The holder of a call has ________ gain potential
Unlimited
What is the FINRA rule that must be adhered to before a client can give discretionary authority to investment advisers?
FINRA requires a written power of attorney before discretionary trades can be accepted
What is the NASAA rule that must be adhered to before a client can give discretionary authority to investment advisers?
NASAA allows verbal discretion to be exercised, as long as the written power of attorney is obtained from the customer within 10 business days
Establishing the structure of a portfolio to meet specific financial goals is called:
Strategic allocation
The market capitalization of a company is the:
number of common shares outstanding times the price per share
What is a “laddering” strategy?
When constructing a bond portfolio, “laddering” the portfolio means that the portfolio is structured with short-term; intermediate term; and long-term investments. As the short-term bonds mature, the proceeds are reinvested either in new bond categories, depending on anticipated movements in interest rates (active strategy)
What is a “barbell” strategy?
A barbell strategy is a similar to a ladder strategy, but uses only short term and long term bonds (the 2 ends of the barbell)
This is an active strategy
What is the difference between the NASAA and IA Act of 1940 regarding custody rules?
Under NASAA, if an IA accepts $500 of prepaid advisory fees (or more), 6 months or more in advance , then the adviser is considered to have taken custody of client funds.
Under IA of 1940, the amount is $1,200 (fed covered)
What is the formula for dividend yield on a stock?
Annual Dividend Income / Market share Price
What is the Monte Carlo Simulation?
A computer simulation that allows one to evaluate the impact of changes in multiple variables simultaneously on the expected performance of an investment over a specified time frame
Monte Carlo simulation analyzes potential portfolio returns achieved based upon what varying factors?
I. Interest rates
II. Inflation rates
III. Equity returns
What are the allowable deductions from a taxable state?
- Funeral and administrative expenses
- Claims against the estate
- State death taxes
- Mortgages against real property owned by the estate
An IA has developed a proprietary trading system that has doubled the fees of the S and P. Other advisers that offer similar services charge an annual advisory fee equal to 5% of AUM. This adviser wishes to charge an annual fee equal to 10% of AUM since he believes his process is superior. Can he?
No. Fees charged by an investment adviser must be comparable to the fees charged by other advisers that offer similar services. Since other advisers that provide similar services charge a fee equal to 5% of assets annually, a 10% annual charge is excessive.
What are the capitalization thresholds for stocks used by S and P?
- Micro Cap: Less than $300 million
- Small Cap: $300 million to $1 billion
- Mid Cap: $1 billion to $5 billion
- Large Cap: Over $5 billion
Under the Investment Advisers Act of 1940, a person is “in the business” of giving investment advice if he or she is compensated for what 3 things?
- Recommendations of securities
- Analyses of securities
- Reports about specific securities
What are some of the key assumptions of the Capital Asset Pricing Model (CAPM)?
- Investors are risk averse and are rational, seeking a higher return for taking on greater risk
- Investors do not consider taxes when making investment decisions
- All investors hold securities for the same time period
- There are no transaction costs
- All investors have access to the same market information
What is one way that one can differentiate open end and closed end funds?
If a sales charge is in place, it is for an open end (mutual) fund.
Closed end management companies are not sold with a sales charge
What is capital stock?
Capital stock is a term for the original capitalization of the company - the stock sold to the public from which the company received its initial capital injection to start business.
What is a a value stock?
Stock of a mature company that sells at a low “multiple” of earnings and that pays a good dividend is considered a good “value” - hence the name “value” stock
To register as an AGENT, the administrator can require what 3 things?
- Agents may have to post a surety bond
- An agent may have to post a surety bond
- An agent may have to pass a qualifying examination
What is included in the Investment Policy Statement? (IPS)
- recommended allocations among differing asset classes
- strategies used for selecting specific stocks in the equity portion of the portfolio
- expected returns and range of these returns
- strategies used for “tactically” timing the market when choosing specific investments within each class
What are the registration requirements for investment advisers whose only clientele is insurance companies?
The investment adviser is exempt from registration in the state of residence of the insurance company as long as it is not physically located in that State
The IA Act of 1940 excludes from registration any adviser that renders advice only on _____________.
U.S. Government Securities
Note that there is no exclusion given to advisers who only give advice about municipal or foreign securities.
Regulation SP applies to customer information that is sourced from anywhere EXCEPT
Public resources, such as a telephone book
