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Question 1 of 10
1. Question
Which of the following statements is true regarding Aggressive growth?
Correct
Aggressive growth
The goal of an aggressive growth investment objective is to achieve a very high level rate of return through capital appreciation. This investment objective is a specific subset of the capital appreciation objective in which the securities that are targeted include only those with extremely high expected rates of return. In order to achieve those rates of return, investors with this aggressive growth investment objective must be willing to undergo a higher level of volatility and risk.Incorrect
Aggressive growth
The goal of an aggressive growth investment objective is to achieve a very high level rate of return through capital appreciation. This investment objective is a specific subset of the capital appreciation objective in which the securities that are targeted include only those with extremely high expected rates of return. In order to achieve those rates of return, investors with this aggressive growth investment objective must be willing to undergo a higher level of volatility and risk. -
Question 2 of 10
2. Question
Which of the following statements is false regarding Tax exempt income?
Correct
Tax exempt income
The goal of a tax-exempt income investment objective is similar to that of a current income investment objective, with the primary difference being the desire to have the current income be tax exempt. Although tax-exempt bonds typically provide for lower coupon rates than taxable bonds, investors must calculate the taxable equivalent yield, defined as the yield divided by 1 minus the investor’s tax rate, so that the yield can be appropriately compared to taxable bonds.Incorrect
Tax exempt income
The goal of a tax-exempt income investment objective is similar to that of a current income investment objective, with the primary difference being the desire to have the current income be tax exempt. Although tax-exempt bonds typically provide for lower coupon rates than taxable bonds, investors must calculate the taxable equivalent yield, defined as the yield divided by 1 minus the investor’s tax rate, so that the yield can be appropriately compared to taxable bonds. -
Question 3 of 10
3. Question
Which of the following statements is false regarding Defensive investment strategy?
Correct
Defensive investment strategy
A defensive investment strategy is one in which an investor is primarily concerned with protection of investment principal rather than potential gains. Put into the context of the trade-off between risk and return, an investor utilizing a defensive strategy would be primarily concerned with mitigating risk and would try to maximize expected returns given an acceptable level of risk.Incorrect
Defensive investment strategy
A defensive investment strategy is one in which an investor is primarily concerned with protection of investment principal rather than potential gains. Put into the context of the trade-off between risk and return, an investor utilizing a defensive strategy would be primarily concerned with mitigating risk and would try to maximize expected returns given an acceptable level of risk. -
Question 4 of 10
4. Question
Which of the following statements is true regarding Financial status, investment objectives, and risk tolerance of clients?
Correct
In order to provide suitable investment recommendations for clients, advisers must conduct thorough due diligence to learn about their client’s financial status, investment objectives, and risk tolerance. Just because an investor believes he will achieve a 20% return by investing in ultra-aggressive Fund A does not mean it is a suitable investment for that investor and only by knowing detailed information about that client and what he is looking to achieve can the adviser properly make recommendations and help the client weigh the risks of each investment alternative.
Incorrect
In order to provide suitable investment recommendations for clients, advisers must conduct thorough due diligence to learn about their client’s financial status, investment objectives, and risk tolerance. Just because an investor believes he will achieve a 20% return by investing in ultra-aggressive Fund A does not mean it is a suitable investment for that investor and only by knowing detailed information about that client and what he is looking to achieve can the adviser properly make recommendations and help the client weigh the risks of each investment alternative.
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Question 5 of 10
5. Question
Which of the following statements is false regarding Short-term liquidity?
Correct
Short-term liquidity needs
Short-term liquidity needs impact an investor’s risk tolerance because an investor’s ability to take risk is inversely correlated to an investor’s short-term liquidity needs. As an investor’s short-term liquidity needs increase, his ability to take risk in his investment portfolio decreases because he will want to ensure that he is not drawing down his pool of invested assets during a downward swing in performance that could significantly impact his long-term performance.Incorrect
Short-term liquidity needs
Short-term liquidity needs impact an investor’s risk tolerance because an investor’s ability to take risk is inversely correlated to an investor’s short-term liquidity needs. As an investor’s short-term liquidity needs increase, his ability to take risk in his investment portfolio decreases because he will want to ensure that he is not drawing down his pool of invested assets during a downward swing in performance that could significantly impact his long-term performance. -
Question 6 of 10
6. Question
Which of the following statements is true regarding Long-term liquidity needs?
Correct
Long-term liquidity needs
Long-term liquidity needs provide for much more flexibility in risk tolerance than do short-term liquidity needs. While short-term liquidity needs make it more difficult to appropriately time withdrawals so that withdrawals are not taken at times of low performance, with a longer time horizon until liquidity is needed, an investor can increase the risk in his portfolio without being adversely impacted by the fluctuations in portfolio value.Incorrect
Long-term liquidity needs
Long-term liquidity needs provide for much more flexibility in risk tolerance than do short-term liquidity needs. While short-term liquidity needs make it more difficult to appropriately time withdrawals so that withdrawals are not taken at times of low performance, with a longer time horizon until liquidity is needed, an investor can increase the risk in his portfolio without being adversely impacted by the fluctuations in portfolio value. -
Question 7 of 10
7. Question
Which of the following statements is true regarding Significant increase in an investor’s income level?
Correct
Significant increase in an investor’s income level
A significant increase in an investor’s income will, all other factors remaining constant, increase an investor’s risk tolerance because his discretionary income will have also increased. However, it would be important for an adviser to also take into consideration how that increase in income is likely to influence the investor’s future expenses and tax rates. Along with that increased income, the investor will most likely also increase expenses proportionately.Incorrect
Significant increase in an investor’s income level
A significant increase in an investor’s income will, all other factors remaining constant, increase an investor’s risk tolerance because his discretionary income will have also increased. However, it would be important for an adviser to also take into consideration how that increase in income is likely to influence the investor’s future expenses and tax rates. Along with that increased income, the investor will most likely also increase expenses proportionately. -
Question 8 of 10
8. Question
Which of the following statements is true regarding Significant increase in inflation?
Correct
Significant increase in inflation
An increase in inflation essentially works as a reduction in an investor’s expected real rate of return. For instance, assume that an investor’s portfolio is expected to return a nominal rate of 7% and inflation is 2%; thus, his expected real return is 5%. Now consider the situation in which the inflation rate rises to 4%. His expected real return has now fallen to 3%, but he is still subject to the same level of risk. The investor must consider whether he is willing to take additional risk in order to increase his nominal return to 9% and restore his expected real return.Incorrect
Significant increase in inflation
An increase in inflation essentially works as a reduction in an investor’s expected real rate of return. For instance, assume that an investor’s portfolio is expected to return a nominal rate of 7% and inflation is 2%; thus, his expected real return is 5%. Now consider the situation in which the inflation rate rises to 4%. His expected real return has now fallen to 3%, but he is still subject to the same level of risk. The investor must consider whether he is willing to take additional risk in order to increase his nominal return to 9% and restore his expected real return. -
Question 9 of 10
9. Question
Which of the following statements is false regarding Willingness to take risk and ability to take risk?
Correct
Willingness to take risk and ability to take risk
An investor’s willingness to take risk is a behavioral trait that is not related to an investor’s personal financial situation. It is driven by each investor’s personal preferences and willingness to accept and live with volatility. On the other hand, an investor’s ability to take risk is driven by an investor’s financial situation and objectives.Incorrect
Willingness to take risk and ability to take risk
An investor’s willingness to take risk is a behavioral trait that is not related to an investor’s personal financial situation. It is driven by each investor’s personal preferences and willingness to accept and live with volatility. On the other hand, an investor’s ability to take risk is driven by an investor’s financial situation and objectives. -
Question 10 of 10
10. Question
Which of the following statements is true regarding Standards of Commercial Honor and Principles of Trade?
Correct
Standards of Commercial Honor and Principles of Trade
FINRA Rule 2010 Standards of Commercial Honor and Principles of Trade states that “a member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.” Broadly speaking, this rule encourages members to be just and equitable in their dealings, although no real specific guidance is provided. One example of a violation of this rule would be a member who treats different customers differently based upon their gender, ethnicity, religion, or other personal attributes. This biased approach to customers violates the just and equitable charge of Rule 2010, as well as a number of other FINRA rules, and would result in significant repercussions for the member.Incorrect
Standards of Commercial Honor and Principles of Trade
FINRA Rule 2010 Standards of Commercial Honor and Principles of Trade states that “a member, in the conduct of its business, shall observe high standards of commercial honor and just and equitable principles of trade.” Broadly speaking, this rule encourages members to be just and equitable in their dealings, although no real specific guidance is provided. One example of a violation of this rule would be a member who treats different customers differently based upon their gender, ethnicity, religion, or other personal attributes. This biased approach to customers violates the just and equitable charge of Rule 2010, as well as a number of other FINRA rules, and would result in significant repercussions for the member.