FINRA FINRA-SERIES-6 Online Practice Questions and Exam Preparation

FINRA FINRA-SERIES-6 Online Questions & Answers

• Question 1:

  Which of the following is true about a hedge fund?

  A. It is designed to help investors hedge their risk and, as such, is a low risk alternative to a mutual fund.
  B. It is closed to all but sophisticated, wealthy investors.
  C. It is more liquid than almost any investment other than a money market mutual fund.
  D. It has very low management fees since it is passively managed.
  B. It is closed to all but sophisticated, wealthy investors.

  ---

  Explanation/Reference:

  A hedge fund is closed to all but sophisticated, wealthy investors. Hedge fund managers engage in riskier strategies than mutual fund managers. They are fairly illiquid; the redemption of shares is restricted. They are actively managed, and management fees are much higher than those charged by other types of funds.

• Question 2:

  Ms. Newbie, a newly-minted registered representative with Savvy Investments, just had her first client walk through the door. The new account form that the client receives a copy of must contain the signatures of:

  I. the client.

  II. Ms. Newbie.

  III.

  Ms. Newbie's branch manager/supervisor.

  A. I only
  B. I and II only
  C. II and III only
  D. I, II, and III
  I. the client. II. Ms. Newbie. III. Ms. Newbie's branch manager/supervisor.
  C. II and III only

  ---

  Explanation/Reference:

  The new account form that Ms. Newbie's client will receive must contain the signatures of both Ms. Newbie and her branch manager/supervisor. The signature of the client is not a requirement.

• Question 3:

  The price at which an investor can sell a security to a market maker in the over-the-counter market is called the:

  A. sale price.
  B. put price.
  C. bid price.
  D. ask price.
  C. bid price.

  ---

  Explanation/Reference:

  An investor can sell a security to a market maker in the over -the-counter market at the bid price, which is the price at which the market maker is willing to buy the security.

• Question 4:

  Mr. Bashful, Mr. Sleepy, Mr. Doc, Mr. Grumpy, Mr. Sneezy, and Mr. Happy are all employees of S. White Investment Advisers. Mr. Doc, Mr. Sneezy, and Mr. Happy give investment advice to the firm's clients and manage their portfolios. Mr. Sleepy greets clients and makes cold calls to solicit more business for the firm. Mr. Bashful performs general clerical services, such as filing. Mr. Grumpy is the office manager and is the direct supervisor of the other five employees.

  Which of S. White's employees must register as investment adviser representatives under the Investment Advisers Act of 1940?

  A. only Mr. Grumpy
  B. Mr. Grumpy, Mr. Doc, Mr. Sneezy, and Mr. Happy
  C. Mr. Grumpy, Mr. Doc, Mr. Sneezy, Mr. Happy, and Mr. Sleepy
  D. All of them must register as investment adviser representatives.
  C. Mr. Grumpy, Mr. Doc, Mr. Sneezy, Mr. Happy, and Mr. Sleepy

  ---

  Explanation/Reference:

  Mr. Grumpy, Mr. Doc, Mr. Sneezy, Mr. Happy, and Mr. Sleepy must register as investment adviser representatives under the Investment Advisers Act of 1940. Only Mr. Bashful need not register since he performs only clerical duties. Any employee who makes investment recommendations and/or manages client portfolios and any employee who solicits or offers investment advisory services must register. Anyone who is a supervisor to those performing these duties must also register.

• Question 5:

  Your client has recently heard about “principal-protected funds” and has asked your ad vice. You should tell her that:

  I. the majority of principal-protected funds guarantee the investor's initial investment, less any front-end load, even if the stock market falls.

  II. it would not be a good investment if she thinks she will need the money within the next five to ten years.

  III. it will beat the returns she could earn on an SandP 500 Index fund in most years.

  IV.

  if she sells her shares at any time other than the maturity date specified, she could lose money if the price per share has fallen.

  A. I only
  B. I and II only
  C. I and III only
  D. I, II, and IV only
  I. the majority of principal-protected funds guarantee the investor's initial investment, less any front-end load, even if the stock market falls. II. it would not be a good investment if she thinks she will need the money within the next five to ten years. III. it will beat the returns she could earn on an SandP 500 Index fund in most years. IV. if she sells her shares at any time other than the maturity date specified, she could lose money if the price per share has fallen.
  D. I, II, and IV only

  ---

  Explanation/Reference:

  Only Statements I, II and IV are true. You can legitimately tell your client that the majority of principal-protected funds guarantee the investor's initial investment, less any front -end load, even if the stock market falls (i.e. Selection I), but that there is a lock-up period involved. Therefore, it would not be a good investment if she thinks she will need the money within the next five to ten years (Selection II) because the principal guarantee will likely be voided, and she might be subject to a penalty for early withdrawal. You should also warn her that if she sells her shares at any time other than the maturity date specified, she could lose money if the price per share has fallen (Selection IV) since the guarantee is only valid on the maturity date of the fund in most instances. You should not tell her that the returns on a principal-protected fund will beat the returns she could earn on an SandP 500 Index fund in most years (Selection III). Although this may happen in a bear market year, it will definitely not be true during bull markets.

• Question 6:

  Mr. B. Beard started making regular investments in a mutual fund with the goal of financing a five-year circumnavigation on his 40-foot sailboat, “Pirate's Lady.” He is getting ready to depart and wants to set up an automatic withdrawal plan such that the money he has invested will see him through his circumnavigation, with nothing remaining in the account at the end.

  Which of the systematic withdrawal plans will best fit his needs?

  A. fixed-time plan
  B. fixed-dollar plan
  C. fixed-percentage plan
  D. fixed-share plan
  A. fixed-time plan

  ---

  Explanation/Reference:

  Since Mr. Beard wants an automatic withdrawal plan such that the money will last through his circumnavigation, with nothing remaining at the end, he should elect to use the fixed -time plan. Under this plan, the fund determines how much it will redeem each period over the five years such that the account is depleted at the end of that time period. There is no way of knowing exactly how long Mr. Beard's money will last under the other three types of plans; it could be greater than or less than 5 years--or exactly 5 years for that matter.

• Question 7:

  Upon receiving approval via a majority vote of its shareholders, a mutual fund is permitted to:

  A. change from a diversified company to a non-diversified company.
  B. engage in margin transactions.
  C. retain any dividends and capital gains that it earned on its portfolio rather than paying them out to the shareholders.
  D. issue preferred stock.
  A. change from a diversified company to a non-diversified company.

  ---

  Explanation/Reference:

  Upon receiving approval via a majority vote of its shareholders, a mutual fund is permitted to change from a diversified company to a non-diversified company. The fund is not allowed to engage in margin transactions, fail to make dividend and capital gain distributions, or issue preferred stock under any circumstances.

• Question 8:

  Which of the following is not included in calculating the expense ratio of a mutual fund?

  A. management fees
  B. 12b-1 fees
  C. redemption fees
  D. recordkeeping fees
  C. redemption fees

  ---

  Explanation/Reference:

  Redemption fees are not included in calculating the expense ratio of a mutual fund. Redemption fees are incurred by the fund shareholders when they redeem their shares of the fund. All of the other expenses represent annual expenses that the fund incurs and are, therefore, included in calculating the expense ratio of a mutual fund.

• Question 9:

  A person's discretionary income is:

  A. the amount that can be allocated to speculative investments.
  B. his income after tax.
  C. the income that he has left to spend or save after having paid taxes on the income and for all of the necessities, e.g., housing, food, clothing, transportation, utilities, etc.
  D. the amount of his income that is needed to pay his regular monthly bills, e.g., rent, food, gasoline, utilities, health insurance, etc.
  C. the income that he has left to spend or save after having paid taxes on the income and for all of the necessities, e.g., housing, food, clothing, transportation, utilities, etc.

  ---

  Explanation/Reference:

  A person's discretionary income is the income that he has left to spend or save after having paid taxes on the income and for all of the necessities, e.g., housing food, clothing, transportation, utilities, etc. His income after tax is referred to as his disposable income.

• Question 10:

  Which of the following established the requirement that insiders report their trading activities to the SEC?

  A. the Securities Act of 1933
  B. Regulation D
  C. Regulation I-N D. the Securities Exchange Act of 1934
  D

  ---

  Explanation/Reference:

  The Securities Exchange Act of 1934 established the requirement that insiders report their trading activities to the SEC. The Securities Act of 1933 deals with new issues, and Regulation D deals with private placements. There is no Regulation I-N.