Same Thing Only Different

Just finished a morning tutoring session and noticed that the client had some trouble recognizing when a different question was asking the same thing as a previous question he had already nailed. Most people get this first question wrong, but today's tutoring client nailed it in about 10 seconds:

An investor purchased shares of a growth & income fund in early February this year.  In late December this year, she receives a capital gains distribution from the fund.  Therefore
a.this represents a tax-free return of capital
b.the capital gain is tax-exempt to the investor
c.the capital gain is treated as a short-term capital gain
d.the capital gain is taxable at long-term capital gains rates

So, since he nailed that one, I assumed he'd also get this one right:


Which of the following represents an accurate statement concerning the tax implications of mutual fund investing?
a.municipal bond mutual funds distribute tax-free long-term capital gains
b.capital gains distributions are determined by the fund's holding period, even if the investor has held the shares for less than one year
c.because the mutual fund provides a 1099 form, the investor is relieved of the responsibility to report dividend income to the IRS
d. all dividends distributed are currently taxed at a maximum of 15%

Notice how answer choice b is explaining exactly why the client got the first question correct? In the first question, the cap gains distribution was long-term because it was based on the fund's holding period--not the investor's. Why then didn't answer choice b scream out to the candidate?
Not sure. He knew answer a was wrong. He knew C was BS. But, still, he couldn't choose answer b here.
Maybe he was tired. But, at the testing center I'm hoping he will keep struggling with a question until he sees it in its proper light. For a lot of you, that isn't happening yet because you're only spending 15 seconds on a question. You want to know the answer without figuring out the question. That doesn't work, people. Be willing to figure out the questions, and you will end up getting licensed. HelpWithSeries65Exam

Series 65 or Series 66 Practice Question

There are many ways to ask a test question. To make sure you've studied the Uniform Prudent Investor Act, the test can ask you which of the following is or is not actually part of that document. Or, they can see how you APPLY the information you were supposed to have gotten from the UPIA. Maybe they throw something like this at you:

A large estate has hired you, an Investment Adviser Representative, to manage the account. Upon review of the assets, you find that 10% of the account is devoted to long-term investment-grade corporate bonds and 90% to a common stock issue that has appreciated 48% the past few months. What should you do according to the principles of the Uniform Prudent Investor Act?
A. nothing, as an estate account is generally closed within 6 months
B. sell the stock, as it is considered imprudent to hold such a large % of a fiduciary account in common stock
C. you may either sell or hold the stock, depending on which seems the more prudent action
D. you should probably sell the stock, as capital gains in this case can be minimized or avoided

Ouch. I know exactly what the question is getting at here, and even though I wrote it, I'm not 100% sure what the right answer is. Seriously. I like "D" here, even though C seems like a darned good answer, too. Generally, a prudent investor should diversify, except when he determines it's more prudent not to. But, the best reason not to diversify would be that he doesn't want to generate a bunch of capital gains. Fine, but this is an estate account--the cost basis is whatever the stock traded for on the date of death, and it's a long-term capital gain, assuming the estate sells it for more than it was trading on the date of death. In fact, an estate can just sell the stock 6 months after the date of death and use the value that day as the cost basis--no capital gains. So, in general, I like Answer Choice C, but since the question says it's an estate account, and since that clearly makes a difference, I go with Answer Choice D. Series 65 Help

What Kind of Questions Are on the Series 65 or Series 66?

Are you comfortable with a question like this?

The definition of "expected return" would relate to which of the following?
A. Sharpe ratio
B. CAPM
C. Beta
D. Term life insurance

Okay, step one--what kind of return does one expect from a life insurance policy that has NO CASH VALUE?
None--eliminate Answer Choice D just because it's kind of smart alecky and sticks out like a sore thumb. Okay, Beta doesn't really try to predict, and isn't a "return" measurement. It just tracks the movement of one part of the index with the overall index--is MSFT more volatile or less volatile than the overall index it belongs to? About even, as it turns out, which is not the point--the point is, eliminate Answer Choice C. Excellent, now you're sitting 50-50. Unfortunately, this is where many of my tutoring clients blow it. They're tired now, cranky. They don't LIKE the Series 65 or Series 66. Uh-huh. I didn't like reading all the new crap from Dodd-Frank, but it seemed to be part of my job description, so let's stop wasting time here and get the job done. What is the Sharpe ratio? It's a risk-ADJUSTED return measurement. It measures the return that's already happened, adjusting it for the risk encountered. It can't possibly be predicting an EXPECTED return, right? So, even if you can't recall the definition of  CAPM (which is kind of lame, actually, but who cares), you simply eliminate Answer Choice A, and you win. CAPM measures expected return in a very interesting way--google the formula for extra credit. Need Series 65 Questions? Series 66?

What is a Brady Bond?

Some of you might see a question about Brady bonds, so let's cover it quickly here. First, these bonds are issued by developing/emerging market governments. Second, they are payable in US dollars. Third, they are often collateralized by US Treasury securities. Fourth, most issuers are Latin American nations. Finally, although these bonds are associated with emerging market issuers, they are among the safest bonds in that category. Need a Tutor?