NASAA Series 65 — All Questions

A surgeon is shopping for disability income insurance. Which definition of total disability is most favorable to her?

• a.She is disabled when her earnings fall, with benefits paid in proportion to the lost income
• b.She is disabled only if she cannot work in any job suited to her education, training and experience
• c.She is disabled only when a covered injury causes a specific listed loss, such as the loss of sight in both eyes or of two limbs
• d.She is disabled if she cannot perform the duties of her own specialty, even if she could work in another job✓

An own-occupation definition pays when the insured cannot do her specialty, which suits a highly specialized professional. An any-occupation test is the narrowest because it denies benefits if any suitable job exists. A named-loss (presumptive) definition covers only listed losses, and a residual benefit pays for partial income loss rather than defining total disability.Disability income insurance contract terms

A client's family needs are $600,000 to replace income, $250,000 to retire the mortgage and $100,000 for education. She has $300,000 of existing life insurance and $150,000 of liquid assets earmarked for these needs. Under the needs approach, how much additional coverage is indicated?

• a.$950,000, which subtracts neither resource
• b.$500,000, which subtracts both resources✓
• c.$800,000, which subtracts only the liquid assets
• d.$650,000, which subtracts only the existing life insurance

Total needs are 600,000 + 250,000 + 100,000 = $950,000. Existing insurance and earmarked liquid assets together total $450,000, leaving $500,000. The $650,000 figure ignores the liquid assets, $800,000 ignores the existing policy, and $950,000 ignores both.Needs analysis approach to life insurance

A client carries $300,000 of auto liability, $500,000 of homeowners liability and a $2 million personal umbrella policy. She is held liable for $1.2 million after an auto accident. How is the loss most likely paid?

• a.The auto policy pays $300,000 and the umbrella policy pays the remaining $900,000✓
• b.The auto policy pays $300,000, the homeowners policy pays $500,000 and the umbrella pays $400,000
• c.The auto policy pays $300,000 and the client pays the remaining $900,000 personally
• d.The umbrella policy pays the full $1.2 million, and the auto policy pays nothing

An umbrella policy sits above the underlying liability limits, so the auto policy responds first and the umbrella covers the excess up to its limit. The umbrella does not displace the underlying policy. The homeowners liability coverage does not apply to an auto accident. The client is not left to pay the excess, since that is precisely the gap the umbrella is bought to fill.Personal liability coverage

A client quickly sold a stock that was up 12% to lock in the gain, but she keeps a stock that is down 30% because she will not sell until it gets back to even. Which behavior does this pattern best illustrate?

• a.The disposition effect, driven by loss aversion✓
• b.Overconfidence, the overrating of one's own skill
• c.Herd behavior, the imitation of other investors
• d.Recency bias, the overweighting of the latest results

Selling winners early and holding losers to avoid realizing a loss is the disposition effect, rooted in loss aversion. Herd behavior is following other investors, recency bias is overweighting the latest results, and overconfidence is overrating one's own skill or information, none of which is the point of this fact pattern. The adviser should refocus the client on each holding's future prospects, not its purchase price.

A client trades about 150 times a year, is certain she can pick winners, and has trailed a comparable index fund for five years after costs. Which bias is most evident, and what is the adviser's best response?

• a.Loss aversion; tell her to hold her losing positions longer
• b.Overconfidence; show her net-of-cost results against a benchmark and document a trading policy in the IPS✓
• c.Anchoring; ask her to base decisions on her original purchase prices
• d.Herd behavior; move her into whatever fund most clients hold

Frequent trading with a belief in superior skill despite poor net results is classic overconfidence, and a benchmark comparison plus a written trading policy is a constructive response. Loss aversion would show up as reluctance to sell losers, anchoring as fixation on a reference price, and herd behavior as imitation of others. Neither of the suggested responses addresses her actual problem.

Several of a client's coworkers recently made large gains in a single theme fund. The client now wants to move his entire retirement portfolio into it, saying he does not want to miss out. Which bias is driving the request?

• a.Loss aversion
• b.Herd behavior✓
• c.Mental accounting
• d.Anchoring

Following what peers are doing, and fearing exclusion from their gains, is herd behavior. Mental accounting is treating money differently by label, loss aversion is the stronger pain of losses than pleasure of gains, and anchoring is fixation on a reference number. The adviser should revisit his IPS, diversification and the risk of buying after a run-up.

A client keeps $80,000 in a savings account earning 1% that she calls her house fund, while carrying $20,000 of credit card debt at 22%. She refuses to touch the savings. Which concept explains her reluctance?

• a.Representativeness, which judges likelihood by resemblance to a typical case
• b.Availability bias, which overweights information that is easy to recall
• c.Mental accounting, which treats money as non-interchangeable because of its label✓
• d.Hindsight bias, which makes past outcomes seem to have been predictable

Treating the house fund as separate from the debt, although the money is fungible and the debt costs far more than the savings earn, is mental accounting. The other three biases are real but concern probability judgments and memory, not the labeling of money. The adviser should show the net cost of holding both.

Which of these IPS entries is a constraint rather than an objective?

• a.A goal of earning a 6% net annual return
• b.A $60,000 need for cash in two years to buy a home✓
• c.A limit on any one-year loss of 15%
• d.A goal of growing the portfolio to $1 million

Constraints are limits on how the portfolio may be run, such as liquidity needs, time horizon, taxes, legal factors and unique circumstances; the dated $60,000 cash need restricts the portfolio's liquidity. A return target and a dollar growth goal are return objectives, and a maximum acceptable loss expresses the risk objective.Investment policy statement; CFA Institute IPS framework

Which event most clearly calls for the adviser to revisit the client's IPS before the next scheduled annual review?

• a.The portfolio drifts 2 points from a target weight that has a 5-point rebalancing band
• b.The client receives a $900,000 inheritance that raises her net worth by about 60%✓
• c.A lower-cost share class of one of her funds becomes available
• d.The broad stock market falls 8% over a quarter, within the loss the IPS already allows

A large inheritance changes the client's capacity, objectives and liquidity, which are the premises of the IPS. A decline that stays within the stated risk limits, a cheaper share class, and drift inside the rebalancing band are all handled by the policy as written and do not change the client's circumstances.Investment policy statement review

A client calls to say a health problem means she will retire five years earlier than planned. What should the adviser do?

• a.Update the profile and IPS, reassess the allocation against the shorter horizon, and document the change and the reasoning✓
• b.Move the portfolio to cash immediately to protect the early retirement date, and revisit the plan only after she has stopped work
• c.Note the call and hold off on changes until the annual review, since the current allocation was already reviewed and approved by her
• d.Wait for the client to submit a formal written change request and a letter from her physician before touching the IPS

A change in horizon alters the premises of the recommendation, so the adviser should promptly update and document the profile and revisit the allocation. Waiting for the annual review or a formal written request leaves an unsuitable portfolio in place. Going entirely to cash on the adviser's own initiative ignores the client's growth needs and her say in the matter.Fiduciary duty; know-your-client updating

Two stocks each have a standard deviation of 20%. A portfolio is invested 50% in each, and the correlation between them is 0.0. The portfolio's standard deviation is closest to:

• a.10.0%
• b.28.3%
• c.14.1%✓
• d.20.0%

With zero correlation, variance = (0.5 x 20)^2 + (0.5 x 20)^2 = 100 + 100 = 200, so the standard deviation is the square root of 200, about 14.1%. The 20.0% figure would result only at a correlation of +1.0. The 10.0% figure halves the risk as if the stocks were perfectly offsetting. The 28.3% figure adds the variances without the weights.Modern portfolio theory

A portfolio of large-company stocks has a standard deviation of 15%. The adviser considers adding 10% in a commodity fund with a standard deviation of 25% and a correlation of 0.1 with the portfolio. Which statement is most accurate?

• a.Portfolio risk can fall only if the new fund's correlation is negative
• b.Portfolio risk can fall below 15%, because the correlation is far below +1.0✓
• c.Portfolio risk can fall only if the new fund's expected return is higher
• d.Portfolio risk must rise, because the new fund is riskier on its own

What matters is how an asset moves relative to the portfolio, not its stand-alone risk. With a 90/10 mix, variance = 0.81(225) + 0.01(625) + 2(0.9)(0.1)(0.1)(15)(25) = about 195.3, a standard deviation near 14.0%. A negative correlation is not required, and the effect on risk does not depend on expected return.Modern portfolio theory

The risk-free rate is 3%, and the market portfolio has an expected return of 10% and a standard deviation of 16%. An investor holds 50% in the risk-free asset and 50% in the market portfolio. What are the expected return and standard deviation of the combination?

• a.6.5% and 16.0%
• b.10.0% and 8.0%
• c.6.5% and 9.5%
• d.6.5% and 8.0%✓

Return = 0.5(3%) + 0.5(10%) = 6.5%. The risk-free asset has zero standard deviation and no correlation with the market, so risk = 0.5 x 16% = 8.0%. Leaving risk at 16% ignores the risk-free half, and 9.5% treats the 3% rate as if it were a standard deviation. Using the market's 10% return ignores the weighting.Capital market line; separation theorem

Four portfolios are listed as (expected return, standard deviation): A (8%, 10%), B (8%, 12%), C (10%, 12%), D (6%, 7%). Which portfolio is NOT efficient?

• a.Portfolio D
• b.Portfolio C
• c.Portfolio B✓
• d.Portfolio A

An efficient portfolio offers the highest return for its risk and the lowest risk for its return. B is dominated: A earns the same 8% with less risk, and C earns more at the same 12% risk. A has the lowest risk among the 8%-return choices, C has the highest return, and D has the lowest risk of all, so none of them can be beaten on both measures.Efficient frontier

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

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.Efficient market hypothesis

Studies find that corporate insiders earn abnormal profits on trades in their own companies' stock. Which form of the efficient market hypothesis does this evidence contradict?

• a.The semi-strong form only
• b.The strong form only✓
• c.All three forms
• d.The weak form only

Strong-form efficiency says even private information is reflected in prices. Consistent insider profits show that private information is not fully priced in, which contradicts the strong form but says nothing about whether public information or past prices are reflected. The weak and semi-strong forms are therefore not contradicted by this evidence.Efficient market hypothesis

Which finding is generally treated as a market anomaly, meaning a pattern that appears to conflict with market efficiency?

• a.Index funds have earned returns close to the market return before fees
• b.Over long periods, small-company stocks have earned more than their CAPM-predicted returns✓
• c.Stocks with higher betas have tended to earn higher average returns than stocks with lower betas
• d.Stock prices jump within minutes of an unexpected earnings announcement

The size effect, a return premium for small companies beyond what beta explains, is a documented anomaly. Quick price reactions to news and index funds tracking the market are what an efficient market predicts, and a link between beta and return is the relationship CAPM itself describes.Market anomalies

A client asks why the adviser favors index funds when some active managers beat the market. Which response best reflects the evidence?

• a.Active managers underperform mainly because they hold too few stocks to diversify, not because of their costs
• b.Index funds avoid market risk, so their value does not fall when the index declines and the market has a bad year
• c.Index funds hold the best-performing stocks in each sector, so they beat active managers in every kind of market
• d.Active managers must overcome higher fees and trading costs, and few outperform consistently after costs✓

Studies of active funds generally find that costs consume the gross outperformance of most managers, and past winners are hard to pick in advance. An index fund still bears market risk and falls when its index does. Concentration may raise volatility but is not why most active funds trail, and an index fund holds the market's securities, not a selection of the best ones.Active versus passive management

An adviser keeps a client's long-term policy at 60% stocks and 40% bonds, but holds 68% stocks for the next 6 to 12 months because she believes equities are undervalued. This is an example of:

• a.Tactical asset allocation✓
• b.Portfolio rebalancing
• c.Dynamic asset allocation
• d.Strategic asset allocation

A short-term, deliberate deviation from the long-term policy mix to exploit a market view is tactical asset allocation. Strategic allocation is the long-term policy mix itself, rebalancing returns a drifted portfolio to target and does not express a view, and dynamic allocation changes the mix mechanically as markets move.Asset allocation approaches

A client wants low-cost broad market exposure for most of her money but would like a smaller portion in actively managed specialty ideas. Which structure fits?

• a.Sector rotation, with the whole portfolio moved among industries
• b.Barbell, with holdings concentrated in short-maturity and long-maturity bonds
• c.Constant-mix, with fixed proportions restored after every market move and no split between passive and active
• d.Core-satellite, with a large index core and smaller actively managed holdings around it✓

A core-satellite design pairs an inexpensive passive core with smaller active positions. Constant-mix is a rebalancing rule and not a way of dividing passive and active money. A barbell describes bond maturities, and sector rotation is a whole-portfolio active style.Core-satellite portfolio construction

A target-date fund described as having a "through" glide path will do which of the following?

• a.Keep lowering its stock allocation for years after the target date✓
• b.Reach its most conservative mix at the target date and hold it there
• c.Raise its stock allocation after the target date to offset inflation
• d.Hold a constant stock and bond mix throughout its life

A "through" glide path continues shifting toward bonds into retirement, on the assumption that the money must last for decades. The fund that stops at the target date has a "to" glide path. A fixed mix is not a glide path at all, and increasing stock exposure after the date is not how either type is designed.Target-date funds

A client's policy is 50% stocks, 30% bonds and 20% real assets, with a rebalancing band of plus or minus 3 percentage points. The portfolio now holds 57% stocks, 28% bonds and 15% real assets. Which asset classes breach their bands?

• a.Stocks and real assets only✓
• b.All three asset classes
• c.Stocks only, because it shows the largest deviation from target
• d.Bonds and real assets only

Stocks are 7 points over target, outside the 3-point band, and real assets are 5 points under, also outside. Bonds are 2 points under, within the band. Stocks alone ignores the real-asset shortfall, and the other two choices wrongly include bonds.Rebalancing policy; tolerance bands

A foundation owes a single $5 million grant in exactly eight years and wants its bond portfolio concentrated near that date. Which structure is that?

• a.A barbell, with holdings in 1-year and 15-year bonds
• b.A ladder, with equal amounts maturing each year for eight years
• c.A bullet portfolio, with maturities clustered around year eight✓
• d.A floating-rate portfolio, with coupons that reset periodically

A bullet portfolio concentrates maturities at one point and suits a known single liability. A ladder spreads maturities evenly and leaves most of the money to mature before or after the date. A barbell sits at the short and long ends and not at the target date, and floating-rate notes address interest-rate resets, not the timing of the liability.Bond portfolio strategies

A client holds a ladder of five Treasury notes, $20,000 each, maturing in one through five years. The one-year note matures. To keep the ladder intact, what should the adviser do with the proceeds?

• a.Buy a new five-year note✓
• b.Hold cash until rates rise
• c.Buy a new one-year note
• d.Buy a new ten-year note

Rolling the maturing rung into the longest rung restores the original structure of one maturity per year over five years. Buying another one-year note would leave two rungs at the short end and no five-year rung, a ten-year note extends beyond the ladder, and waiting in cash is market timing that abandons the strategy's purpose.Bond ladder

A manager screens for companies whose earnings are growing faster than the market but whose price-to-earnings ratio is low relative to that growth rate. This style is best described as:

• a.Growth at a reasonable price (GARP)✓
• b.Momentum investing
• c.Deep-value investing
• d.Contrarian investing

GARP seeks growth stocks whose valuation is moderate relative to their growth, often measured by a PEG ratio. Deep value buys the cheapest stocks regardless of growth, momentum buys recent price winners, and contrarian investing buys what the crowd is selling.Equity investment styles

A manager buys the stocks in the top tenth of 12-month price performance, expecting recent winners to continue to outperform. This is best described as:

• a.Growth at a reasonable price
• b.Value investing
• c.Momentum investing✓
• d.Contrarian investing

Buying recent winners in the expectation that the trend will persist is momentum investing. Contrarian investing does the opposite, value investing looks at low prices relative to fundamentals, and GARP screens on growth relative to valuation, not past price performance.Equity investment styles

An adviser compares a barbell of 2-year and 20-year bonds with a bullet portfolio of 11-year bonds, both having about the same duration. Compared with the bullet, the barbell will generally have:

• a.Zero reinvestment risk
• b.Greater convexity✓
• c.Lower convexity
• d.A shorter maturity than its duration

For the same duration, the barbell's cash flows are more spread out, which gives it greater convexity: its price gains from falling rates are larger than its losses from equal rises. Lower convexity describes the bullet. The barbell's average maturity is not shorter than its duration, and its short-maturity bonds create reinvestment risk, not remove it.Bond portfolio strategies; convexity

A client holds a large position in her employer's stock and wants to limit downside for a year without selling. The adviser suggests a collar. What does the strategy involve?

• a.Buying both a put and a call on the stock
• b.Buying a protective put and selling a covered call on the stock✓
• c.Selling a put and buying a call on the stock
• d.Selling a covered call and buying more shares with the premium

A collar combines a long put for downside protection with a short call, whose premium helps pay for the put, at the cost of capping upside. Selling a put and buying a call adds exposure instead of limiting it. Buying both options costs more and does not cap upside, and using the premium to buy shares increases concentration.Collars; hedging concentrated positions

A client with a large, low-basis stock position wants diversification without recognizing the gain immediately. Which approach is designed for this?

• a.Contribute the shares to an exchange fund in return for an interest in a diversified pool, with the original basis carrying over✓
• b.Pledge the shares as collateral for a margin loan and use the proceeds for a diversified portfolio, which removes the concentration
• c.Donate the shares to her own revocable trust, which is treated as a transfer that resets the basis to the market value on the transfer date
• d.Swap the shares for stock in a similar company, which reduces the position without triggering a taxable gain on either side of the exchange

An exchange fund lets investors pool concentrated shares into a diversified portfolio; the gain is deferred and the original basis carries over to the new interest. A revocable trust is not a sale and does not reset basis. A swap for another stock is a taxable exchange, and a margin loan against the shares leaves the concentration in place.Exchange funds; concentrated positions

A client owns 10,000 shares of employer stock worth $60 each with a $12 per-share basis. She plans to sell 2,500 shares a year for four years. Assuming a 20% federal rate on long-term gains and no price change, what is the tax on the first year's sale?

• a.$30,000, taxing the full proceeds
• b.$96,000, taxing all 10,000 shares
• c.$6,000, taxing only the basis sold
• d.$24,000, which is 20% of the $120,000 gain✓

Gain per share is 60 - 12 = $48, so 2,500 shares produce a $120,000 gain, and 20% of that is $24,000. The $30,000 figure taxes the $150,000 of proceeds and ignores basis. The $96,000 figure taxes the gain on all 10,000 shares. The $6,000 figure taxes only the $30,000 of basis in the shares sold.Concentrated stock; staged sales

A client owns a stock trading at $52 and enters a sell stop order at $48. After bad overnight news the stock opens at $41. What most likely happens?

• a.The stop triggers at the open and becomes a market order that fills near $41✓
• b.The order does not execute, because the stock never actually traded at $48 after the open
• c.The order fills at exactly $48, because the stop price is guaranteed once the order is entered
• d.The order becomes a limit order at $48 and stays unfilled

A stop order becomes a market order once the stop price is reached or passed, so a gap down fills at whatever the market offers, here near $41. The stop price is a trigger, not a guaranteed fill. A gap through the stop price still triggers it, and only a stop-limit order would convert to a limit order at its limit price.SEC Investor Bulletin: Stop, Stop-Limit, and Trailing Stop Orders

A client buys a stock at $50 and places a sell trailing stop order with a $4 trail. The stock rises to $58 and then declines steadily. At what price does the stop trigger?

• a.$58, the highest price the stock reached
• b.$46, the initial stop set below the purchase price
• c.$50, the price at which the client bought the stock
• d.$54, which is $4 below the $58 peak✓

A trailing stop follows the stock's high by the trail amount and does not move down, so after the $58 peak the stop sits at 58 - 4 = $54 and triggers when the price falls to that level. The $46 figure is the initial stop that has since ratcheted up. The $50 figure is the purchase price, and $58 is the peak, not the stop.SEC Investor Bulletin: Stop, Stop-Limit, and Trailing Stop Orders

A client wants to buy 5,000 shares of a stock but only if all 5,000 can be bought immediately; otherwise the whole order should be canceled. Which order type does this?

• a.All-or-none
• b.Immediate-or-cancel
• c.Fill-or-kill✓
• d.Good-till-canceled limit

A fill-or-kill order must be executed in full immediately or canceled in its entirety. An all-or-none order also requires a complete fill but stays active until it is filled or canceled. An immediate-or-cancel order is filled as far as possible at once and cancels the rest, so partial fills occur. A good-till-canceled limit order simply persists.SEC Investor Bulletin: Understanding Order Types

A stock closed yesterday at $40 and today trades at $35.80. What restriction applies to short sales of that stock under the SEC's alternative uptick rule?

• a.All short selling in the stock is halted for the remainder of the trading day, and trading resumes normally tomorrow morning
• b.Short sales may be executed only at a price above the last sale, as in the old uptick rule, and only until the close today
• c.All short selling market-wide is halted for 15 minutes, and then normal short selling resumes for the rest of the session
• d.Short sale orders may not be executed or displayed at or below the national best bid for the rest of today and tomorrow✓

Rule 201 is triggered by a decline of 10% or more from the prior close, and 35.80 is down 10.5%. Restricted short sales must then be priced above the national best bid for the rest of that day and the following day. It is a price test, not a trading halt. A plus-tick rule is the old uptick rule, and market-wide halts come from the separate market-wide circuit breakers.Regulation SHO Rule 201 (17 CFR 242.201)

A broker-dealer routes all customer equity orders to the market center that pays it the most for order flow, although another center consistently gives better prices. Which obligation is the firm most likely violating?

• a.The limit order display rule, which requires all customer orders to be shown on an exchange
• b.The short-sale price test, which limits routing of orders to the national best bid
• c.The order protection rule, which requires every order to be routed to the exchange with the highest volume
• d.Best execution, which requires reasonable diligence to obtain the most favorable terms for the customer✓

FINRA Rule 5310 requires reasonable diligence to find the best market so the customer's resulting price is as favorable as possible, with regular and rigorous review of execution quality; payment for order flow does not override that duty. The other rules cover trade-throughs, order display and short selling, not routing based on the firm's compensation.FINRA Rule 5310

A client buys 600 shares at $45 in a margin account. Under Regulation T initial margin, how much must the client deposit?

• a.$13,500, which is 50% of the $27,000 cost✓
• b.$18,900, which is 70% of the purchase cost of $27,000
• c.$27,000, which pays the full cost in cash with no loan
• d.$6,750, which is the 25% maintenance rate applied to the cost

The purchase costs 600 x 45 = $27,000, and Regulation T requires 50% initially, or $13,500, with the broker lending the other $13,500. The $6,750 figure is 25%, the maintenance rate. The $18,900 figure is 70%, and $27,000 is the full price paid in cash.Regulation T (12 CFR 220.12); FINRA Rule 4210

A client buys $30,000 of stock in a margin account with a $15,000 deposit and a $15,000 loan. The maintenance requirement on long positions is 25%. At what market value does a maintenance call arise?

• a.$15,000, which is zero equity and well past the call point
• b.$18,750, which applies the 25% rate to the loan balance
• c.$22,500, which assumes the stock must fall 25% before a call
• d.$20,000, where equity equals 25% of market value✓

Equity equals market value minus the $15,000 debit, so a call arises when (MV - 15,000) / MV falls to 25%, which gives MV = 15,000 / 0.75 = $20,000. The $18,750 figure applies 25% to the debit instead. The $22,500 figure assumes a 25% fall in value, and $15,000 would be zero equity, well past the call point.FINRA Rule 4210

A client sells short 1,000 shares at $50 and deposits the Regulation T margin of 50% of the sale value. The maintenance requirement on a short position is 30% of current market value. At about what price per share does a maintenance call arise?

• a.$65.00
• b.$75.00
• c.$57.69✓
• d.$60.00

The account holds credit of $50,000 sale proceeds plus a $25,000 deposit = $75,000. Equity is 75,000 - 1,000P, and a call arises when it equals 30% of 1,000P, so 75,000 = 1,300P and P = $57.69. The $65.00 figure adds 30% to the sale price. The $60.00 figure uses the 25% rate for longs, and $75.00 would be zero equity.Regulation T; FINRA Rule 4210

A margin account holds stock now worth $28,000 against a $18,000 debit balance. The maintenance requirement is 25%. Which statement is correct?

• a.Equity is about 64.3% of market value, so there is no call
• b.Equity is about 35.7% of market value, and a call arises because the debit exceeds half the market value
• c.Equity is about 35.7% of market value, which exceeds the maintenance requirement, so there is no call✓
• d.Equity is about 35.7% of market value, which is below the 50% initial requirement, so a maintenance call is issued

Equity is 28,000 - 18,000 = $10,000, or 35.7% of $28,000. That is above the 25% maintenance minimum, so no call arises. The 50% Regulation T figure applies to new purchases, not to a continuing position. The 64.3% figure is the debit as a share of market value, not equity, and the size of the debit relative to value is not a trigger on its own.FINRA Rule 4210

A client buys $20,000 of stock on 50% margin. A year later the stock is up 20% and the loan interest is 6% of the $10,000 borrowed. Ignoring commissions and dividends, what is the return on the client's invested $10,000?

• a.34%, the $3,400 net gain on $10,000 invested✓
• b.28%, which charges interest on the whole $20,000
• c.20%, the unleveraged return on the stock
• d.40%, which leaves out the interest cost on the loan entirely

The gain is 20% of $20,000 = $4,000, less $600 interest, or $3,400 on $10,000 invested, which is 34%. The 40% figure ignores the interest cost. The 20% figure is the unleveraged return on the stock. The 28% figure charges interest on the entire $20,000 position instead of the $10,000 loan.Margin leverage

On Thursday, December 31, 2026, a client sells stock at a loss in a regular-way trade that settles in January 2027. In which tax year is the loss recognized?

• a.2027, because recognition waits for settlement
• b.2026, but only if the client asks for same-day cash settlement
• c.2026, because the trade date controls✓
• d.2027, unless the client elects to treat it as a 2026 sale

For publicly traded securities a gain or loss is recognized on the trade date, not the settlement date, so a December 31 sale counts for that year even though it settles one business day later in January. The client cannot choose a year by election, and no special settlement request is needed to put the loss in 2026.IRS Publication 550; SEC Rule 15c6-1(a)

A pension fund that has sold securities instructs its custodian how to deliver them. The fund wants to be sure it does not deliver the securities before receiving payment. Which instruction provides that protection?

• a.Receive versus payment (RVP)
• b.Delivery versus payment (DVP)✓
• c.Cash on trade date
• d.Free delivery

In a DVP settlement the securities and the cash change hands simultaneously, so the seller does not part with the securities unpaid. Free delivery moves securities with no payment at the same time. Receive versus payment is the buyer-side counterpart, which protects a purchaser and is not the arrangement a seller uses, and cash on trade date describes timing, not simultaneous exchange.Delivery versus payment; institutional settlement

A client buys a stock at $40, receives $1.20 in dividends during the year, and sells it at $43. What is the holding period return?

• a.7.5%
• b.3.0%
• c.10.5%✓
• d.9.8%

Holding period return = (ending price - beginning price + income) / beginning price = (43 - 40 + 1.20) / 40 = 10.5%. The 7.5% figure leaves out the dividend. The 9.8% figure divides by the ending price instead of the beginning price. The 3.0% figure is the dollar capital gain.

A fund returns +40% in its first year and -30% in its second year. What is the fund's annualized (geometric) return over the two years?

• a.About 0.0%
• b.About +5.0%
• c.About -2.0%
• d.About -1.0%✓

The growth factors are 1.40 and 0.70, which multiply to 0.98, and the square root of 0.98 is about 0.990, a geometric return of about -1.0% per year. The +5.0% figure is the arithmetic average. The -2.0% figure is the cumulative two-year loss, not an annual rate. A 0.0% figure would require the two returns to offset exactly.

A client invests $100,000 at the start of year 1 and the portfolio gains 20%. At the start of year 2 she adds another $100,000, and the portfolio then loses 10%. Which statement is correct?

• a.The time-weighted return is about -0.7%, because it counts the added $100,000
• b.The two returns are equal, because the same investments earned them over the same two years in the same account
• c.The money-weighted return is higher, because more dollars were invested in the year of the gain than in the year of the loss
• d.The time-weighted return, about 3.9% a year, is higher than the money-weighted return, about -0.7% a year✓

Time-weighted return removes the effect of cash flows: 1.20 x 0.90 = 1.08, about 3.9% a year. Money-weighted return reflects the client's decision to add money before the weak year; solving the cash flows gives about -0.7%. The larger sum was invested in the losing year, so the money-weighted return is lower, and the two measures differ whenever flows occur between periods.

A bond portfolio earns a 12% nominal return in a year when inflation is 5%. Using the exact formula, the real return is closest to:

• a.6.0%
• b.17.6%
• c.7.0%
• d.6.7%✓

The real return is (1.12 / 1.05) - 1 = 6.67%, about 6.7%. The 7.0% figure uses simple subtraction, which is only an approximation. The 17.6% figure multiplies the two rates (1.12 x 1.05) instead of dividing. The 6.0% figure subtracts 6 points of inflation from nominal return, an arithmetic slip.

A savings account pays a stated annual rate of 12% compounded monthly. What is its effective annual rate?

• a.12.68%, compounding twelve times a year✓
• b.12.55%, compounding four times a year
• c.12.36%, compounding twice a year
• d.12.00%, with no compounding

The effective annual rate is (1 + 0.12/12)^12 - 1 = 1.01^12 - 1 = 12.68%. The 12.00% figure is the stated rate with no compounding. The 12.36% figure reflects semiannual compounding and 12.55% reflects quarterly compounding, both of which compound less often than monthly.

A portfolio returned 11% for the year against a benchmark return of 8%. Its tracking error was 4%, its standard deviation was 14% and the risk-free rate was 3%. What is its information ratio?

• a.0.57, excess return over the risk-free rate divided by standard deviation
• b.0.21, active return divided by total standard deviation
• c.0.75, active return divided by tracking error✓
• d.2.75, the portfolio return divided by tracking error

The information ratio is active return divided by tracking error: (11 - 8) / 4 = 0.75. The 0.57 figure is the Sharpe ratio, (11 - 3) / 14. The 0.21 figure divides active return by the portfolio's total standard deviation. The 2.75 figure divides the raw return by tracking error.Information ratio

Four funds are compared with the same benchmark (up-market capture, down-market capture). Which fund has the most favorable profile?

• a.Fund D: 110% up capture, 120% down capture
• b.Fund C: 80% up capture, 70% down capture
• c.Fund A: 95% up capture, 110% down capture
• d.Fund B: 105% up capture, 85% down capture✓

A strong fund gains more than the benchmark when it rises and loses less when it falls, so it should have up capture above 100% and down capture below 100%. Fund B alone does both. Fund A gains less and loses more. Fund C loses less but gives up even more of the gains, and Fund D gains more but also loses more.Up/down capture ratios

A manager holds 18% in a sector that is 10% of the benchmark. The sector outperformed the overall benchmark, and the manager's holdings in the sector returned exactly the sector index's return. Which attribution effect explains the added return?

• a.The selection effect
• b.The allocation effect✓
• c.The market-timing effect
• d.The interaction effect

The extra return came from overweighting a sector that did well, which is the allocation effect. Because the manager's holdings matched the sector index, security selection added nothing, and the interaction effect, which depends on selection differing from the index, is also zero. No timing decision between asset classes is described.Performance attribution