Series 65 Investment Adviser Law Examination

1.Elena watches a report that the Federal Reserve has bought Treasury securities from bond dealers. What does that open-market purchase do?

2.A bank economist notes that the Federal Reserve has raised the discount rate. Which effect should an adviser expect?

3.If the Federal Reserve raises reserve requirements, what happens to banks' capacity to lend?

4.Marcus hears that the state cut income taxes and that a new public bridge was funded. He calls both steps monetary policy. How should they be classified?

5.A client's chart of the business cycle has just marked a trough. Which phase comes next?

6.Output and hiring have climbed for several years and have just hit the high point before activity turns down. Which phase is that high point?

7.Priya's regional report shows falling output, rising unemployment, and shrinking retail sales. Which business-cycle phase is that decline?

8.Output has stopped falling and sits at its low point, just before a recovery begins. What is that low point called?

9.Owen owns an existing 10-year corporate bond. Market yields rise, and the bond's coupon does not change. What happens to the bond's market price?

10.Two bonds each have a 3 percent coupon. One matures in 2 years and the other in 30 years. Yields rise by the same amount. Which price should fall more?

11.Two bonds both mature in 20 years. One pays a 2 percent coupon and the other pays 8 percent. Yields rise. Which price should fall more?

12.Households and firms are spending heavily while factories are already near full capacity, and consumer prices rise. Which kind of inflation is this?

13.Fuel and freight costs jump. Shops raise prices even though customers are cautious and unsold goods are stacking up. Which kind of inflation fits?

14.Rosa's portfolio returned 6.4 percent over the year, and inflation was 2.1 percent. What is the approximate real return?

15.A one-year note offers a 9 percent nominal return, and inflation is 4 percent. Using the Fisher relation, what is the real return rounded to the nearest hundredth of a percent?

16.A banker asks which rate the Federal Reserve charges on a loan made through the discount window.

17.The Federal Reserve sells Treasury securities to dealers in the open market. What does that sale do to reserves?

18.Andre wants a data series that usually turns before the broad economy turns. Which series fits that leading role?

19.Naomi wants a series that usually confirms an economic turn after it has already happened. Which series is lagging?

20.A plant lays off welders because orders dropped in a broad downturn. Their skills still match welding jobs that exist in a healthy economy. What kind of unemployment is this?

21.Luis leaves one design job on Friday and starts another design job three weeks later after an ordinary search. What kind of unemployment was the gap?

22.Newspaper press operators in Camille's city lose their jobs after advertisers move online. Local employers no longer need those press skills. What kind of unemployment is this?

23.On a chart Jonah is reviewing, the one-year Treasury yield is 5.2 percent and the 10-year Treasury yield is 4.1 percent. How should the shape be described?

24.The dollar rises against the currencies of the countries that buy most of Farah's exported machinery. What can that move do to her export sales?

25.Derek wants to cash out shares of an open-end mutual fund. Who redeems those shares?

26.Ingrid owns a traditional closed-end fund. Its market price is below net asset value. Why can that discount exist?

27.A sponsor builds a bond portfolio, freezes the holdings, sets an end date, and hires no manager to swap bonds. What is that vehicle?

28.A fund reports $25,400,000 of assets, $1,400,000 of liabilities, and 2,000,000 shares. What is its net asset value per share?

29.A bond with a 5 percent coupon on a $1,000 par value is trading at $800. What is its current yield?

30.A corporate bond has a 6 percent coupon, and its yield to maturity is 4.5 percent. Which statement is right?

31.A corporate bond has a 3 percent coupon, and its yield to maturity is 5 percent. Which description fits?

32.Samir says his 20-year Treasury bond has no risk because Treasuries are exempt from registration under the Securities Act of 1933. What is the flaw?

33.The risk-free rate is 2 percent, the expected market return is 8 percent, and a stock's beta is 1.5. What required return does the capital asset pricing model give?

34.The risk-free rate is 5 percent, the expected market return is 11 percent, and a portfolio's beta is 0.5. What required return does the capital asset pricing model give?

35.Beth wants the statistic that measures a stock's total risk, including the risk specific to that one company. Which statistic is that?

36.Hugo's brokerage account holds stock in only one local bank. Which risk can he reduce by spreading the money across many issuers?

37.Lila owns a broad U.S. stock-index fund and asks whether that diversification has removed market risk. What is the answer?

38.A portfolio returned 14 percent. The risk-free rate was 2 percent, and the portfolio's standard deviation was 20 percent. What is the Sharpe ratio?

39.Chris bought a stock at $50, received a $1.50 dividend, and sold it at $53. What was the holding-period return?

40.Paula puts 70 percent of a portfolio in equities expected to return 9 percent and 30 percent in bonds expected to return 3 percent. What is the portfolio's expected return?

41.A mix is 40 percent in a fund with beta 1.25, 35 percent in a fund with beta 0.80, and 25 percent in a fund with beta 0.20. What is the portfolio beta?

42.A municipal bond yields 3.8 percent. The client's federal income-tax bracket is 24 percent. Ignoring state tax, what is the taxable-equivalent yield?

43.A taxable corporate bond yields 5 percent. The client's federal bracket is 24 percent. What is the after-tax yield, ignoring state tax?

44.A preferred stock pays a $2.50 annual dividend and trades at $40. What is its current yield?

45.A bond with a 7 percent coupon on a $1,000 par value trades at $875. What is its current yield?

46.A client buys a corporate zero-coupon bond in a taxable account. It was issued at a deep discount and pays no cash coupon. Which description is right?

47.A client buys Treasury Inflation-Protected Securities and may sell them within a year. The client says the market price cannot fall. What is accurate?

48.A client compares a fixed annuity, whose insurer credits a set rate, with a variable annuity, whose value moves with separate-account portfolios. Which one is a security?

49.A client buys a call option on a stock and pays the premium. Which right did the client buy?

50.A client owns shares and wants protection if the price drops, without a promise that the shares will rise. Which choice fits?

51.One fund trades all day on an exchange. Another is bought from, and redeemed by, the fund company at the next net asset value. Which pairing is correct?

52.A client calls a money market mutual fund an FDIC-insured bank deposit. What should the adviser say?

53.A client buys shares of an equity real estate investment trust that owns apartment buildings. What does the client actually own?

54.A client buys an American depositary receipt for a company based abroad. The receipt trades in dollars in the United States. Which risk remains?

55.A client will hold one fund family for about 15 years. The family publishes a breakpoint, and a lower-cost share class is available. Another class pays the adviser a higher trail. What should the adviser recommend?

56.A client has saved a house down payment in cash and plans to buy in four years. A large loss could not be replaced. Where should that earmarked money sit?

57.A client is 28, has a stable job and an emergency fund, can accept large swings, and will not use retirement savings for about 35 years. Which mix can fit?

58.A client buys broad index funds and trades about once every few years. An adviser offers a wrap fee that bundles advice and trading. What is the problem?

59.A grandmother funds an account under the Uniform Gifts to Minors Act and later wants the money back if the child skips college. What is the rule?

60.A trustee refuses every corporate bond because a bond can default. The trust calls for a diversified portfolio and allows marketable bonds. What does the prudent-investor standard require?

61.Most of a client's wealth is stock in the company where the client also works. The client asks about the risk of that concentration. What should the adviser emphasize?

62.Tuition due in 18 months is sitting in cash. An adviser suggests a small-cap fund for a quick gain. What should happen to that idea?

63.A retiree wants investment-grade bonds and does not want every dollar of principal coming due on the same day. Which structure fits?

64.A client invests $400 on the first of each month into the same fund and asks whether the method locks in a profit. What is true of dollar-cost averaging?

65.A client's target is 60 percent stocks and 40 percent bonds. After a rally, stocks are 72 percent of the account. What does rebalancing do?

66.A client has no emergency fund and wants to place most of the family's savings in a private fund with a seven-year lockup. What is the suitability problem?

67.A cost-sensitive client wants broad U.S. stock-market exposure and does not want to pay for stock picking. Which point is right?

68.A client may need a large cash withdrawal in two years. A deferred annuity on offer has a seven-year surrender charge. What should the adviser conclude?

69.A client is eligible to contribute to a Roth IRA, can pay the tax now, and expects a higher tax bracket in retirement. Why can a Roth contribution fit?

70.A traditional IRA was funded entirely with deductible contributions. How are withdrawals of that balance generally taxed?

71.A parent wants an education savings account the parent still controls, with room to name a different child later. Which account matches?

72.Two sisters hold a brokerage account as joint tenants with right of survivorship. One sister's will leaves all of her property to a charity. Who takes her share of that account?

73.A client with low risk tolerance asks whether borrowing half the account to buy more stock can only help. What is the right warning?

74.A client has a taxable account and a traditional IRA that will stay untouched for many years. An investment-grade corporate bond fund pays ordinary interest each year. Which placement can fit?

75.A client sells a fund at a loss and buys the same fund 10 days later. What happens to the loss?

76.A client bought shares in a taxable account and sold them 14 months later at a gain. How is that gain classified?

77.An IRA beneficiary form names a niece. A later will leaves that IRA to a nephew. Who inherits the IRA?

78.A client deeds a house into a revocable living trust and asks whether that step, by itself, erases estate tax and avoids probate for the house. What is accurate?

79.A parent of two young children has a mortgage, little savings, and a tight budget. The need is income replacement for 20 years, not cash value. Which insurance fits better?

80.A client asks the adviser to sign a letter promising that the account will earn 8 percent every year. What should the adviser do?

81.A client in good health has other income for living costs and asks about waiting to claim Social Security from full retirement age until 70. What happens to the monthly retirement benefit?

82.Northwind Advisers has $125 million of assets under management and no exemption. Where does the firm generally register?

83.Harbor Street Advisers has $80 million of assets under management, one office, and no exemption. Where does the firm generally register?

84.Lumen Counsel has $105 million of assets under management. Which registration statement is correct?

85.Pike Advisory's only office is in Maine. During the past twelve months it has four clients in New Hampshire and no place of business there. How can a common state exemption apply?

86.An adviser has no office in New Hampshire and has had six clients there during the past twelve months. What happens to the common de minimis exemption?

87.An investment adviser representative of a Commission-registered firm rents an office in Arizona and meets clients there. Where does that representative generally register?

88.A prospect asks for the firm's narrative disclosure of services, fees, and conflicts before signing. Which document is that?

89.The adviser hands over the brochure as the client signs. The contract lets the client cancel without penalty for five business days. Does that timing satisfy the common delivery rule?

90.An adviser's fiscal year has just ended. When is the annual updating amendment to Form ADV due?

91.In March, an adviser raises its fee schedule, and the change is material. When must Form ADV reflect that change?

92.Birch and Cole Advisers will hold client securities and cash. Which custody practice is required?

93.An adviser has custody of client assets and also sends its own account statements to clients. Which safeguard is part of the custody rule?

94.A firm wants 20 percent of each account's gains, including small retail accounts that are not qualified clients. May it charge that fee?

95.An adviser wants soft-dollar credits to pay the office rent, buy furniture, and fund a staff vacation. Which of those costs can the safe harbor cover?

96.A broker supplies research the adviser uses for client portfolios and charges a reasonable commission. The adviser still seeks best execution. Can that research fit the soft-dollar safe harbor?

97.A draft advertisement says that every client account will finish the year higher. What should the firm do with that sentence?

98.A retired nurse who is a client offers the adviser a personal loan to buy a car. What should the adviser do?

99.The adviser, as a customer, takes a mortgage from a client bank that makes mortgage loans to the public. The loan uses the bank's ordinary underwriting. Is that loan allowed?

100.The adviser has discretion. After the account moves to commissions, the adviser doubles the trading. The client's goals have not changed, and the extra trades are there to raise the adviser's pay. What should the adviser do?

101.A client will send a large buy order at the open. Before sending it, the adviser buys the same stock in a personal account. What is the lawful response?

102.At a private dinner, a client who is a chief executive says a merger will be announced on Friday. The news is not public. The adviser wants to buy the stock on Monday. What is the lawful response?

103.A current client offers a favorable quotation for the firm's website and is not paid. How should the firm treat that testimonial?

104.A firm's homepage calls the team SEC-approved investment experts. What should the firm do with that phrase?

105.A salesperson says a Treasury bond may be sold with a made-up yield because Treasuries are exempt from registration under the Securities Act of 1933. What is the right response?

106.A founder asks which statute requires registration of a new public offering of corporate stock, unless an exemption applies. Which statute is it?

107.The owners sell the advisory firm. The buyer intends to take over every client contract and not tell the clients. What is required?

108.A draft contract says the client waives every fiduciary duty and every claim under the securities laws. What should the adviser do with that clause?