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
