You are viewing 2 securities to place in a client's portfolio. Security A has an expected return of 12%, and Security B has an expected return of 16%. If you were to place 25% of the portfolio into Security A with the balance going into Security B, the pr
D) 15%
If a customer's chief concern is to shelter as much of his portfolio earnings from tax as possible, which of the following securities would be most suitable?
A) Money market instruments
B) Municipal GOs
C) Treasury receipts
D) High-yield bonds
B) Municipal GOs
The interest on municipal GOs is exempt from federal income tax and perhaps state income tax, depending on the investor's residency.
U19LO5
A 61-year-old wanting to take a lump-sum distribution from his Keogh will
A) incur a 50% penalty tax
B) be taxed at long-term capital gains rates
C) incur a 10% penalty tax
D) be taxed at ordinary income rates
D) be taxed at ordinary income rates
The distribution described here would be taxed as ordinary income.
A 10% penalty tax would apply if the individual were under age 59�.
U24LO2
All of the following are characteristics typical of a money market fund EXCEPT
A) its net asset value normally remains unchanged
B) it has a high beta and is safest in periods of low market volatility
C) it is offered as a no-load investment
D) the underl
B) it has a high beta and is safest in periods of low market volatility
A money market fund has almost no price volatility, because the underlying portfolio consists of low-beta instruments, and the fund is deliberately managed for low beta (see the Gloss
Margin is borrowing money from a broker-dealer to buy a stock using the investment as collateral. In many cases, the brokerage firm then uses that collateral for a loan from a bank. Which of the following account documents authorizes the firm to pledge th
D) The hypothecation agreement
The hypothecation agreement gives permission to the broker-dealer to pledge a customer's margin securities as collateral. The firm hypothecates customer securities to the bank, and the bank loans money to the broker-dealer o
An investor owns a common stock that has been paying a dividend at an annual rate of $2.00. If the investor buys 100 shares of the stock at $50 and sells it 3 months later for $52, the approximate annualized rate of return is
A) 4%
B) 5%
C) 12%
D) 20%
D) 20%
Annualized rate of return is computed by taking the investor's total return and annualizing it.
In this case, the investor had $2 of appreciation and $0.50 (1 quarter) in dividends. Total return of $2.50 divided by the $50 cost is 5%. But, that is
Which of the following would NOT be considered evidence of custody of a client's funds or securities?
A) The investment adviser has discretionary authority over the client's account.
B) The adviser writes checks on the client's account to pay for client's
A) The investment adviser has discretionary authority over the client's account.
"Custody" means possession (even temporary possession) of a client's funds or securities.
It includes authority over a client's bank account for any type of disbursement, but
All of the following statements concerning the EMH are correct EXCEPT
A) the weak form of market efficiency involves market data, whereas the semi-strong and strong form involves the assimilation of all public and private information, respectively.
B) inv
B) investors usually react slowly to new and random information pertaining to all currently available security market information.
The efficient market hypothesis (EMH) posits that an efficient market is one in which the prices of securities quickly and f
An investment adviser whose primary business is the rendering of investment advice providing investment supervisory services is entitled to use the term
A) investment counsel
B) financial planner
C) pension consultant
D) senior adviser
A) investment counsel
The term investment counsel may only be used by those advisers whose primary function is the rendering of investment advice with individual continuous monitoring of the accounts.
U1LO1
You have a 45-year-old client wishing to save for retirement. The client does not have a great deal of investment sophistication and inquires about the risks you have exposed him to by placing the majority of his portfolio in listed common stocks. You wou
B) liquidity risk
A portfolio of listed common stocks will have little to no liquidity risk because listed shares are easily traded. Even though common stock tends to offer protection against inflation, there is no assurance that the portfolio will keep p
Which of the following is NOT correct regarding the capital asset pricing model (CAPM)?
A) The stock risk premium is the inducement necessary to entice the individual to invest in a particular stock.
B) CAPM does not consider unsystematic risk.
C) The mar
D) CAPM uses standard deviation as a measure of market risk.
CAPM accounts for the impact of systematic risk (as measured by beta) only and does not take into consideration unsystematic risk, which is assumed to have been diversified away.
U20LO8
A portfolio manager who is engaging in rebalancing on a semiannual basis is most likely using which portfolio management style?
A) Buy and hold
B) Strategic asset allocation
C) Tactical asset allocation
D) Active asset allocation
B) Strategic asset allocation
At least annually, and sometimes more frequently, a portfolio manager who follows strategic asset allocation will examine the relative proportion of the selected asset classes and, based on market performance, rebalance the p
Which of the following statements about balance sheets are TRUE?
I. Balance sheets provide a snapshot of a company's financial position on a given date.
II. Balance sheets represent the relationship between a company's assets, liabilities, and stockholder
C) I and II
A balance sheet shows a company's assets, liabilities, and stockholders' equity on a specific date. The financial statement that reflects a company's operating activities and earnings over a period of time is the income statement.
U9LO1
Which of the following would be considered unethical under the NASAA Model Rule on Unethical Business Practices of Investment Advisers, Investment Adviser Representatives, and Federal Covered Advisers?
A) An investment adviser representative receives an o
C) A loan is made to an investment adviser representative by one of her clients who happens to be the chief loan officer where she maintains her principal banking relationship.
It is an unethical and prohibited business practice for investment advisers an
Long Range Planning (LRP) is a covered investment adviser doing business in all 50 states. Fred Fergus is an IAR with LRP and splits his time between an office in State A and State D. Fred has retail clients as follows:
16 clients in State A
12 clients in
B) States A and D
In the Investment Advisers Act of 1940, it states that "no law of any State requiring the registration, licensing, or qualification as an investment adviser or supervised person of an investment adviser shall apply to any person that is
A registered investment adviser has been investigated by the Administrator for fraudulent misrepresentations purportedly made to several clients. If the IA is found to have been in violation of the Uniform Securities Act, this may result in
I. a $10,000 f
B) II and IV
The Administrator may appoint a receiver over the investment adviser's assets and require the IA to make restitution to the victim.
The maximum fine for a violation of the USA is $5,000, and the maximum prison term is 3 years.
U5LO4
Which of the following are features of Class C mutual fund shares?
I. Typically charge no front-end load
II. Typically charge a front-end load
III. Typically impose lower CDSCs than Class B shares for a shorter period
IV. Typically convert to Class A shar
B) I and III
Class C shares generally have the following features: no front-end sales charge, lower CDSCs than Class B shares for a shorter period, and no conversion to Class A shares regardless of how long they are held. Because of these features, Class
Savant Investment Managers (SIM) has a client with a long position in PQR common stock. The position has an average cost per share of $30, and with PQR currently selling at $50 per share, the client is interested in a method that will allow her to protect
A) entering a sell stop order at $45.
Sell stop orders, commonly called "stop loss" orders, are designed to halt a loss or protect a gain. These are sell orders placed below the current market that become triggered if it happens that the stock should trad
Which of the following analyze corporate financial statements and trends in sales and income?
A) Fundamentalists
B) Chartists
C) Technicians
D) Market timers
A) Fundamentalists
Fundamental analysts obtain information from corporate financial statements, as well as other relevant sources. Technical analysts review market charts, while fundamental analysts are concerned with the earnings ability of corporations
If a federal covered adviser's fiscal year ends on October 31, 2017, it must file its annual updating amendment to its Form ADV no later than
A) March 30, 2018
B) February 28, 2018
C) January 29, 2018
D) December 31, 2017
C) January 29, 2018
The annual updating amendment to Form ADV must be filed within 90 days of the adviser's fiscal-year end.
U1LO5
An investment adviser should develop an investment policy based on the needs and objectives of the client. When the client is a business entity structured as a general partnership, the investment policy would have to consider
A) the mean requirement of th
B) the objectives of all the partners on a collective basis
Because all income and gains pass through to the partners, and because there is unlimited personal liability for all general partners, we must examine the objectives of each of them to determine
Which of the following statements regarding an agent's registration is most accurate?
A) If the broker-dealer with which that agent is registered should have its registration revoked, the agent may continue to do business only with existing clients and ma
B) Revocation of the registration of that agent's broker-dealer will result in cancellation of that agent's effective registration.
The registration of an agent is not effective during any period when he is not associated with a particular broker-dealer r
Which of the following would be of least interest to a chartist?
A) The advance/decline line
B) The relationship between the current market price of an issuer's common stock and most recently reported earnings per share
C) The volume of shares traded duri
B) The relationship between the current market price of an issuer's common stock and most recently reported earnings per share
A chartist is interested in the volume of shares traded, and the short interest for that particular stock. The advance/decline l
If general interest rates increase, the interest income of a bond unit investment trust (UIT) will probably:
A) change as soon as the portfolio manager can take advantage of the higher rates now available in the marketplace
B) increase
C) remain the same
C) remain the same
Because the portfolio of a UIT is fixed, the income generated by that portfolio will not change.
Remember, a UIT does not have a portfolio manager.
U14LO7
Knowing the average maturities would be most important when doing a cash flow analysis on
A) REITs
B) mortgage-backed securities
C) common stock
D) preferred stock
B) mortgage-backed securities
Mortgage-backed pass-through securities pass through interest and principal payments to their investors. The rate at which the cash flows are generated depends, among other things, on the rate at which the mortgages mature.
U
Which of the following statements under the Investment Company Act of 1940 is TRUE?
A) Mutual funds must file semiannual reports with the SEC.
B) Mutual funds furnish financial reports to shareholders at least annually.
C) Holding companies are not includ
C) Holding companies are not included in the definition of an investment company.
The Act lists three different types of investment companies:
1. face-amount certificate companies,
2. unit investment trusts (UIT's) and
3. management companies.
Holding com
Which of the following would NOT constitute custody of a client's account under the Investment Advisers Act of 1940?
I. Client prepayment of $1,000 of advisory fees, 6 months in advance
II. Having temporary custody of a client's securities
III. Depositing
D) I only
"Custody" means possession (even temporarily) of a client's funds or securities. It includes authority over a client's bank account for any type of disbursement, but it does not include the acceptance by the adviser of prepaid advisory fees.
U7L
The Uniform Securities Act contains a number of security exemptions. The Act empowers the Administrator to revoke the exemption for which of the following?
I. Any security listed or approved for listing upon notice of issuance on the Nasdaq Stock Market;
C) II and III
Under the USA, the Administrator can revoke any transaction exemption, except those involving federal covered securities. When it comes to revoking a security's exemption, the only 2 where the Administrator has to power to do so are those is
Ineligible investments in an IRA would include all of the following EXCEPT
A) cash value life insurance
B) stamps
C) American Silver Eagles
D) Kruggerands
C) American Silver Eagles
A limited group of coins, especially the "eagles" minted by the U.S. Treasury Department, are eligible for investment in an IRA.
The South African Gold Krugerrand is the world's first modern bullion gold coin and remains one of t
The present value of a dollar
A) is the amount of goods and services it will buy in the future at today's rate price level
B) cannot be calculated without knowing the level of inflation
C) indicates how much must be invested today at a given interest rate
C) indicates how much must be invested today at a given interest rate, to equal a specific cash value in the future
The present value of a dollar will indicate how much must be invested today at a given interest rate, to equal a cash amount required in th
If you had expectations of high inflation, you would
A) increase equity exposure and reduce fixed income exposure
B) increase fixed-income exposure and reduce tangible asset exposure
C) increase fixed-income exposure and reduce equity exposure
D) increase
A) increase equity exposure and reduce fixed income exposure
Rising inflation will reduce real returns on fixed-income investments, so you would want to reduce that exposure. Equities, tangible assets, and commodities tend to increase along with the infla
An investment is made of $10,000. At the end of the year, $500 in nonqualifying dividends has been received and the value of the investment is $10,500. If the investor is in the 30% tax bracket, the after-tax yield is
A) 5.0%
B) 8.5%
C) 3.5%
D) 6.5%
C) 3.5%
The only return (as far as yield is concerned) is the $500 of dividends. Remember, nonqualifying dividends do not "qualify" for the 15% rate.
Subtracting 30% for taxes leaves $350 which, when divided by the $10,000 initial cost, is an after-tax yi
An investor is considering the purchase of some bonds to diversify his portfolio. If he should decide to purchase Treasury STRIPS instead of Treasury Bonds, his major risk would be
A) purchasing power risk
B) credit risk
C) reinvestment risk
D) interest r
D) interest rate risk
Treasury STRIPS are zero-coupon bonds and, as such, have a longer duration than those paying semiannual interest. The longer the duration, the greater the interest rate risk. Because both are guaranteed by the U.S. government, there
Which of the following are characteristics of negotiable jumbo CDs?
I. Issued in amounts of $100,000 to $1 million or more
II. Typically pay interest on a monthly basis
III. Always mature in 1 to 2 years with a prepayment penalty for early withdrawal
IV.
A) I and IV
Negotiable jumbo CDs are issued for $100,000 to $1 million or more and trade in the secondary market. Most jumbo CDs are issued with maturities of 1 year or less. Being negotiable, there is no prepayment penalty. These CDs generally pay intere
Issuance of which of the following would most likely increase the leverage in a company's capital structure?
A) Bonds
B) Warrants
C) Preferred stock
D) Common stock
A) Bonds
Leverage is the use of borrowed money. This is reflected in a company's debt-to-equity ratio. Of these choices, the only one that is borrowed money is the bonds.
U9LO1
The business cycle has expanded, peaked, and contracted. The current economic activity could best be described as a trough. Which of the following would most likely be found in the trough?
I. A high rate of inflation
II. A low rate of inflation
III. A hig
B) II and III
A trough is the latter stage of a recession. Unemployment is higher than normal, and with a lesser demand for goods and services, the inflation rate is low.
U8LO2
In general, a broker-dealer will disclose any changes to its fee schedule
A) to the Administrator and then to the clients
B) when requested by the client
C) by notifying clients of the change in advance
D) within 30 days following the change
C) by notifying clients of the change in advance
Most broker-dealers disclose fee changes at least 30 days in advance, and there is no requirement whatsoever to notify the Administrator.
U6LO1
It is not uncommon to find financial planners who use their home as the base of their operations. When a financial planner who works from home is also registered as an agent of a broker-dealer, she must
A) not use personal computers to store client inform
C) have cybersecurity policies and procedures in place to protect customer data
Cybersecurity policies and procedures are necessary for the broker-dealer to protect customer data in the firm's offices, and an agent's office at home is nothing more than an
Which of the following would not be unlawful for an investment adviser under the Uniform Securities Act?
A) Including in the contract a clause that if the contract is terminated ahead of the scheduled termination date, there will be no refund of prepaid f
A) Including in the contract a clause that if the contract is terminated ahead of the scheduled termination date, there will be no refund of prepaid fees
Investment advisory contracts must outline compensation provisions and indicate the amount to be refu
In addition to the normal required filings, an investment adviser who maintains custody of client funds and/or securities will be required to complete
A) Form ADV-W
B) Form ADV-E
C) Form ADV Part 1
D) Form ADV Appendix 1
B) Form ADV-E
The Form ADV-E (E for Examination) is completed by every investment adviser who maintains custody of client assets.
Then, the form is used by the independent accountant who performs the surprise annual examination of the adviser's records.
T
An individual with $100,000 to invest will require these funds in 6 months for the purchase of a house. In which of the following circumstances did the agent act CORRECTLY?
A) The agent convinced the client to invest in a real estate partnership as a hedg
C) The agent convinced the client to invest in a Treasury bill on the basis of its safety.
Investment in a Treasury bill is the only suitable investment among the choices listed. Purchase of annuities and a real estate partnership are long-term investment
A fundamental analyst researching a stock is concerned with all of the following EXCEPT
A) capitalization ratio
B) volume of shares traded
C) the stock's market price as a multiple of the company's earnings
D) management efficiency
B) volume of shares traded
A fundamental analyst is concerned with the economic climate, the inflation rate, how an industry is performing, a company's historical earnings trends, how it is capitalized, and its product lines, management, and financial sta
An investor signed a letter of intent to purchase $50,000 worth of Sky-High Mutual Fund. At the end of 13 months, he had only invested $48,000 in the fund. Which of the following is TRUE?
A) The fund will liquidate shares to meet the additional sales char
A) The fund will liquidate shares to meet the additional sales charge.
An investor has only 13 months to meet a letter of intent commitment. Once that period of time has elapsed, the investment company is entitled to a refund of the discount it had origin
All of the following practices are unethical under the NASAA Statement of Policy on Dishonest or Unethical Business Practices of Broker-Dealers and Agents EXCEPT
A) using deceptive or misleading advertising or sales presentations
B) backdating a customer'
C) charging higher commissions than normal for executing thinly traded foreign securities
It is not an unethical practice to charge higher commissions for trades that are difficult to execute, such as trading a thinly traded foreign security. The other ac
Which of the following would have to register as an investment adviser under the Uniform Securities Act?
A) A retired aeronautical engineer who charges a nominal fee for holding seminars on opportunities in aerospace stocks
B) A trust company
C) An econom
A) A retired aeronautical engineer who charges a nominal fee for holding seminars on opportunities in aerospace stocks
Excluded from the definition are banks, publishers of general paid circulation publications (newspapers or magazines), investment advise
A pension plan administrator hires an investment adviser to oversee the investment decisions of the plan. The adviser's primary responsibility is to which of the following?
A) The adviser
B) The plan sponsor
C) The pension plan administrator
D) The plan
D) The plan
The adviser's primary fiduciary responsibility is to the plan itself. By maintaining proper fiduciary responsibility to the plan, the interests of the participants of the plan are protected.
U24LO5
The value of which of the following would be least likely to be impacted by changes in interest rates?
A) A laddered bond portfolio
B) A U.S. Treasury bond issued 25 years ago with a 30-year maturity
C) A convertible preferred stock
D) A bank CD maturing
D) A bank CD maturing in 5 years
This question is dealing with interest rate (or money-rate) risk. That risk refers to the inverse relationship between the price of fixed-income investments and interest rates. That is, when interest rates go up, the price
Which of the following would probably be an acceptable hedge clause under SEC interpretations?
A) "It is understood that we will expend our best efforts in the supervision of the portfolio, but we assume no responsibility for action taken or omitted in go
D) A clause that limits the investment adviser's liability for losses caused by conditions and events beyond its control, such as war, strikes, natural disasters, new government restrictions, market fluctuations, or communications disruptions
A clause con
A feature of which of the following business entities is limited liability for owners, as well as flow-through of income?
A) C corporation
B) Sole proprietorship
C) General partnership
D) Limited partnership
D) Limited partnership
Limited partnership interests offer both flow-through of income (or loss) along with limited liability. The general partnership has full liability, as does the sole proprietorship. C corporations have limited liability, but no flow-