NASAA Series 66 — All Questions

A client has a 4-year-old child and wants to save for college through a 529 plan. Which statement about the federal tax treatment is most accurate?

• a.Contributions are deductible on the federal return, and withdrawals are tax-free
• b.Earnings are taxed each year, but contributions are returned tax-free
• c.Earnings grow tax-deferred, and qualified education withdrawals are tax-free✓
• d.Earnings are taxed as ordinary income at withdrawal, even if spent on tuition

A 529 plan has no federal deduction for contributions; earnings grow tax-deferred and are free of federal tax when used for qualified education expenses. Annual taxation of earnings describes a taxable account, and earnings are taxed as ordinary income only on non-qualified withdrawals.

A client with a $400,000 portfolio is retiring and plans a first-year withdrawal of 4% of the portfolio, with later withdrawals rising by inflation. What is the first-year withdrawal?

• a.$1,600, found by multiplying $400,000 by 0.4%
• b.$100,000, found by dividing $400,000 by 4
• c.$10,000, found by dividing $400,000 by 40
• d.$16,000, found by multiplying $400,000 by 4%✓

First-year withdrawal = $400,000 x 0.04 = $16,000, with later amounts adjusted for inflation. Dividing by 40 gives $10,000 and misreads the rate as 2.5%. Dividing by 4 treats the percentage as a divisor and gives $100,000, a quarter of the portfolio. Moving the decimal two places gives $1,600, a tenth of the intended amount.

Before recommending a portfolio allocation, an investment adviser must first:

• a.pick the investments with the best returns over the past year
• b.learn the client's finances, goals, time horizon and risk tolerance✓
• c.apply the model portfolio the firm assigns to every new account
• d.get the client's signature on the firm's fee schedule and brochure

A recommendation has to rest on a reasonable understanding of the client, and that starts with gathering the client's financial profile and goals. A firm-wide model portfolio ignores individual circumstances. Recent performance says nothing about suitability. A signed fee schedule is a disclosure step and does not tell the adviser what to recommend.

A client holds 60% of the portfolio in the employer's stock. The best way to address this concentration is typically:

• a.to leave the position alone because the client is loyal to the employer
• b.to diversify in stages, mindful of taxes and trading restrictions✓
• c.to sell the entire position at once and buy an index fund
• d.to borrow against the position and buy more of the same stock

Gradual diversification reduces single-stock risk while managing capital gains taxes and restrictions such as blackout periods. Selling everything at once may create a large tax bill and ignores those limits. Leaving the position alone keeps the concentration risk. Borrowing to buy more increases leverage on the same concentration.

An adviser uses a strategic asset allocation for a client. The adviser would:

• a.set long-term targets from risk tolerance and rebalance periodically✓
• b.move the entire portfolio to cash whenever the market falls 10%
• c.shift weights every quarter to follow the best recent performers
• d.hold the original weights for life, whatever the client's circumstances

Strategic allocation sets long-term target weights that reflect the client's goals and risk tolerance and rebalances back to them. Shifting with momentum is tactical or market timing. Moving to cash on declines is also timing. Holding the weights unchanged for life ignores changes in the client's situation, which should lead to a review.

Rebalancing a portfolio by selling appreciated assets and buying depreciated ones is mainly intended to:

• a.guarantee higher returns than a portfolio that is never rebalanced
• b.remove the need for periodic reviews of the client's situation
• c.keep the portfolio's risk in line with its target allocation✓
• d.reduce taxes by realizing the gains in the current year

Rebalancing restores the target weights, so the portfolio does not drift into a riskier mix as winners grow. It does not guarantee higher returns. Selling appreciated assets realizes gains, which can increase taxes in a taxable account. Periodic reviews are still necessary.

A client plans to buy a home in two years. The down payment should be held mainly in:

• a.long-term Treasury bonds, which carry no credit risk
• b.growth stocks with high long-term return potential
• c.speculative options that could double in months
• d.money market funds and short-term high-quality bonds✓

A short horizon calls for capital preservation and liquidity, which money market funds and short-term bonds provide. Growth stocks can fall sharply within two years. Long-term Treasuries have no credit risk but can lose value when rates rise. Speculative option positions risk losing the entire down payment.

A private foundation reports $2,000,000 of net investment income for the year. What federal excise tax does it owe on that income under IRC Section 4940?

• a.$20,000
• b.$100,000
• c.$27,800✓
• d.$40,000

The excise tax on a private foundation's net investment income is a flat 1.39% for tax years beginning after December 20, 2019, so $2,000,000 x 1.39% = $27,800. The $40,000 answer uses the old 2% rate, $20,000 uses the old reduced 1% rate, and $100,000 applies the 5% minimum-payout percentage, which is a distribution requirement and not a tax rate.IRC Section 4940

A private foundation holds investment assets not used for its charitable activities with a net value of $8,000,000. About how much must it distribute in qualifying distributions this year to meet the minimum payout under IRC Section 4942?

• a.1.39% of that value, so about $111,200
• b.1% of that value, so about $80,000
• c.5% of that value, so roughly $400,000✓
• d.2% of that value, so about $160,000

The minimum investment return that drives the payout is 5% of the net value of assets not used directly for exempt purposes, so $8,000,000 x 5% = $400,000. The 1.39% figure is the excise tax rate on net investment income, 2% is the pre-2020 excise tax rate, and 1% was the former reduced excise rate; none of them sets the payout.IRC Section 4942

A client's adviser manages an irrevocable trust account. The grantor who funded the trust years ago phones in an order to sell a position and send the proceeds to the grantor's daughter, who is a beneficiary. Whose instruction does the adviser need before acting?

• a.The grantor's, because the grantor created and funded the trust years ago
• b.The daughter's, because she is the beneficiary receiving the money
• c.The drafting attorney's, because the attorney holds the original document
• d.The trustee's, exercised within the powers the trust agreement gives✓

Legal title and investment authority sit with the trustee, who must act under the trust instrument. Once an irrevocable trust is funded the grantor generally has no power to direct it, a beneficiary has an interest in the assets but not management authority, and the drafting attorney has no authority to instruct the account.

A client has died. The client's daughter, named executor in the will, asks the adviser to sell securities held in the client's individual account. What should the adviser obtain before accepting her instructions?

• a.A copy of the will signed by the daughter as the named executor
• b.The decedent's durable power of attorney naming the daughter as agent
• c.Letters testamentary issued by the probate court, with a death certificate✓
• d.A notarized affidavit from the daughter stating she is the sole heir

An executor's authority begins when the probate court appoints her and issues letters testamentary; the court document, with proof of death, shows she can act for the estate. A will alone does not prove court appointment, a power of attorney ends at the principal's death, and an heir's affidavit does not give anyone authority over an estate account.

A closely held C corporation wants to open an advisory account. Which document establishes which officers may give instructions on the corporation's behalf?

• a.A board resolution naming the authorized officers and their powers✓
• b.The articles of incorporation filed with the Secretary of State
• c.The corporation's EIN assignment letter from the IRS
• d.A certificate of good standing from the state of incorporation

The adviser relies on a corporate resolution adopted by the board that names the individuals who may act and the scope of their authority over the account. The articles and a good-standing certificate show the entity exists and is active, and the EIN letter shows its tax identification; none of them says who may act.

A manager-managed LLC with four members opens an account. The operating agreement names one member as the manager. A different member phones in a request to withdraw funds. Absent any other grant of authority, what should the adviser do?

• a.Accept it if the caller holds more than a 25% membership interest in the LLC
• b.Accept it, because each LLC member is a co-owner of the assets and may direct them
• c.Accept it once the caller signs a personal indemnity in the adviser's favor
• d.Decline, and take instructions only from the manager or others the agreement names✓

In a manager-managed LLC, authority to act for the entity comes from the operating agreement and rests with the manager, not with each member. Co-ownership of the LLC does not create agency, the size of a membership interest does not substitute for authority, and an indemnity from an unauthorized caller does not make the instruction valid.

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.