Examen de práctica Series 65

• A. Buying Treasury securities in the open market
• B. Lowering the reserve requirement for banks
• C. Selling Treasury securities in the open market
• D. Cutting the federal funds rate target

Respuesta: C. Selling Treasury securities in the open market

Selling Treasuries pulls cash out of the banking system, which shrinks the money supply and pushes interest rates up. Borrowing gets more expensive and demand cools. Buying securities, lowering reserve requirements and cutting the rate target all add money or make it cheaper, which is expansionary. Fiscal policy is a different tool, taxing and spending decided by Congress and the President, not the Fed.

A stock has a beta of 1.2. The risk-free rate is 3 percent and the expected return on the market is 9 percent. The CAPM expected return on the stock is _____ percent.

Opciones para el hueco 1: 9.0, 10.2, 10.8, 12.0

Respuesta: 10.2

The Capital Asset Pricing Model is expected return = risk-free rate + beta x (market return - risk-free rate). That is 3 + 1.2 x (9 - 3) = 3 + 7.2 = 10.2 percent. The 10.8 option comes from multiplying beta by the full market return and forgetting the risk-free rate, and 9.0 treats the stock as if its beta were 1. Remember that beta captures only systematic risk, which is the only risk CAPM pays you for.

• A. The fund must redeem shares from investors at 20 dollars
• B. The shares trade at a discount to NAV, which market supply and demand can cause
• C. The share price must equal the NAV at the close of every trading day
• D. The shares are priced once a day after the market closes

Respuesta: B. The shares trade at a discount to NAV, which market supply and demand can cause

A closed-end fund issues a fixed number of shares and does not redeem them. Investors trade the shares with each other on an exchange, so the price is set by supply and demand and can sit above NAV at a premium or below it at a discount. Here the discount is 2.50 on 20, or 12.5 percent. An open-end mutual fund is the opposite: it redeems at NAV and prices once a day.

• A. Bond A rises about 7 percent and Bond B rises about 3 percent
• B. Bond A rises about 3 percent and Bond B rises about 7 percent
• C. Bond A falls about 7 percent and Bond B falls about 3 percent
• D. Both bonds rise about 1 percent

Respuesta: A. Bond A rises about 7 percent and Bond B rises about 3 percent

Duration estimates the percentage change in a bond's price for a 1 percentage point change in yield, in the opposite direction. Rates fell, so prices rise, and the bond with the longer duration moves more. That is about 7 percent for Bond A and 3 percent for Bond B. The estimate gets less accurate for big rate moves because price and yield are not perfectly linear.

An investor in the 32 percent federal tax bracket owns a municipal bond yielding 4.0 percent. Ignoring state tax, a taxable bond must yield about _____ percent to match it after federal tax.

Opciones para el hueco 1: 4.0, 5.3, 5.9, 12.5

Respuesta: 5.9

Tax-equivalent yield is the tax-free yield divided by (1 - the tax rate). That is 4.0 / 0.68 = about 5.9 percent. The 5.3 option multiplies 4.0 by 1.32, and 12.5 divides by the bracket instead of by one minus the bracket. The higher the client's bracket, the more a tax-free yield is worth, which is why muni bonds fit high-bracket clients and rarely fit clients in low brackets or in a tax-deferred account.

• A. Her stated willingness to take risk, because the client's comfort level controls
• B. The adviser's own view of where the stock market is heading this year
• C. The expected return of the highest-yielding fund the firm offers
• D. Her ability to take risk, because a short horizon and a fixed need limit how much loss she can absorb

Respuesta: D. Her ability to take risk, because a short horizon and a fixed need limit how much loss she can absorb

Risk tolerance has two parts. Willingness is how a client feels about losses, and ability is what the client can afford to lose given the time horizon, liquidity needs and income. When the two conflict, the lower one governs the recommendation. Money needed in 18 months leaves little time to recover from a drop, so the portfolio should lean toward stability even though she says she is comfortable. A good adviser documents that conversation.

• A. Dollar-weighted return
• B. Holding period return on the ending balance
• C. Time-weighted return
• D. Current yield

Respuesta: C. Time-weighted return

A time-weighted return splits the period at every cash flow and links the sub-period returns, so the size and timing of deposits and withdrawals do not change the result. That makes it the standard for comparing managers, who do not control when clients add or remove money. A dollar-weighted return, which is the internal rate of return, does reflect those cash flows, so it measures the client's own experience instead.

• A. Technical analysis of past price charts
• B. Trading on material nonpublic information
• C. Fundamental analysis of published financial statements
• D. Using public economic data to rotate between sectors

Respuesta: B. Trading on material nonpublic information

Semi-strong form efficiency says prices already reflect all public information, which includes past prices, financial statements and economic data. So technical analysis, fundamental analysis of public filings and sector rotation on public data should not beat the market consistently. Only information the market does not have could, and trading on material nonpublic information is illegal insider trading. Weak form covers only past prices, and strong form says even private information is already priced in.

• A. It passes under her will to her daughter, who becomes a co-owner with the surviving partner
• B. It passes automatically to the surviving partner, outside her will
• C. It is divided equally between the surviving partner and her daughter
• D. It is held by the state until a court names a new owner

Respuesta: A. It passes under her will to her daughter, who becomes a co-owner with the surviving partner

Tenants in common each own a separate share that can be unequal, and each owner can sell it, give it away or leave it by will. There is no right of survivorship. That is the difference from joint tenants with right of survivorship and tenancy by the entirety, where a deceased owner's interest passes automatically to the survivor and the will does not control it.

Marca todas las que correspondan.

• A. Act solely in the interest of plan participants and their beneficiaries
• B. Guarantee that no participant's account will lose value
• C. Diversify plan investments to reduce the risk of large losses, unless it is clearly prudent not to
• D. Follow the plan documents, to the extent they are consistent with ERISA
• E. Invest at least half of plan assets in the employer's stock

Respuesta: A. Act solely in the interest of plan participants and their beneficiaries, C. Diversify plan investments to reduce the risk of large losses, unless it is clearly prudent not to, D. Follow the plan documents, to the extent they are consistent with ERISA

ERISA fiduciaries owe four duties: loyalty to participants and beneficiaries, prudence, diversification, and following the plan documents when those are consistent with the law. None of them is a guarantee, because markets move and a fiduciary is judged on process, not results. ERISA does not call for holding employer stock either, and heavy concentration in it is a diversification problem, not a requirement.

Spreading a portfolio across many unrelated holdings mainly reduces _____ risk, while _____ risk, such as a recession that hits the whole market, cannot be diversified away.

Opciones para el hueco 1: systematic, unsystematic

Opciones para el hueco 2: systematic, unsystematic

Respuesta: unsystematic, systematic

Unsystematic risk belongs to one company or sector, such as a failed product, a lawsuit or a credit downgrade, and holding many different securities spreads it out. Systematic risk hits the whole market, for example interest rate moves, recessions or inflation, so every holding feels it. Beta measures exposure to systematic risk, which is why CAPM pays investors only for that kind.

• A. Disclosing the conflict fully and fairly, and recommending the funds only when they serve the client's best interest
• B. Nothing more, as long as the funds are suitable for the client
• C. Telling clients about the payments only if they ask how the firm is paid
• D. Avoiding the fund company entirely, since any conflict of interest is prohibited

Respuesta: A. Disclosing the conflict fully and fairly, and recommending the funds only when they serve the client's best interest

An adviser owes a duty of care and a duty of loyalty. Conflicts are not banned, but the adviser must disclose them in enough detail that a client can understand them and decide with that knowledge, and must still put the client's interest ahead of the firm's. Suitability alone is a lower bar. Waiting for the client to ask does not meet the duty to disclose, and a blanket ban goes further than the rule does.

• A. A state may require the firm to register and pass the state's own review
• B. It registers with the SEC, and a state may require a notice filing and a fee but may not require the firm to register
• C. It is exempt from state antifraud law
• D. It may not have clients in a state until that state approves its Form ADV

Respuesta: B. It registers with the SEC, and a state may require a notice filing and a fee but may not require the firm to register

Federal law splits advisers between the SEC and the states. A federal covered adviser registers with the SEC, and the state can ask for a notice filing and a fee but cannot make the firm register there. States keep their antifraud authority, so they can still investigate and act against fraud by a federal covered adviser. The size thresholds that decide which regulator an adviser belongs to are set by law and change over time, so check the current ones.

Marca todas las que correspondan.

• A. Holding the client's securities itself
• B. Having authority to deduct advisory fees directly from the client's account
• C. Having discretionary authority to buy and sell in the client's account, with no ability to withdraw anything
• D. Serving as trustee of a trust that holds the client's assets
• E. Mailing the client a quarterly performance report

Respuesta: A. Holding the client's securities itself, B. Having authority to deduct advisory fees directly from the client's account, D. Serving as trustee of a trust that holds the client's assets

Custody means holding client assets directly or having the ability to get at them. Holding them, deducting fees from the account and serving as trustee all qualify. Trading authority by itself is not custody, because the adviser cannot take the money out, and sending a report certainly is not. An adviser with custody generally has to keep client assets with a qualified custodian such as a bank or broker-dealer, make sure clients receive account statements from it at least quarterly, and disclose the custody on Form ADV.

Marca todas las que correspondan.

• A. Buying a stock for the adviser's own account just ahead of a large client order in the same stock
• B. Allocating a block trade among client accounts under a fair policy stated in advance
• C. Recommending an investment mainly because it pays the adviser a higher commission, without telling the client
• D. Paying a higher commission for research that benefits clients, when the adviser decides in good faith the cost is reasonable and discloses the practice
• E. Seeking the best overall execution for client trades, not just the lowest commission

Respuesta: B. Allocating a block trade among client accounts under a fair policy stated in advance, D. Paying a higher commission for research that benefits clients, when the adviser decides in good faith the cost is reasonable and discloses the practice, E. Seeking the best overall execution for client trades, not just the lowest commission

Trading ahead of a client order is front running, and recommending a product for the adviser's higher pay without disclosure hides a conflict. Both put the adviser first. A written allocation policy treats clients fairly, and best execution looks at price, speed, certainty and total cost, not commission alone. Soft dollar research is allowed inside the safe harbor in the federal securities laws when the adviser decides in good faith that the cost is reasonable for the value received and the practice is disclosed.