NASAA Series 66 — All Questions

An adviser manages the account of a limited partnership. A limited partner phones with an instruction to buy a position. Absent a different provision in the partnership agreement, who may direct the partnership's account?

• a.The limited partner holding the largest capital account
• b.Any limited partner, since each contributed capital to the account
• c.The limited partners acting together by simple majority vote
• d.The general partner, acting under the partnership agreement✓

The general partner manages the partnership and has authority to bind it; limited partners keep their limited liability by not taking part in management. Contributing capital, having the largest account, or voting as a group does not give limited partners authority to direct the account unless the agreement says so.

A C corporation earns $100,000 of taxable investment income, pays the 21% federal corporate rate, and distributes all of what is left as a qualified dividend taxed at 15% to its sole shareholder. Ignoring state taxes and the net investment income tax, what is the total federal tax on the $100,000?

• a.$15,000
• b.$21,000
• c.$36,000
• d.$32,850✓

The corporation pays 21% x $100,000 = $21,000, leaving $79,000. The shareholder pays 15% x $79,000 = $11,850 on the dividend, so total tax is $21,000 + $11,850 = $32,850. The $21,000 answer stops at the corporate level, $36,000 applies the 15% to the full $100,000 instead of the after-tax dividend, and $15,000 counts only shareholder-level tax.IRC Section 11(b)

Two unrelated clients hold a brokerage account as tenants in common, 60% and 40%. The 40% owner dies; the will leaves everything to a niece. What happens to the 40% interest?

• a.It passes automatically to the surviving owner by right of survivorship
• b.It passes through the decedent's estate to the niece under the will✓
• c.It is frozen until the surviving owner buys it at market value
• d.It is divided between the surviving owner and the niece in a 60/40 proportion

A tenant in common owns a separate, divisible share that has no right of survivorship, so the deceased owner's share goes to the estate and then to the will's beneficiary. Automatic transfer to the survivor is a feature of joint tenancy with right of survivorship, and no rule splits the share or forces a buyout.

A university board is setting a spending policy for an endowment fund governed by the Uniform Prudent Management of Institutional Funds Act (UPMIFA). Which approach matches the Act's prudence standard?

• a.Weigh duration, inflation and purposes, and use a total-return approach✓
• b.Keep the fund from ever falling below the dollar value of the original gift
• c.Spend only the interest and dividends, leaving all appreciation untouched
• d.Distribute a fixed 5% of fund assets each year, as private foundations must

UPMIFA directs the board to consider specified factors, including the fund's duration and purposes, inflation and expected total return, and allows spending from appreciation. The income-only approach and a historic-dollar-value floor are older practices that UPMIFA replaced, and the fixed 5% payout is an IRC Section 4942 rule for private foundations, not an endowment rule.Uniform Prudent Management of Institutional Funds Act (UPMIFA)

A client age 55 has $500,000 and wants $1,000,000 in nine years with no further contributions. The client's risk tolerance supports a portfolio with an expected return near 5%. What should the adviser do?

• a.Explain that the goal needs about 8% a year, above the client's tolerance, and discuss saving more or a lower goal✓
• b.Use the 5% portfolio with margin leverage to lift the expected return toward the 8% needed
• c.Build an 8% portfolio, because the return the goal requires should set the client's risk level
• d.Use the 5% portfolio and say the goal stays on track, since stocks have averaged more than 8% historically

Doubling money in nine years requires about 8% a year (72 / 9), which exceeds what the client can tolerate, so the honest response is to reconcile the goal and the risk, through more savings, more time or a lower target. Letting the goal override tolerance, promising a result the plan does not support, or adding leverage to a client who cannot tolerate that risk all fail the client-profile obligation.

A client born in 1962 has a projected Social Security retirement benefit of $2,400 a month at full retirement age. About what monthly benefit results if the client claims at the earliest age, 62?

• a.$1,800
• b.$1,680✓
• c.$1,920
• d.$2,040

For anyone born in 1960 or later, full retirement age is 67, so claiming at 62 is 60 months early. The reduction is 5/9 of 1% a month for the first 36 months (20%) plus 5/12 of 1% for the remaining 24 months (10%), a 30% cut: $2,400 x 0.70 = $1,680. The other figures reflect cuts of 20%, 25% and 15%, which understate the reduction.Social Security Act Section 202 (SSA full retirement age)

A client born in 1964 is weighing claiming Social Security at age 70 or waiting until 72. What does waiting past 70 add to the monthly benefit?

• a.A larger spousal add-on that grows each year after age 70
• b.Another 4% a year, half the rate that applies before age 70
• c.Another 8% a year, so about 16% more than the age-70 benefit
• d.Nothing, because delayed retirement credits stop accruing at age 70✓

Delayed retirement credits of about 8% a year build from full retirement age until age 70, and no credit is earned for months after 70, so waiting only forfeits benefits. The 8% rate stops at 70, there is no reduced 4% rate afterward, and no spousal add-on grows with delay past 70.Social Security Act Section 202 (delayed retirement credits)

Under the SEC's 2019 interpretation of the Investment Advisers Act fiduciary duty, how often must an adviser update a retail client's investment profile?

• a.Only when the client volunteers that something in the client's life has changed
• b.At intervals no greater than 36 months, as the broker-dealer account-record rule requires
• c.As often as needed to keep a reasonable understanding of the client's objectives✓
• d.At least once every 12 months, in step with the annual Form ADV updating amendment

The Commission's interpretation requires an adviser to update the profile to maintain a reasonable understanding of the client's objectives and adjust advice to changed circumstances, with frequency set by the facts of the relationship. No fixed annual interval is prescribed, the 36-month cycle belongs to the broker-dealer account-record rule (Exchange Act Rule 17a-3(a)(17)), and waiting for the client to speak up falls short of the duty.SEC Release IA-5248 (2019 fiduciary interpretation)

A 62-year-old client's pension and expected Social Security will cover all essential living expenses. Compared with an otherwise identical client who depends on the portfolio for essentials, this client's:

• a.Ability to take risk is greater, though willingness must be assessed separately✓
• b.Time horizon is shorter, since a 62-year-old is nearing the start of retirement
• c.Willingness to take risk is necessarily higher, so an aggressive mix fits
• d.Liquidity need from the portfolio is higher because pension income is fixed

Reliable income that covers essentials means the portfolio is not needed to pay for them, which raises risk capacity; whether the client is comfortable with volatility is a separate question of willingness. Capacity does not determine tolerance, a time horizon is set by when and how the money will be spent, and covered essentials reduce, not raise, the need for portfolio liquidity.

A retiree spends $90,000 a year, receives $36,000 from Social Security and $24,000 from a pension, and plans an initial portfolio withdrawal rate of 4%. What portfolio size covers the remaining spending?

• a.$2,250,000
• b.$750,000✓
• c.$1,350,000
• d.$1,650,000

The portfolio must fund $90,000 - $36,000 - $24,000 = $30,000 a year, and $30,000 / 0.04 = $750,000. The $2,250,000 answer applies 4% to all spending, $1,350,000 subtracts only Social Security, and $1,650,000 subtracts only the pension.

In the usual investment policy statement framework, the constraints are liquidity, time horizon, taxes, legal and regulatory factors, and unique circumstances. A client's instruction that the portfolio hold no fossil-fuel producers is best classified as which kind of constraint?

• a.Legal and regulatory, because it limits what the account may hold
• b.Unique circumstances, because it reflects the client's personal values✓
• c.Liquidity, because it reduces the number of tradable securities
• d.Tax, because it narrows the securities available for harvesting losses

Client-specific preferences and ethical restrictions fall under unique circumstances. No law or regulation requires the exclusion, so it is not legal or regulatory; it is not a tax rule even though it may limit choices; and a values screen is not a cash-flow or marketability requirement.

A client says a stock is worth buying only if it drops back to $120, its price two years ago, though the company's earnings have since halved. Which bias is the client showing?

• a.Confirmation bias: favoring facts that support a held view
• b.Anchoring: relying too heavily on a past reference point✓
• c.Mental accounting: treating money differently by its source
• d.Recency bias: giving the latest events too much weight

The $120 price is a stale reference point that the client holds to despite new information, which is anchoring. Recency bias would overweight the latest events, confirmation bias concerns selectively gathering supporting evidence, and mental accounting concerns separate mental buckets of money.

After two strong years for one sector, a client wants to move 70% of the portfolio into it because it 'just keeps winning.' Which bias is most clearly at work?

• a.Herding: following what other investors are doing
• b.Recency bias: projecting recent results far into the future✓
• c.Anchoring: fixating on one earlier price or figure
• d.Loss aversion: weighing losses more heavily than gains

Extrapolating the last two years of results into the future is recency bias. Anchoring ties judgment to a specific past reference number, herding depends on copying other investors, and loss aversion is about the pain of losses, which the client is not describing.

A client wants to buy a fund because 'everyone at my golf club is buying it,' and cannot explain its strategy or fees. Which bias is shown?

• a.Herding: copying what other investors are doing✓
• b.Overconfidence: overrating one's own knowledge and skill
• c.Confirmation bias: favoring facts that support a held view
• d.Framing: reacting to how a choice is presented

Buying because peers are buying is herding. The client does not claim superior skill, so it is not overconfidence; there is no existing view being protected, so it is not confirmation bias; and the choice is not being reacted to because of how it is worded, so it is not framing.

A client trades several times a week, is sure the market can be timed, and has trailed a broad index fund by three points a year for five years, yet plans to trade more. Which bias is shown?

• a.Herding: copying what other investors are doing
• b.Loss aversion: weighing losses more heavily than gains
• c.Overconfidence: overrating one's own knowledge and skill✓
• d.Status quo bias: preferring to leave things as they are

Persisting in frequent trading and market timing despite years of underperformance shows overrating one's own skill. The client is acting on a personal view, not copying others (herding), is not described as avoiding losses (loss aversion), and is changing positions constantly, the opposite of status quo bias.

A client keeps $80,000 of 'house fund' savings earning 0.5% while carrying a credit card balance at 22%, and says the savings are off limits. Which bias is shown?

• a.Availability bias: judging by examples that come easily to mind
• b.Anchoring: clinging to one earlier reference number
• c.Mental accounting: treating money differently depending on its label✓
• d.Status quo bias: preferring to leave things exactly as they are

Treating a labeled pot of money as untouchable even though paying off 22% debt would clearly help is mental accounting. Status quo bias is inertia without a labeling rationale, anchoring needs a stale reference number, and availability bias is about vivid examples.

A client reads only analyst reports that praise a company the client owns and dismisses downgrades as biased. Which bias is shown?

• a.Confirmation bias: favoring facts that support a view already held✓
• b.Recency bias: giving the latest events too much weight
• c.Availability bias: judging by examples that come easily to mind
• d.Hindsight bias: believing past events were predictable

Seeking out supportive reports and discounting contrary ones is confirmation bias. Hindsight bias concerns judging past outcomes as having been obvious, availability bias concerns vivid examples, and recency bias concerns overweighting the latest data.

A client declines a strategy described as 'a 25% chance of losing money' but accepts the identical strategy described as 'a 75% chance of making money.' Which bias is shown?

• a.Anchoring: tying a judgment to an earlier figure
• b.Representativeness: judging by resemblance to a familiar pattern
• c.Mental accounting: treating money differently by its label
• d.Framing: reacting to how a choice is presented✓

The choices are mathematically identical and only the wording differs, which is framing. Mental accounting needs different pots of money, anchoring needs a reference number carried over from the past, and representativeness judges by resemblance to a familiar pattern.

Which line plots expected return against total risk, measured by standard deviation, for portfolios that combine the risk-free asset with the market portfolio?

• a.The efficient frontier of risky assets
• b.The security market line
• c.The capital market line✓
• d.The security characteristic line

The capital market line starts at the risk-free rate on the return axis, runs tangent to the efficient frontier at the market portfolio, and uses standard deviation on the horizontal axis. The security market line uses beta, the efficient frontier covers risky assets only, and the characteristic line is a regression of one security's returns on the market's.

The risk-free rate is 4% and the expected market return is 9%. A stock with a beta of 1.5 is forecast to return 11%. According to CAPM, the stock is:

• a.Impossible to judge without the stock's standard deviation and correlation data
• b.Undervalued, because its 11% forecast is well above the 9% expected market return
• c.Overvalued: below the security market line, since 11% is under the 11.5% required✓
• d.Fairly valued: a beta above 1.0 justifies a forecast above the market's 9% return

The required return is 4% + 1.5 x (9% - 4%) = 11.5%. A forecast of 11% falls short of that, so the stock plots below the security market line and offers too little for its systematic risk. Comparing the forecast with the market return ignores beta, a higher beta raises the required return and does not justify any forecast above 9%, and CAPM needs only beta, not standard deviation.

Over the past year a portfolio returned 12%, its beta was 1.2 and its standard deviation was 15%. The risk-free rate was 3%. What is its Treynor ratio?

• a.0.60
• b.9.0
• c.7.5✓
• d.10.0

The Treynor ratio is excess return divided by beta: (12% - 3%) / 1.2 = 7.5. The 0.60 figure divides by standard deviation, which is the Sharpe ratio; 10.0 divides the total return by beta without subtracting the risk-free rate; and 9.0 is the excess return before dividing by any risk measure.

A portfolio returned 10.5% with a beta of 0.9. The risk-free rate was 3% and the market returned 8%. What is the portfolio's Jensen's alpha?

• a.7.5%
• b.3.0%✓
• c.0.3%
• d.2.5%

CAPM expects 3% + 0.9 x (8% - 3%) = 7.5%, so alpha is 10.5% - 7.5% = 3.0%. The 2.5% answer compares the portfolio with the market's return and ignores beta, 0.3% applies the beta to the whole market return instead of the premium, and 7.5% is the CAPM-expected return, not the excess over it.

A manager's portfolio returned 9.5% for the year against 8.0% for its benchmark, with tracking error of 3.0%. What is the information ratio?

• a.1.50
• b.0.50✓
• c.3.17
• d.2.00

The information ratio is active return divided by tracking error: (9.5% - 8.0%) / 3.0% = 0.50. The 3.17 result divides the raw return by tracking error, 1.50 stops at the active return, and 2.00 inverts the fraction.

A fund has an R-squared of 0.40 against its benchmark index. What does this indicate?

• a.It captured 40% of the benchmark's return after expenses over the measurement period
• b.40% of its return variation is explained by the benchmark; beta is less reliable✓
• c.Its alpha is 0.40, meaning that share of its return is attributable to manager skill
• d.Its correlation with the benchmark is 0.40, which is a weak positive relationship

R-squared measures the share of the fund's return variation explained by movements in the benchmark; at 0.40, 60% is unexplained, so beta and other benchmark-based statistics are unreliable. It is not a ratio of returns, it is not alpha, and it is the square of the correlation, so a correlation of 0.40 would produce an R-squared of 0.16.

Fund A has a mean return of 10% and a standard deviation of 15%. Fund B has a mean return of 6% and a standard deviation of 6%. Which fund has less risk per unit of return, using the coefficient of variation?

• a.Fund A, with a ratio of 0.67 against 1.0 for Fund B, found by dividing return by risk
• b.Fund A, because a higher coefficient of variation means less risk per unit of return
• c.Fund A, because its 10% mean return more than outweighs its higher standard deviation
• d.Fund B, with a coefficient of variation of 1.0 against 1.5 for Fund A✓

The coefficient of variation is standard deviation divided by mean return: Fund A is 15 / 10 = 1.5 and Fund B is 6 / 6 = 1.0. The lower figure means less risk per unit of return, so Fund B wins. The other options judge by return alone, invert the ratio to 0.67 for Fund A, or read the direction of the ratio backwards.

A study finds that technical strategies based on chart patterns earn no excess returns after costs, while analysis of published financial statements does earn excess returns. What do these findings support?

• a.Both weak-form and semi-strong-form efficiency hold, so no public information gives an edge
• b.Strong-form efficiency holds, because no investor can profit from any information
• c.Weak-form efficiency holds, but semi-strong-form efficiency does not✓
• d.Semi-strong-form efficiency holds, but weak-form does not

Weak-form efficiency says past price patterns carry no exploitable information, which the chart result supports. Semi-strong efficiency says all public information, including financial statements, is already priced, so profits from statement analysis contradict it. Semi-strong cannot hold without weak, and strong-form efficiency would rule out any excess returns at all.

How does arbitrage pricing theory (APT) differ from the capital asset pricing model?

• a.APT measures risk with standard deviation, while CAPM measures systematic risk with beta
• b.APT assumes only unsystematic risk earns a premium, while CAPM prices systematic risk
• c.APT prices several risk factors, each with its own sensitivity, where CAPM uses one✓
• d.APT requires every investor to hold the market portfolio, which CAPM does not demand

APT models expected return as the risk-free rate plus premiums for multiple macroeconomic or other factors, each with its own sensitivity, while CAPM has one factor, market beta. Both theories price systematic risk only, the market-portfolio requirement belongs to CAPM, and APT also uses factor sensitivities rather than standard deviation.

Which content belongs in a client's investment policy statement?

• a.The adviser's forecast of next year's returns for each major asset class and sector
• b.The adviser's fee schedule and a summary of the conflicts of interest it must disclose
• c.Objectives, constraints, allocation ranges, and a rebalancing and review process✓
• d.A list of securities to buy this quarter, with a price target and rationale for each

An IPS records the client's objectives and constraints, the policy allocation with ranges, and how the portfolio will be monitored and rebalanced, so it guides decisions over time. Specific security picks and market forecasts change too quickly to be policy, and fees and conflicts belong in the adviser's Form ADV Part 2A brochure.

A client holds 70% of a portfolio in an index core fund charging 0.05% and 30% in active satellite funds averaging 1.00%. What is the portfolio's weighted-average expense ratio?

• a.0.525%
• b.1.050%
• c.0.715%
• d.0.335%✓

Weight each fee by its share: 0.70 x 0.05% + 0.30 x 1.00% = 0.035% + 0.300% = 0.335%. The 0.525% answer simply averages the two fees, 0.715% reverses the weights, and 1.050% adds the two fees together.

A strategist expects a recession within the year and rotates sectors by business cycle. Which shift fits that view?

• a.Toward energy and materials, the sectors that tend to lead when a recession begins
• b.Toward financials and real estate, which tend to lead just before a downturn
• c.Toward consumer discretionary and industrials, away from staples and utilities
• d.Toward consumer staples, health care and utilities, away from cyclical sectors✓

Defensive sectors such as staples, health care and utilities hold up better when spending and profits fall, so a recession view favors them over cyclicals like industrials and discretionary. Cyclicals lead in recoveries, energy and materials tend to lead later in an expansion, and financials and real estate usually lead early in a recovery.

A constant-dollar formula plan keeps $60,000 in equities. After a rally, equities are worth $75,000 and the bond holding is $40,000. What does the plan require?

• a.Buy $15,000 more equities to keep pace with the rally
• b.Sell $15,000 of equities and move the proceeds into bonds✓
• c.Sell $35,000 of equities to match the bond holding
• d.Sell $6,000 of equities to restore a 60/40 split

A constant-dollar plan holds equities at a fixed dollar amount, so the $15,000 above the $60,000 target is sold and moved to bonds. Selling $6,000 is the constant-ratio answer for a 60/40 mix of the $115,000 total, buying more equities reverses the plan, and equalizing the two holdings is not a feature of the plan.

A constant-ratio plan targets 60% equities and 40% bonds. After a market move the portfolio holds $90,000 of equities and $30,000 of bonds. How much should be sold from equities?

• a.$30,000
• b.$48,000
• c.$42,000
• d.$18,000✓

The total is $120,000, so equities should be 60% x $120,000 = $72,000; selling $90,000 - $72,000 = $18,000 of equities restores the ratio. The $30,000 answer is the constant-dollar result that returns equities to $60,000, $42,000 uses a 40/60 split by mistake, and $48,000 is the bond target and not an equity sale.

A client wants rules-based exposure to value and momentum factors at a lower cost than active management. What additional risk does a factor-tilted (smart beta) fund add compared with a cap-weighted index fund?

• a.Tracking error against the index when the factor lags for years✓
• b.Default risk, because factor funds hold lower-quality bonds than index funds
• c.Currency risk, because factor funds must hold foreign securities to qualify
• d.Key-person risk, because one manager makes every security selection decision

A fund that weights holdings by factor rules deliberately departs from market-cap weights, so its returns can differ from the index for years when the factor is out of favor. Factor funds follow published rules instead of one manager's discretion, they are not bond funds, and nothing in a factor tilt requires foreign holdings.

A client asks that the portfolio exclude companies that derive more than 10% of revenue from tobacco and weapons. This approach is best described as:

• a.Negative screening✓
• b.Shareholder engagement
• c.ESG integration
• d.Community impact investing

Removing companies by industry or revenue criteria is negative screening. ESG integration weighs environmental, social and governance factors within ordinary financial analysis without excluding an industry outright, impact investing targets measurable social outcomes alongside return, and engagement uses ownership to influence management.

An investor buys a $100,000 portfolio with $50,000 of cash and $50,000 borrowed at 6%. The portfolio falls 10% over the year. Ignoring taxes, what is the return on the investor's own $50,000?

• a.-20%
• b.-16%
• c.-26%✓
• d.-13%

The portfolio loses $10,000 and interest costs $3,000, so the investor is down $13,000 on $50,000 of equity, or -26%. The -20% answer doubles the loss but ignores interest, -16% subtracts the 6% rate from the 10% loss without leverage, and -13% divides the dollar loss by the $100,000 total instead of the investor's equity.

An investor owns a stock at $50 and puts on a collar by buying a $45 put for $2.00 and selling a $58 call for $1.20. What is the maximum loss per share if the position is held to expiration?

• a.$4.20
• b.$5.00
• c.$7.20
• d.$5.80✓

The stock can fall from $50 to the $45 put strike, a $5.00 loss, and the net premium paid of $2.00 - $1.20 = $0.80 adds to it, for $5.80. The $5.00 answer ignores the net debit, $4.20 subtracts the debit instead of adding it, and $7.20 is the maximum gain ($58 - $50 - $0.80).

An investor owns a stock at $80 and puts on a collar by buying a $75 put for $3.10 and selling a $90 call for $1.60. What is the break-even price of the position?

• a.$80.00
• b.$81.50✓
• c.$83.10
• d.$78.50

The net cost of the options is $3.10 - $1.60 = $1.50 per share, so the stock must rise from $80 to $81.50 before the position makes money. The $78.50 answer subtracts the debit, $80.00 ignores the options' cost, and $83.10 counts only the put premium.

An index rises 25% on day 1 and falls 20% on day 2, ending where it began. A fund seeking the daily inverse (-1x) of the index return is held over both days. About what is the fund's two-day result?

• a.-5%
• b.-10%✓
• c.+10%
• d.0%

The inverse fund resets daily: it loses 25% on day 1 (0.75) and gains 20% on day 2 (1.20), and 0.75 x 1.20 = 0.90, a 10% loss. A flat index does not give a flat inverse fund over several days because of daily compounding, so 0% is wrong. Neither a 5% loss nor a 10% gain follows from the compounding: the gain would require the fund to rise on day 1.

Two retirees each start with $1,000,000 and withdraw $50,000 at the start of every year. Retiree X's portfolio returns -20% in year 1 and +20% in year 2. What is X's balance at the end of year 2?

• a.$852,000✓
• b.$872,000
• c.$710,000
• d.$900,000

After the first withdrawal X has $950,000, which falls 20% to $760,000; after the second withdrawal $710,000 grows 20% to $852,000. The $872,000 figure is the balance had the +20% year come first, the loss-first order being the sequence-of-returns problem; $900,000 ignores the effect of returns on a shrinking base; and $710,000 stops before the year 2 return.

A retiree uses a three-bucket strategy (cash, income, growth). Stocks fall 25% this year. Which bucket should fund spending first?

• a.The income bucket, with cash reserved for emergencies only
• b.The cash bucket, so the growth bucket is not sold at depressed prices✓
• c.The income bucket, after the growth bucket is fully sold
• d.The growth bucket, sold evenly so each bucket keeps its target size

A bucket plan holds one to three years of spending in cash so that a market drop does not force equity sales at a loss and the growth bucket has time to recover. Selling growth evenly or fully, as two options describe, locks in the 25% decline. Drawing the income bucket while keeping cash untouched treats the cash bucket as an emergency fund only, which is not its role in a bucket plan.

A portfolio targets 40% bonds. Policy A rebalances when an asset class drifts more than 5 percentage points from target; Policy B rebalances when it drifts more than 10% of its target weight. Bonds are now 35.5% of the portfolio. Which policy calls for rebalancing?

• a.Neither policy, since a 4.5-point drift is under the 5-point band
• b.Both policies, because bonds sit under their 40% target weight
• c.Only Policy B, because its band runs from 36% to 44% and bonds sit below it✓
• d.Only Policy A, because a 10% band is looser than a 5-point band

Policy A's band is 35% to 45%, and 35.5% is inside it, so Policy A is not triggered. Policy B's tolerance is 10% of 40% = 4 points, a band of 36% to 44%, and 35.5% is outside it, so Policy B is triggered. Neither policy fails because the 4.5-point drift is smaller than A's band but larger than B's 4-point band. Both policies fails because A is not triggered. Only Policy A reverses the result: a 10% relative band is a tighter 4 points here, not a looser one. Being below target is not a trigger by itself.

The quote on a stock is $48.20 bid, $48.30 offered. A customer enters a day order to buy at a limit of $48.00, and the stock then trades between $48.10 and $48.60 for the rest of the session. What happens to the order?

• a.It converts to a market order at the close and fills near the $48.50 closing price
• b.It expires unfilled, because the price never traded at $48.00 or lower✓
• c.It stays active into the next session until it is filled at $48.00 or better
• d.It executes at $48.10, the day's low, because that was the best price available to buy

A buy limit order can execute only at the limit price or lower, and the stock never traded at $48.00, so the order is not filled. A day order expires at the close. A limit order does not turn into a market order, and it carries over to the next session only if it was entered good-til-canceled.

A customer holds a sell stop order at $45.00. The stock closes at $46.00, then opens the next morning at $42.00 after bad news. What happens to the order?

• a.It stays unfilled until the price rebounds to $45.00 or better
• b.It becomes a market order and fills near $42.00, below the stop price✓
• c.It fills at the prior close of $46.00, the last price before the trigger
• d.It fills at $45.00, because the stop price is a guaranteed fill price

A sell stop becomes a market order when the stock trades at or below the stop price, so it fills at whatever price is available, here about $42.00; a gap can produce a price worse than the stop. The stop price is not a guaranteed fill price, waiting for a rebound describes a stop-limit order, and an order cannot fill at a price that traded before it was triggered.

A customer enters a sell stop-limit order with a $45.00 stop and a $44.00 limit. The stock opens the next day at $42.00. What happens?

• a.It fills at $44.00 because the limit price on the order is a guaranteed price
• b.It is canceled, because the stock opened below the order's $44.00 limit price
• c.It becomes a market order and fills near the $42.00 opening price right away
• d.It becomes a limit order at $44.00 or better, so it may not fill at $42.00✓

Trading through the stop price activates a stop-limit order as a limit order, which can execute only at $44.00 or higher; with the stock at $42.00 it waits and may never fill. Converting to a market order describes a plain stop order, a limit price caps how bad a fill can be but does not guarantee one, and the order stays working after it is triggered.

A customer enters an immediate-or-cancel (IOC) order to buy 5,000 shares at a limit of $30.00. At that moment only 3,200 shares are offered at $30.00 or lower. What happens?

• a.3,200 shares execute and the remaining 1,800 are canceled✓
• b.3,200 shares execute and the other 1,800 rest on the book until the close
• c.None execute, and the entire 5,000-share order is canceled outright
• d.None execute, and the order waits until all 5,000 can be filled together

An IOC order fills whatever it can immediately and cancels the rest, so 3,200 shares trade and 1,800 are canceled. Canceling everything describes a fill-or-kill order, leaving the unfilled part working describes a day limit order, and waiting for the full size describes an all-or-none order.

A customer asks a broker-dealer to sell short 1,000 shares of a listed stock. Under Regulation SHO, what must the firm have done before accepting the order?

• a.Confirmed that the customer owns shares of the same issuer in another account at the firm
• b.Borrowed or arranged to borrow the shares, or had reasonable grounds they can be borrowed✓
• c.Confirmed that the last sale was an uptick over the previous trade at a different price
• d.Obtained the customer's signed written promise to deliver the shares at settlement

The locate requirement of Rule 203(b)(1) bars accepting a short sale order unless the firm has borrowed the security, has a bona fide arrangement to borrow it, or has reasonable grounds to believe it can be borrowed for delivery when due. The old uptick test was removed and replaced by the Rule 201 circuit-breaker test; a customer promise and ownership of related shares do not establish that shares can be delivered.17 CFR 242.203(b)(1) (Regulation SHO)

A customer sells short 200 shares at $50 and covers at $42. While the position was open, the company paid a $0.75 dividend. Ignoring commissions and margin interest, what is the profit?

• a.$8,400
• b.$1,750
• c.$1,450✓
• d.$1,600

The trade gains $8 a share on 200 shares, or $1,600, but the short seller must pay the lender the $0.75 dividend on each share, or $150, leaving $1,450. The $1,600 figure ignores the dividend payment, $1,750 adds it instead of subtracting it, and $8,400 is the cost of buying the shares back.

A stock closed Monday at $40.00. On Tuesday it trades down to $36.00. Under Regulation SHO Rule 201, what is the effect?

• a.Not triggered; the decline would have to reach 20% from the prior close first
• b.Triggered; every short sale is prohibited outright for the rest of Tuesday
• c.Triggered; the price test lasts only through Tuesday's close, not into Wednesday
• d.Triggered; short sales must be above the national best bid through Wednesday✓

A decline of at least 10% from the prior close, here $40.00 to $36.00, triggers the alternative uptick rule, which restricts short sales at or below the national best bid for the remainder of that day and the following day. It restricts price, not all short selling, the trigger is 10% and not 20%, and the restriction carries through the next day.17 CFR 242.201 (Regulation SHO)

A customer opens a margin account with $30,000 in cash and no other positions. Under Regulation T's 50% initial requirement, what is the most marginable stock the customer can buy?

• a.$60,000✓
• b.$90,000
• c.$30,000
• d.$120,000

With a 50% initial requirement the customer's $30,000 covers half of the purchase, so total buying power is $30,000 / 0.50 = $60,000. The $30,000 answer assumes no borrowing, $120,000 uses the 25% maintenance percentage instead of the initial requirement, and $90,000 reflects a 3-to-1 leverage that Regulation T does not allow for this account.12 CFR 220.12 (Regulation T)

A customer buys $40,000 of marginable stock, depositing $20,000 and borrowing $20,000. The stock falls to $26,000. Using a 25% maintenance requirement, what is the maintenance call?

• a.$7,000
• b.$6,500
• c.$500✓
• d.$14,000

Equity is $26,000 - $20,000 = $6,000, and 25% of $26,000 requires $6,500, so the shortfall is $500. The $7,000 answer applies the 50% initial requirement to the new value, $14,000 is the dollar loss on the position, and $6,500 is the required equity, not the amount short.FINRA Rule 4210