STC Series 66 Final #1 and 2 exam
questions and answers
A client purchases an equity-indexed annuity contract that guarantees a 4% return or 80%
of the performance of the S&P 500, whichever is greater. The index declines over the
course of the next year. What return will your client receive? - answer 4%
An equity-indexed annuity guarantees the contract owner a minimum interest rate or the
performance of a stock index such as the S&P 500 Index. If the return on this index is less
than the guaranteed rate, the owner receives the guaranteed rate. If the index return is
greater than the guarantee, the owner receives the greater return. (62437)
The investment policy statement of a qualified retirement plan states that no more than
50% of the plan's assets may be invested in stocks. The investment manager places 65% of
the plan's assets in stocks in order to take advantage of a bull market and increase the value
of the plan's assets. Has the investment manager violated the fiduciary responsibility
provisions of ERISA? - answer Yes, since the investment manager did not follow the
stipulations of the investment policy statement
This is an actual court case. The plan's trustees sued the investment manager who was held
liable even though the plan's assets increased. (62146)
All of the following choices are required to be included in a trade blotter, EXCEPT: -
answer The amount of interest or dividends the investor will receive
Broker-dealers and investment advisers are required to keep certain books and records.
One of them is a blotter, which is a daily record of all purchases and sales of securities. The
trade blotters contain information concerning the transaction such as the account in which
the trade was executed, the trade date, the unit value and total value of the transaction, the
name and amount of securities, and whom the securities were bought from or sold to.
Blotters are also required when a firm receives or delivers securities as well as receives or
disburses cash.
Under the Uniform Securities Act, the statute of limitations for criminal violations of the
Act is: - answer Five years
The statute of limitations for criminal violations under the Act is five years. (62943)
,A small, single-office investment advisory firm has $4 million in assets under management.
The firm is located in Texas. According to the Uniform Securities Act, which of the
following persons associated with the firm will NOT fall under the definition of an
investment adviser representative? - answer An in-house accountant who tabulates
investment results for client accounts
IA representatives are persons who are associated with an IA and make recommendations,
manage accounts, solicit or negotiate the sale of IA services, or supervise any persons who
engage in these activities. Persons who perform clerical functions (e.g., accountants) are
not considered IA representatives. There is no requirement for a person to be an employee
or to be solely dedicated to sales to meet the definition of IA representative.
Under the Securities Exchange Act, a customer confirmation is NOT required to disclose: -
answer The time of the trade execution
The Securities Exchange Act requires broker-dealers to make specific disclosures on
customer confirmations. Some of the required information includes the capacity in which
the broker-dealer is acting (i.e., agency or principal), the amount of commission received by
the broker-dealer for executing an agency trade, and the settlement date of the trade. The
time of the trade execution is not required to be disclosed on a customer confirmation;
however, it may be provided if the customer makes a specific request.
Under the Uniform Securities Act, an Administrator may deny registration to an agent
because of findings that indicate the agent had been convicted of a felony within the past: -
answer 10 years
The Administrator may deny an agent's registration if she finds the individual has been
convicted of a felony within the past 10 years. (62109)
NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment
Adviser Representatives, and Federal Covered Advisers states that any fee arrangement
based on capital gains or portfolio appreciation may only be used if which of the following
disclosures is made in writing? - answer That the arrangement may cause the adviser to
recommend strategies that encourage a client to take greater-than-normal risks
As opposed to other fee arrangements, performance-based fees are more likely to encourage
an adviser to take greater risks with a client's money in order to generate more fees. While
performance-based fees are generally prohibited under the Uniform Securities Act, some
state Administrators make exceptions. (67684)
,Susan is a high-ranking official in the Comptroller's Office of Zanzibar Securities. Her title
is Executive Vice President. Under the Uniform Securities Act, Susan is: - answer Not
considered an agent since she is not involved in sales or trading
Only personnel engaged in securities transactions are agents. Officers can be considered
agents, but it depends on their particular job function. (79474)
Which of the following securities is NOT considered exempt under the Uniform Securities
Act? - answer Securities issued by an automobile company
Under the Uniform Securities Act, any security issued by Canada or a Canadian Province,
or savings and loan association, or any railroad company is considered an exempt security.
There is an exemption under the Act for common carriers but an automobile company does
not qualify for this exemption. (
Value investors would be interested in companies that have - answer Low price earnings
ratios
Value investing is a method of identifying securities that are undervalued based on
company fundamentals. Value stocks tend to have low stock prices in relationship to their
earnings, a higher dividend yield than their industry peers, and, typically, trade at a price
closer to or at a discount to the book value than their competitors. Value investors believe
that the most undervalued companies should rebound and outperform the market. This, of
course, assumes that the company is financially sound. (63012)
As an investment adviser, you are required to record and keep a record of every transaction
in a security for a client's account within: - answer 10 days of the end of each quarter,
excluding direct obligations of the U.S. government
Under both the Investment Advisers Act and the Uniform Securities Act, investment
advisers are required to keep a record of every securities transaction within 10 days of the
end of the quarter in which the transaction took place. Transactions in direct obligations of
the U.S. government are excluded from this requirement.
What is the benefit of discounting the cash flows of a fixed-income security? - answer It
compares the price of a bond against the sum of the present values of the bond's future
payouts
A discounted cash flow evaluates each coupon payment and the repayment of a bond's
principal at a present value, based on a rate of return. This makes it possible to evaluate a
bond's value against the investor's desired rate of return. The sum of each of the discounted
, cash flows, plus the present value of the bond's principal, determines the total value of the
bond. By comparing this value to the current price of the bond, the adviser will be able to
determine if the bond is an attractive investment for a client.
Based on the past performance of XYZ stock, an investment adviser has determined that
there is a 25% chance that in a bull market, XYZ stock will return 20%. In a flat market
(50% probability), the return should be 5%. The likelihood of a bear market is 25%, and
expected returns would be a loss of 10%. What is the expected return for XYZ stock? -
answer 5%
According to modern portfolio theory, the expected return is the sum of the weighted
average of an investment's return. To find each weighted return, multiply the return by the
likelihood of that return. For XYZ stock, the expected return is as follows.
Return
Likelihood
Weighted Return20%x25%=5%5%x50%=2.5%(10%)x25%=(2.5%)
Expected return = 5% (5% + 2.5% - 2.5%)
Your client is considering purchasing a fund of hedge funds. Which of the following
statements concerning this investment is TRUE? - answer These securities are not liquid
investments
A fund of hedge funds is a mutual fund that invests in unregistered, private hedge funds.
Although hedge funds are not required to register with the SEC, funds of hedge funds
typically do not have this exemption available to them. Since funds of funds are invested in
illiquid securities, hedge funds, they do not typically offer investors the opportunity to sell
on a daily basis. (Traditional mutual funds offer this feature.) Liquidity means an investor
can efficiently sell or convert her investment into cash.
Which of the following is/are regulated under the Investment Company Act of 1940?
Investment companies investing money into other investment companies
The firm that serves as a mutual fund's custodian and holds its assets
The minimum rate of return required to remain registered as a fund
questions and answers
A client purchases an equity-indexed annuity contract that guarantees a 4% return or 80%
of the performance of the S&P 500, whichever is greater. The index declines over the
course of the next year. What return will your client receive? - answer 4%
An equity-indexed annuity guarantees the contract owner a minimum interest rate or the
performance of a stock index such as the S&P 500 Index. If the return on this index is less
than the guaranteed rate, the owner receives the guaranteed rate. If the index return is
greater than the guarantee, the owner receives the greater return. (62437)
The investment policy statement of a qualified retirement plan states that no more than
50% of the plan's assets may be invested in stocks. The investment manager places 65% of
the plan's assets in stocks in order to take advantage of a bull market and increase the value
of the plan's assets. Has the investment manager violated the fiduciary responsibility
provisions of ERISA? - answer Yes, since the investment manager did not follow the
stipulations of the investment policy statement
This is an actual court case. The plan's trustees sued the investment manager who was held
liable even though the plan's assets increased. (62146)
All of the following choices are required to be included in a trade blotter, EXCEPT: -
answer The amount of interest or dividends the investor will receive
Broker-dealers and investment advisers are required to keep certain books and records.
One of them is a blotter, which is a daily record of all purchases and sales of securities. The
trade blotters contain information concerning the transaction such as the account in which
the trade was executed, the trade date, the unit value and total value of the transaction, the
name and amount of securities, and whom the securities were bought from or sold to.
Blotters are also required when a firm receives or delivers securities as well as receives or
disburses cash.
Under the Uniform Securities Act, the statute of limitations for criminal violations of the
Act is: - answer Five years
The statute of limitations for criminal violations under the Act is five years. (62943)
,A small, single-office investment advisory firm has $4 million in assets under management.
The firm is located in Texas. According to the Uniform Securities Act, which of the
following persons associated with the firm will NOT fall under the definition of an
investment adviser representative? - answer An in-house accountant who tabulates
investment results for client accounts
IA representatives are persons who are associated with an IA and make recommendations,
manage accounts, solicit or negotiate the sale of IA services, or supervise any persons who
engage in these activities. Persons who perform clerical functions (e.g., accountants) are
not considered IA representatives. There is no requirement for a person to be an employee
or to be solely dedicated to sales to meet the definition of IA representative.
Under the Securities Exchange Act, a customer confirmation is NOT required to disclose: -
answer The time of the trade execution
The Securities Exchange Act requires broker-dealers to make specific disclosures on
customer confirmations. Some of the required information includes the capacity in which
the broker-dealer is acting (i.e., agency or principal), the amount of commission received by
the broker-dealer for executing an agency trade, and the settlement date of the trade. The
time of the trade execution is not required to be disclosed on a customer confirmation;
however, it may be provided if the customer makes a specific request.
Under the Uniform Securities Act, an Administrator may deny registration to an agent
because of findings that indicate the agent had been convicted of a felony within the past: -
answer 10 years
The Administrator may deny an agent's registration if she finds the individual has been
convicted of a felony within the past 10 years. (62109)
NASAA's Model Rule on Unethical Business Practices of Investment Advisers, Investment
Adviser Representatives, and Federal Covered Advisers states that any fee arrangement
based on capital gains or portfolio appreciation may only be used if which of the following
disclosures is made in writing? - answer That the arrangement may cause the adviser to
recommend strategies that encourage a client to take greater-than-normal risks
As opposed to other fee arrangements, performance-based fees are more likely to encourage
an adviser to take greater risks with a client's money in order to generate more fees. While
performance-based fees are generally prohibited under the Uniform Securities Act, some
state Administrators make exceptions. (67684)
,Susan is a high-ranking official in the Comptroller's Office of Zanzibar Securities. Her title
is Executive Vice President. Under the Uniform Securities Act, Susan is: - answer Not
considered an agent since she is not involved in sales or trading
Only personnel engaged in securities transactions are agents. Officers can be considered
agents, but it depends on their particular job function. (79474)
Which of the following securities is NOT considered exempt under the Uniform Securities
Act? - answer Securities issued by an automobile company
Under the Uniform Securities Act, any security issued by Canada or a Canadian Province,
or savings and loan association, or any railroad company is considered an exempt security.
There is an exemption under the Act for common carriers but an automobile company does
not qualify for this exemption. (
Value investors would be interested in companies that have - answer Low price earnings
ratios
Value investing is a method of identifying securities that are undervalued based on
company fundamentals. Value stocks tend to have low stock prices in relationship to their
earnings, a higher dividend yield than their industry peers, and, typically, trade at a price
closer to or at a discount to the book value than their competitors. Value investors believe
that the most undervalued companies should rebound and outperform the market. This, of
course, assumes that the company is financially sound. (63012)
As an investment adviser, you are required to record and keep a record of every transaction
in a security for a client's account within: - answer 10 days of the end of each quarter,
excluding direct obligations of the U.S. government
Under both the Investment Advisers Act and the Uniform Securities Act, investment
advisers are required to keep a record of every securities transaction within 10 days of the
end of the quarter in which the transaction took place. Transactions in direct obligations of
the U.S. government are excluded from this requirement.
What is the benefit of discounting the cash flows of a fixed-income security? - answer It
compares the price of a bond against the sum of the present values of the bond's future
payouts
A discounted cash flow evaluates each coupon payment and the repayment of a bond's
principal at a present value, based on a rate of return. This makes it possible to evaluate a
bond's value against the investor's desired rate of return. The sum of each of the discounted
, cash flows, plus the present value of the bond's principal, determines the total value of the
bond. By comparing this value to the current price of the bond, the adviser will be able to
determine if the bond is an attractive investment for a client.
Based on the past performance of XYZ stock, an investment adviser has determined that
there is a 25% chance that in a bull market, XYZ stock will return 20%. In a flat market
(50% probability), the return should be 5%. The likelihood of a bear market is 25%, and
expected returns would be a loss of 10%. What is the expected return for XYZ stock? -
answer 5%
According to modern portfolio theory, the expected return is the sum of the weighted
average of an investment's return. To find each weighted return, multiply the return by the
likelihood of that return. For XYZ stock, the expected return is as follows.
Return
Likelihood
Weighted Return20%x25%=5%5%x50%=2.5%(10%)x25%=(2.5%)
Expected return = 5% (5% + 2.5% - 2.5%)
Your client is considering purchasing a fund of hedge funds. Which of the following
statements concerning this investment is TRUE? - answer These securities are not liquid
investments
A fund of hedge funds is a mutual fund that invests in unregistered, private hedge funds.
Although hedge funds are not required to register with the SEC, funds of hedge funds
typically do not have this exemption available to them. Since funds of funds are invested in
illiquid securities, hedge funds, they do not typically offer investors the opportunity to sell
on a daily basis. (Traditional mutual funds offer this feature.) Liquidity means an investor
can efficiently sell or convert her investment into cash.
Which of the following is/are regulated under the Investment Company Act of 1940?
Investment companies investing money into other investment companies
The firm that serves as a mutual fund's custodian and holds its assets
The minimum rate of return required to remain registered as a fund
