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Question 1 of 10
1. Question
Which of the following statement(s) is (are) true about aggressive growth investment objective?
I. The goal of an aggressive growth investment objective is to achieve a very high level rate of return through capital appreciation.
II. Aggressive growth 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.
III. In order to achieve high expected rates of return, investors with this aggressive growth investment objective must be willing to undergo a higher level of volatility and risk.
IV. Investors with aggressive growth investment objective typically have a much longer time horizon in order to minimize the impacts of market downturns.Correct
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. As such, investors with this objective typically have a much longer time horizon in order to minimize the impacts of market downturns.
Incorrect
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. As such, investors with this objective typically have a much longer time horizon in order to minimize the impacts of market downturns.
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Question 2 of 10
2. Question
Which of the following statement(s) is (are) true about tax-exempt income investment objective?
I. 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.
II. Although tax-exempt bonds typically provide for higher 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.
III. Some investors may prefer to earn tax-exempt income if they pay particularly high rates or if they feel that the tax-equivalent yield on tax-exempt bonds provides a more attractive risk-adjusted return than yields on taxable bonds.
IV. One example of a security for a tax exempt income investment objective is a municipal bond, which is exempt from federal taxes and, possibly, many state and local taxes as well.Correct
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. Some investors may prefer to earn tax-exempt income if they pay particularly high rates or if they feel that the tax-equivalent yield on tax-exempt bonds provides a more attractive risk-adjusted return than yields on taxable bonds. One example of a security for a tax exempt income investment objective is a municipal bond, which is exempt from federal taxes and, possibly, many state and local taxes as well.
Incorrect
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. Some investors may prefer to earn tax-exempt income if they pay particularly high rates or if they feel that the tax-equivalent yield on tax-exempt bonds provides a more attractive risk-adjusted return than yields on taxable bonds. One example of a security for a tax exempt income investment objective is a municipal bond, which is exempt from federal taxes and, possibly, many state and local taxes as well.
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Question 3 of 10
3. Question
Which of the following statement(s) is (are) true about defensive investment strategy?
I. A defensive investment strategy is one in which an investor is primarily concerned with protection of investment principal rather than potential gains.
II. 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.
III. A defensive investment strategy would be utilized by investors who are either younger or would have a longer investing time horizon.
IV. A defensive investment strategy would be utilized by investors who are either older or would have a shorter investing time horizon.Correct
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. Typically, a defensive investment strategy would be utilized by investors who are either older or would have a shorter investing time horizon.
Incorrect
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. Typically, a defensive investment strategy would be utilized by investors who are either older or would have a shorter investing time horizon.
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Question 4 of 10
4. Question
Which of the following statement(s) is (are) not true about an aggressive investment strategy?
I. Typical investments within an aggressive investment strategy may include small and mid-cap equity securities and international securities, all of which have potential for higher returns but also substantially higher levels of risk.
II. Investors choosing to invest in aggressive strategies typically have shorter time horizons.
III. Younger investors who are saving for a retirement that is 30 or 40 years in the future will likely pursue an aggressive investment strategy.
IV. Investors who need to achieve a high level of return may choose to pursue an aggressive strategy.Correct
An aggressive investment strategy is one in which an investor is primarily concerned with achieving a certain level of return and is willing to accept a higher than normal level of risk in order to achieve that return. Typical investments within an aggressive investment strategy may include small and mid-cap equity securities and international securities, all of which have potential for higher returns but also substantially higher levels of risk. As such, investors choosing to invest in aggressive strategies typically have longer time horizons so that market fluctuations should have time to correct prior to the point at which they will need to liquidate or begin drawing down funds. Younger investors who are saving for a retirement that is 30 or 40 years in the future will likely pursue an aggressive investment strategy. Additionally, investors who need to achieve a high level of return may choose to pursue an aggressive strategy. However, even investors choosing an aggressive strategy should seek to minimize risk at a given level of expected return through proper diversification and asset allocation techniques.
Incorrect
An aggressive investment strategy is one in which an investor is primarily concerned with achieving a certain level of return and is willing to accept a higher than normal level of risk in order to achieve that return. Typical investments within an aggressive investment strategy may include small and mid-cap equity securities and international securities, all of which have potential for higher returns but also substantially higher levels of risk. As such, investors choosing to invest in aggressive strategies typically have longer time horizons so that market fluctuations should have time to correct prior to the point at which they will need to liquidate or begin drawing down funds. Younger investors who are saving for a retirement that is 30 or 40 years in the future will likely pursue an aggressive investment strategy. Additionally, investors who need to achieve a high level of return may choose to pursue an aggressive strategy. However, even investors choosing an aggressive strategy should seek to minimize risk at a given level of expected return through proper diversification and asset allocation techniques.
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Question 5 of 10
5. Question
In order to provide suitable investment recommendations for clients, advisers must conduct thorough due diligence to learn about their client’s
I. Financial status
II. Investment objectives
III. Educational qualification
IV. Risk toleranceCorrect
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.
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.
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Question 6 of 10
6. Question
Which of the following statement(s) is(are) true about short-term liquidity needs?
I. Short-term liquidity needs make it more difficult to appropriately time withdrawals so that withdrawals are not taken at times of low performance.
II. 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.
III. As an investor’s short-term liquidity needs increase, his ability to take risk in his investment portfolio decreases.
IV. Short-term liquidity needs provide for much more flexibility in risk tolerance than do long-term liquidity needs.Correct
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.
Short-term liquidity needs make it more difficult to appropriately time withdrawals so that withdrawals are not taken at times of low performanceIncorrect
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.
Short-term liquidity needs make it more difficult to appropriately time withdrawals so that withdrawals are not taken at times of low performance -
Question 7 of 10
7. Question
Which of the following statement(s) is(are) true about long-term liquidity needs?
I. Long-term liquidity needs provide for much more flexibility in risk tolerance than do short-term liquidity needs.
II. 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.
III. With longer term liquidity needs, an investor has more time to experience the fluctuations in the price of a security without having immediate needs to withdraw those funds.
IV. A more conservative investment may not be suitable for an investor with long term liquidity needs.Correct
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. With longer term liquidity needs, an investor has more time to experience the fluctuations in the price of a security without having immediate needs to withdraw those funds. Thus, the investor can choose an ideal time to diversify out of the riskier assets and into a safer portfolio as he approaches his future liquidity needs. This investor will want to ensure that he invests in securities that provide enough expected return to meet his financial objectives. Thus, a more conservative investment may not be suitable for an investor with long term liquidity needs.
Incorrect
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. With longer term liquidity needs, an investor has more time to experience the fluctuations in the price of a security without having immediate needs to withdraw those funds. Thus, the investor can choose an ideal time to diversify out of the riskier assets and into a safer portfolio as he approaches his future liquidity needs. This investor will want to ensure that he invests in securities that provide enough expected return to meet his financial objectives. Thus, a more conservative investment may not be suitable for an investor with long term liquidity needs.
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Question 8 of 10
8. Question
Which of the following(s) is (are) likely to impact on an investor’s income level?
I. Marital status
II. Number of dependents
III. Financial situation
IV. Financial objectivesCorrect
The investor’s marital status and number of dependents is likely to impact how that increase in income may be translated into an increase in expenses.
Incorrect
The investor’s marital status and number of dependents is likely to impact how that increase in income may be translated into an increase in expenses.
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Question 9 of 10
9. Question
Which of the following(s) is (are) the “essential facts” about every customer that as an adviser of your customer you requires to know when opening and servicing customer accounts?
I. Effectively service the account
II. Act in accordance with special handling instructions for the account
III. Understand the authority of each person acting on behalf of the account
IV. Comply with applicable laws, regulations, and rules.Correct
FINRA Rule 2090-Know Your Customer requires advisers to use “reasonable diligence” when opening and servicing customer accounts. Part of this reasonable diligence is knowing the “essential facts” about every customer, including those required to (i) effectively service the account, (ii) act in accordance with special handling instructions for the account, (iii) understand the authority of each person acting on behalf of the account and (iv) comply with applicable laws, regulations, and rules.
Incorrect
FINRA Rule 2090-Know Your Customer requires advisers to use “reasonable diligence” when opening and servicing customer accounts. Part of this reasonable diligence is knowing the “essential facts” about every customer, including those required to (i) effectively service the account, (ii) act in accordance with special handling instructions for the account, (iii) understand the authority of each person acting on behalf of the account and (iv) comply with applicable laws, regulations, and rules.
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Question 10 of 10
10. Question
Which of the following factor(s) is (are) specified to be considered in developing the investment profile by the new FINRA Rule 2111?
I. Investor’s age
II. Financial situation and needs
III. Tax status
IV. Investment objectivesCorrect
The new FINRA Rule 2111 expands upon the previous NASD Rule 2310 by specifying the factors to be considered in developing the investment profile,
including an investor’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information disclosed by the investor.Incorrect
The new FINRA Rule 2111 expands upon the previous NASD Rule 2310 by specifying the factors to be considered in developing the investment profile,
including an investor’s age, other investments, financial situation and needs, tax status, investment objectives, investment experience, investment time horizon, liquidity needs, risk tolerance, and any other information disclosed by the investor.