STC SERIES 66 STUDY GUIDE UPDATED QUESTIONS AND
ANSWERS GRADED A+
✔✔Which of the following is/are regulated under the Investment Company Act of 1940?
I. Investment companies investing money into other investment companies
II. The firm that serves as a mutual fund's custodian and holds its assets
III. The minimum rate of return required to remain registered as a fund
IV. The performance of the investment company
A. I only
B. I, II, and III only
C. I and II only
D. I, II, III, and IV - ✔✔C. I and II only
The Investment Company Act of 1940 regulates investment companies, their
investment advisers, custodian banks, and distributors. The Investment Company Act of
1940 does not regulate performance and it does not require minimum rates of return in
order to maintain registration
✔✔A client and his wife purchased their home for $300,000. They have occupied their
home for the last 26 years and have made $80,000 of improvements over the years.
The home was recently put on the market for $800,000, but eventually sold for
$770,000. Upon sale, the taxable capital gains would be how much?
A. $500,000
B. $390,000
C. $0
D. $470,000 - ✔✔C. $0
Upon the sale of a primary residence, a portion of any capital gains are excluded from
taxation. If filing a single tax return, the first $250,000 of gains from the sale are
excluded. If filing a joint tax return, the first $500,000 in gains are excluded. In general,
to qualify for the exclusion, both the ownership test and the use test must be met. For
example, five years prior to the sale of the home you must have occupied the home as
your primary residence for a minimum period of two years.
✔✔Which of the following statements is TRUE regarding the state securities
Administrator?
A. The Administrator may issue a cease-and-desist order to an agent of a broker-dealer
without a hearing
B. The Administrator may issue an injunction against a registered agent of a broker-
dealer
C. The Administrator may arrest any registered employee of a broker-dealer
,D. For due cause, the Administrator, may enjoin, or legally block, an agent's ability to
conduct business in a particular state - ✔✔A. The Administrator may issue a cease-and-
desist order to an agent of a broker-dealer without a hearing
Under the Uniform Securities Act, the state Administrator does not have the authority to
issue an injunction or an enjoining order, nor may the Administrator arrest anyone or
send him to jail. These orders must come strictly from a judge or court of law. The
Administrator may, however, issue a cease-and-desist order to an entity under its
jurisdiction.
✔✔If a client executes a secondary market trade through a broker-dealer, what
information must be disclosed to the client?
A. The reason that the trade was suitable
B. Any unusually excessive fees
C. The brochure or Form ADV Part 2
D. A prospectus - ✔✔B. Any unusually excessive fees
Broker-dealers and/or their agents are always required to notify their clients if the fees
that they are going to be charged are excessive or out of the ordinary. Form ADV Part 2
or the brochure is actually a disclosure document that investment advisers provide to
their clients; this is not used by broker-dealers. A prospectus is required only for new
issues in the primary market, not when secondary market trades are executed through a
broker-dealer. Although all securities recommendations should be suitable, there is no
requirement to provide an explanation in advance as to why each trade is suitable.
✔✔An investment adviser's client is considering acquiring a company for $10 million.
The company's expected future cash flows are $2 million in the first year, $4 million in
the second year, and $8 million in the third year. Which of the following measures would
be most helpful when evaluating this investment?
A. Estimated payback period
B. Internal rate of return (IRR)
C. Average rate of return
D. Future value of current cash flows - ✔✔B. Internal rate of return (IRR)
This is really a question about the present and future values of the company. The
present value of the company is simply the purchase price of $10 million, while the
future values are the cash flows of $2 million, $4 million, and $8 million. The internal
rate of return is the rate of return that makes the present value of all cash flows [i.e.
$2/(1 + r)1, $4/(1 + r)2, and $8/(1+ r)3] equal to the market value (i.e. $10 million). In the
formula, the "r" is the missing IRR. Once the IRR is calculated, the client can use that
rate to compare this investment to other investments (e.g., competing companies,
bonds, or money market securities).
, ✔✔A client is considering purchasing a fund of hedge funds. Which of the following
statements is TRUE concerning this investment?
A. These securities have higher management fees than hedge funds.
B. Funds of hedge funds may be purchased only by investors who meet standards that
are established by the SEC.
C. These securities will outperform traditional mutual funds over time.
D. These securities must be held for a minimum of six months. - ✔✔A. These securities
have higher management fees than hedge funds.
A fund of hedge funds is a mutual fund that invests in unregistered, private hedge funds.
Although hedge funds themselves are not required to register with the SEC, funds of
hedge funds are typically required to register with the SEC and are able to be sold to
both accredited and non-accredited investors. A fund of hedge funds typically has
higher management fees. The fund of hedge funds is assessed a management fees by
each hedge fund in which it invests and will also have its own investment adviser that
assesses a management fee.
✔✔Which of the following statements is TRUE about indexing?
A. It may result in a portfolio that does not accurately track the index.
B. It is an active management strategy.
C. It measures the performance of an IA versus an index.
D. It is a strategy in which an IA attempts to outperform a specific index. - ✔✔A. It may
result in a portfolio that does not accurately track the index.
Indexing is a passive, not an active, management strategy. When using this passive
strategy, an IA attempts to build a portfolio that will mirror or match the performance of a
specific index. However, it is quite possible that the portfolio's actual return may not
match the performance of the index. If this is the case, it is referred to as a tracking
error.
✔✔An investment adviser has computed investment returns from clients over the past
three years. Which of the following methods would be most useful for calculating the
variance of returns that the clients have attained?
A. Sharpe Model
B. Standard Deviation
C. Black-Scholes Model
D. Average Return - ✔✔B. Standard Deviation
Standard deviation is a statistical term used to characterize the dispersion of numerical
measures in a given population. The standard deviation tells how tightly a set of values
is clustered around the average. It is a measure of dispersal, or variation, in a group of
numbers. Standard deviation provides a good indication of volatility.
ANSWERS GRADED A+
✔✔Which of the following is/are regulated under the Investment Company Act of 1940?
I. Investment companies investing money into other investment companies
II. The firm that serves as a mutual fund's custodian and holds its assets
III. The minimum rate of return required to remain registered as a fund
IV. The performance of the investment company
A. I only
B. I, II, and III only
C. I and II only
D. I, II, III, and IV - ✔✔C. I and II only
The Investment Company Act of 1940 regulates investment companies, their
investment advisers, custodian banks, and distributors. The Investment Company Act of
1940 does not regulate performance and it does not require minimum rates of return in
order to maintain registration
✔✔A client and his wife purchased their home for $300,000. They have occupied their
home for the last 26 years and have made $80,000 of improvements over the years.
The home was recently put on the market for $800,000, but eventually sold for
$770,000. Upon sale, the taxable capital gains would be how much?
A. $500,000
B. $390,000
C. $0
D. $470,000 - ✔✔C. $0
Upon the sale of a primary residence, a portion of any capital gains are excluded from
taxation. If filing a single tax return, the first $250,000 of gains from the sale are
excluded. If filing a joint tax return, the first $500,000 in gains are excluded. In general,
to qualify for the exclusion, both the ownership test and the use test must be met. For
example, five years prior to the sale of the home you must have occupied the home as
your primary residence for a minimum period of two years.
✔✔Which of the following statements is TRUE regarding the state securities
Administrator?
A. The Administrator may issue a cease-and-desist order to an agent of a broker-dealer
without a hearing
B. The Administrator may issue an injunction against a registered agent of a broker-
dealer
C. The Administrator may arrest any registered employee of a broker-dealer
,D. For due cause, the Administrator, may enjoin, or legally block, an agent's ability to
conduct business in a particular state - ✔✔A. The Administrator may issue a cease-and-
desist order to an agent of a broker-dealer without a hearing
Under the Uniform Securities Act, the state Administrator does not have the authority to
issue an injunction or an enjoining order, nor may the Administrator arrest anyone or
send him to jail. These orders must come strictly from a judge or court of law. The
Administrator may, however, issue a cease-and-desist order to an entity under its
jurisdiction.
✔✔If a client executes a secondary market trade through a broker-dealer, what
information must be disclosed to the client?
A. The reason that the trade was suitable
B. Any unusually excessive fees
C. The brochure or Form ADV Part 2
D. A prospectus - ✔✔B. Any unusually excessive fees
Broker-dealers and/or their agents are always required to notify their clients if the fees
that they are going to be charged are excessive or out of the ordinary. Form ADV Part 2
or the brochure is actually a disclosure document that investment advisers provide to
their clients; this is not used by broker-dealers. A prospectus is required only for new
issues in the primary market, not when secondary market trades are executed through a
broker-dealer. Although all securities recommendations should be suitable, there is no
requirement to provide an explanation in advance as to why each trade is suitable.
✔✔An investment adviser's client is considering acquiring a company for $10 million.
The company's expected future cash flows are $2 million in the first year, $4 million in
the second year, and $8 million in the third year. Which of the following measures would
be most helpful when evaluating this investment?
A. Estimated payback period
B. Internal rate of return (IRR)
C. Average rate of return
D. Future value of current cash flows - ✔✔B. Internal rate of return (IRR)
This is really a question about the present and future values of the company. The
present value of the company is simply the purchase price of $10 million, while the
future values are the cash flows of $2 million, $4 million, and $8 million. The internal
rate of return is the rate of return that makes the present value of all cash flows [i.e.
$2/(1 + r)1, $4/(1 + r)2, and $8/(1+ r)3] equal to the market value (i.e. $10 million). In the
formula, the "r" is the missing IRR. Once the IRR is calculated, the client can use that
rate to compare this investment to other investments (e.g., competing companies,
bonds, or money market securities).
, ✔✔A client is considering purchasing a fund of hedge funds. Which of the following
statements is TRUE concerning this investment?
A. These securities have higher management fees than hedge funds.
B. Funds of hedge funds may be purchased only by investors who meet standards that
are established by the SEC.
C. These securities will outperform traditional mutual funds over time.
D. These securities must be held for a minimum of six months. - ✔✔A. These securities
have higher management fees than hedge funds.
A fund of hedge funds is a mutual fund that invests in unregistered, private hedge funds.
Although hedge funds themselves are not required to register with the SEC, funds of
hedge funds are typically required to register with the SEC and are able to be sold to
both accredited and non-accredited investors. A fund of hedge funds typically has
higher management fees. The fund of hedge funds is assessed a management fees by
each hedge fund in which it invests and will also have its own investment adviser that
assesses a management fee.
✔✔Which of the following statements is TRUE about indexing?
A. It may result in a portfolio that does not accurately track the index.
B. It is an active management strategy.
C. It measures the performance of an IA versus an index.
D. It is a strategy in which an IA attempts to outperform a specific index. - ✔✔A. It may
result in a portfolio that does not accurately track the index.
Indexing is a passive, not an active, management strategy. When using this passive
strategy, an IA attempts to build a portfolio that will mirror or match the performance of a
specific index. However, it is quite possible that the portfolio's actual return may not
match the performance of the index. If this is the case, it is referred to as a tracking
error.
✔✔An investment adviser has computed investment returns from clients over the past
three years. Which of the following methods would be most useful for calculating the
variance of returns that the clients have attained?
A. Sharpe Model
B. Standard Deviation
C. Black-Scholes Model
D. Average Return - ✔✔B. Standard Deviation
Standard deviation is a statistical term used to characterize the dispersion of numerical
measures in a given population. The standard deviation tells how tightly a set of values
is clustered around the average. It is a measure of dispersal, or variation, in a group of
numbers. Standard deviation provides a good indication of volatility.
