Mixed Deck — All Stock Broker Topics Flashcards

What is 'Value at Risk' (VaR) as a risk management tool?

Answer: A statistical estimate of the maximum potential loss over a specified time period at a given confidence level

VaR estimates the maximum loss a portfolio could experience over a specific period (e.g., one day) at a given confidence level (e.g., 95%), meaning there is only a 5% probability of losing more than the VaR amount.

What does 'short selling' involve?

Answer: Selling borrowed shares with the obligation to buy them back later, profiting if the price falls

Short selling involves borrowing shares and selling them, hoping to repurchase them at a lower price later to return to the lender, profiting from the price decline.

What is a 'Chinese wall' (information barrier) in broker-dealer firms, and why is it important?

Answer: An internal information barrier separating departments that possess material non-public information (e.g., investment banking) from those that trade securities (e.g., sales and trading), to prevent insider trading

A Chinese wall (information barrier) is a set of policies and procedures separating investment banking (which handles MNPI) from trading and research departments, preventing the misuse of material non-public information in trades.

What ethical standard requires brokers to treat all customers fairly regarding the timeliness of executing customer orders?

Answer: The priority of customers' orders over proprietary trading or the representative's personal account

Brokers must prioritize customer orders over trading for the firm's own account or the representative's personal account in the same security, ensuring customers are not disadvantaged by self-interested trading.

What does 'in the money' mean for a call option?

Answer: The strike price is below the current market price

A call option is in the money when the underlying stock's current price exceeds the strike price, giving the option positive intrinsic value.

Which strategy profits most in a neutral market where the stock price remains flat near the strike price?

Answer: Short straddle

A short straddle (selling both a call and a put at the same strike) collects premium income and is most profitable when the stock price stays near the strike at expiration.

What is 'rebalancing' a portfolio and why is it done?

Answer: Periodically adjusting a portfolio back to its target asset allocation after market movements cause drift

Portfolio rebalancing involves selling assets that have grown above their target allocation and buying those that have fallen below, restoring the original intended risk profile and asset mix.

Which type of annuity provides a guaranteed fixed payment amount throughout the payout period?

Answer: Fixed annuity

A fixed annuity guarantees a set, predetermined payment amount during the distribution phase, providing predictable income regardless of market performance.

A consumer who owns 100 shares of stock may be protected by:

Answer: Buying a put

Explanation: The easiest way to hedge a long stock position against a market downturn is to buy a put. If the market declines, the holder of a long put option can put (sell) the stock at the exercise price, shielding the stock position from market risk.

What distinguishes a 'floor broker' from a 'market maker' on a stock exchange?

Answer: Floor brokers execute orders for clients and earn commissions; market makers quote both buy and sell prices using their own capital to provide liquidity

Floor brokers act as agents executing customer orders on behalf of clients for commissions, while market makers act as principals, posting continuous buy and sell quotes and using their own capital to facilitate trading.

What is a UGMA/UTMA account?

Answer: A custodial account where an adult manages assets gifted to a minor until the minor reaches the age of majority

Uniform Gift to Minors Act (UGMA) and Uniform Transfer to Minors Act (UTMA) accounts are custodial accounts allowing adults to hold and manage securities gifted to minors until they reach legal adulthood.

Which type of account registration passes assets directly to named beneficiaries upon the account holder's death, bypassing probate?

Answer: Transfer on Death (TOD) or Payable on Death (POD) designation

A Transfer on Death (TOD) or Payable on Death (POD) designation allows account assets to pass directly to named beneficiaries upon the account holder's death, completely bypassing the probate process.

Which type of option gives the holder the right, but not the obligation, to SELL shares at a specified strike price?

Answer: Put option

A put option gives the holder the right (not obligation) to sell the underlying security at the strike price before or at expiration, profiting when the underlying price falls.

If a registered principal or registered representative's registration has been cancelled or terminated for a period of ___________ or more, he or she must repeat the qualifying exam.

Answer: 2 years

Explanation: If your registration has been revoked or canceled for more than two years, you must retake the qualifying exam.

What is a Real Estate Investment Trust (REIT) and how must it distribute income to maintain its tax-advantaged status?

Answer: A publicly traded company that must distribute at least 90% of taxable income to shareholders

A REIT is a company that owns income-producing real estate and must distribute at least 90% of its taxable income to shareholders as dividends to maintain its special tax status.

What is 'alpha' in the context of investment performance evaluation?

Answer: The excess return of an investment relative to its expected return given its risk (beta)

Alpha represents the excess return a portfolio or security generates above what would be predicted by its beta (systematic risk exposure), measuring the value added by the investment manager's skill.

What is the minimum net capital requirement concept that prevents broker-dealers from operating with excessive debt relative to assets?

Answer: Net capital rule

The net capital rule (SEC Rule 15c3-1) limits the amount of debt a broker-dealer may incur relative to its liquid assets.

What information must a broker-dealer gather before opening a new customer account under the 'know your customer' (KYC) rule?

Answer: Name, address, date of birth, Social Security number, financial situation, investment objectives, and risk tolerance

KYC requirements mandate collecting comprehensive customer information including personal identification, financial status, investment experience, and investment objectives to ensure suitable recommendations.

What is a 'market order' in securities trading?

Answer: An order to buy or sell immediately at the best available current market price

A market order instructs the broker to buy or sell a security immediately at the best available current price, prioritizing execution speed over price certainty.

How often must existing margin account holders get the Margin Disclosure Statement?

Answer: Annually

Explanation: Margin customers must get the Margin Disclosure Statement at least once a year.