SERIES 65 EXAM 3
Capital Asset Pricing Model (CAPM) - correct answer ✔✔a model that relates the required rate of return
on a security to its systematic risk as measured by beta
Agent of a BD - correct answer ✔✔Subchapter S status is revoked if there are more than 100
shareholders. As with limited partners, shareholders have limited liability, and income and losses flow
through to shareholders. Subchapter S Corporations have state charters.
The identity of an estates executor can be determined from which document? - correct answer
✔✔Normally, the deceased has named an executor (executrix) in her will.
All of the following are disadvantages for a limited partner, EXCEPT:
A. The conduit (flow-through) treatment for income and loss
B. Lack of voting power
C. Lack of liquidity
D. Possible adverse changes in the Internal Revenue Code - correct answer ✔✔A. Limited partnerships
are not a liquid investment. Investors should have staying power if they are considering a purchase of a
limited partnership interest. Another risk would be changes in the Internal Revenue Code, which could
cause the tax benefits from the program to be invalid. Also, a limited partner has no voice (vote) in the
operation of the program. A major advantage is that the partnership is not a taxable entity. All income
and loss flows through to the partner for treatment on the partner's own tax return.
Random Walk Theory (Hypothesis) - correct answer ✔✔A follower of the Random Walk Hypothesis
believes that the market is too efficient to effectively trade with sustained returns exceeding the average
return of the market. She would, therefore, most likely follow a buy and hold strategy, possibly in index
funds. Market timing, even using index funds, is not taking a random walk approach.
What is the cost basis for a beneficiary? - correct answer ✔✔When receiving a gift of stock, the
recipient's cost basis is the donor's cost basis or the market value as of the date of the gift, whichever is
less.
, Which of the following nonissuer transactions would be exempt from registration under the Uniform
Securities Act?
A. The issuer is operating an Internet business and has not had a profit since going public
B. The issuer is operating as a blank-check company that is investing in profitable companies
C. The issuer is operating a company whose primary business is to engage in mergers and acquisitions
D. The issuer is operating as a blind-pool company that is investing in companies that have been in
business for at least two years - correct answer ✔✔A. Under the USA, a nonissuer transaction may be
exempt from registration if the issuer is engaged in business, whether or not the company is profitable.
The USA specifically states that this exemption is not available if the issuer operates a blank-check, blind-
pool, or shell company whose primary business plan is to engage in a merger or business combination.
The answer here is not suggesting that a transaction in a security of an unprofitable company is exempt
from registration; however, the other choices are definitely not considered exempt transactions.
A client has been watching a thinly traded stock and has noticed that it has not had any trading activity
today. What type of risk is the MOST significant for this type of investment?
A.Market risk
B. Inflation risk
C. Liquidity risk
D. Business risk - correct answer ✔✔CIf a security is thinly traded, it indicates that the market for that
investment is illiquid. If an investment has a wide spread, it means the difference between the bid and
ask prices is larger than normal. Market risk, or the risk that the market will affect a security's value, is a
real risk, but not the most significant one for a thinly traded stock. Even if the stock market increases, the
stock itself may still be illiquid
A corporate bond has a 12% nominal yield. To be equivalent, an investor in the 28% tax bracket would
need a municipal bond with a yield of:
A.7.9%
B. 10.2%
C. 8.6%
D 9.4% - correct answer ✔✔C. To determine the net yield of a taxable bond, multiply the yield times the
complement of the tax bracket. The net yield would be 8.6% (12% yield multiplied by 72%, which is the
complement of the tax bracket).
Capital Asset Pricing Model (CAPM) - correct answer ✔✔a model that relates the required rate of return
on a security to its systematic risk as measured by beta
Agent of a BD - correct answer ✔✔Subchapter S status is revoked if there are more than 100
shareholders. As with limited partners, shareholders have limited liability, and income and losses flow
through to shareholders. Subchapter S Corporations have state charters.
The identity of an estates executor can be determined from which document? - correct answer
✔✔Normally, the deceased has named an executor (executrix) in her will.
All of the following are disadvantages for a limited partner, EXCEPT:
A. The conduit (flow-through) treatment for income and loss
B. Lack of voting power
C. Lack of liquidity
D. Possible adverse changes in the Internal Revenue Code - correct answer ✔✔A. Limited partnerships
are not a liquid investment. Investors should have staying power if they are considering a purchase of a
limited partnership interest. Another risk would be changes in the Internal Revenue Code, which could
cause the tax benefits from the program to be invalid. Also, a limited partner has no voice (vote) in the
operation of the program. A major advantage is that the partnership is not a taxable entity. All income
and loss flows through to the partner for treatment on the partner's own tax return.
Random Walk Theory (Hypothesis) - correct answer ✔✔A follower of the Random Walk Hypothesis
believes that the market is too efficient to effectively trade with sustained returns exceeding the average
return of the market. She would, therefore, most likely follow a buy and hold strategy, possibly in index
funds. Market timing, even using index funds, is not taking a random walk approach.
What is the cost basis for a beneficiary? - correct answer ✔✔When receiving a gift of stock, the
recipient's cost basis is the donor's cost basis or the market value as of the date of the gift, whichever is
less.
, Which of the following nonissuer transactions would be exempt from registration under the Uniform
Securities Act?
A. The issuer is operating an Internet business and has not had a profit since going public
B. The issuer is operating as a blank-check company that is investing in profitable companies
C. The issuer is operating a company whose primary business is to engage in mergers and acquisitions
D. The issuer is operating as a blind-pool company that is investing in companies that have been in
business for at least two years - correct answer ✔✔A. Under the USA, a nonissuer transaction may be
exempt from registration if the issuer is engaged in business, whether or not the company is profitable.
The USA specifically states that this exemption is not available if the issuer operates a blank-check, blind-
pool, or shell company whose primary business plan is to engage in a merger or business combination.
The answer here is not suggesting that a transaction in a security of an unprofitable company is exempt
from registration; however, the other choices are definitely not considered exempt transactions.
A client has been watching a thinly traded stock and has noticed that it has not had any trading activity
today. What type of risk is the MOST significant for this type of investment?
A.Market risk
B. Inflation risk
C. Liquidity risk
D. Business risk - correct answer ✔✔CIf a security is thinly traded, it indicates that the market for that
investment is illiquid. If an investment has a wide spread, it means the difference between the bid and
ask prices is larger than normal. Market risk, or the risk that the market will affect a security's value, is a
real risk, but not the most significant one for a thinly traded stock. Even if the stock market increases, the
stock itself may still be illiquid
A corporate bond has a 12% nominal yield. To be equivalent, an investor in the 28% tax bracket would
need a municipal bond with a yield of:
A.7.9%
B. 10.2%
C. 8.6%
D 9.4% - correct answer ✔✔C. To determine the net yield of a taxable bond, multiply the yield times the
complement of the tax bracket. The net yield would be 8.6% (12% yield multiplied by 72%, which is the
complement of the tax bracket).
