FINRA FINRA-SIE Online Practice Questions and Exam Preparation

FINRA FINRA-SIE Online Questions & Answers

• Question 121:

  Which of the following terms is used to describe a measure of the price volatility or correlation of a security in relation to movements in the overall market?

  A. Beta
  B. Alpha
  C. Sharpe ratio
  D. Price-to-earnings (P/E) ratio
  A. Beta

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  Explanation

  Beta measures how sensitive a security's returns are to movements in a broader market index (often described as the security's volatility relative to the market). That makes choice A correct. Conceptually, beta estimates the degree to which a stock tends to move when the overall market moves. A beta of 1.0 suggests the security tends to move in line with the market. A beta greater than 1.0 indicates the security has historically been more volatile than the market (tending to rise more in up markets and fall more in down markets). A beta less than 1.0 indicates lower relative volatility. A negative beta (rare) indicates the security tends to move opposite the market. Alpha, in contrast (choice B), is typically discussed as a measure of risk-adjusted excess return versus a benchmark-how much a manager or security outperformed/underperformed after accounting for market risk. The Sharpe ratio (choice C) measures risk-adjusted return using total volatility (standard deviation) and compares return above a risk-free rate per unit of risk; it is not a correlation-to-market measure. The P/E ratio (choice D) is a valuation metric (price per share divided by earnings per share) and does not measure volatility or correlation. On the SIE, beta is most commonly tested as a systematic (market) risk concept. It relates to how much of a security's risk is tied to broad market movements versus diversifiable company-specific factors.

  Understanding beta helps in portfolio construction and in explaining why some stocks are considered more aggressive or more defensive relative to market swings.

• Question 122:

  The custodian of the account for a 17-year-old student has given the student permission to place transactions in her UTMA account. The student contacts the registered representative (RR) who services the account and requests that the RR sell 200 shares of XYZ at the market.

  Which of the following actions is most appropriate for the RR to take in this situation?

  A. Obtain a consent form from the custodian to permit trading by the student
  B. Obtain account agreements signed by the student and custodian to permit trading by the student
  C. Prohibit the student from entering any type of transaction for the account
  D. Prohibit further trading in the account until approval from the branch office manager has been obtained
  C. Prohibit the student from entering any type of transaction for the account

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  Explanation

  The correct answer is C, Prohibit the student from entering any type of transaction for the account. Under the Uniform Transfers to Minors Act (UTMA), the account is legally owned by the minor, but only the custodian has authority to manage and control the account. The minor (in this case, a 17-year-old student) does not have legal capacity to enter into securities transactions, regardless of any permission granted informally by the custodian. From a regulatory standpoint, broker-dealers and registered representatives must follow strict rules regarding account authority. Even if a custodian tells the minor they may trade, this does not override legal requirements. The RR may only accept instructions from the custodian, who is the legally authorized party. Choices A and B are incorrect because no documentation can grant trading authority to a minor-this would violate securities regulations and contract law principles.

  Choice D is unnecessary because the issue is not lack of approval, but lack of legal authority. Therefore, the RR must refuse the order and only accept trading instructions from the custodian, making choice C the correct and compliant action.

• Question 123:

  Which of the following legislation established the registration requirements for persons receiving compensation for advice concerning securities?

  A. Securities Act of 1933
  B. Investment Advisers Act of 1940
  C. Investment Company Act of 1940
  D. The Securities Acts Amendments of 1975
  B. Investment Advisers Act of 1940

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  Explanation

  The correct answer is B, Investment Advisers Act of 1940. This Act specifically regulates individuals and firms that provide investment advice for compensation, making it directly applicable to the scenario described in the question. Step-by-step, the Investment Advisers Act of 1940 requires investment advisers to register with the SEC or state regulators, depending on their assets under management. It also imposes fiduciary duties, meaning advisers must act in the best interests of their clients, provide full disclosure of conflicts of interest, and adhere to anti-fraud provisions. Choice A, the Securities Act of 1933, focuses on the initial issuance of securities, requiring registration of new securities offerings and full disclosure to investors. It does not regulate investment advisers.

  Choice C, the Investment Company Act of 1940, governs investment companies such as mutual funds, not individuals providing advice. Choice D, the Securities Acts Amendments of 1975, primarily enhanced the regulatory framework of markets and expanded the authority of the SEC, but did not establish adviser registration requirements. Therefore, the law that directly addresses registration and regulation of investment advisers receiving compensation is the Investment Advisers Act of 1940.

• Question 124:

  Which of the following statements is true regarding the difference in treatment between common stock and preferred stock?

  A. Common stock and preferred stock are treated the same under a bankruptcy proceeding.
  B. Common stock and preferred stock are treated the same when it comes to payment of dividends.
  C. Common stock dividend payment is treated as a higher priority over that of preferred stock.
  D. Common stock is a lower priority compared to preferred stock under a bankruptcy proceeding.
  D. Common stock is a lower priority compared to preferred stock under a bankruptcy proceeding.

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  Explanation

  Priority in Bankruptcy: Preferred stockholders have a higher claim on a company's assets than common stockholders during liquidation. Common stockholders are residual claimants.

  Dividend Priority: Preferred stockholders are entitled to fixed dividends before common stockholders receive any dividends.

  Incorrect Options: A &

  B: Common and preferred stocks are treated differently in bankruptcy and dividend payments.

  C: Common stock dividends are subordinate to preferred stock dividends.

  SEC Guidance on Stockholder Rights: SEC Stock Rights.

• Question 125:

  A registered representative (RR) notices that their long-time elderly customer's portfolio has some unusual activity that is not within the customer's typical investing pattern. The RR wants to ensure that the customer is not being exploited.

  Which of the following initial steps is the RR permitted to take to resolve their suspicions?

  A. Immediately close the account
  B. Liquidate the suspicious assets
  C. Immediately report the unusual activity to FINRA and the SEC
  D. Contact the customer directly and, if necessary, notify the customer's trusted contact person
  D. Contact the customer directly and, if necessary, notify the customer's trusted contact person

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  Explanation

  The most appropriate permitted initial step is to contact the customer directly to confirm the activity and, if needed, notify the customer's trusted contact person, making D correct. FINRA guidance and firm practices around protecting seniors emphasize proactive steps to detect and respond to potential financial exploitation. A trusted contact is a person the customer authorizes the firm to contact if there are concerns about possible exploitation, diminished capacity, or suspicious activity. Reaching out to the customer helps verify whether the activity was authorized and consistent with their intentions, and involving the trusted contact (when appropriate and permitted) adds another protective layer. Choice A is inappropriate because immediately closing an account is an extreme action that is not the standard first step and could harm the customer or disrupt legitimate needs.

  Choice B is also inappropriate because liquidating assets without authorization is generally impermissible absent a clear legal basis, proper discretion, or a valid protective hold process under firm policy and applicable rules.

  Choice C is not the correct initial step; while firms may have reporting obligations in certain circumstances, the immediate first response is typically internal escalation and customer contact rather than "reporting to FINRA and the SEC" as the first action.

  On the SIE, this tests senior investor protection concepts: recognizing red flags, escalating internally, and using tools like the trusted contact to help protect vulnerable customers while respecting account authority and documentation requirements.

• Question 126:

  Which of the following statements describes the composition of FINRA arbitration panels for customer disputes?

  A. All arbitrators are practicing attorneys.
  B. All arbitrators are employed in the securities industry.
  C. Panels are permitted to be a combination of industry and public arbitrators.
  D. Arbitrators are randomly chosen from a pool established jointly by the claimant and the respondent.
  C. Panels are permitted to be a combination of industry and public arbitrators.

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  Explanation

  The correct answer is C, Panels are permitted to be a combination of industry and public arbitrators. FINRA arbitration panels are designed to ensure fairness and neutrality in resolving disputes between customers and broker-dealers. Step-by-step, FINRA classifies arbitrators into two main categories: Public arbitrators, who have no significant ties to the securities industry Industry arbitrators, who have experience working within the securities industry For customer disputes, panels may include a mix of these arbitrators. In many cases, especially for larger claims, panels consist of two public arbitrators and one industry arbitrator, though customers may request an all-public panel. Choice A is incorrect because arbitrators are not required to be attorneys.

  Choice B is incorrect because not all arbitrators come from the securities industry-public arbitrators are specifically included to provide impartiality.

  Choice D is incorrect because arbitrators are selected from a FINRA-provided roster, and while parties can rank and strike candidates, they do not jointly create the pool. Thus, FINRA arbitration panels are intentionally structured as a combination of public and industry arbitrators, ensuring balanced perspectives, making Answer C correct.

• Question 127:

  Which of the following must a registered representative disclose as an outside business activity (OBA) on his Form U4?

  A. Volunteer work for a local charity
  B. Trustee on a grandparent's estate account
  C. Board member for a publicly traded company
  D. Board member serving without compensation for a not-for-profit entity
  C. Board member for a publicly traded company

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  Explanation

  FINRA Rule 3270 requires registered representatives to disclose all outside business activities that involve compensation or could reasonably be perceived as a conflict of interest. C is correct because serving as a board member for a publicly traded company is a business activity requiring disclosure, even if compensation is indirect.

  A is incorrect because volunteer work for charities does not require disclosure. B is incorrect because acting as a trustee for a personal or family estate is generally not considered an OBA.

  D is incorrect because unpaid board membership for a not-for-profit entity does not typically require disclosure.

• Question 128:

  Which of the following best describes diversification as an investment strategy?

  A. Maximizing returns by concentrating holdings
  B. Reducing unsystematic risk
  C. Eliminating market risk
  D. Timing market cycles
  B. Reducing unsystematic risk

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  Explanation

  Diversification reduces unsystematic (company-specific) risk by spreading investments across different issuers or sectors. Market risk cannot be eliminated through diversification.

  References:

  SIE Study Guide, Portfolio Management

• Question 129:

  An investor is normally subject to the greatest degree of market risk when purchasing:

  A. common stock.
  B. preferred stock.
  C. corporate bonds.
  D. U.S. government bonds.
  A. common stock.

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  Explanation

  Among the choices, common stock generally exposes an investor to the greatest market risk, so A is correct. Market risk (systematic risk) is the risk that overall market movements-driven by economic conditions, interest rates, investor sentiment, geopolitical events, and broad factors-will cause the value of an investment to fluctuate. Common stocks typically have the most direct exposure to business performance expectations and market sentiment, and they do not have contractual cash flows or principal repayment at maturity. Because common shareholders are residual owners, their value can be highly volatile and can decline significantly in adverse markets or company-specific downturns. Preferred stock (choice B) is generally less volatile than common stock because it has a stated dividend and a senior claim over common in dividends and liquidation, though it still carries equity risk and rate sensitivity. Corporate bonds (choice C) are debt instruments with contractual interest payments and principal repayment at maturity; while they do have interest rate and credit risk and can fluctuate in price, they typically exhibit less market volatility than common stocks. U.S. government bonds (choice D) are generally considered to have low credit risk and often lower volatility relative to equities; their primary risk is interest rate risk rather than equity market risk, and they often behave differently than stocks during market stress. On the SIE, this type of question tests the basic hierarchy: equities (especially common) are generally riskier and more volatile than debt, and within debt, U.S. government securities are typically viewed as having lower credit risk than corporate debt. Therefore, common stock is the best answer for greatest market risk exposure.

• Question 130:

  Which of the following characteristics describes the withdrawal provisions of a Coverdell Education Savings Account (ESA)?

  A. Funds must be used for higher education only and may be used by the beneficiary at any age without a tax penalty.
  B. Funds must be used for higher education only and must be used by the beneficiary before a specific age to avoid a tax penalty.
  C. Funds may be used for any level of education and may be used by the beneficiary at any age without a tax penalty.
  D. Funds may be used for any level of education and must be used by the beneficiary before a specific age to avoid a tax penalty.
  D. Funds may be used for any level of education and must be used by the beneficiary before a specific age to avoid a tax penalty.

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  Explanation

  A Coverdell Education Savings Account (ESA) is an education savings vehicle with tax-advantaged treatment when used for qualified education expenses, and importantly, it can be used for a broad range of education levels (not just college), including many K-12 expenses as well as higher education. Additionally, Coverdell ESAs are associated with an age-based rule: funds generally must be distributed for the beneficiary's education by a certain age (commonly tested as age 30 for the beneficiary) to avoid adverse tax consequences, unless an exception applies (such as certain special needs beneficiaries). Therefore, the statement that best matches the typical SIE-tested description is D: funds may be used for any level of education and must be used before a specific age to avoid a tax penalty. Choices A and B are incorrect because they limit usage to higher education only, which is not characteristic of Coverdell ESAs as tested-Coverdell is commonly contrasted with some other education savings tools by its ability to cover K-12 and higher education qualified expenses. Choice C is incorrect because it states funds can be used at any age without a tax penalty, ignoring the typical age limitation and distribution expectations

  that are frequently emphasized on exam questions. The SIE focus is on recognizing how education accounts differ by (1) what expenses qualify, (2) who controls the account, (3) contribution/beneficiary rules, and (4) withdrawal timing rules.

  For Coverdell ESAs, the commonly tested takeaway is: broader education use (K-12 through higher education) but with an age-related distribution requirement.