All of the following activities in a customer's mutual fund account may be considered a violation of the Conduct Rules EXCEPT: Show
A)excessive activity in the customer's account. B)granting of discretionary authority to a new registered representative. C)short-term trading in mutual fund shares. D)switching of Class A shares between fund families. B) Mutual funds are considered a long-term investment. Thus, switching Class A shares of funds, short-term trading of funds, and excessive activity in a customer's account very likely indicate that the registered representative is churning. There is nothing unlawful about granting discretionary authority to a new registered representative. A registered representative wishes to lend money to a customer. Under which of the following circumstances would written notice to the broker/dealer be required?1.The customer is the RRs' spouse.2.The RR and the customer have been close friends since high school. 3.The customer is the RRs' mother. 4.He and the customer have a business relationship outside the firm that necessitates occasional lending between them. II IV- Written notice to the broker/dealer would be required for a loan from the RR to a friend or someone with whom he has a business relationship. It is not required for loans to immediate family members such as spouses or parents. A municipal securities registered representative may be allowed to share in a customer's account if which of the following is TRUE?
I II- MSRB rules specifically prohibit an associated person of a municipal securities dealer from sharing in a customer's account unless the sharing is in direct proportion to the associated person's investment in that account. Sharing in losses as well as profits is also a requirement but is not sufficient if the proportionate sharing test is not met. The proportionate test does not apply if there is an immediate family relationship between the two account holders. MSRB rules specifically prohibit an associated person of a municipal securities dealer from sharing in a customer's account unless the sharing is in direct proportion to the associated person's investment in that account. Sharing in losses as well as profits is also a requirement but is not sufficient if the proportionate sharing test is not met. The proportionate test does not apply if there is an immediate family relationship between the two account holders. All of the following require prior notification by a registered representative to his broker/dealer EXCEPT A)when he volunteers on the telephones for a fund-raising campaign for the local college B)when he is invited to sit on the board of directors of a local business C)when he takes a part-time job during the holiday season to earn extra money D)when he assists in the private distribution of securities for a non-profit organization A) Volunteer fund raising for the local college, since it is not a business or securities activity, would not require prior notification of his broker/dealer. When comparing investment alternatives, all of the following must be considered EXCEPT: A)differences in risk exposure between the two companies. B)relative after-tax returns, when appropriate. C)relative time period of returns on investment. D)state of incorporation of the companies. D) The state of incorporation is generally not a relevant factor when comparing investments. It is the registered representative's responsibility to perform due diligence on any investments he recommends to customers, even referrals. Because of his referrals, he could be found guilty in the perpetration of fraud. If a registered representative perceives that unethical trading practices are occurring at his firm or another firm, the RR can report this information to A)the FBI B)the FINRA regulatory tip line in Washington DC C)the Investor Complaint Center operated by FINRA D) B) FINRA operates a regulatory tip line that allows industry insiders to file information relating to rules violations. You must receive permission from your broker/dealer before you sell or offer for sale any security to your clients. To avoid a charge of selling away, you must also see to it that any sales that result are carried on your broker/dealer's books. Which of the following statements best describes the term "churning"? A)Excessive trading in a customer's account for the express purpose of generating commissions. B)Making false or misleading statements to a customer for the purpose of inducing the customer to purchase or sell a security. C)Manipulation of market prices by a firm. D)Purchasing the same security in more than one customer account at a time A) Churning is excessive trading for a particular customer's circumstances or exceeding what would normally be considered suitable. This is equally true for both discretionary and nondiscretionary accounts. The term "churning" refers to: A)entering more transactions than necessary, solely for the purpose of generating commissions. B)purchasing calls on a particular stock for your own account before entering a large customer order for the stock. C)repeatedly purchasing stock in order to keep the price up. D)repeatedly selling a stock short in order to prevent a price rise. A) Unnecessary transactions entered into for the purpose of generating commissions constitute churning. A charge of churning can result from both excessive number and excessive size of transactions. A registered representative knows that a large block trade to buy shares of XYZ stock for one of his institutional accounts will be executed shortly. The RR enters small orders to buy 100 shares of XYZ for each of his retail discretionary accounts prior to the block trade. This action is: A)a violation known as front-running. B)allowed. C)a violation known as marking the market. D)a violation known as capping. A) Having knowledge that is not public knowledge of an orders pending execution and placing orders before it occurs, so as to benefit in price movement after it is executed, is a violation known as front-running. Having knowledge that is not public knowledge of an orders pending execution and placing orders before it occurs, so as to benefit in price movement after it is executed, is a violation known as front-running. A member firm wants to give a gift to a registered representative of another member firm. Which of the following would be applicable to the gift? A)This is permitted only if the gift does not exceed $100 and the recipient registered representative's employer consents. B)This is permitted only if the gift does not exceed $150. C)This is permitted only if the gift does not exceed $100 and FINRA's approval is obtained. D)This is permitted only if the gift does not exceed $100. D) The Conduct Rules place restrictions on the gift-giving activities of registered personnel. Specifically, an employee of one member firm may give gifts up to $100 every 12 months to a registered representative of another member firm. This is designed to prevent employees of different broker/dealers from working together in a way that would be detrimental to the investing public. Notification to or approval by FINRA or the receiving registered representative's firm is not required The Conduct Rules place restrictions on the gift-giving activities of registered personnel. Specifically, an employee of one member firm may give gifts up to $100 every 12 months to a registered representative of another member firm. This is designed to prevent employees of different broker/dealers from working together in a way that would be detrimental to the investing public. Notification to or approval by FINRA or the receiving registered representative's firm is not required If a registered representative wishes to open a joint account with his brother, who is a client of his, which of the following rules would NOT apply?A)The Conduct Rules. B)The representative's principal must approve the opening of the account. C)The sharing in profits and losses in the account must be proportional to each party's investment in the account. D)The account may be opened as either tenants in common or as joint tenants with rights of survivorship. C) If a registered representative is opening a joint account with an immediate family member, the sharing of profits and losses need not be proportional to each party's investment in the account. While the member firm has the right to reject or restrict any outside business affiliations if a conflict of interest exists, their prior written approval is not required before the business activity can begin If a new customer is preparing to buy his first home within the next year, and his investment objective is aggressive growth, which of the following investments would be most suitable for your customer's portfolio? A)Index fund. B)Blue-chip equity fund. C)High-yield bond fund. D)T-bills. D) While his profile indicates aggressive growth, the fact that he will need his funds in a year or less to purchase a home is the major consideration. With such a short time horizon, any equity investment involves too much risk, as does an investment in a high-yield bond fund. Of the choices, T-bills make the most sense. If a new customer is preparing to buy his first home within the next year, and his investment objective is aggressive growth, which of the following investments would be most suitable for your customer's portfolio? A)Index fund. B)Blue-chip equity fund. C)High-yield bond fund. D)T-bills. D) While his profile indicates aggressive growth, the fact that he will need his funds in a year or less to purchase a home is the major consideration. With such a short time horizon, any equity investment involves too much risk, as does an investment in a high-yield bond fund. Of the choices, T-bills make the most sense. If a registered representative purchases a limited partnership unit without providing prior written notice to his employing firm, the representative: A)has violated FINRA's rule prohibiting outside business activities. B)is in compliance with FINRA rules because the partnership is a passive investment. C)has violated FINRA's rule against interpositioning. D)must have his firm's written approval before receiving any distributions. B) The prohibitions against outside business activities do not apply to a passive investment. Holding a limited partnership interest does not entitle the representative to actively manage the partnership; thus, the representative is not in violation. If a customer, while out of town, receives a margin call for securities purchased a day earlier, which of the following actions would be appropriate?1.The customer overnights a personal check to cover the call. 2.The broker servicing the account writes a personal check to cover the call. 3.The brokerage firm transfers the position to its trading account until the customer returns. 4. The customer uses a wire transfer of funds to cover the call. I IV- Personal checks as well as wire transfers can be used to meet the call, but a broker may never loan money to a customer. Furthermore, the brokerage firm may never transfer a customer's position to its proprietary trading account pending the customer's return to satisfy a customer's margin call. A broker/dealer providing office furniture, telephone lines, or computer equipment to any advisor or financial institution in exchange for directed commissionable transactions to the broker/dealer would generally not fall under the SEC’s safe harbor rule regarding soft dollar arrangements. SEC Rule 10b-18: transactions outside the safe harbor --if and issuer decides to buy back its stock, compliance with 10b-18 is voluntary --safe harbor is not available unless all four conditions are met --SEC required disclosures are required in buybacks whether or not safe harbor is obtained --buybacks not presumed manipulative if not in safe harbor FINRA rules do not allow cash or non-cash payment for customer referrals to anyone who is not a FINRA member. The prohibition regarding referrals or finder’s fees includes payments made in connection with locating, introducing, or referring brokerage account customers to the member firm or registered representative. In recommending securities to customers, a FINRA member firm must do which of the following?
II III- Under the Conduct Rules, a FINRA member firm recommending securities to customers must not make future performance or reimbursement guarantees, must have a suitable basis for its recommendation, and must disclose or offer to disclose supporting documentation. Under the Conduct Rules, a FINRA member firm recommending securities to customers must not make future performance or reimbursement guarantees, must have a suitable basis for its recommendation, and must disclose or offer to disclose supporting documentation. A representative may never guarantee a customer against a loss. This is specified in the Conduct Rules, not the Uniform Practice Code. Under FINRA rules, a registered representative is permitted to borrow money from a customer: A)if written notification is given to the firm and the representative receives written approval. B)under no circumstances. C)without restriction. D)if written notification is given to the firm. If a registered representative wants to share in the profit or loss of a customer's account, all of the following statements are true EXCEPT: A)FINRA must be notified in writing. B)sharing is permitted without regard to the proportion contributed if there is an immediate family relationship between the parties. C)the account must be approved by a principal. D)sharing is permitted only in proportion to the capital contributed by each party. A) All accounts must be approved by a principal, but FINRA is never notified regarding the opening of accounts. In a joint account involving a customer and a registered representative, profit and loss must be shared in proportion to the capital contributed by each party. The proportionate test does not apply if there is an immediate family relationship between the two. All accounts must be approved by a principal, but FINRA is never notified regarding the opening of accounts. In a joint account involving a customer and a registered representative, profit and loss must be shared in proportion to the capital contributed by each party. The proportionate test does not apply if there is an immediate family relationship between the two. financial risk is the risk of issuer default Risk that the value of your position will change due to changes in market risk factors: equity risk, interest rate risk, commodity risks etc. market risk can be minimized by purchasing bonds with shorter maturities when interest rate rises, utilities are affected more than other sectors of the economy as inflation rises, purchasing power of the dollar declines inflation is the primary risk for long-term debt securities capital
risk is unrelated to the underlying security Economic and social risk include - international developments -government fiscal policies -gov monetary policies -new legislation -consumer demand changes **before giving investment advice to a client, a rep should ask about investment experience, tax situation, existing portfolio, financia resources, liquidity needs, and investment objectives Investment objectives may include: -tax planning -current income -retirement income -future plans -any combinations above **taxes may be avoided, deferred, or minimized with limited partnerships, muni bonds, variable annuities, or other tax advantaged instruments **pension funds have little need for tax advantage investments due tot he fact they previously qualified for tax exemption -attempt to obtain maximum return - arbitrage techniques -buying securities with high betas Arbitrage and the Currency Market
transactions designed to take advantage of yield differentials in the market **long term program of covered call option writing is the most conservative option strategy -good for pension funds, mutual funds, and individuals supplementing income In constructing a profile for your customer, you wish to assemble information on both financial and nonfinancial investment considerations that affect your customer. Which of the following qualify as financial investment considerations?
III IV- Liquid net worth and credit card payments involve concrete sums of money and cash flow and, thus, are financial. Tax status and risk tolerance do not involve actual sums of money and, thus, are nonfinancial considerations. A wealthy client owns a large percentage of a thinly traded common stock. When this client wants to sell a major portion of his securities, he will immediately face: A)credit risk. B)interest rate risk. C)marketability risk. D)market risk. C) It is difficult to sell a large block of securities in a thinly traded stock without a substantial discount to market price. This is known as liquidity or marketability risk. It is difficult to sell a large block of securities in a thinly traded stock without a substantial discount to market price. This is known as liquidity or marketability risk. If a registered representative (RR) feels the proposed transactions might not be suitable for the customer there is no obligation by industry rule to refuse the trade but there is however a responsibility to explain so to them before entering any orders. In a JTWROS account either party may enter trades without the prior consent of the other party. Which of the following activities are a registered representative's responsibilities?
I II- A registered representative, in addition to entering orders, is primarily responsible for determining investments' suitability and for explaining different investments to prospective investors. Duration would be the greatest for which of the following bonds? A)5.5% coupon, maturing in 5 years. B)6% coupon, maturing in 5 years. C)6% coupon, maturing in 10 years. D)5.5% coupon, maturing in 10 years. D) Duration measures the time in years it takes for a bond to pay for itself. Duration is greatest for bonds with lower coupons and bonds with longer maturities. Duration measures the time in years it takes for a bond to pay for itself. Duration is greatest for bonds with lower coupons and bonds with longer maturities. A married couple in their early 40s is willing to accept some risk and wants to keep pace with inflation. Which of the following investment choices would be most suitable for them? A)A diversified common stock portfolio B)Exchange-traded notes (ETNs) C)A government bond portfolio D)Municipal bonds A) Of the choices given, and considering the couple's willingness to accept some risk, common stock would be the most likely to keep pace with inflation. Though generally safer, government bonds and municipal bonds would not likely have yields high enough to achieve the objective. Exchange-traded notes (ETNs) are a more complicated investment and carry credit risk as well. Traders in stock index options are exposed to: A)redemption risk. B)credit risk. C)call risk. D)systematic risk. D)Systematic risk is the possibility that an overall decline in the market will cause a loss in an investment. Index options investors are exposed to the risk that market movement will cause the option positions to move adversely. Systematic risk is the possibility that an overall decline in the market will cause a loss in an investment. Index options investors are exposed to the risk that market movement will cause the option positions to move adversely. What is Non-Systematic Risk and will diversification eliminate or reduce the risk? Non-Systematic
Risk is Can be minimized with diversification A change in which of the following should be indicated in a customer's file?
I III- All primary information, such as name, address, and Social Security number, and all information that could affect recommendations or a customer's financial situation must be noted immediately in the file. Educational degrees and society memberships do not affect investment recommendations. All primary information, such as name, address, and Social Security number, and all information that could affect recommendations or a customer's financial situation must be noted immediately in the file. Educational degrees and society memberships do not affect investment recommendations. If a customer is in the 15% federal income tax bracket and his main investment objective is current income, which of the following securities should the agent recommend? A)Investment-grade corporate bond. B)City of Milwaukee GO bond. C)U.S. government bond. D)Zero-coupon bond. A) The investor is in a low-tax bracket, so the tax-exempt municipal bond is not a suitable investment. To maximize income, the best recommendation is the corporate bond which offers a higher yield than a government bond with a similar maturity. Reinvestment risk is the chance that, after purchasing a bond, interest rates: A)fall. B)remain stable. C)become volatile. D)rise. A) Reinvestment risk is the danger that after purchasing a bond, interest rates will fall. This means that the fixed interest payments received over the remaining life of the bond will be reinvested at lower rates. The good news is that the price of the bond has probably risen due to falling rates. Reinvestment risk is the danger that after purchasing a bond, interest rates will fall. This means that the fixed interest payments received over the remaining life of the bond will be reinvested at lower rates. The good news is that the price of the bond has probably risen due to falling rates. Diversification helps protect against which of the following types of risk? A)Nonsystematic. B)Systematic. C)Inflation. D)Market. A) Diversification reduces nonsystematic risk, which is associated with the decline of an individual security's value. Systematic risk, such as market risk, affects all securities and therefore is not eliminated by diversification.
ABC stock has a beta of 1.2. If the OEX index increases by 6%, ABC would be expected to: A)increase by 6.0%. B)increase by 7.2%. C)decrease by 6.0%. D)decrease by 7.2%. B) A stock with a beta of 1.2 is 20% more volatile than the market in general. Therefore, if the market rises, ABC can be expected to rise by 20% more than the market. Conversely, if the market falls, stocks with a beta of more than 1 can be expected to fall more than the market falls. Your customer, a new investor, 24 years of age, earns $35,000 per year and has saved $10,000 to invest. She would like to purchase her first home in approximately 5 years. Which of the following would be the least suitable recommendation given her objective? A)Tax-free municipal bonds B)Preferred stocks C)A balanced fund D)Large-cap equity fund A) This new investor is not yet at an income level where the tax-free benefits of municipal bonds would be of great benefit. In addition, municipal bonds would have lower yields than other debt securities and would not be as likely to add to the growth needed to achieve her goal. Given her investment objective, each of the other choices would be more suitable regarding potential growth. Which of the following statements is NOT true? A)Beta is a measure of a security's deviation from its historical average returns. B)Beta is a volatility measure of a security compared with the overall market. C)A stock with a beta of 1.2 will move 20% more than the market. D)A stock with a beta of .8 will move 20% less than the market. A) A measure of a security's deviation from its historical average returns is the security's standard deviation. Beta measures a security's volatility in relation to the overall market. Stocks with a beta greater than 1 are more volatile than the market and stocks with a beta less than 1 are less volatile than the market. A convertible corporate bond with an 8% coupon yielding 7.1% is available, but may be called some time this year. Which feature of this bond would probably be least attractive to your client? A)Current yield. B)Coupon yield. C)Convertibility. D)Near-term call D) The near-term call would mean that no matter how attractive the bond's other features, the client may not have very long to enjoy them. Recommendations may be made only when it is suitable for the customer's needs. Therefore, he would not recommend the variable annuity to all of his clients despite the tax advantages. If a client is moderately risk-averse and has an investment objective of capital preservation, what types and allocation of investments would you recommend for this customer? A)A preponderance of speculative stocks and high-yield bonds. B)A mix of high yield bonds and cash/cash equivalents. C)A mix of investment-grade bonds and cash/cash equivalents. D)A preponderance of growth stocks and limited partnership vehicles.
C) An individual with an investment objective of capital preservation should be investing in a mix of investment grade bonds and cash/cash equivalents. Lower risk capital appreciation vehicles, such as large-cap common stock, should also be considered. The other choices noted are too risky for a risk-averse investor. Municipal bonds are better suited for individuals in high tax brackets and offer little upside appreciation potential. Rank the following from the safest to the most risky.
III I II IV) It should be obvious that U.S. government securities would be first and tech stocks last. As for options II and III, stocks will fluctuate more in price than highly rated corporate bonds. If a customer attempts to place an order for municipal securities that the registered representative deems completely unsuitable for the customer, the registered representative: A)must obtain the permission of a municipal securities principal before executing the order. B)must refuse to execute the order. C)may execute the order on a not-held basis. D)may execute the order and mark the order ticket as "unsolicited". D) A registered representative may enter any unsolicited order from a customer despite the fact that the representative believes the trade to be unsuitable for the customer. The representative must mark the order ticket "unsolicited". A registered representative may enter any unsolicited order from a customer despite the fact that the representative believes the trade to be unsuitable for the customer. The representative must mark the order ticket "unsolicited". An investor diversifying a corporate bond portfolio does NOT consider: A)domicile of the investor. B)maturity. C)issuer. D)quality. A) Domicile, or geographic location of the investor, is not relevant in diversifying a corporate bond portfolio. For example, it is irrelevant if GM the client is located in Michigan or New Jersey. This could be a factor for municipal bond investors due to the possibility of avoiding state income tax. A corporate bond portfolio can be diversified by issuer, quality (rating), domicile of the issuer and maturity. , an equity income fund seeks current income through dividend-paying stocks and generally have a secondary objective of moderate growth. None of the remaining choices would align with the client's moderate risk criteria. If a customer is concerned about interest rate risk, which of the following securities is leastappropriate? A)5-year corporate bonds. B)10-year corporate bonds. C)25-year municipal bonds. D)Treasury bills. C) Interest rate risk is the danger that interest rates will rise and adversely affect a bond's price. This risk is greatest for long-term bonds; short-term debt securities are affected the least if interest rates change. If your customer is pursuing an aggressive stock buying strategy, which of the following is mostsuitable for him? A)ABC stock with a beta coefficient of 1.0. B)DEF stock with a beta coefficient of .93. C)GHI stock with a beta coefficient of 1.20. D)Convertible bonds of a mid-cap company. C) Beta coefficients greater than 1.0 signify that the stock will fluctuate more than the market as a whole. In general, the higher the beta is, the greater the risk. Such risk-taking is appropriate for investors who seek aggressive stock-buying strategies and have both the financial ability and the temperament to withstand downturns in the market. Beta coefficients greater than 1.0 signify that the stock will fluctuate more than the market as a whole. In general, the higher the beta is, the greater the risk. Such risk-taking is appropriate for investors who seek aggressive stock-buying strategies and have both the financial ability and the temperament to withstand downturns in the market. An investor's portfolio has a beta coefficient of .85. If the overall market declined by 10% over the course of a year, the portfolio's value has likely: A)increased by 10.85%. B)decreased by 8.5%. C)decreased by 11.76%. D)increased by 8.5%. D) A beta coefficient of .85 means that the portfolio is considered to be .85 times as volatile as the overall market. Therefore, if the market declines by 10%, the portfolio with a beta of .85 is likely to decline by only 8.5% (.10 × .85). When interest rates are changing, an investor might expect which of the following to be the mostvolatile? A)Corporate bond with 20 years to maturity. B)Treasury bill with 5 months to maturity. C)Treasury STRIPS with 20 years to maturity. D)Treasury note with 5 years to maturity. C) When interest rates are changing, bonds with more years remaining to maturity will have greater volatility. Because zero-coupon bonds, such as treasury receipts and STRIPS, do not make interest payments but are priced at a deep discount to par value, they are more volatile than coupon-bearing bonds. Credit risk involves: A)danger of not being able to sell the investment at a fair market price. B)fluctuations in overall interest rates. C)possibility of issuer default. D)inflationary risks. C) Credit risk is the danger of losing all or part of the invested principal as the result of the issuer's failure. In a rising market, which of the following is least volatile? A)A stock with a beta of 2.0. B)A stock with an alpha of 0.5. C)A stock with a beta of 0.5. D)A stock with an alpha of 2.0. C) Beta is a measure of a stock's volatility relative to the overall market, as measured by the S&P 500. A stock with a beta of 2.0 will move twice as fast as the overall market, while a stock with a beta of 0.5 will move half as fast as the overall market. Which of the following statements regarding nonsystematic risk are TRUE?
I III- Nonsystematic risk is company risk, the risk that an individual investment will perform poorly. Diversification can reduce most nonsystematic risks. Mr. and Mrs. Smith, both nearing retirement, want to reallocate $200,000 of their $500,000 portfolio of blue-chip stocks to an investment that would add to their monthly income after retirement. Of the possible investment choices below, which would be the most suitable recommendation given their investment objective? A)Preferred shares of stock B)High-yield corporate bonds C)GNMA securities D)Exchange-traded notes C) Of the answer choices given, only Ginnie Mae (GNMA) securities would offer monthly income. Additionally, GNMAs are backed by the US government, which adds to their suitability for this couple nearing retirement. None of the remaining answer choices offer monthly income, and 2 of them (high-yield corporate bonds and exchange-traded notes) have unique risk associated with them, making them unsuitable for those near or in retirement. The ABCD Corporation has a beta coefficient of 1.25. Your client's portfolio contains $20,000 of ABCD. After a rise in the overall market of 10%, we would expect the value of this client's ABCD to: A)increase by $5,000. B)increase by $2,500. C)increase by $2,000. D)decrease by 25%. B) A stock with a beta coefficient of 1.25 could be expected to rise in value at a rate 25% greater than the overall market. Since the market has increased by 10%, this stock should increase by 12.5% or $2,500 (10% × 1.25 × $20,000 = $2,500). A customer pursuing income using a defensive investment strategy while avoiding volatility would bemost interested in: A)short-term government bonds. B)limited partnerships. C)high yield corporate debt. D)growth stocks. A) Remember to take all investor characteristics into account. Short-term government bonds will produce for the customer safe income with little price volatility. An investment adviser who switches among investment classes based upon anticipated market changes is using a technique known as: A)value investing. B)dollar cost averaging. C)asset allocation. D)indexing. A money management strategy that switches among asset classes based upon anticipated market moves is asset allocation. Indexing is a passive strategy that makes no attempt to anticipate market moves. An index strategy reflects an underlying index with the adviser keeping securities in the portfolio in proportion to their weight in the underlying index. Value investing seeks to actively invest in securities that are selling at a discount to their book value and out of favor with the market. Dollar cost averaging is a method of acquiring shares at a lower average cost over time and is not an investment style. A new customer asks her registered representative to recommend undervalued or out-of-favor securities with relatively low prices. This portfolio management strategy is known as: A)tactical. B)value. C)passive.
D)growth. B) Value investing is the strategy of selecting stocks that trade for less than their book value. Value investors actively seek stocks of companies with sound financial statements that they believe the market has undervalued. If an investor practices value investing, which of the following stock types is he least likely to purchase? A)A stock with a low price-to-earnings ratio. B)A stock that has exhibited a high dividend yield in the past. C)A stock with an above-average price-to-earnings ratio. D)A stock that is presently selling for two-thirds of net current assets. C) A growth investor looks for stocks with above-average price-to-earnings ratios. Conversely, a value investor focuses on stocks with low PE ratios, a low price-to-book value, and historically high dividend yields. A growth investor looks for stocks with above-average price-to-earnings ratios. Conversely, a value investor focuses on stocks with low PE ratios, a low price-to-book value, and historically high dividend yields. Market timing is normally associated with which of the following portfolio management styles? A)Modern portfolio theory. B)Passive management. C)Tactical asset allocation. D)Strategic asset allocation. C) Tactical asset allocation, which attempts to capitalize on short-term market swings, is a market timing strategy. Tactical asset allocation, which attempts to capitalize on short-term market swings, is a market timing strategy. Which of the following best describes a growth investment? A)Value of the investment increases over time. B)Investment appreciation is tax-deferred. C)Both principal and accumulating interest and dividends increase over time. D)Only interest and dividends are reinvested. A) Growth refers to an increase in an investment's value over time. Interest and dividends are income. The capital asset pricing model assumes A)that no type of risk can be diversified away B)that those who participate in smaller transactions are generally wrong in regards to timing purchases and sales C)investors are averse to risk and expect to be rewarded for taking risk D)that prices are influenced by supply and demand only C) CAPM takes into account systematic risk, the type of risk that investors use diversification to lessen. It assumes that investors are averse to risk, and, if taking on risk, expect to be rewarded for it and, therefore, the pricing of an asset must reflect that What is a basic assumption in an active management investment style? A)There is no opportunity cost to investing. B)Some securities are mispriced and value can be captured through security selection. C)The market is efficiently priced and that will make an active management style effective. D)Asset allocation makes no difference. B) An investment manager using an active management investment style believes that by using investment expertise he can select securities that are undervalued to achieve superior returns over time. Which of the following is the best example of a passive investment management style? A)Value investing. B)Exclusive use of index funds. C)Investment in small capitalization technology securities. D)Use of index funds in conjunction with selecting specific securities in the index to overweight certain sectors. B) A passive investment style uses index funds because the manager does not believe that returns above the averages can be sustained for any length of time because the market is priced efficiently. Use of index funds in conjunction with specific securities in order to overweight sectors is an active style. Investment in small capitalization technology securities involves actively selecting securities that the manager believes will perform well or better than the market. An investor diversifying a corporate bond portfolio does NOT consider:
D) Domicile, or geographic location of the investor, is not relevant in diversifying a corporate bond portfolio. For example, it is irrelevant if GM the client is located in Michigan or New Jersey. This could be a factor for municipal bond investors due to the possibility of avoiding state income tax. A corporate bond portfolio can be diversified by issuer, quality (rating), domicile of the issuer and maturity. Diversification helps protect against which of the following types of risk?
C) Diversification reduces nonsystematic risk, which is associated with the decline of an individual security's value. Systematic risk, such as market risk, affects all securities and therefore is not eliminated by diversification. DPPs or limited partnerships are illiquid investments because there is generally no secondary market Which of the following investments is most suitable for an investor seeking monthly income?
B) The money-market mutual fund is the most suitable investment for an investor seeking monthly income. The other securities offer higher long-term growth potential, but they are not designed to provide monthly income. If a client is moderately risk-averse and has an investment objective of capital preservation, what types and allocation of investments would you recommend for this customer? A) A preponderance of speculative stocks and high-yield bonds. B) A mix of high yield bonds and cash/cash equivalents. C) A preponderance of growth stocks and limited partnership vehicles. D) A mix of investment-grade bonds and cash/cash equivalents. d)An individual with an investment objective of capital preservation should be investing in a mix of investment grade bonds and cash/cash equivalents. Lower risk capital appreciation vehicles, such as large-cap common stock, should also be considered. The other choices noted are too risky for a risk-averse investor. In constructing a profile for your customer, you wish to assemble information on both financial and nonfinancial investment considerations that affect your customer. Which of the following qualify as financial investment considerations?
III IV) Liquid net worth and credit card payments involve concrete sums of money and cash flow and, thus, are financial. Tax status and risk tolerance do not involve actual sums of money and, thus, are nonfinancial considerations. If a customer is in the 15% federal income tax bracket and his main investment objective is current income, which of the following securities should the agent recommend?
D) The investor is in a low-tax bracket, so the tax-exempt municipal bond is not a suitable investment. To maximize income, the best recommendation is the corporate bond which offers a higher yield than a government bond with a similar maturity. Your broker/dealer provides occasional research reports to an institutional trading desk in exchange for that institution doing executions for its various fund portfolios through your broker. This is known as A)customer portfolio margining (CPM) B)front running C)churning D)soft dollar arrangement D)Soft dollar arrangements are ones in which a broker/dealer may provide products or services to an advisor or fiduciary in general, in exchange for that advisor directing brokerage transactions to the broker/dealer for execution. Placing broker's personal orders ahead of a customer's large order to profit from the market effects of the trade If a registered representative purchases a limited partnership unit without providing prior written notice to his employing firm, the representative: A)has violated FINRA's rule prohibiting outside business activities. B)must have his firm's written approval before receiving any distributions. C)is in compliance with FINRA rules because the partnership is a passive investment. D)has violated FINRA's rule against interpositioning. C)The prohibitions against outside business activities do not apply to a passive investment. Holding a limited partnership interest does not entitle the representative to actively manage the partnership; thus, the representative is not in violation. When comparing investment alternatives, all of the following must be considered EXCEPT: A)differences in risk exposure between the two companies. B)relative time period of returns on investment. C)relative after-tax returns, when appropriate. D)state of incorporation of the companies. D)The state of incorporation is generally not a relevant factor when comparing investments. FINRA rules do not allow cash or non-cash payment for customer referrals to anyone who is not a FINRA member. The prohibition regarding referrals or finder’s fees includes payments made in connection with locating, introducing, or referring brokerage account customers to the member firm or registered representative. If a registered representative perceives that unethical trading practices are occurring at his firm or another firm, the RR can report this information to A)the FINRA regulatory tip line in Washington DC B)the Director of Arbitration of FINRA C)the FBI D)the Investor Complaint Center operated by FINRA A)FINRA operates a regulatory tip line that allows industry insiders to file information relating to rules violations. All of the following require prior notification by a registered representative to his broker/dealer EXCEPTA)when he takes a part-time job during the holiday season to earn extra money B)when he is invited to sit on the board of directors of a local business C)when he volunteers on the telephones for a fund-raising campaign for the local college D)when he assists in the private distribution of securities for a non-profit organization C)Volunteer fund raising for the local college, since it is not a business or securities activity, would not require prior notification of his broker/dealer. If a customer buys $28,000 of ABC stock in April of 1999 and at year end, the stock is worth $23,000, how much may the customer deduct on his 1999 tax return? A)$3,000. B)$5,000. C)$2,000. D)$0. D) Until the customer realizes the loss by selling, there is no tax deduction. Which of the following statements is correct concerning FINRA rules regarding outside employment by RRs?Which of the following statements is correct concerning FINRA rules regarding outside employment by RRs? C. RRs are required to notify their employers of any outside employment whether securities related or not.
Which of the following is true of FINRA rules regarding a private securities?Which of the following is TRUE of FINRA rules regarding private securities transactions performed by an associated person? If the member firm approves of the transaction(s) it must record them and supervise them.
Which of the following actions may be performed by an individual registered with FINRA with a Series 6 license?A Series 6 license allows registered persons to sell mutual funds, new issues of closed-end funds, and variable products only. It does not allow persons to sell stocks (equities), bonds, futures or commodities.
How often must a member firm provide a copy of the FINRA procedures to its customers quizlet?After opening a new account, how many days does a firm have to provide the customer with a copy of the account record? Member firms must provide new customers with a copy of the account record (new account form) within 30 days of opening the account; this ensures the information the firm has on file is accurate.
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Under FINRA rules which of the following is CORRECT regarding RRs sharing in customer accounts
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