Unit 4 questions wrong Flashcards
(11 cards)
Which of the following is not a financial consideration?
A) A customer’s risk tolerance
B) The value of a customer’s home
C) A customer’s income
D) A customer’s debt
A customer’s risk tolerance
Financial considerations are those that are expressed as a dollar amount of a stream of payments. Financial considerations may be found on a customer’s balance sheet or income statement.
An option disclosure document must be provided to a customer before which of the following may take place?
A) Before opening a margin account
B) The account may be approved for option trading
C) Options may be discussed
D) Before suitability regarding options is determined
The option disclosure document must be provided to the customer before an account can be approved for options trading. Discussing options and making suitability determinations should occur before seeking option approval.
Your customers, ages 60 and 58, are married and have raised three children. Both want to retire this year. They have accumulated a nest egg of about $1 million, which they will use to travel around the world, pursue their hobbies, and care for each other’s health. Both are concerned about rising inflation and are comfortable with a reasonable level of risk. Which of the following mutual funds is the most suitable for these customers?
A) ABC Investment-Grade Bond Fund
B) LMN Cash Reserves Money Market Fund
C) XYZ Government Income Fund
D) LMN Growth & Income Fund
D) LMN Growth & Income Fund
These customers are preparing for retirement, and they want to maintain a comfortable standard of living, which means staying ahead of inflation. A combined fund that offers both current income and growth potential is the best choice for this couple.
Stocks, bonds, and cash are the three major categories of asset allocation. Some advisers add another class of assets called
A) tangible assets.
B) options.
C) insurance.
D) futures.
A) tangible assets.
Some experts say that tangible assets should also be included in a balanced allocation because these types of assets tend to reduce inflation risk. Options and futures are derivatives of other securities or commodities. Insurance is generally seen as part of the fixed income (bond) allocation.
Which of the following investments will require specific disclosure regarding the cost of liquidation?
A) Windmill Growth ETF
B) Windmill Growth Fund Class C
C) Windmill Growth Fund Class A
D) Windmill Growth Fund Class B
D) Windmill Growth Fund Class B
Class B shares generally have contingent deferred sales charges (back-end loads) associated with liquidation. The load reduces over the holding period, eventually dropping to zero. Customers buying Class B shares should be fully informed of the costs of selling.
BuyStuff, Inc., is a NYSE listed big box retailer. BuyStuff stock has a beta coefficient of 1.2. If the S&P 500 goes up 5% the expected return for BuyStuff stock is which of these?
A) 5%
B) 6%
C) 7%
D) 4%
B) 6%
Beta is a measurement of a security’s sensitivity (or volatility) to the security’s market, in this case a BuyStuff stock and the S&P 500. If the beta is 1.2, then the stock will, on average, move 20% more than the index. To find the expected return, multiply the index return by the beta. 1.2 × 5 = 6.
Which of the following would be a reasonable comparison when choosing between two investments?
A) Small company fund and a small company index fund
B) Certificate of deposit and a small company fund
C) Emerging markets fund and an international bond fund
D) Money market fund and a large company stock fund
A) Small company fund and a small company index fund
The two that hold small companies are the closest and fairest comparison. The investments used here are not specifically mentioned in this section but are covered earlier in this course and are extensively covered in the SIE material. Familiarity with them is an assumption of the exam.
Which of the following investments is most susceptible to interest rate risk?
A) Federal funds rate
B) A balanced fund
C) 30-year Treasury bond
D) Preferred stock
Interest rate risk refers to the sensitivity of an investment’s price or value to fluctuations in interest rates. Although preferred stock prices move inversely with interest rates and so do the bonds within a balanced fund, 30-year Treasury bond prices will be affected the most because the greater the maturity, the greater the sensitivity.
A customer must receive which of the following disclosure documents before placing a trade for an option income fund?
I. The fund’s prospectus
II. An option disclosure document
III. A liability release
IV. An option account agreement
I only
I. The fund’s prospectus
An option income fund requires only the delivery of the fund’s prospectus. The fund manager is the person placing the option trades, not the customer.
Your married customers are both 42 years old, have two children ages 14 and 12, and they have spent the last 10 years accumulating money to provide for their children’s education. Their oldest child will enter college in four years, and the customers are very cautious investors. If they need a safe investment that provides regular income to help them meet tuition payments, which of the following mutual funds is the most suitable for these customers?
A) RST Balanced Fund
B) LMN Investment-Grade Bond Fund
C) ABC Stock Index Fund
D) ATF Overseas Opportunities Fund
B) LMN Investment-Grade Bond Fund
These clients cannot afford a downturn in the stock market between now and the time they want to send their children to college. An investment-grade bond fund will provide the income and safety required for accumulating additional funds for college expenses.
