During the contraction phase of the business cycle, which of the following typically occurs?

Unemployment rises while corporate profits tend to decline

Gross domestic product rises for at least two consecutive quarters

Central banks typically raise rates to cool demand

Consumer spending accelerates and profits expand

Which of the following is generally classified as a coincident economic indicator?

Industrial production and personal income

The average duration of unemployment

New orders for consumer goods and materials

Building permits for new private housing

The kiddie tax generally causes a minor child's unearned investment income above an annual threshold to be:

Taxed at the parents' (higher) marginal tax rate

Taxed at the child's zero bracket without any limit

Exempt from all federal income tax

Deductible by the parents on their return

A firm that conducts both investment banking and advisory business maintains information barriers primarily to:

Prevent material nonpublic information from reaching trading personnel

Segregate customers' fully paid securities from the firm's own assets

Spare the firm from disclosing conflicts between its departments to clients

Let investment banking staff review analysts' reports before publication

Two assets whose returns have a correlation coefficient of +1.0 are combined in a portfolio. The portfolio's standard deviation is:

The weighted average of the two standard deviations

Zero, if the two assets are held in equal dollar amounts

Lower than the weighted average, because some offsetting still occurs

Higher than the weighted average, because the risks compound together

A 45-year-old takes a partial withdrawal from a non-qualified annuity. How is it taxed?

Earnings come out first as ordinary income, plus a 10% penalty

Earnings and basis are taxed pro rata at capital gains rates

Cost basis comes out first and is not taxed or penalized

Earnings come out first as long-term gain, with no penalty

A company creates an employees' stock purchase plan that involves investment contracts. To use the exemption in section 402(a)(11), what must it do?

Notify the Administrator in writing 30 days before the plan begins

Register the plan by coordination before any employee enrolls

Obtain the Administrator's written approval before the plan begins

File a notice with the Administrator within 30 days after the plan begins

An analyst plans to outperform by reading companies' newly released earnings reports faster than other investors. If the semi-strong form of market efficiency holds, what result should the analyst expect?

No consistent excess return, because prices adjust to public announcements almost at once

Excess returns, because published earnings reports take several weeks to be fully reflected in stock prices

Excess returns, but only if the analyst also studies past price charts and trading volume to confirm the pattern

No excess return, but only for stocks that are not followed by many analysts

Why is a government's debt denominated in a foreign currency generally considered riskier for default than the same government's debt in its own currency?

The government cannot create the foreign currency and must earn or hold it

Foreign-currency bonds are never rated by the major credit rating agencies

Foreign courts automatically seize the government's assets upon any late payment

Local-currency bonds carry no inflation risk because the central bank backs them

Under the agency cross rule, what must an adviser include in the written disclosure statement it sends to each consenting client at least annually?

The total number of agency cross transactions since the last statement and the total commissions or other remuneration received

The realized gain or loss on each cross trade and the tax lot method used to figure it

The adviser's estimate of the price improvement the client got compared with an open market execution on the same day, based on its own model

The name of the counterparty on the other side of every cross trade completed during the period, along with the price paid by each

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1. Economics & Analysis
During the contraction phase of the business cycle, which of the following typically occurs?
- a.Gross domestic product rises for at least two consecutive quarters
- b.Unemployment rises while corporate profits tend to decline
- c.Central banks typically raise rates to cool demand
- d.Consumer spending accelerates and profits expand
Answer: b
Explanation: A contraction is marked by falling output, rising unemployment, weakening demand and declining corporate profits. Two consecutive quarters of rising GDP describe an expansion, not a contraction, and accelerating consumer spending with expanding profits is the expansion pattern. Central banks generally cut rates during downturns to stimulate activity; raising them to cool demand is typical of the late-expansion or peak phase.
2. Economics & Analysis
Which of the following is generally classified as a coincident economic indicator?
- a.Industrial production and personal income
- b.The average duration of unemployment
- c.New orders for consumer goods and materials
- d.Building permits for new private housing
Answer: a
Explanation: Coincident indicators move in step with the overall economy; industrial production and personal income are classic examples. New orders and building permits are leading indicators that turn before the economy, and the average duration of unemployment is a lagging indicator. The trap is confusing leading indicators with coincident ones.
3. Recommendations & Strategies
The kiddie tax generally causes a minor child's unearned investment income above an annual threshold to be:
- a.Taxed at the child's zero bracket without any limit
- b.Taxed at the parents' (higher) marginal tax rate
- c.Exempt from all federal income tax
- d.Deductible by the parents on their return
Answer: b
Explanation: The kiddie tax taxes a child's unearned income above a set threshold at the parents' marginal rate, preventing families from shifting investment income to a child's lower bracket. It commonly affects UGMA/UTMA custodial accounts.
4. Laws & Regulations
A firm that conducts both investment banking and advisory business maintains information barriers primarily to:
- a.Segregate customers' fully paid securities from the firm's own assets
- b.Spare the firm from disclosing conflicts between its departments to clients
- c.Let investment banking staff review analysts' reports before publication
- d.Prevent material nonpublic information from reaching trading personnel
Answer: d
Explanation: An information barrier, historically called a Chinese wall, separates departments that receive confidential deal information from those that trade or advise. Its purpose is to stop material nonpublic information from reaching trading personnel, and it supports the written policies against misuse of that information that Advisers Act Section 204A requires, backed by restricted lists, watch lists, and surveillance of employee and firm trading. Segregating customer securities from firm assets is a custody and net-capital protection, a different rule. A barrier does not excuse conflict disclosure. Letting bankers review research before publication would pull the wall down, not build it.
Source: Advisers Act s.204A (15 U.S.C. 80b-4a)
5. Economics & Analysis
Two assets whose returns have a correlation coefficient of +1.0 are combined in a portfolio. The portfolio's standard deviation is:
- a.The weighted average of the two standard deviations
- b.Zero, if the two assets are held in equal dollar amounts
- c.Lower than the weighted average, because some offsetting still occurs
- d.Higher than the weighted average, because the risks compound together
Answer: a
Explanation: With perfect positive correlation the assets move in lockstep, so combining them offers no diversification and the portfolio's risk is exactly the weighted average. Any correlation below +1.0 pulls risk under that average. Risk cannot exceed the weighted average, because that is the maximum. Zero risk would require a correlation of -1.0 and specific weights.
6. Investment Vehicles
A 45-year-old takes a partial withdrawal from a non-qualified annuity. How is it taxed?
- a.Earnings and basis are taxed pro rata at capital gains rates
- b.Earnings come out first as ordinary income, plus a 10% penalty
- c.Cost basis comes out first and is not taxed or penalized
- d.Earnings come out first as long-term gain, with no penalty
Answer: b
Explanation: For non-qualified annuity contracts, withdrawals are treated as earnings first (last in, first out), taxed as ordinary income, and the taxable amount incurs a 10% additional tax before age 59 1/2. Basis-first treatment applies to the annuitized payout through the exclusion ratio, not to partial withdrawals. Pro rata treatment does not apply to the contract, and annuity earnings are never taxed as capital gains.
Source: Annuity taxation
7. Laws & Regulations
A company creates an employees' stock purchase plan that involves investment contracts. To use the exemption in section 402(a)(11), what must it do?
- a.Notify the Administrator in writing 30 days before the plan begins
- b.Register the plan by coordination before any employee enrolls
- c.Obtain the Administrator's written approval before the plan begins
- d.File a notice with the Administrator within 30 days after the plan begins
Answer: a
Explanation: The employee benefit plan exemption applies to investment contracts issued in connection with an employees' stock purchase, savings, pension, profit-sharing or similar plan if the Administrator is notified in writing thirty days before the inception of the plan. It is a notice requirement made in advance, not a registration, a later filing or an approval.
Source: Uniform Securities Act (1956) section 402(a)(11)
8. Recommendations & Strategies
An analyst plans to outperform by reading companies' newly released earnings reports faster than other investors. If the semi-strong form of market efficiency holds, what result should the analyst expect?
- a.No consistent excess return, because prices adjust to public announcements almost at once
- b.Excess returns, because published earnings reports take several weeks to be fully reflected in stock prices
- c.Excess returns, but only if the analyst also studies past price charts and trading volume to confirm the pattern
- d.No excess return, but only for stocks that are not followed by many analysts
Answer: a
Explanation: Semi-strong efficiency says prices already reflect all public information, so fast reading of public releases gives no consistent edge. Slow adjustment is the opposite claim, and charting does not add to public information that is already priced. The form does not carve out thinly followed stocks, which is a different question about market structure.
Source: Efficient market hypothesis
9. Economics & Analysis
Why is a government's debt denominated in a foreign currency generally considered riskier for default than the same government's debt in its own currency?
- a.The government cannot create the foreign currency and must earn or hold it
- b.Foreign-currency bonds are never rated by the major credit rating agencies
- c.Foreign courts automatically seize the government's assets upon any late payment
- d.Local-currency bonds carry no inflation risk because the central bank backs them
Answer: a
Explanation: A government that borrows in its own currency can, in principle, always create more of it to pay (at the cost of inflation or currency weakness), so rating agencies often rate local-currency debt higher. Foreign-currency debt must be serviced from export earnings, reserves or new borrowing. It is false that such bonds are unrated. Local-currency bonds do carry inflation risk. Courts do not automatically seize assets on a late payment; sovereign immunity makes enforcement difficult.
Source: CFA Institute curriculum, Fixed Income (sovereign credit risk)
10. Laws & Regulations
Under the agency cross rule, what must an adviser include in the written disclosure statement it sends to each consenting client at least annually?
- a.The total number of agency cross transactions since the last statement and the total commissions or other remuneration received
- b.The realized gain or loss on each cross trade and the tax lot method used to figure it
- c.The adviser's estimate of the price improvement the client got compared with an open market execution on the same day, based on its own model
- d.The name of the counterparty on the other side of every cross trade completed during the period, along with the price paid by each
Answer: a
Explanation: Rule 206(3)-2(a)(3) requires an annual disclosure, sent with or as part of the account statement, that identifies the total number of agency cross transactions during the period and the total commissions or other remuneration received by the adviser and anyone relying on the rule. It does not require counterparty names, tax data, or price-improvement estimates, although the adviser must still seek best execution.
Source: 17 CFR 275.206(3)-2(a)(3)

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