renew their registration by filing an annual updating amendment with the SEC within 90 days after the end of their fiscal year. The adviser is required to send it out to investors within 120 days if there are any changes and provide a summary of the changes.
Under the Investment Advisers Act of 1940, charging a performance-based advisory fee is allowed for all of the following clients EXCEPT
(A) Clients with $1,000,000 under the adviser’s management or a net worth of at least $2,000,000.
(B) Accredited investors.
(C) Registered investment companies.
(D) Institutional investors with more than $1,000,000 in managed assets.
B
The SEC exemption that allows advisers to charge performance-based fees for certain clients does not extend to accredited investors, a term associated only with the private placement of securities under SEC Regulation D.
Under the Investment Advisers Act of 1940, investment advisers must
(A) Have at least 6 months’ experience as a representative for a registered broker/dealer.
(B) Maintain a bond if they have custody of client securities or funds.
(C) Disclose pertinent information about themselves to all prospective clients.
(D) Appoint the SEC as their attorney for service of any legal process.
C
To limit losses on a short sale, a customer should enter which type of open order?
(A) Sell limit
(B) Buy limit
(C) Sell stop
(D) Buy stop
D
When can investment advisers charge performance-based fees?
(A) When based upon an SEC exemption
(B) Performance-based fees are always prohibited.
(C) After full disclosure is made to all clients
(D) With the approval of the Administrator
A
A client has $200,000 to invest for 2 years. During this time, the client would like to maximize returns while taking minimal risk. What should the agent recommend?
(A) T-bills
(B) Large-cap stocks
(C) Indexed mutual funds
(D) Municipal bonds
A
While common stocks and mutual funds may do well over a period of time, this investor only has money to invest for 2 years and wants minimal risk. While municipal bonds are safe, they also have low yields and without knowing the client’s tax bracket, it cannot be assumed that the client would maximize returns. In this case, it appears that T-bills would be most suitable since they are safe and short-term.
A certified public accountant (CPA) gives investment advice in connection with his tax practice without charging any additional fees. Lately, he finds that 25% of his work is related to investment advice so he decides to start advertising that service. At what point does the CPA have to register as an adviser?
(A) Never, since he is already a CPA
(B) When his advice accounts for more than 25% of his work
(C) Whenever he starts to advertise his advisory services
(D) When he starts charging an additional fee for his advisory services
C
A corporate bond was purchased for 103 with an 8% nominal yield and a first call date in 3 years. What is the most important yield for an investor to consider?
(A) Yield to call
(B) Nominal yield
(C) Yield to maturity
(D) Current yield
A
Under ERISA, who of the following is not considered to be a pension plan fiduciary?
(A) The person who does the plan’s tax returns
(B) Plan administrators
(C) Members of the plan’s investment committee
(D) An investment adviser who serves as trustee for the plan
A
The duration of a zero-coupon bond bought at a discount is
(A) Less than maturity.
(B) Greater than maturity.
(C) Unknown without knowing the discount price.
(D) Equal to maturity.
D
Which type of investment vehicle is least suitable for an IRA?
(A) Zero-coupon bonds
(B) Stock
(C) T-bills
(D) Municipal bonds
D
What is ACCOUNTS RECEIVABLE RATIO?
The accounts receivable turnover ratio is an accounting measure used to quantify a company’s effectiveness in collecting its receivables or money owed by clients. The ratio shows how well a company uses and manages the credit it extends to customers and how quickly that short-term debt is collected or is paid. The receivables turnover ratio is also called the accounts receivable turnover ratio.
KEY TAKEAWAYS
The accounts receivable turnover ratio is an accounting measure used to quantify a company’s effectiveness in collecting its receivables or money owed by clients.
A high receivables turnover ratio can indicate that a company’s collection of accounts receivable is efficient and that the company has a high proportion of quality customers that pay their debts quickly.
A low receivables turnover ratio might be due to a company having a poor collection process, bad credit policies, or customers that are not financially viable or creditworthy.
A company’s receivables turnover ratio should be monitored and tracked to determine if a trend or pattern is developing over time.
Define INVENTORY TURNOVER RATIO
Inventory turnover is a ratio showing how many times a company has sold and replaced inventory during a given period. A company can then divide the days in the period by the inventory turnover formula to calculate the days it takes to sell the inventory on hand. Calculating inventory turnover can help businesses make better decisions on pricing, manufacturing, marketing and purchasing new inventory.
All of the following are liquidity ratios EXCEPT
(A) Current ratio.
(B) Price-to-book ratio.
(C) Accounts receivable turnover ratio.
(D) Inventory turnover ratio.
B
The price-to-book ratio is a valuation ratio, not a liquidity ratio.
All of the following are used in volatility measurements EXCEPT
(A) Standard deviation.
(B) Correlation.
(C) Real return.
(D) Beta.
C
The most subjective suitability information is the client’s
(A) Net worth.
(B) Time horizon.
(C) Investment objective.
(D) Attitude toward risk.
D
An individual was convicted of a misdemeanor when purchasing a security 5 years ago. This conviction will
(A) Prevent him from registration in any capacity.
(B) Not prevent him from registering as an investment adviser representative since the conviction was not a felony.
(C) Not prevent him from registering as an investment adviser representative, but would prevent him from registering as an agent of a broker/dealer.
(D) Not prevent him from registering in any capacity since it was in connection with a purchase and not a sale.
A
All of the following are exempt securities EXCEPT
(A) Municipal bonds.
(B) Stock issued by an insurance company.
(C) Units of a real estate investment trust (REIT).
(D) Federal covered securities.
C
Define REAL (RATE OF) RETURN
A real rate of return is the annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other external factors. This method expresses the nominal rate of return in real terms, which keeps the purchasing power of a given level of capital constant over time. Adjusting the nominal return to compensate for factors such as inflation allows you to determine how much of your nominal return is real return.
The Formula for the Real Rate of Return Is
\text{Real rate of return} = \text{Nominal interest rate} - \text{Inflation rate}Real rate of return=Nominal interest rate−Inflation rate
A portfolio earned 12% last year. Of this amount, 3% was from capital gains and 9% was from dividends. If inflation last year was 3.5%, what was the investor’s real return?
(A) 3%
(B) 8.5%
(C) 9%
(D) 12%
B
If a trade is based upon verbal discretion, the investment adviser representative must get discretion in writing within how many days?
(A) 10 days
(B) 15 days
(C) 20 days
(D) 30 days
A
If an IAR leaves a state-registered investment adviser (IA), who must notify the Administrator?
(A) The IAR
(B) The IA
(C) The B/D
(D) No one
B
An investment adviser representative has a wealthy married couple as a client. They want to make sure that they leave the most money possible to their children. How would the representative set up their accounts to best take advantage of the unified credit?
(A) One account with the children named as beneficiaries
(B) Two accounts
(C) One account in the name of the children
(D) Trust
D
A retirement plan set up to benefit only key employees is known as a
(A) Nonqualified deferred compensation plan.
(B) Defined benefit plan.
(C) Profit-sharing plan.
(D) Defined contribution plan.
A
Which of the following is NOT true regarding life insurance?
(A) Proceeds of a life insurance policy are always subject to estate taxes.
(B) It is often purchased to pay estate taxes.
(C) Life insurance proceeds are included in the value of a decedent’s estate.
(D) Proceeds of a life insurance policy are paid tax free to the beneficiary.
A
According to the Investment Advisers Act of 1940, which of the following is NOT an investment adviser?
(A) A person paid to give advice on bank stocks
(B) A publisher of a newsletter that makes securities recommendations
(C) A person who receives a fee for advising others on Treasury securities
(D) A lawyer who charges a separate fee for giving specific investment advice
C
The Investment Advisers Act of 1940 excludes from the definition of investment adviser anyone who advises only on government or agency securities. A lawyer who gives investment advice falls within the definition of investment adviser if he or she offers the advice as part of his or her practice and receives compensation for it. A person who is paid to give advice on bank stocks and a publisher of a newsletter that gives specific securities recommendations both fall within the definition of an investment adviser under the Act.
What is the best definition of a benchmark portfolio?
(A) The index that most closely matches an actual portfolio’s investment objectives
(B) A model portfolio with the correct allocation of asset classes
(C) The portfolio for a portfolio manager to try to beat
(D) A predetermined set of securities used to compare the performance of an actual portfolio
D
Advertising would have to be filed with the state administrator on which of the following securities?
(A) Federal covered securities
(B) U.S. government
(C) Private placement
(D) Corporate common stock
D
Advertising does not have to be filed on U.S. government securities, private placements, or federal covered securities since they are all either exempt securities or exempt transactions. However, it is best to assume that corporate stock is nonexempt.
An investor has established a long position in company ABC’s stock. The investor expects the stock price to move sideways. Which of the following could the investor do to create income?
(A) Buy puts on ABC stock
(B) Buy calls on ABC stock
(C) Sell calls on ABC stock
(D) Short ABC stock
C
On a premium bond, the yield to maturity is
(A) Lower than the current yield.
(B) Higher than the nominal yield.
(C) Higher than the current yield.
(D) The same as the coupon rate.
A
A premium bond is one that is selling in the secondary market for more than par, which means that interest rates have gone down since the bond was issued. If interest rates go down, bond prices in the secondary market go up, causing both the current yield and the yield to maturity to go down.
What two types of Accounts are involved in BALANCE OF PAYMENTS?
The balance of payments divides transactions in two accounts: the current account and the capital account. Sometimes the capital account is called the financial account, with a separate, usually very small, capital account listed separately. The current account includes transactions in goods, services, investment income and current transfers. The capital account, broadly defined, includes transactions in financial instruments and central bank reserves. Narrowly defined, it includes only transactions in financial instruments. The current account is included in calculations of national output, while the capital account is not.
The sum of all transactions recorded in the balance of payments must be zero, as long as the capital account is defined broadly. The reason is that every credit appearing in the current account has a corresponding debit in the capital account, and vice-versa. If a country exports an item (a current account credit), it effectively imports foreign capital when that item is paid for (a capital account debit).
Which of the following would be a credit toward the U.S. balance of payments?
(A) An increase in imports over exports
(B) An increase in foreign loans
(C) Repayment of debt by foreign borrowers
(D) A decrease in services provided overseas
C
The U.S. balance of payments system records all of the country’s economic transactions with the rest of the world during a particular time period by using a system of debits and credits to help the country evaluate its competitive strengths and weaknesses and forecast the strength of its currency. Any transaction that causes money to flow into a country is a credit to its balance of payments account and any transaction that causes money to flow out is a debit.
Info about Cash Flow Statement
A company’s financial statements offer investors and analysts a portrait of all the transactions that go through the business, where every transaction contributes to its success. The cash flow statement is believed to be the most intuitive of all the financial statements because it follows the cash made by the business in three main ways—through operations, investment, and financing. The sum of these three segments is called net cash flow.
The statement of cash flow would include which of the following? I. Net Income; II. Amortization; III. Depreciation; IV. Dividends paid
(A) II ; IV
(B) I III
(C) I, II, III &; IV
(D) IV only
C
After a hearing and if in the public interest, the Administrator may impose all of the following sanctions for violations of the Uniform Securities Act EXCEPT
(A) Bar.
(B) Civil penalty (fine).
(C) Criminal penalty (jail).
(D) Censure.
C
The basis for determining the inflation-adjusted rate of return is
(A) Internal rate of return.
(B) The consumer price index.
(C) 3-month CD rates.
(D) 3-month T-bill rates.
B
Inflation-adjusted return (real return) may be found by reducing the nominal rate of return on an investment by the rate of inflation as indicated by the consumer price index (CPI).
Which of the following statements is correct?
(A) A federal covered security must be registered at the state level.
(B) Municipal bond interest appears in adjusted gross income (AGI) on a client’s federal tax return.
(C) Market makers are not underwriters.
(D) Advertising must be filed on exempt securities.
C
Market makers are not underwriters. Market makers are the dealer side of broker/dealer. Market makers take an inventory position in a stock in order to make the market. Market makers make money on their inventory positions. Municipal bond interest does not appear in a client’s AGI on his or her federal tax return because municipal bond interest is exempt from federal income taxes. Advertising does not have to be filed on an exempt security but must be filed on all nonexempt securities. A federal covered security is not registered at the state level; instead, it is registered federally with the SEC.
A 5-year certificate of deposit at the bank has which of following risks? I. Purchasing power risk; II. Interest rate risk; III. Business risk; IV. Reinvestment risk
(A) I ; III
(B) I ; IV
(C) II ; III
(D) II ; IV
B
Money in a 5-year certificate of deposit at the bank is tied up in this product for 5 years. At maturity, purchasing power risk and reinvestment risk will be present.
A bond rated B by Moody’s and BB by Standard & Poor’s is
(A) High yield.
(B) In default.
(C) High grade.
(D) Suitable for fiduciaries.
A
When must an investment adviser disclose personal securities transactions to a customer? I. If the adviser makes trades that are inconsistent with their advice; II. If the adviser makes trades that take advantage of the impact caused by their recommendations; III. Whenever a personal trade is made.
(A) II only
(B) I, II ; III
(C) I only
(D) I ; II
D
Although advisers do not have to disclose all of their personal trades to customers, they must disclose the trades that they make that are inconsistent with their advice and trades that they make that take advantage of their recommendations.
When the dollar appreciates, what happens to the trade deficit?
(A) It will remain level.
(B) It will double.
(C) It will decrease.
(D) It will increase.
D
An investor has $3,500 in capital gains during the year and $7,000 in unrealized losses. If she takes the losses before the end of the year, how much can be carried over to next year?
(A) $500
(B) $3,000
(C) $3,500
(D) $7,000
A
Net capital gains and capital losses dollar-for-dollar to find the final position, a $3,500 net long-term capital loss. Of this, the investor may write off (deduct) $3,000 (which is the maximum annual limit) from her other income on the tax return for the year. The remaining $500 net capital loss may be carried over and used to offset $500 in capital gains next year.
To find the real rate of return on a bond, an investor must
(A) Subtract inflation.
(B) Calculate the bond’s total return.
(C) Calculate the bond’s yield to maturity.
(D) Take taxes into consideration.
A
The Standard & Poor’s 500 index is what type of weighted index?
(A) Capitalization
(B) Volume
(C) Price
(D) P/E
A
Which of following is the least important consideration in portfolio optimization?
(A) Variance
(B) Expected return
(C) Risk tolerance
(D) Duration
D
Which of the following would be found on a company’s income statement? I. Revenue; II. Liabilities; III. Assets; IV. Dividends
(A) III & IV
(B) I, II & III
(C) II only
(D) I & IV
D
A 30-year-old married couple with children ages 3 and 5 have an aggressive attitude toward risk, want to have enough money to send their kids to college, and want to retire by age 60. They should invest in which of the following?
(A) Municipal bonds
(B) Fixed income securities
(C) Balanced mutual funds
(D) Equities
D
The gift tax exclusion is an amount that
(A) The person giving the gift does not have to pay taxes on.
(B) The recipient of a gift can write off against ordinary income.
(C) The person giving the gift has to pay gift taxes on.
(D) The recipient of a gift does not have to pay taxes on.
A
Which of the following does NOT meet the definition of “providing investment advice incidental to normal business practices” outlined in SEC Release IA-1092?
(A) Financial planner who provides only nonspecific investment advice as part of his fee-based services but who makes specific securities recommendations to clients in his capacity as an investment representative for a broker/dealer
(B) Attorney who advertises the availability of investment advice
(C) Accountant who charges clients an additional fee for providing investment advice
(D) Management consultant who tells a couple of small business clients who had invested their surpluses in speculative securities that they should find something less risky
D
The management consultant’s advice to clients is more personal opinion than providing investment advice as a business. In the other three choices, investment advice is offered as part of the individual’s regular business. Lawyers, accountants, engineers, and teachers are generally not considered investment advisers provided the advice is incidental to their regular profession.
A husband and wife are 55 and 57 years old respectively. The husband plans to retire at age 62 and the wife at age 65. Both are healthy. What is the best estimate of the time horizon for their investment portfolio?
(A) 5 years
(B) 7 years
(C) 10 years
(D) Over 20 years
D
What are some risks that an investor in an American Depositary Receipt (ADR) should consider? I. Currency exchange rate risk; II. Political risk; III. Interest rate risk; IV. Inflationary risk
(A) I only
(B) I & III
(C) I, II & IV
(D) IV only
C
A bond rated B or Bb would be which of the following types of bonds?
(A) Conservative
(B) High yield
(C) Investment grade
(D) Safe
B
An affiliated person of a mutual fund may NOT do which of the following?
(A) Sit on the fund’s Board of Directors
(B) Buy from or sell securities directly to the fund’s portfolio
(C) Buy shares of the fund
(D) Redeem shares of the fund
B
A callable bond maturing in 10 years is trading at 105 with an 8% coupon rate. If the bond is called in 3 years, all of the following would be needed to figure out the bond’s yield to call EXCEPT
(A) Twenty payments of $40.
(B) Present value $1,050.
(C) Six payments of $40.
(D) Future value of $1,000.
A
Define RECORD DATE
The record date, or date of record, is the cut-off date established by a company in order to determine which shareholders are eligible to receive a dividend or distribution. The determination of a record date is required to ascertain who exactly a company’s shareholders are as of that date, since shareholders of an actively traded stock are continually changing. The shareholders of record as of the record date will be entitled to receive the dividend or distribution, declared by the company.
On stock, the record date is the date on which
(A) A shareholder must own a stock in order to be entitled to a dividend.
(B) The stock goes ex-dividend.
(C) The company actually pays the dividend.
(D) The Board of Directors declared a dividend.
A
On January 2, 2016, an investor bought a stock for $10 a share. The investor sold the stock for $12 a share on January 3, 2017. He received a $1.00 dividend per share and is in a combined 25% tax rate. The after-tax rate of return was
(A) 15.0%.
(B) 22.5%.
(C) 24.0%.
(D) 28.0%.
B
If a person wants to set up a business, but doesn’t want others to be able to access his or her personal financial statements, he or she would most likely set up which of the following?
(A) General partnership
(B) Limited partnership
(C) LLC
(D) Sole proprietorship
C
3. When is an investment adviser representative allowed to place a trade based upon verbal discretion? I. Never; II. Anytime, as long as the client provides written discretionary authority within 10 days; III. Anytime, as long as it related to timing and price; IV. Anytime, as long as the client specifies the type and quantity.
a) II, III & IV
b) II only
c) IV only
d) II & III
A
If a client provides verbal discretion, the IAR may make discretionary trades on the same day. The IAR will need to obtain written discretionary authority from the client within 10 days. If the client specifies the type and quantity, the IAR is always given automatic discretion over timing and price; this does not need to be in writing.
5. Disciplinary proceedings under the Uniform Securities Act generally require the Administrator to provide which of the following? I. Opportunity for a hearing; II. Written findings of facts and conclusions of law; III. Appropriate prior notice
a) I, II & III
b) I & III
c) II only
d) II & III
A
The Administrator must provide appropriate prior notice, opportunity for a hearing, and written findings of facts and conclusions of law. Even if an order is issued summarily, that is, made effective upon issue without prior notice, a registrant must be notified upon issue of the order and must be given the opportunity to request a hearing.
6. Under the Uniform Securities Act, the Administrator may do all of the following EXCEPT
a) Hold a witness in contempt of court for failure to appear.
b) Revoke a previously allowed exemption.
c) Issue a stop order to revoke the effectiveness of a registration statement.
d) Issue a cease and desist order without a prior hearing.
A
The Administrator has broad powers, including the issuance of stop orders, cease and desist orders, and the revocation of previously allowed exemptions. For example, the state’s private placement rule states that new securities sold privately are exempt transactions if no more than 10 offers are made. If the issuer makes 11 offers, the Administrator could revoke the exemption. However, only a judge can hold a witness in contempt.
7. All of the following are financial ratios EXCEPT
a) Debt-to-equity ratio.
b) Price/earnings ratio.
c) Current ratio.
d) Quick ratio.
B
Price/earnings ratio is a valuation ratio, not a financial ratio. Price/earnings ratios are used to determine if a stock is under- or overvalued. Financial ratios measure a corporation’s liquidity (current ratio and quick ratio) or the amount of leverage (bonds) in its capital structure (debt-to-equity ratio).
9. An institutional investor includes all of the following EXCEPT
a) Mutual funds.
b) An insurance company.
c) A pension plan.
d) An accredited investor.
D
An accredited investor is a person or organization that has a significant level of net worth, financial knowledge, and investment experience. Accredited investors include individuals with a minimum net worth of $1,000,000, a minimum annual income exceeding $200,000 in each of the previous 2 years and expected this year, or $300,000 in joint income. Accredited investors do not include investment advisers or investment advisory companies. While many institutional investors (such as banks, insurance companies, and investment companies) are considered to be accredited investors, an accredited investor need not be an institutional investor.
19. A trustee managing a trust in accordance with the Prudent Investor Act will be evaluated regarding fiduciary duties on which basis?
a) On the performance of individual transactions versus the S&P 500
b) Each individual transaction
c) On the performance of the entire portfolio as a whole
d) On individual transactions and the entire performance
C
There are two fiduciary standards governing the prudence of the individual investments selected by a fiduciary – the Prudent Investor Act and the Prudent Man Rule. The Prudent Investor Act, which was adopted in 1990, reflects a modern portfolio theory and total return approach to the exercise of fiduciary investment discretion. This approach allows fiduciaries to utilize modern portfolio theory to guide investment decisions and requires risk versus return analysis. Therefore, a fiduciary’s performance is measured on the performance of the entire portfolio rather than on individual investments.
26. Standard deviation is used to measure
a) Risk.
b) Time.
c) Internal rate of return.
d) Volatility.
A
Standard deviation is a quantitative descriptive statistic that measures the risk associated with price fluctuations of a given asset, such as stocks or bonds. When evaluating investments, investors should estimate both the expected return and the uncertainty of future returns. Standard deviation provides a quantified estimate of the uncertainty of future returns.
Under NASAA’s Model Regulations for Investment Advisers and Federal Covered Advisers, to which of the following clients would it be unethical for an adviser who is not a lending institution to lend money? I. A bank affiliated with the adviser; II. Another investment adviser with whom the lending adviser has no affiliation; III. A business not affiliated with the adviser whose financial statements have been audited by the adviser’s CPA.
I, II & III
I & II
I & III
II & III
D
The question asks for clients to whom it would be unethical for the adviser to lend money. An adviser who is not a lending institution may lend money to a client only if the client is an affiliate of the adviser.
29. If the expected return on assets decreases, the net present value will
a) Double.
b) Increase.
c) Decrease.
d) Remain the same.
B
Return on assets tells an investor how much profit a company generated for each $1 in assets. Often, a company will do an analysis to determine whether to invest additional capital into the purchase of a new asset. If the expected return of assets should decrease, then the net present value will increase. At a discount rate of zero, the net present value of an investment is just the total cash inflows minus the cash outflows of a project. Thus, the highest net present value will occur when the discount rate is zero. As the discount rate increases, the net present value decreases.
36. To reduce a client’s exposure to systematic risk in his stock portfolio, an adviser should consider which of the following?
a) Beta
b) Diversification
c) Standard & Poor’s and Moody’s ratings
d) Price/earnings ratios
A
Beta is a measure of a portfolio’s volatility as compared to the volatility of the overall market. Since systematic risk is risk associated with the overall market, lowering the client’s beta relative to that of the market should lower his or her exposure to market risk. Diversification, safety ratings, and price/earnings ratios should be considered when evaluating unsystematic risk, which is the risk associated with a particular issuer’s securities.
40. If interest rates in the economy go down, which of the following is true regarding outstanding bonds?
a) The current yield will be the same as the nominal yield.
b) The yield to maturity will be higher than the nominal yield.
c) The current yield will be higher than the nominal yield.
d) The yield to maturity will be lower than the nominal yield.
D
If interest rates in the economy go down, bond prices will go up in the secondary market. This causes their yields to go down. On a premium bond (one selling for more than par), the yield to maturity will be lower than both the current yield and the nominal yield.
46. If a broker/dealer firm hires an agent to sell an issuer’s new securities, the agent represents
a) The issuer.
b) FINRA.
c) The broker/dealer firm.
d) The broker/dealer firm and the issuer.
C
Although an agent may represent an issuer or a broker/dealer, if it is the broker/dealer who hires the agent to sell the securities, the agent represents the broker/dealer. An issuer who hires an agent to sell its own securities would not need to hire a broker/dealer since an agent may represent an issuer as well.
51. Assuming the same amount was invested, which type of plan would generate the most taxable income?
a) Nonqualified deferred annuity
b) Nondeductible traditional IRA
c) 403(b) tax-sheltered annuity
d) Roth IRA
C
Since all contributions to a 403(b) tax-sheltered annuity are made with before-tax dollars, the participant has a zero cost basis in the plan. Upon distribution, both the contributions and the earnings will be taxable as ordinary income. All of the other choices present in this question are funded with after-tax dollars and there are either no taxes due upon qualified distribution (Roth IRA) or only the earnings will be taxable (nonqualified deferred annuities and traditional IRAs funded with after-tax dollars).
52. The best measurement of investment performance over a period of time is
a) Holding period return.
b) Inflation-adjusted return.
c) Total return.
d) Annualized return.
D
Holding period return is the total return on an investment over a variable time period. Converting holding period return to annualized return makes rates of return easier to compare.
56. Under the Investment Advisers Act of 1940, federal covered investment advisers must amend their Form ADV each year by filing an annual updating amendment within
a) 90 days after the end of their fiscal year.
b) 60 days after the end of their fiscal year.
c) 60 days after the end of their calendar year.
d) 90 days after the end of their calendar year.
A
Federal covered advisers are those who must register with the SEC (such as those who advise mutual funds). They must renew their registration by filing an annual updating amendment with the SEC within 90 days after the end of their fiscal year. The adviser is required to send it out to investors within 120 days if there are any changes and provide a summary of the changes.
57. Under the Investment Advisers Act of 1940, charging a performance-based advisory fee is allowed for all of the following clients EXCEPT
a) Clients with $1,000,000 under the adviser’s management or a net worth of at least $2,000,000.
b) Accredited investors.
c) Registered investment companies.
d) Institutional investors with more than $1,000,000 in managed assets.
B
The SEC exemption that allows advisers to charge performance-based fees for certain clients does not extend to accredited investors, a term associated only with the private placement of securities under SEC Regulation D.
62. A client has $200,000 to invest for 2 years. During this time, the client would like to maximize returns while taking minimal risk. What should the agent recommend?
a) T-bills
b) Large-cap stocks
c) Indexed mutual funds
d) Municipal bonds
A
While common stocks and mutual funds may do well over a period of time, this investor only has money to invest for 2 years and wants minimal risk. While municipal bonds are safe, they also have low yields and without knowing the client’s tax bracket, it cannot be assumed that the client would maximize returns. In this case, it appears that T-bills would be most suitable since they are safe and short-term.
71. All of the following are liquidity ratios EXCEPT
a) Current ratio.
b) Price-to-book ratio.
c) Accounts receivable turnover ratio.
d) Inventory turnover ratio.
B
The price-to-book ratio is a valuation ratio, not a liquidity ratio.
79. An investment adviser tells their customer, “No customer has ever lost money and we don’t expect you to either.” This is
a) A prohibited guarantee against loss.
b) A permitted statement if approved by the state Administrator.
c) A permitted statement if true.
d) A prohibited guarantee of performance.
A
Under NASAA’s Model Rules regarding unethical business practices of investment advisers, investment adviser representatives, and federal covered advisers, an adviser is prohibited from guaranteeing a client that a specific result will be achieved (a gain or no loss) with the advice rendered.
86. An investor seeking growth would buy stocks with a
a) High price-to-sales ratio.
b) Low price-to-book ratio.
c) High price/earnings ratio.
d) High market price but with high earnings potential.
B
A low price-to-book ratio could mean that the stock is undervalued.
87. According to the Investment Advisers Act of 1940, which of the following is NOT an investment adviser?
a) A person paid to give advice on bank stocks
b) A publisher of a newsletter that makes securities recommendations
c) A person who receives a fee for advising others on Treasury securities
d) A lawyer who charges a separate fee for giving specific investment advice
C
The Investment Advisers Act of 1940 excludes from the definition of investment adviser anyone who advises only on government or agency securities. A lawyer who gives investment advice falls within the definition of investment adviser if he or she offers the advice as part of his or her practice and receives compensation for it. A person who is paid to give advice on bank stocks and a publisher of a newsletter that gives specific securities recommendations both fall within the definition of an investment adviser under the Act.
90. Advertising would have to be filed with the state administrator on which of the following securities?
a) Federal covered securities
b) U.S. government
c) Private placement
d) Corporate common stock
D
Advertising does not have to be filed on U.S. government securities, private placements, or federal covered securities since they are all either exempt securities or exempt transactions. However, it is best to assume that corporate stock is nonexempt.
92. On a premium bond, the yield to maturity is
a) Lower than the current yield.
b) Higher than the nominal yield.
c) Higher than the current yield.
d) The same as the coupon rate.
A
A premium bond is one that is selling in the secondary market for more than par, which means that interest rates have gone down since the bond was issued. If interest rates go down, bond prices in the secondary market go up, causing both the current yield and the yield to maturity to go down.
93. Which of the following would be a credit toward the U.S. balance of payments?
a) An increase in imports over exports
b) An increase in foreign loans
c) Repayment of debt by foreign borrowers
d) A decrease in services provided overseas
C
The U.S. balance of payments system records all of the country’s economic transactions with the rest of the world during a particular time period by using a system of debits and credits to help the country evaluate its competitive strengths and weaknesses and forecast the strength of its currency. Any transaction that causes money to flow into a country is a credit to its balance of payments account and any transaction that causes money to flow out is a debit.
99. The basis for determining the inflation-adjusted rate of return is
a) Internal rate of return.
b) The consumer price index.
c) 3-month CD rates.
d) 3-month T-bill rates.
B
Inflation-adjusted return (real return) may be found by reducing the nominal rate of return on an investment by the rate of inflation as indicated by the consumer price index (CPI).
102. Which of the following statements is correct?
a) A federal covered security must be registered at the state level.
b) Municipal bond interest appears in adjusted gross income (AGI) on a client’s federal tax return.
c) Market makers are not underwriters.
d) Advertising must be filed on exempt securities.
C
Market makers are not underwriters. Market makers are the dealer side of broker/dealer. Market makers take an inventory position in a stock in order to make the market. Market makers make money on their inventory positions. Municipal bond interest does not appear in a client’s AGI on his or her federal tax return because municipal bond interest is exempt from federal income taxes. Advertising does not have to be filed on an exempt security but must be filed on all nonexempt securities. A federal covered security is not registered at the state level; instead, it is registered federally with the SEC.
103. A 5-year certificate of deposit at the bank has which of following risks? I. Purchasing power risk; II. Interest rate risk; III. Business risk; IV. Reinvestment risk
a) I & III
b) I & IV
c) II & III
d) II & IV
B
Money in a 5-year certificate of deposit at the bank is tied up in this product for 5 years. At maturity, purchasing power risk and reinvestment risk will be present.
104. An investor bought a stock for $95 and sold it one year and one day later for $100. During the year, the investor received $3 in dividends. What was his yield?
a) 3%
b) 3.2%
c) 4%
d) 8%
B
Do not confuse yield with total return. Yield formulas are based upon earnings, not appreciation or capital gains. In this case, simply divide the annual dividends of $3 by the purchase price paid of $95 to find that the yield is about 3.2%.
107. When must an investment adviser disclose personal securities transactions to a customer? I. If the adviser makes trades that are inconsistent with their advice; II. If the adviser makes trades that take advantage of the impact caused by their recommendations; III. Whenever a personal trade is made.
a) II only
b) I, II & III
c) I only
d) I & II
D
Although advisers do not have to disclose all of their personal trades to customers, they must disclose the trades that they make that are inconsistent with their advice and trades that they make that take advantage of their recommendations.
109. An investor has $3,500 in capital gains during the year and $7,000 in unrealized losses. If she takes the losses before the end of the year, how much can be carried over to next year?
a) $500
b) $3,000
c) $3,500
d) $7,000
A
Net capital gains and capital losses dollar-for-dollar to find the final position, a $3,500 net long-term capital loss. Of this, the investor may write off (deduct) $3,000 (which is the maximum annual limit) from her other income on the tax return for the year. The remaining $500 net capital loss may be carried over and used to offset $500 in capital gains next year.
116. Which of the following does NOT meet the definition of “providing investment advice incidental to normal business practices” outlined in SEC Release IA-1092?
a) Financial planner who provides only nonspecific investment advice as part of his fee-based services but who makes specific securities recommendations to clients in his capacity as an investment representative for a broker/dealer
b) Attorney who advertises the availability of investment advice
c) Accountant who charges clients an additional fee for providing investment advice
d) Management consultant who tells a couple of small business clients who had invested their surpluses in speculative securities that they should find something less risky
D
The management consultant’s advice to clients is more personal opinion than providing investment advice as a business. In the other three choices, investment advice is offered as part of the individual’s regular business. Lawyers, accountants, engineers, and teachers are generally not considered investment advisers provided the advice is incidental to their regular profession.
124. If interest rates in the economy go up, the yields on outstanding debt will do which of the following?
a) Go up
b) Flatten
c) Go down
d) Remain unchanged
A
Remember the teeter-totter: if interest rates go up, then yields go up and price goes down. When interest rates go up, any new bond being issued at that point would have to pay a higher coupon rate.
130. A customer buys a stock for $50. One year later, the stock has gone up in value to $55. Two years later, it has dropped in value to $52. If the stock has paid $2 in dividends to the customer for each of the last 2 years, what is the total return?
a) $2
b) $4
c) $6
d) $9
C
Total return is defined as yield plus growth. Growth is also known as appreciation which can be realized or unrealized. In this question, the investor has $2 of growth (from $50 to $52) and $4 of yield (dividends), so the total return is $6. If the question asks for it as a percentage, divide $6 by $50, which is 12%.
Which of the following types of municipal bonds is backed by the full faith of the issuer?
(A) Revenue anticipation note
(B) Revenue bond
(C) General obligation bond
(D) Industrial development revenue bond
chose C
All of the following are used to measure variance EXCEPT
(A) Correlation.
(B) Standard deviation.
(C) Mean.
(D) Beta.
chose C
Which of the following is/are prohibited as funding vehicles for IRAs? I. Stocks; II. Collectibles; III. Mutual funds
(A) II & III
(B) II only
(C) III only
(D) I & III
Chose B
Which of the following statements is true?
(A) Variable annuities have higher expenses than mutual funds.
(B) Waivers are enforceable in court.
(C) A variable annuity has a guaranteed rate of return.
(D) Performance-based fees are always allowed.
Chose B
To find the holding period return, all of the following would be necessary EXCEPT the
(A) Prime rate.
(B) Sales price.
(C) Time held.
(D) Purchase price.
Chose A
A 5% Treasury note was purchased for $9,800 and is now selling for $10,200. What is its current yield?
(A) 4.75%
(B) 4.9%
(C) 5%
(D) 5.20%
Chose C
While making a presentation to a prospective client, an investment adviser representative (IAR) would like to show the client the adviser’s impressive client list. Under the NASAA Model Regulations for Investment Advisers and Federal Covered Advisers, this would be considered unethical unless: I. The adviser pays its clients a fee. II. The IAR discloses the fee to the clients. III. The adviser is required by law to do so. IV. The adviser obtains its clients’ consent.
(A) III & IV
(B) I, II, III & IV
(C) I only
(D) I & II
Chose A
A mutual fund’s 12b-1 fee is an ongoing expense of the fund paid by the fund’s
(A) Shareholders.
(B) Custodian.
(C) Underwriters.
(D) Manager.
Chose A
Which of the following would be the least appropriate funding vehicle for a 403(b) plan?
(A) Money market funds
(B) Stocks
(C) Mutual funds
(D) Annuities
Chose A
Which of the following requires timing the market?
(A) Tactical asset allocation
(B) Strategic asset allocation
(C) Buy and hold strategy
(D) Index fund
Chose A
To reduce a client’s exposure to systematic risk in his stock portfolio, an adviser should consider which of the following?
(A) Price/earnings ratios
(B) Beta
(C) Diversification
(D) Standard & Poor’s and Moody’s ratings
CHOSE C
Under NASAA’s Model Rules on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, all are prohibited actions EXCEPT
(A) Failing to disclose any material conflicts of interest.
(B) Placing an order to buy or sell a security for the account of a client upon the instruction of a third party who was previously granted written third-party trading authorization.
(C) Disclosing the identity, affairs, or investments of a client without his or her consent.
(D) Providing a research report to a client that was prepared by someone else without disclosing that fact.
CHOSE D
What is the official designation of the person or agency that enforces the Uniform Securities Act in each state?
(A) Transfer agent
(B) Registrar
(C) Issuer
(D) Administrator
CHOSE D
Participants in traditional IRAs must begin taking distributions no later than
(A) Age requirements no longer apply to IRA distributions.
(B) Age 59 ½.
(C) Age 62.
(D) April 1st of the year after they turn age 70 ½.
CHOSE D
An intrastate offering is exempt from which of the following?
(A) Blue-sky registration
(B) All registration
(C) Federal registration
(D) State registration
CHOSE C
What type of retirement plan requires employer contributions?
(A) Nonqualified
(B) Defined contribution
(C) Deferred compensation
(D) Defined benefit
CHOSE D
Define a DEFINED BENEFIT PLAN
Defined-Benefit Plans
Employers guarantee a specific retirement benefit amount for each participant in a defined-benefit plan. The amount is based on factors such as the employee’s salary and years of service.
Employees have little control over the funds until they are received in retirement. The company takes responsibility for the investment and for its distribution to the retired employee.
That means the employer bears the risk that the returns on the investment will not cover the defined-benefit amount due to the retired employee.
Because of this risk, defined-benefit plans require complex actuarial projections and insurance for guarantees, making the costs of administration very high.
This has made defined-benefit plans all but obsolete.
Define a DEFINED-CONTRIBUTION PLAN
Defined-contribution plans are funded primarily by the employee, called “the participant,” with the employer matching contributions to a certain amount.
The most common type of defined-contribution plan is the 401(k) plan. Participants may elect to defer a portion of their gross salary via a pre-tax payroll deduction to the plan, and the company may match the contribution up to a limit it sets.
The contributions are invested, at the participant’s direction, in select mutual funds, money market funds, annuities, or individual stocks offered by the plan.
As the employer has no obligation toward the account’s performance after the funds are deposited, these plans require little work and are low risk to the employer. The employee is responsible for directing the contributions and investments.
Which of the following cannot be found on a client’s cash flow statement?
(A) Expenses
(B) Assets
(C) Dividends
(D) Interest
CHOSE B
A variable annuity offers the deferral of which of the following? I. Income taxes; II. Social Security taxes; III. Unemployment taxes; IV. Medicare taxes
(A) I only
(B) III only
(C) II & IV
(D) I, II, III & IV
CHOSE A
Under NASAA’s Model Rules concerning the unethical business practices of investment advisers, investment adviser representatives, and federal covered advisers, when can an adviser borrow money from a client? I. When the client is affiliated with the investment adviser; I. When the client is a financial institution in the business of loaning money; III. When the client is a broker/dealer firm; IV. Under no circumstances
(A) I, II & III
(B) IV only
(C) I only
(D) II & III
CHOSE A
In which of the following situations must the IA register with the SEC?
(A) The IA manages the investment portfolio of an insurance company.
(B) The IA manages the investment portfolio of an investment company.
(C) The IA manages $27,000,000 in assets.
(D) The IA manages $20,000,000 in assets.
CHOSE B
Which of the following is actively traded on exchanges?
(A) Shares of an open-end investment company
(B) Series EE savings bonds
(C) Shares of a closed-end investment company
(D) Limited partnership units
CHOSE C
How is gross profit margin calculated?
(A) Assets minus liabilities
(B) Gross revenue minus cost of goods sold
(C) Gross revenue minus administrative expenses
(D) Gross revenue minus taxes
CHOSE B
The main risk on investment grade corporate bonds is
(A) Inflation.
(B) Regulatory.
(C) Liquidity.
(D) Business.
CHOSE A
It is important to read the footnotes on a corporate balance sheet because they may show undisclosed liabilities in the form of all of the following EXCEPT
(A) Stock options granted to officers and employees.
(B) Retained earnings.
(C) Current and deferred income taxes.
(D) Underfunded pension plans.
CHOSE D
A company has 50 employees whose average age is 27. The retirement plans offer 12 different equity choices. Under Section 404(c) of ERISA, which of the following statements is true?
(A) The employees must be allowed to change their investment allocations annually.
(B) This plan is adequately diversified.
(C) The plan must also include a fixed income choice and money market choice.
(D) The plan does not have to educate the employees.
CHOSE B
Which of the following is considered to be an offer or sale under the Uniform Securities Act (USA)?
(A) A gift of stock as a bonus for purchasing another security
(B) Securities reissued as a result of a business reorganization
(C) Securities issued as a result of a shareholder approved merger
(D) Using stock as collateral for a loan
CHOSE A
A lawyer calls an investment adviser representative to place a trade for a client who is in a coma. In this scenario, the representative should do which of the following?
(A) Make sure that the lawyer represents the client
(B) Make sure that the lawyer has a power of attorney from the client
(C) Process the trade
(D) Refer the matter to a registered principal
CHOSE B (BUT KNOW ITS D)
Which type of portfolio would be considered to be most volatile?
(A) 75% stocks, 25% bonds
(B) 50% stocks, 50% bonds
(C) 5% stocks, 95% bonds
(D) 90% stocks, 10% bonds
CHOSE D
Under the Uniform Securities Act, both exempt securities and exempt transactions are exempt from all of the following EXCEPT
(A) Notice filing requirements.
(B) Anti-fraud rules.
(C) Advertising filing requirements.
(D) Registration.
CHOSE B
Who is responsible for managing the assets in a trust?
(A) Beneficiary
(B) Donor
(C) Grantor
(D) Trustee
CHOSE D
Which of the following is correct about a Roth IRA?
(A) Contributions are tax deferred.
(B) The investor does not have to begin withdrawals at age 70 ½.
(C) The investor must stop contributions at age 70 ½.
(D) Anyone can contribute.
CHOSE B
A nonresident investment adviser with no office in this state would not have to register if they advise any of the following EXCEPT
(A) Broker/dealers.
(B) Mutual funds.
(C) Employees of state government.
(D) Other investment advisers.
CHOSE C
Under the Uniform Securities Act (USA), an investment adviser representative (IAR) is a person who engages in any of the following EXCEPT
(A) Trains other IARs.
(B) Manages client portfolios.
(C) Supervises other IARs.
(D) Renders advice regarding securities.
CHOSE A
Which of the following types of investments has the greatest amount of interest rate risk?
(A) Preferred stock
(B) Zero-coupon bonds
(C) Common stock
(D) Debentures
CHOSE B
Which type of analyst would be concerned with the statement of cash flows?
(A) Quantitative
(B) Historical
(C) Fundamental
(D) Technical
CHOSE C
A buy and hold portfolio strategy offers all of the following advantages over a rebalancing strategy EXCEPT
(A) Less time is spent on portfolio management.
(B) Lower transaction costs.
(C) The equity portion of the portfolio will outperform the bond portion over time.
(D) It meets the changing needs of the investor.
CHOSE D
An investment adviser must give the adviser’s disclosure document (brochure) to which of the following?
(A) Only to clients who enter into substantially revised contracts
(B) All new and prospective clients
(C) All new clients, but never to existing clients
(D) Only to clients who contract for impersonal advisory services
CHOSE B
An index mutual fund is which of the following?
(A) Allocated
(B) Passive
(C) Active
(D) Guaranteed
CHOSE B
An investment advisory firm may execute a discretionary trade for a new client as long as it receives written discretionary authority from the client
(A) No later than the trade date.
(B) Within 10 days of the trade.
(C) No later than the settlement date.
(D) In advance of the trade.
CHOSE B
Which of the following would appear on a client’s income statement?
(A) Liabilities
(B) Assets
(C) Dividends
(D) Net worth
CHOSE C
A market maker is quoting a stock in the OTC market 35–36. A customer who wants to sell her stock will receive
(A) 34.5.
(B) 35.
(C) 35.5.
(D) 36.
CHOSE B
On a discount bond, which of the following yields will be the highest?
(A) Nominal
(B) Coupon
(C) Current
(D) Yield to Maturity (YTM)
CHOSE D
What trades in the foreign exchange market?
(A) ADRs
(B) REITs
(C) Foreign stocks
(D) Currencies
CHOSE D
An Administrator acting under the Uniform Securities Act must do which of the following before taking any disciplinary action with regard to a registrant? I. Cite a cause listed in the act; II. Obtain the approval of the appropriate state court; III. Find that the action is in the public interest.
(A) II & III
(B) I, II & III
(C) I & II
(D) I & III
CHOSE D
Under the Investment Advisers Act of 1940, when may an investment adviser use a testimonial from a celebrity who uses the adviser’s services?
(A) Only if no compensation is made to the celebrity
(B) Only if the celebrity is compensated adequately
(C) Only if the celebrity agrees in writing
(D) Under no circumstances
CHOSE D
When can money be withdrawn from an IRA under age 59 ½ without penalty?
(A) With permission of the IRS
(B) To make a gift to a child
(C) College tuition
(D) Annuitization of 3 years or more
chose C
The passive approach to investing is best illustrated by which of the following?
(A) A mutual fund manager who attempts to duplicate the performance of the S&P 500 index
(B) A mutual fund manager who buys growth stocks in an attempt to generate capital gains
(C) A mutual fund manager who engages in market timing
(D) A mutual fund manager who utilizes technical analysis
chose A
Assuming the same amount was invested, which type of plan would generate the most taxable income?
(A) Nonqualified deferred annuity
(B) Nondeductible traditional IRA
(C) 403(b) tax-sheltered annuity
(D) Roth IRA
chose C
An order to buy or sell a security as soon as possible at the best available price is known as a
(A) Stop order.
(B) Limit order.
(C) Stop/limit order.
(D) Market order.
chose D
Under the Uniform Securities Act, except for actions taken under summary process, the Administrator may not deny an application, suspend a registration, or impose a civil penalty on a registrant or applicant unless: I. Appropriate notice is given to the applicant or registrant. II. The applicant or registrant is given an opportunity for a hearing. III. Findings of fact and conclusions of law are in a record. IV. The registrant or applicant pleads guilty to all charges.
(A) II & III
(B) I, II & III
(C) I, II, III & IV
(D) I & II
chose B
An investor seeking growth would buy stocks with a
(A) High market price but with high earnings potential.
(B) High price-to-sales ratio.
(C) Low price-to-book ratio.
(D) High price/earnings ratio.
chose C
Under SEC Regulation D, which of the following is NOT considered to be an accredited investor?
(A) Banks
(B) Insurance companies
(C) Individuals with a net worth of $1 million or income in excess of $200,000
(D) Investment advisers
chose D
Under Prudent Man rules, an investment adviser would be evaluated related to fiduciary duties in which of the following ways?
(A) On individual transactions and the entire performance
(B) On the performance of individual transactions versus the S&P 500
(C) Each individual transaction
(D) On the performance of the entire portfolio as a whole
CHOSE D
At age 61, an investor has contributed a total of $20,000 to his Roth IRA over the past 5 years and now has an account value of $35,000. If he takes a partial withdrawal of $10,000, what are his tax implications?
(A) $10,000 taxed as capital gain
(B) $10,000 taxed as ordinary income plus a 10% premature distribution penalty
(C) None
(D) $10,000 taxed as ordinary income
CHOSE C
Which of the following is/are systematic risks? I. Market risk; II. Interest Rate risk; III. Inflationary risk; IV. Business risk
(A) IV only
(B) I, II & III
(C) II only
(D) I & II
chose B
Which of the following has the least exposure to inflation risk?
(A) Fixed-annuity
(B) Common stock
(C) Preferred stock
(D) Cash
CHOSE B
The basis for determining the inflation-adjusted rate of return is
(A) 3-month T-bill rates.
(B) Internal rate of return.
(C) The consumer price index.
(D) 3-month CD rates.
CHOSE C
When selling securities in an offering, a broker/dealer could make which of the following statements to a prospective customer?
(A) The number of shares available is limited.
(B) If these securities do not rise in value, the firm will make up your losses.
(C) These securities are sure to rise in value.
(D) New research enhances the value of these securities.
CHOSE A
If the U.S. dollar is strong, the trade deficit will do which of the following?
(A) Decrease
(B) Remain unchanged
(C) Double
(D) Increase
CHOSE D
A wealthy client has an investment objective of income. With discretionary authority over this account, the investment adviser representative (IAR) elected to purchase $25,000 worth of noninterest-bearing bonds on behalf of the client. The IAR may be guilty of
(A) Making an unsuitable trade.
(B) Deliberately failing to follow a customer’s instructions.
(C) Effecting transactions without the customer’s authority to do so.
(D) Making an unauthorized trade.
CHOSE A
Which federal law primarily regulates the activities of exchanges, transfer agents, broker/dealers, and registered representatives?
(A) Investment Advisers Act of 1940
(B) Investment Company Act of 1940
(C) Securities Act of 1933
(D) Securities Exchange Act of 1934
CHOSE D
Who sets the prime rate?
(A) The Chairman of the Federal Reserve Board
(B) The Securities and Exchange Commission
(C) The banks
(D) The Federal Open Market Committee
CHOSE D
All of the following are liquidity ratios EXCEPT
(A) Inventory turnover ratio.
(B) Current ratio.
(C) Price-to-book ratio.
(D) Accounts receivable turnover ratio.
CHOSE C
Which of the following will include a company’s gross margin?
(A) Form 10K
(B) Income statement
(C) Statement of cash flow
(D) Balance sheet
chose C
Any disciplinary action taken by the Administrator under the Uniform Securities Act (USA) must follow which of the following procedures provided under the Act? I. Provision for a hearing on the action after receipt of a written request for a hearing; II. Provision that a written order describing the violation be sent to the party involved in the dispute prior to any action being taken by the Administrator; III. Prompt notification to the applicant of the action taken; IV. Prompt notification to the applicant’s employer if the action concerns an investment adviser representative.
(A) III & IV only
(B) I, II, III & IV
(C) I & II only
(D) II & III only
CHOSE A
Which of the following Acts requires full disclosure of all material information about securities offered for the first time to the public?
(A) Trust Indenture Act of 1939
(B) Securities Investor Protection Act of 1970
(C) Securities Act of 1933
(D) Securities Exchange Act of 1934
CHOSE C
On a variable annuity, the rate of return
(A) Depends upon the performance of the insurer’s underlying general account investments.
(B) Is guaranteed by the insurer to be no less than the assumed investment rate illustrated in the contract.
(C) Depends upon the performance of the separate accounts selected by the client.
(D) Is guaranteed by the Federal Deposit Insurance Corporation (FDIC).
CHOSE C
Which of the following has the least exposure to inflation risk?
(A) Common stock
(B) Bonds
(C) Preferred stock
(D) Fixed annuities
CHOSE A
If a retirement plan automatically enrolls employees, which of the following must be done in order to limit a fiduciary’s liability for any plan losses that are a result of automatically investing participant contributions in certain default investments? I. There are only four types of allowable default investments. II. An initial notice and an annual notice must be sent to plan participants. III. Participants must also have the opportunity to direct their investments to a broad range of other options. IV. Education materials must be provided.
(A) I & III
(B) I, II, III & IV
(C) II & IV
(D) IV only
CHOSE B
An IAR meets with a representative of his firm’s research department who discloses that the firm is going to publish a very favorable research report and buy recommendation on a particular stock to all of the firm’s customers tomorrow. The IAR
(A) Should buy call options on the stock today in his own account.
(B) Cannot trade ahead of a research report.
(C) Should buy the stock today for his own account.
(D) Should buy the stock today for his discretionary accounts.
chose B
The broadest stock index is
(A) Standard & Poor’s 500.
(B) Russell 2000.
(C) Wilshire 5000.
(D) Dow Jones Industrial Average.
CHOSE C
A company’s balance sheet states the following: Assets: Cash $1,000; Accounts receivable $2,000; Equipment $7,000 Liabilities: Payroll $750; Accounts payable $1,250; Bond debt $3,000. What is the company’s working capital?
(A) $250
(B) $1,000
(C) $4,000
(D) $5,000
CHOSE B
If interest rates in the economy go up, the yields on outstanding debt will do which of the following?
(A) Go up
(B) Flatten
(C) Go down
(D) Remain unchanged
CHOSE C
A 55-year-old invested $10,000 in a nonqualified annuity several years ago. Due to earnings in the account, the balance is now $25,000. If she withdraws $5,000 in cash, what are the tax implications?
(A) $5,000 will be taxable as long-term capital gain.
(B) $5,000 will be taxable as ordinary income.
(C) $5,000 will be taxable as ordinary income in addition to a $500 IRS penalty.
(D) None, since this amount is below the $10,000 cost basis.
CHOSE A
Younger investors with longer time horizons are more likely to accept
(A) Less risk.
(B) More risk.
(C) No risk.
(D) Moderate risk.
CHOSE B
A consolidation pattern shows a stock price moving which way?
(A) Down
(B) As bearish
(C) As bullish
(D) Sideways
CHOSE D
What is the primary reason that a corporation would rather issue stock than bonds?
(A) The corporation never has any obligation to repay the stockholder.
(B) A stockholder has no voting rights as bondholders do.
(C) A bondholder has a residual claim on assets.
(D) The dividends paid to stockholders are tax deductible.
chose C
Which of the following trades at a price unrelated to its NAV per share?
(A) Limited partnership units
(B) Open-end mutual fund
(C) Closed-end fund
(D) Diversified open-end fund
CHOSE A
The Prudent Investor Act is directed primarily toward which of the following?
(A) An IA of a mutual fund
(B) The trust’s CPA
(C) The money manager of a pension plan
(D) A trustee of a trust
CHOSE C
A famous athlete offers to record a testimonial for an investment adviser for use in a television commercial. Under the Uniform Securities Act, the investment adviser may
(A) Use the testimonial with the approval of the state administrator.
(B) Not use the testimonial under any circumstances.
(C) Use the testimonial as long as the athlete receives no compensation.
(D) Use the testimonial and may pay the athlete.
CHOSE B
Under the Investment Advisers Act of 1940, which of the following statements is true about a broker/dealer (B/D) that charges a wrap fee to customers as a standard business practice?
(A) The B/D is not required to register as an investment adviser unless specifically required to do so by the Administrator.
(B) The B/D must register as an investment adviser because the wrap fee includes a separate charge for investment advisory services and the transaction.
(C) The B/D has committed a prohibited practice: broker/dealers are not permitted to charge wrap fees under the Investment Advisers Act of 1940.
(D) The B/D is not subject to registration as an investment adviser.
chose B
What is the purpose of looking at a stock’s moving average as opposed to just looking at its actual price?
(A) To predict the future
(B) To define the trend and recognize changes in the trend
(C) To determine whether the stock is a good buy
(D) To time the market
CHOSE B
Investing without regard to high or low values of the stock during the year is a characteristic of
(A) Fundamental investing.
(B) Indexing.
(C) Passive investing.
(D) Technical investing.
CHOSE A
A valuation ratio that can be found by dividing a stock’s current market price by its book value is known as
(A) Benchmark ratio.
(B) Price/earnings ratio.
(C) Standard deviation.
(D) Price/book ratio.
CHOSE D
Which of the following is a direct obligation of the federal government?
(A) American Depositary Receipts (ADRs)
(B) Fannie Mae bonds
(C) General obligation bonds
(D) Ginnie Mae bonds
CHOSE D
4. Which of the following statements is true?
a) Variable annuities have higher expenses than mutual funds.
b) Waivers are enforceable in court.
c) A variable annuity has a guaranteed rate of return.
d) Performance-based fees are always allowed.
A
It is true that variable annuities have higher expenses than mutual funds. Variable annuities do not have a guaranteed rate of return. Performance-based fees are generally prohibited. Waivers are unenforceable in court.
6. A 5% Treasury note was purchased for $9,800 and is now selling for $10,200. What is its current yield?
a) 4.75%
b) 4.9%
c) 5%
d) 5.20%
B
The par value of this T-note is $10,000. With a 5% nominal interest rate, it will pay $500 a year in interest. Since current yield measures what the note will yield an investor who buys it today, the $500 interest that it will pay must be divided by its present market price of $10,200, which is 4.9%. Because the note is trading at a premium, the current yield will be less than the nominal yield. It is trading at a premium because interest rates in the economy must have gone down slightly since the note was issued.
11. To reduce a client’s exposure to systematic risk in his stock portfolio, an adviser should consider which of the following?
a) Price/earnings ratios
b) Beta
c) Diversification
d) Standard & Poor’s and Moody’s ratings
B
Beta is a measure of a portfolio’s volatility as compared to the volatility of the overall market. Since systematic risk is risk associated with the overall market, lowering the client’s beta relative to that of the market should lower his or her exposure to market risk. Diversification, safety ratings, and price/earnings ratios should be considered when evaluating unsystematic risk, which is the risk associated with a particular issuer’s securities.
12. Under NASAA’s Model Rules on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers, all are prohibited actions EXCEPT
a) Failing to disclose any material conflicts of interest.
b) Placing an order to buy or sell a security for the account of a client upon the instruction of a third party who was previously granted written third-party trading authorization.
c) Disclosing the identity, affairs, or investments of a client without his or her consent.
d) Providing a research report to a client that was prepared by someone else without disclosing that fact.
B
An adviser may never take orders from someone other than his or her customer unless that party has been granted written third-party trading authority in advance of the trade.
24. It is important to read the footnotes on a corporate balance sheet because they may show undisclosed liabilities in the form of all of the following EXCEPT
a) Stock options granted to officers and employees.
b) Retained earnings.
c) Current and deferred income taxes.
d) Underfunded pension plans.
B
Although corporate retained earnings or undistributed net income is shown on the balance sheet as a component of stockholders’ equity, retained earnings are not reflected in the footnotes and are not a liability. Stockholders’ equity is also known as net worth and is what the shareholders would receive if the company were liquidated.
25. A company has 50 employees whose average age is 27. The retirement plans offer 12 different equity choices. Under Section 404(c) of ERISA, which of the following statements is true?
a) The employees must be allowed to change their investment allocations annually.
b) This plan is adequately diversified.
c) The plan must also include a fixed income choice and money market choice.
d) The plan does not have to educate the employees.
C
Under Section 404(c) of ERISA, the retirement plan must offer at minimum three different investment choices. These choices must be different in risk and reward possibilities. Although 12 equity choices is a broad number of choices, they are all equity choices. The plan must also offer a fixed income choice as well as a money market choice. In this way, three different risk categories are covered — equity is the highest risk, bond fund below that, and money market fund as the least risky.
53. Under Prudent Man rules, an investment adviser would be evaluated related to fiduciary duties in which of the following ways?
a) On individual transactions and the entire performance
b) On the performance of individual transactions versus the S&P 500
c) Each individual transaction
d) On the performance of the entire portfolio as a whole
C
The Prudent Man Rule requires that each investment be judged on its own merits. Thus, a fiduciary could be held liable for a loss in one investment which, when viewed in isolation, may have been imprudent at the time it was acquired but as a part of a total investment strategy, was a prudent investment in the context of the investment portfolio taken as a whole.
62. Who sets the prime rate?
a) The Chairman of the Federal Reserve Board
b) The Securities and Exchange Commission
c) The banks
d) The Federal Open Market Committee
C
The prime rate is the interest rate that banks set for their best commercial customers.
65. Any disciplinary action taken by the Administrator under the Uniform Securities Act (USA) must follow which of the following procedures provided under the Act? I. Provision for a hearing on the action after receipt of a written request for a hearing; II. Provision that a written order describing the violation be sent to the party involved in the dispute prior to any action being taken by the Administrator; III. Prompt notification to the applicant of the action taken; IV. Prompt notification to the applicant’s employer if the action concerns an investment adviser representative.
a) III & IV only
b) I, II, III & IV
c) I & II only
d) II & III only
B
The USA requires that the Administrator follow these procedures when intending to take disciplinary action against someone registered in the state.
73. If interest rates in the economy go up, the yields on outstanding debt will do which of the following?
a) Go up
b) Flatten
c) Go down
d) Remain unchanged
A
Remember the teeter-totter: if interest rates go up, then yields go up and price goes down. When interest rates go up, any new bond being issued at that point would have to pay a higher coupon rate.
74. A 55-year-old invested $10,000 in a nonqualified annuity several years ago. Due to earnings in the account, the balance is now $25,000. If she withdraws $5,000 in cash, what are the tax implications?
a) $5,000 will be taxable as long-term capital gain.
b) $5,000 will be taxable as ordinary income.
c) $5,000 will be taxable as ordinary income in addition to a $500 IRS penalty.
d) None, since this amount is below the $10,000 cost basis.
C
Tax rules state that the partial withdrawal of annuity funds is taxed as interest first and principal last. Although the $5,000 withdrawal is less than the cost basis, the entire $5,000 is taxable as ordinary income and is subject to the IRS 10% premature distribution penalty since she is less than age 59 ½.
77. What is the primary reason that a corporation would rather issue stock than bonds?
a) The corporation never has any obligation to repay the stockholder.
b) A stockholder has no voting rights as bondholders do.
c) A bondholder has a residual claim on assets.
d) The dividends paid to stockholders are tax deductible.
A
When a corporation issues debt (bonds), they are borrowing money. The money that is borrowed must be paid back. When the bond reaches maturity (typically in 30 years), the corporation pays the bondholder back the principal amount ($1,000). When a corporation issues shares of stock (equity), it is selling pieces of ownership. The corporation does not owe the shareholder any money. Some corporations will pay dividends to shareholders, but they are never under any obligation to do so. Dividends paid to stockholders are taxable to the stockholder. As an owner of the corporation, the stockholder has voting rights.
78. Which of the following trades at a price unrelated to its NAV per share?
a) Limited partnership units
b) Open-end mutual fund
c) Closed-end fund
d) Diversified open-end fund
C
Open-end mutual funds are not traded in the secondary market. Open-end funds are sold at their asking price and redeemed at their NAV per share. Closed-end mutual funds, on the other hand, trade in the secondary market at a price based upon supply and demand. The closed-end mutual fund share may be trading above or below its net asset value per share.
79. The Prudent Investor Act is directed primarily toward which of the following?
a) An IA of a mutual fund
b) The trust’s CPA
c) The money manager of a pension plan
d) A trustee of a trust
D
The Uniform Prudent Investor Act is centrally concerned with the investment responsibilities arising under the private gratuitous trust, which is the common vehicle for conditioned wealth transfer within the family. Nevertheless, the prudent investor rule also bears on charitable and pension trusts, among others.
