Series 65 Practice Exam.
Free practice test — 137 quality-checked questions, instant feedback.

1. An investor holds a portfolio of long-term, high-quality corporate bonds. If prevailing market interest rates rise sharply, what is the MOST direct effect on the current market value of these existing bonds?

• A. Their coupon payments will automatically increase to match new rates
• B. Their market value will generally rise because the issuer's credit improves
• C. Their market value is unaffected because they are high-quality
• D. Their market value will generally fall because their fixed coupons become less attractive

2. When comparing two investments, an analyst notes that Investment A has a higher expected return than Investment B but also a higher expected variability of outcomes. This relationship BEST illustrates which fundamental principle?

• A. Risk and return are unrelated to one another
• B. Higher potential returns are generally associated with higher risk (the risk-return tradeoff)
• C. Variability of outcomes reduces expected return to zero
• D. Lower-risk investments always produce higher returns

3. An investor buys shares in a small company whose stock trades infrequently with wide bid-ask spreads. When she tries to sell a large position quickly, she can only do so at a substantially lower price. This situation MOST directly illustrates:

• A. Inflation risk
• B. Liquidity risk
• C. Legislative risk
• D. Currency risk

4. Two mutual funds have identical average annual returns over five years, but Fund X has a much higher standard deviation of returns than Fund Y. Which statement BEST characterizes the difference?

• A. Fund Y carries more systematic risk than Fund X
• B. Fund X has experienced greater volatility around its average return
• C. Standard deviation measures only downside losses, so Fund X lost more money
• D. Fund X is guaranteed to outperform Fund Y going forward

5. A retiree relies on a fixed nominal income from a long-term bond ladder. Over a prolonged period of rising consumer prices, what is the PRIMARY risk to this income stream?

• A. The bonds will become more liquid
• B. The issuer will call the bonds at a premium
• C. The purchasing power of the fixed payments will decline
• D. The bonds will default

6. Which characteristic BEST distinguishes systematic (market) risk from unsystematic (nonsystematic) risk?

• A. Systematic risk affects the market as a whole and cannot be diversified away, while unsystematic risk is specific to an issuer and can be reduced through diversification
• B. Both types of risk are fully eliminated by holding a single security
• C. Systematic risk can be eliminated through broad diversification, while unsystematic risk cannot
• D. Unsystematic risk applies only to government bonds

7. An investor holds common stock rather than a bond of the same corporation. In the event the company is liquidated, how does the common stockholder's claim compare to that of the bondholder?

• A. The common stockholder has a residual claim paid only after creditors, including bondholders, are satisfied
• B. The common stockholder is guaranteed repayment of principal
• C. The common stockholder and bondholder are paid at the same time
• D. The common stockholder is paid before the bondholder

8. A bond is issued with a provision allowing the issuer to redeem it before maturity, typically when interest rates have fallen. From the investor's perspective, the PRIMARY disadvantage of this feature is:

• A. The investor loses all accrued interest
• B. The bond's credit rating automatically drops to default
• C. The investor may have to reinvest the returned principal at lower prevailing rates
• D. The investor must pay a penalty to keep the bond

9. A U.S. investor buys securities denominated in a foreign currency. Even if the securities perform well in local-currency terms, the investor's realized return in U.S. dollars can be reduced by:

• A. The securities becoming more liquid
• B. An adverse move in the exchange rate between the foreign currency and the dollar
• C. The issuer paying a higher dividend
• D. An increase in the domestic risk-free rate only

10. Which of the following correctly pairs a Series 65 exam parameter with its official value?

• A. Registration fee — $180
• B. Number of scored questions — 187
• C. Passing score — 92 of 130 scored questions
• D. Time limit — 130 minutes

11. A client is concerned that a bond issuer might fail to make scheduled interest or principal payments. Which type of risk is the client describing?

• A. Reinvestment risk
• B. Credit (default) risk
• C. Liquidity risk
• D. Purchasing-power risk

12. Which financial ratio measures a company's ability to meet short-term obligations using only its most liquid assets, excluding inventory?

• A. The debt-to-equity ratio
• B. The quick ratio, or acid test
• C. Return on equity
• D. The current ratio

13. An economy has experienced two consecutive quarters of declining real GDP, rising unemployment and falling corporate profits. Which phase of the business cycle does this describe?

• A. Trough
• B. Contraction
• C. Peak
• D. Expansion

14. Which of the following is generally classified as a leading economic indicator?

• A. The average duration of unemployment
• B. Industrial production
• C. Building permits for new private housing
• D. The prime rate charged by banks

15. The Federal Reserve wishes to tighten monetary policy. Which action is consistent with that objective?

• A. Reducing the reserve requirement
• B. Lowering the discount rate
• C. Selling government securities in the open market
• D. Purchasing government securities in the open market

16. An economy experiences stagnant growth and high unemployment occurring simultaneously with rising prices. What is this condition called?

• A. Deflation
• B. Hyperinflation
• C. Disinflation
• D. Stagflation

17. Which security is designed to protect an investor against inflation by adjusting principal in line with the Consumer Price Index?

• A. Treasury bills
• B. Fixed-rate corporate debentures
• C. Treasury Inflation-Protected Securities
• D. Treasury STRIPS

18. A municipal bond is backed by the revenue generated from a toll bridge rather than the taxing power of the issuer. What type of bond is it?

• A. A general obligation bond
• B. A Treasury note
• C. A revenue bond
• D. A double-barreled bond

19. A company reports net income of 5 million dollars and has 2 million shares outstanding, trading at 40 dollars. What is the price-to-earnings ratio?

• A. 12.5
• B. 20
• C. 16
• D. 8

20. A yield curve slopes downward, with short-term rates exceeding long-term rates. What is this shape called and what does it often signal?

• A. A flat curve, indicating indifference to maturity
• B. A normal curve, associated with strong expansion
• C. An inverted curve, historically associated with expectations of slowing growth
• D. A humped curve, indicating a liquidity shortage at the long end

21. An investor wants to know approximately how long it will take to double an investment earning 8 percent annually. Using the rule of 72, what is the answer?

• A. About 9 years
• B. About 15 years
• C. About 12 years
• D. About 6 years

22. Which type of risk cannot be reduced through diversification across many securities?

• A. Systematic risk, also called market risk
• B. Regulatory risk affecting one industry
• C. Business risk specific to one company
• D. Financial risk from a single issuer's leverage

23. A portfolio has a beta of 1.3. The risk-free rate is 3 percent and the expected market return is 9 percent. Under the capital asset pricing model, what is the expected return of the portfolio?

• A. 12.0 percent
• B. 11.7 percent
• C. 7.8 percent
• D. 10.8 percent

24. A portfolio returned 11 percent while its CAPM-predicted return was 9 percent. What does the 2 percent difference represent?

• A. The Sharpe ratio
• B. Standard deviation of returns
• C. Beta, the portfolio's sensitivity to market moves
• D. Positive alpha, the return in excess of that explained by systematic risk

25. Two assets have a correlation coefficient of negative 1.0. What is the diversification implication?

• A. Correlation has no bearing on portfolio risk
• B. They move identically, offering no risk reduction
• C. They move in exactly opposite directions, offering the greatest possible risk reduction
• D. They are unrelated, offering moderate risk reduction

26. Under the semi-strong form of the efficient market hypothesis, which type of analysis would be expected to fail to produce excess returns?

• A. No form of analysis is affected under semi-strong form
• B. Technical analysis only
• C. Both technical analysis and fundamental analysis using public information
• D. Analysis based on material nonpublic information only

27. An adviser compares two portfolios using the Sharpe ratio. What does this measure express?

• A. The correlation between the portfolio and its benchmark
• B. Total return without adjustment for risk
• C. Excess return per unit of systematic risk, measured by beta
• D. Excess return over the risk-free rate per unit of total risk, measured by standard deviation

28. An investor purchases a bond with a 5 percent coupon at a price of 90. What is the current yield?

• A. 5.56 percent
• B. 5.00 percent
• C. 4.50 percent
• D. 9.00 percent

29. For a bond trading at a premium, what is the correct ranking of yields from highest to lowest?

• A. Current yield, nominal yield, yield to call, yield to maturity
• B. All four yields are equal for a premium bond
• C. Yield to call, yield to maturity, current yield, nominal yield
• D. Nominal yield, current yield, yield to maturity, yield to call

30. Two bonds have identical credit quality and yield, but one matures in three years and the other in twenty. If interest rates rise sharply, what happens?

• A. Neither changes in price because credit quality is unchanged
• B. Both fall by the same percentage since yields are equal
• C. The twenty-year bond falls more in price because it has greater duration
• D. The three-year bond falls more because it must be reinvested sooner

31. An investor in the 32 percent federal tax bracket is comparing a corporate bond yielding 6 percent to a tax-free municipal bond. What municipal yield would be equivalent on an after-tax basis?

• A. 6.00 percent
• B. 4.08 percent
• C. 8.82 percent
• D. 1.92 percent

32. An investor buys shares of a fund that trades on an exchange throughout the day at prices that may differ from net asset value, and that does not continuously issue new shares to the public. What type of fund is this?

• A. A closed-end fund
• B. An open-end mutual fund
• C. A variable annuity subaccount
• D. A unit investment trust

33. A client wants exposure to commercial real estate with daily liquidity and without direct property management. Which vehicle best fits?

• A. A non-traded private placement partnership
• B. A residential mortgage on a personal residence
• C. A direct participation program in raw land
• D. A publicly traded REIT

34. An investor holds a variable annuity during the accumulation phase. Who bears the investment risk?

• A. The contract owner
• B. The separate account custodian
• C. The insurance company
• D. The state guaranty association

35. Which characteristic distinguishes a Roth IRA from a traditional IRA?

• A. Contributions are made after tax and qualified distributions are tax free
• B. Required minimum distributions must begin at the same age as a traditional IRA for the original owner
• C. Earnings are taxed annually as they accrue
• D. Contributions are always deductible regardless of income

36. A retirement plan promises a participant a specified monthly benefit at retirement based on salary and years of service. Which type of plan is this and who bears the investment risk?

• A. A defined benefit plan; the employer bears the investment risk
• B. A defined contribution plan; the employee bears the investment risk
• C. A profit sharing plan; the risk is shared equally
• D. A defined benefit plan; the employee bears the investment risk

37. Under ERISA Section 404(c), a plan fiduciary can obtain relief from liability for participant investment losses if which condition is satisfied?

• A. The plan uses only actively managed funds
• B. The plan guarantees a minimum annual return
• C. Participants exercise control over their accounts and are offered a broad range of investment alternatives with adequate information
• D. The plan invests exclusively in employer stock

38. An investor sells a stock at a loss and repurchases substantially identical shares eleven days later. What is the tax consequence?

• A. The loss is disallowed under the wash sale rule and added to the basis of the new shares
• B. The loss is converted into a long-term capital loss
• C. The loss is deductible but the new shares receive a zero basis
• D. The loss is fully deductible because more than ten days elapsed

39. An investor holds appreciated stock and dies. What generally happens to the cost basis for the heir under current federal law?

• A. It is stepped down to the decedent's original purchase price
• B. It is reset to zero
• C. It carries over unchanged from the decedent
• D. It is stepped up to fair market value at the date of death

40. A client's portfolio is rebalanced back to target weights whenever an asset class drifts more than five percentage points from target. Which approach is this?

• A. Constant ratio laddering
• B. Tactical asset allocation based on market forecasts
• C. Strategic asset allocation with threshold rebalancing
• D. Dollar cost averaging

41. An investor contributes a fixed dollar amount monthly to a mutual fund regardless of price. What is the mathematical effect of this strategy?

• A. It eliminates market risk entirely
• B. It guarantees a profit in a declining market
• C. The average cost per share equals the average price
• D. The average cost per share is lower than the average of the prices paid

42. An investment adviser is developing a recommendation for a 58-year-old client with a large concentrated position in her employer's stock. Which risk should be addressed first?

• A. Reinvestment risk on future coupon payments
• B. Concentration risk, because both her human capital and her portfolio depend on one employer
• C. Currency risk from foreign operations
• D. Prepayment risk on mortgage-backed holdings

43. An adviser recommends a strategy to a client with a five-year time horizon and low risk tolerance. Which allocation is most consistent with that profile?

• A. A concentrated position in small-capitalization growth equities
• B. A majority in short and intermediate high-quality fixed income with a modest equity allocation
• C. Primarily commodity futures and leveraged funds
• D. Primarily long-dated zero-coupon bonds

44. Under the Investment Advisers Act of 1940, an adviser must deliver a brochure describing its business, fees, conflicts and disciplinary history. Which document serves this purpose?

• A. Form 13F
• B. Form ADV Part 2A
• C. Form ADV Part 1
• D. Form U4

45. When must an investment adviser deliver its brochure to a new advisory client?

• A. At the first annual review following the contract
• B. Before or at the time of entering into the advisory contract
• C. Only upon the client's written request
• D. Within 120 days after the contract is signed

46. An investment adviser is a fiduciary. Which obligation follows most directly from that status?

• A. A duty to act in the client's best interest and to disclose or eliminate material conflicts
• B. A duty to trade only through affiliated broker-dealers
• C. A duty to guarantee the client will not lose money
• D. A duty to obtain the highest return available in the market

47. An adviser directs client brokerage to a firm that provides research the adviser uses in managing accounts. Under what statutory provision may this be permissible?

• A. It is permissible without condition because the adviser chooses the broker
• B. It is permitted only if the client personally selects the broker
• C. It is prohibited in all circumstances
• D. The Section 28(e) safe harbor for soft dollar arrangements, if the research is eligible and the commission is reasonable

48. Under the Investment Advisers Act, when is an adviser generally deemed to have custody of client assets?

• A. Whenever it has discretionary trading authority
• B. When it holds client funds or securities, or has authority to withdraw them from a client account
• C. Only when it physically possesses stock certificates
• D. Only when it acts as trustee of a family trust

49. An adviser wishes to charge a fee based on a share of capital gains in a client's account. Under the Advisers Act, when is this generally permitted?

• A. Only for qualified clients meeting asset or net worth thresholds, and other limited categories
• B. For any client whose account exceeds 25,000 dollars
• C. Never, under any circumstances
• D. For any client who consents in writing

50. An investment advisory contract may not be assigned to another adviser without which of the following?

• A. The Administrator's written approval
• B. Nothing; advisory contracts are freely assignable
• C. The client's consent
• D. A ninety-day notice period only

51. An adviser publishes an advertisement featuring a client testimonial. Under the modern marketing framework, what is generally required?

• A. Testimonials are banned outright with no exceptions
• B. Nothing, provided the testimonial is truthful
• C. Only the adviser's name need appear
• D. Clear disclosure of whether the promoter is a client and whether compensation was paid, plus oversight of the arrangement

52. An adviser proposes to act as principal, selling a security from its own inventory to an advisory client. What does the Advisers Act require?

• A. Written disclosure and client consent obtained before completion of each such transaction
• B. Disclosure on the next quarterly statement
• C. Only the approval of the adviser's chief compliance officer
• D. Nothing beyond the trade confirmation

53. An adviser learns that a client has become incapacitated and a family member asks the adviser to take instructions from her instead. What is the appropriate action?

• A. Liquidate the portfolio to cash and await instructions
• B. Continue managing under the existing discretionary authority indefinitely without any inquiry
• C. Take instructions only from a person with documented legal authority, such as a power of attorney or guardianship
• D. Accept the family member's instructions if she is the closest living relative

54. A client asks an adviser to explain the difference between time-weighted and dollar-weighted returns. Which statement is accurate?

• A. Time-weighted return removes the effect of client cash flows and is the better measure of manager skill
• B. The two always produce identical results
• C. Time-weighted return measures the client's actual experience including deposits
• D. Dollar-weighted return removes the effect of cash flows and measures manager skill

55. An investment adviser representative wants to send a client a projection showing the portfolio will earn 9 percent annually for the next twenty years. What is the issue?

• A. There is no issue if 9 percent equals the historical average
• B. The projection is acceptable if the client signs a waiver
• C. Projections are prohibited under all circumstances
• D. Presenting a projected return as assured is misleading; assumptions and their limitations must be clearly disclosed

56. A stock has a required return of 10 percent, just paid an annual dividend of 2 dollars, and dividends are expected to grow at 4 percent perpetually. Using the constant growth dividend discount model, what is the intrinsic value?

• A. 34.67 dollars
• B. 33.33 dollars
• C. 50.00 dollars
• D. 20.00 dollars

57. An investor buys a call option on a stock. What is the maximum loss and the maximum gain?

• A. Maximum loss is the premium paid; maximum gain is theoretically unlimited
• B. Both loss and gain are limited to the strike price
• C. Maximum loss is the strike price; maximum gain is the premium
• D. Maximum loss is unlimited; maximum gain is the premium received

58. An investor holds 100 shares of a stock and buys one put option on that stock. What is this strategy called and what does it accomplish?

• A. A straddle, which profits from volatility in either direction
• B. A collar, which requires no premium outlay
• C. A protective put, which limits downside while retaining upside
• D. A covered call, which generates income and caps upside

59. A client wants exposure to a foreign company's shares without dealing in foreign currency settlement or a foreign exchange. Which instrument is designed for this?

• A. A Eurodollar deposit
• B. An American Depositary Receipt
• C. A Treasury STRIP
• D. A forward contract on the foreign currency

60. Which characteristic distinguishes preferred stock from common stock?

• A. A fixed dividend rate and priority over common in liquidation, generally without voting rights
• B. A guaranteed dividend that must be paid every year
• C. Priority over bondholders in liquidation
• D. Greater potential for capital appreciation than common

61. An investor is concerned that a bond issuer may redeem a high-coupon bond early if interest rates fall, forcing reinvestment at lower rates. What feature creates this exposure?

• A. A sinking fund prohibition
• B. A call provision
• C. A put provision
• D. A conversion feature

62. A client in a high tax bracket holds both a taxable bond fund and a growth stock fund, and has both a taxable account and an IRA. Which asset location is generally most tax efficient?

• A. Split both funds equally between the two accounts
• B. Hold the growth stock fund in the IRA and the bond fund in the taxable account
• C. Hold the taxable bond fund in the IRA and the growth stock fund in the taxable account
• D. Asset location has no effect on after-tax outcomes

63. An adviser recommends that a client roll a 401(k) into an IRA the adviser will manage for a fee. What conflict must be addressed?

• A. The adviser earns compensation from the rollover, so the recommendation's basis and the comparison to leaving assets in the plan must be disclosed
• B. There is no conflict because rollovers are always in the client's interest
• C. The conflict is eliminated if the IRA fee is lower than the plan's fee
• D. The conflict is eliminated once the rollover is complete

64. Which statement about an investment adviser representative's registration is accurate under state law?

• A. IARs need not register anywhere if the adviser is properly registered
• B. An IAR of a federal covered adviser may still be required to register in a state where the IAR has a place of business
• C. IARs of federal covered advisers are never required to register with any state
• D. IAR registration is handled exclusively by the SEC in all cases

65. A conservative investor wants a pooled investment vehicle that seeks to maintain a stable share price, invests in short-term high-quality debt instruments, and offers same-day liquidity. Which investment BEST fits this description?

• A. A balanced fund
• B. A long-term bond fund
• C. A high-yield bond fund
• D. A money market mutual fund

66. A bond fund concentrates its holdings in corporate bonds rated below investment grade. Relative to an investment-grade bond fund, this fund's PRIMARY additional risk is:

• A. Credit (default) risk, because the issuers have weaker financial capacity to meet obligations
• B. Reinvestment risk, because coupons must be reinvested periodically
• C. Interest rate risk, because low-rated bonds are more sensitive to rate changes
• D. Purchasing power risk, because coupons are fixed

67. A mutual fund's prospectus discloses an ongoing annual charge used to compensate for marketing, distribution, and shareholder servicing expenses, deducted from fund assets. What is this charge called?

• A. A contingent deferred sales charge
• B. A management advisory fee
• C. A redemption fee
• D. A 12b-1 fee

68. A share of preferred stock includes a feature entitling the holder to receive additional dividends beyond the stated rate if the company's common dividend exceeds a certain level. What is this feature called?

• A. Participating feature
• B. Cumulative feature
• C. Convertible feature
• D. Callable feature

69. An investor purchases a zero-coupon corporate bond and holds it to maturity. Compared to a conventional coupon-paying bond of the same maturity and credit quality, what is a key advantage regarding risk?

• A. It eliminates credit risk because the issuer cannot default before maturity
• B. It provides tax-free growth because no interest is imputed annually
• C. It eliminates reinvestment risk because no periodic interest payments must be reinvested
• D. It eliminates interest rate risk because the price never fluctuates before maturity

70. A corporate bond gives the holder the right to exchange it for a fixed number of shares of the issuer's common stock. How does this conversion feature typically affect the bond's coupon rate compared to a similar non-convertible bond from the same issuer?

• A. The coupon rate is typically higher, compensating for reduced liquidity
• B. The coupon rate floats with the issuer's stock price
• C. The coupon rate is typically lower, because the conversion feature itself has value to the investor
• D. The coupon rate is unaffected, since conversion value is priced separately

71. An investor holds a mortgage-backed pass-through security. When homeowners refinance their mortgages faster than expected due to falling interest rates, what risk does the investor face?

• A. Prepayment risk, causing principal to be returned earlier than expected and reinvested at lower rates
• B. Extension risk, causing the security's average life to lengthen
• C. Currency risk, because payments are tied to a foreign benchmark
• D. Credit risk, because the underlying mortgages are likely to default

72. A company suspends its preferred dividend for two years due to financial distress. If the preferred stock carries a cumulative feature, what happens to the missed dividends?

• A. They are permanently forfeited once a dividend period is missed
• B. They convert automatically into additional common shares
• C. They are paid only if the company is liquidated
• D. They accumulate as arrears and must be paid before any common dividend is resumed

73. Unlike a traditional open-end mutual fund, an exchange-traded fund's shares outstanding change primarily through:

• A. Direct daily purchases and redemptions with retail investors at net asset value
• B. In-kind creation and redemption of large share blocks by authorized participants
• C. Board-approved share buybacks funded by fund cash reserves
• D. Periodic stock splits declared by the fund's transfer agent

74. An investor places an order to buy shares of an open-end mutual fund at 2:00 p.m., before the fund's daily pricing cutoff. At what price will the order be executed?

• A. A price negotiated directly with the fund's portfolio manager
• B. The next calculated net asset value, determined after the market closes that day
• C. The prior day's closing net asset value
• D. The average of the day's high and low net asset values

75. A client compares two mutual funds with similar strategies and holding periods. Fund M charges a front-end sales charge deducted at purchase; Fund N charges no sales load. All else equal, how does Fund M's sales charge affect the client's initial investment?

• A. It has no effect on the amount invested, only on annual expenses
• B. It increases the number of shares purchased for the same dollar outlay
• C. It reduces the dollar amount actually invested in the fund below the amount the client paid
• D. It is refunded if the fund underperforms its benchmark

76. A pooled investment vehicle uses leverage and short selling, charges a performance fee, and is generally limited to accredited investors and qualified purchasers. Which characteristic MOST distinguishes this vehicle's liquidity from a registered open-end mutual fund?

• A. It is traded continuously on a national exchange
• B. It offers daily redemption at net asset value like a mutual fund
• C. It must redeem shares within one business day of request
• D. It typically imposes lock-up periods and limited redemption windows

77. A company raises capital by selling securities directly to a limited number of sophisticated investors without registering the offering with regulators, relying on an exemption. This describes:

• A. An initial public offering
• B. A rights offering to existing shareholders
• C. A private placement
• D. A secondary market transaction

78. A bank issues a structured note that promises to return an investor's original principal at maturity while offering a return linked to a stock index, provided the note is held until maturity. What risk does the investor retain despite the principal protection feature?

• A. Interest rate risk identical to a floating-rate bond
• B. Reinvestment risk from monthly coupon payments
• C. Currency risk from foreign-denominated coupons
• D. The credit risk of the issuing bank, since the principal guarantee depends on the issuer's ability to pay

79. A client invests in a direct participation program that owns and operates commercial real estate, passing income, losses, and tax benefits through to limited partners. Which characteristic is MOST associated with this investment?

• A. Guaranteed minimum distributions set by the general partner
• B. FDIC insurance on invested capital
• C. Daily liquidity through exchange trading
• D. Limited liquidity, since interests are not easily transferable and there is no active secondary market

80. A variable life insurance policy allows the policyowner to allocate cash value among separate account subaccounts investing in securities. Who bears the investment risk on those subaccounts?

• A. The insurance company, which guarantees a minimum cash value regardless of subaccount performance
• B. State guaranty funds, which reimburse investment losses
• C. The policyowner, whose cash value and potentially the death benefit fluctuate with subaccount performance
• D. A third-party reinsurer contracted by the insurer

81. A retiree wants predictable, guaranteed periodic payments from an annuity and is willing to accept the insurer's general account crediting rate rather than market-linked returns. Which annuity type is MOST appropriate?

• A. A fixed annuity, where the insurer bears investment risk and guarantees the payment amount
• B. An indexed annuity linked to an equity benchmark with no guaranteed minimum
• C. A variable annuity invested in equity subaccounts
• D. A deferred variable annuity with no guaranteed income rider

82. An investor buys a put option on a stock, paying a premium. What is the investor's maximum possible loss and maximum possible gain on this position?

• A. Maximum loss is unlimited; maximum gain is limited to the premium received
• B. Both maximum loss and maximum gain are limited to the premium paid
• C. Maximum loss is limited to the strike price; maximum gain is unlimited
• D. Maximum loss is limited to the premium paid; maximum gain is substantial, realized if the stock falls significantly toward zero

83. An investor owns 100 shares of a stock and sells one call option against that position. What is the PRIMARY purpose of this covered call strategy?

• A. To hedge against currency risk on a domestic holding
• B. To eliminate all downside risk on the stock position
• C. To guarantee unlimited upside in exchange for a small premium
• D. To generate additional income from the premium while capping upside potential above the strike price

84. An investor buys securities using a margin loan from the broker-dealer, putting up only a portion of the purchase price in cash. How does this MOST directly affect the investor's risk profile?

• A. It eliminates the risk of loss beyond the cash invested
• B. It converts market risk into credit risk borne solely by the broker-dealer
• C. It magnifies both potential gains and potential losses relative to an all-cash purchase
• D. It reduces volatility of returns compared to an all-cash purchase

85. An investor borrows shares and sells them short, anticipating a price decline. If the stock instead rises sharply and continues rising, what is the investor's loss exposure?

• A. Losses are theoretically unlimited, because there is no ceiling on how high the stock price can rise
• B. Losses are capped at the margin deposit posted with the broker
• C. Losses are capped at the original sale proceeds
• D. Losses are capped at twice the initial short sale value

86. An investor holds a Treasury Inflation-Protected Security to maturity during a sustained period of deflation, where the CPI index falls below its level at issuance. What does the investor receive at maturity?

• A. Only the accumulated inflation adjustments, with no return of original principal
• B. No less than the original par amount, due to the security's principal floor at maturity
• C. A fixed dollar amount set at issuance regardless of the CPI's path
• D. Less than the original par amount, since principal adjusts downward with deflation without a floor

87. A grandparent wants to give a grandchild a low-risk, non-marketable debt security backed by the U.S. government that is purchased directly from the government rather than traded on an exchange. Which type of security fits this description?

• A. A corporate bond registered with a national exchange
• B. A municipal revenue bond
• C. A U.S. savings bond, which is non-marketable and not traded on an exchange
• D. A Treasury bond traded on the secondary market

88. A municipality issues bonds to fund general operations, pledging its full taxing authority to repay principal and interest. What type of bond is this, and what is its PRIMARY source of repayment?

• A. A mortgage revenue bond, repaid from homeowner mortgage payments
• B. An industrial development bond, repaid by a corporate tenant
• C. A revenue bond, repaid from a specific project's earnings
• D. A general obligation bond, repaid from the issuer's general taxing power

89. An investor compares the credit risk of a long-term U.S. Treasury bond to that of a long-term corporate bond from a stable company. How do these securities typically compare?

• A. The Treasury bond is generally considered to carry negligible credit risk, while the corporate bond carries some issuer-specific default risk
• B. The Treasury bond carries materially higher credit risk due to political uncertainty
• C. The corporate bond carries no credit risk if it is investment grade
• D. The two carry essentially identical credit risk because both are dollar-denominated

90. A corporate bond issue includes a formal legal contract specifying the issuer's obligations, covenants, and the appointment of an independent party to protect bondholders' interests. What are this contract and appointed party called?

• A. The indenture and the trustee, respectively
• B. The registration statement and the transfer agent
• C. The prospectus and the underwriter
• D. The offering memorandum and the custodian

91. A bond indenture requires the issuer to periodically set aside funds or retire a portion of the outstanding bonds before final maturity. What is this provision called, and what is its PRIMARY benefit to bondholders?

• A. A put provision, which allows bondholders to sell the bond back at par at any time
• B. A conversion provision, which allows exchange into common stock
• C. A call provision, which benefits the issuer by allowing early refinancing
• D. A sinking fund provision, which reduces the risk that the issuer will be unable to repay the full principal at maturity

92. In the event of a corporate liquidation, a subordinated debenture holder's claim on assets ranks:

• A. Behind senior debt but ahead of preferred and common stockholders
• B. Ahead of all other creditors and equity holders
• C. Ahead of secured bondholders but behind common stockholders
• D. Equal to senior unsecured bondholders

93. A passively managed index fund seeks to replicate the performance of a benchmark index rather than outperform it. What risk is MOST specific to this passive approach?

• A. The risk that the portfolio manager makes poor active security selections
• B. The risk that the fund's holdings diverge entirely from any published index
• C. Credit risk on the fund's cash collateral in a securities lending program
• D. Tracking error, the risk that the fund's return deviates from the benchmark it seeks to replicate

94. A target-date retirement fund gradually shifts its asset allocation from mostly equities toward mostly fixed income as the target retirement year approaches. What is this asset allocation pattern called?

• A. A glide path
• B. A style drift
• C. A yield curve
• D. An efficient frontier

95. A corporation issues a security giving the holder the right to purchase shares of the company's stock at a fixed price, often attached to a bond offering as a sweetener, with a much longer expiration than a typical listed option. What is this security called?

• A. A warrant
• B. A convertible preferred share
• C. A call option
• D. A stock right

96. An economist compares two measures of a nation's economic output: one uses current-year prices, and the other adjusts for changes in the price level over time. Which measure adjusts for inflation, and why is it generally preferred for comparing output across years?

• A. Real GDP, because removing the effect of price changes isolates the actual change in output
• B. The Consumer Price Index, because it measures a fixed basket of goods
• C. Nominal GDP, because it reflects prices actually paid in each period
• D. The unemployment rate, because it is unaffected by price changes

97. One government-published index tracks the prices businesses receive for their output at the wholesale or producer level, while another tracks prices paid by urban consumers for a market basket of goods and services. Which index measures consumer-level prices?

• A. The Index of Leading Economic Indicators
• B. The GDP deflator
• C. The Consumer Price Index
• D. The Producer Price Index

98. The Federal Reserve announces a target range for the interest rate at which banks lend reserve balances to one another overnight. What is this benchmark rate called?

• A. The Treasury bill rate
• B. The federal funds rate
• C. The discount rate
• D. The prime rate

99. A bank borrows funds directly from the Federal Reserve's lending facility rather than from another bank. What is the interest rate charged on this direct borrowing called?

• A. The discount rate
• B. The London Interbank Offered Rate
• C. The prime rate
• D. The federal funds rate

100. The Federal Reserve wants to increase the money supply and lower short-term interest rates. Which open market operation is consistent with this goal?

• A. Raising the discount rate
• B. Raising the reserve requirement for member banks
• C. Selling Treasury securities to primary dealers
• D. Buying Treasury securities in the open market, injecting reserves into the banking system

101. The Federal Reserve raises the percentage of deposits that banks must hold in reserve rather than lend out. What is the PRIMARY effect of this action on the banking system's lending capacity?

• A. It directly sets the interest rate banks charge borrowers
• B. It reduces the amount of funds banks have available to lend, tightening credit conditions
• C. It increases the amount of funds banks have available to lend
• D. It has no effect on lending capacity, only on bank profitability

102. A government increases infrastructure spending and cuts taxes to stimulate economic growth during a slowdown. This describes an example of which type of policy, as opposed to action taken by the central bank?

• A. Fiscal policy
• B. Regulatory policy
• C. Monetary policy
• D. Trade policy

103. A yield curve shows long-term interest rates higher than short-term rates, which is the historically typical shape. What does this normal upward slope generally reflect?

• A. An equal probability of rates rising or falling at every maturity
• B. A central bank actively suppressing short-term rates below zero
• C. Investors generally demanding higher compensation for lending money over longer periods
• D. Investor expectations of an imminent recession

104. An analyst wants a single measure that estimates how much a bond's price will change for a given change in interest rates, accounting for both coupon and maturity. Which measure BEST serves this purpose?

• A. Current yield
• B. Coupon rate
• C. Duration
• D. Yield to call

105. Two bonds have identical duration, but Bond X exhibits greater convexity than Bond Y. For a large change in interest rates, how does Bond X's price typically respond compared to Bond Y's?

• A. Bond X's price will respond identically to Bond Y's in both directions
• B. Bond X's price will fall more when rates fall
• C. Bond X's price will rise more when rates fall and fall less when rates rise, compared to Bond Y
• D. Bond X's price will be unaffected by large rate changes

106. A stock has a beta of 1.5. If the overall market rises by 10 percent, what would this stock's price be expected to do, based solely on its beta?

• A. Fall by 5 percent, reflecting an inverse relationship
• B. Rise by exactly 10 percent, matching the market
• C. Remain unchanged, since beta measures only historical volatility
• D. Rise by approximately 15 percent, reflecting greater sensitivity to market movements

107. An adviser evaluates how well a mutual fund's returns are explained by movements in its benchmark index, using a statistic ranging from 0 to 100. A fund with an R-squared of 95 relative to its benchmark suggests:

• A. The fund's returns are highly explained by movements in the benchmark, making its beta more reliable
• B. The fund significantly outperforms its benchmark
• C. The fund's beta cannot be reliably calculated
• D. The fund holds securities entirely unrelated to the benchmark

108. Fund P and Fund Q have earned the same average annual return over the past ten years, but Fund P's monthly returns have swung far more widely than Fund Q's. Which statistical measure captures this difference in total risk?

• A. Standard deviation
• B. Beta
• C. Alpha
• D. The Sharpe ratio

109. An adviser is selecting a second asset to add to a portfolio for diversification purposes. Compared to an asset with a correlation coefficient of positive 1.0 to the existing portfolio, an asset with a correlation coefficient near 0 would:

• A. Guarantee a negative return whenever the portfolio's other assets rise
• B. Provide greater diversification benefit, since its returns move largely independently of the existing portfolio
• C. Increase overall portfolio risk more than an asset with correlation of positive 1.0
• D. Provide no diversification benefit, since any correlation below 1.0 offers identical benefit

110. A graph plots portfolios offering the highest expected return for each level of risk, or equivalently the lowest risk for each level of expected return. What is this set of optimal portfolios called?

• A. The efficient frontier
• B. The yield curve
• C. The capital allocation line's risk-free segment
• D. The security market line

111. According to modern portfolio theory, combining assets that are not perfectly positively correlated into a portfolio, rather than holding a single asset, PRIMARILY achieves what benefit?

• A. A reduction in overall portfolio risk for a given level of expected return
• B. Elimination of systematic market risk
• C. Elimination of all investment risk
• D. A guaranteed increase in expected return

112. An economy is experiencing rising employment, increasing industrial production, and growing consumer spending, following a prior downturn. Which phase of the business cycle does this MOST likely represent?

• A. Contraction
• B. Recession
• C. Expansion
• D. Trough

113. An index measures households' optimism about current and future economic conditions, based on survey responses regarding employment prospects and spending plans. Economists commonly classify this index as:

• A. A lagging economic indicator, since it only reflects economic conditions after they occur
• B. A leading economic indicator, since shifts in sentiment often precede changes in actual spending
• C. An unrelated statistical measure with no forecasting value
• D. A coincident economic indicator, moving exactly with current GDP

114. Before recommending an investment strategy, an investment adviser representative gathers information about a client's financial situation, investment objectives, risk tolerance, and time horizon. This process is required primarily to satisfy which obligation?

• A. The soft dollar disclosure obligation
• B. The proxy voting obligation
• C. The suitability obligation
• D. The best execution obligation

115. An investment adviser representative executes an unusually high volume of trades in a client's account, generating substantial fees, without any corresponding investment rationale tied to the client's objectives. This practice is known as:

• A. Front running
• B. Window dressing
• C. Churning
• D. Portfolio rebalancing

116. An investment adviser wants to enter orders in a client's account without obtaining the client's approval for each individual transaction. What must the adviser obtain before exercising this authority?

• A. Written discretionary authorization from the client
• B. A notarized power of attorney filed with the SEC before every transaction
• C. Approval from a state securities administrator for each trade
• D. Verbal approval renewed before each trade

117. A client discovers that funds have been withdrawn from her advisory account without her authorization by her investment adviser representative. This action MOST directly violates which principle?

• A. The suitability obligation
• B. The fiduciary duty and prohibition against misappropriating or converting client funds
• C. The proxy voting policy requirement
• D. The best execution obligation

118. An investment adviser representative learns that a large client order is about to be entered that will likely move a security's price, and personally trades in that security ahead of the client's order to profit from the anticipated price move. This practice is called:

• A. Front running
• B. Scalping only when applied to research recommendations
• C. Dollar-cost averaging
• D. Portfolio hedging

119. An investment adviser representative learns material nonpublic information about a company through a personal friendship with an executive and trades on that information before it is publicly disclosed. This conduct is:

• A. Prohibited insider trading, because trading on material nonpublic information breaches a duty of trust and confidence
• B. Permissible only if the profit is donated to charity
• C. Permissible, as long as the trade is disclosed to the client after execution
• D. Permissible, since the representative did not solicit the information

120. An investment adviser representative recommends frequent switching between similar mutual funds primarily because the switches generate new sales charges for the representative, despite no meaningful benefit to the client. This practice is BEST described as:

• A. Legitimate tax-loss harvesting
• B. An unsuitable, commission-motivated recommendation that breaches the adviser's duty to the client
• C. Legitimate asset allocation rebalancing
• D. A prudent diversification strategy

121. An investor wants to buy a stock but only if the price falls to a specific level or lower, and is willing to wait rather than buy immediately at the current market price. Which order type should the investor use?

• A. A market order
• B. An all-or-none order without a price restriction
• C. A limit order
• D. A stop order

122. An investor owns a stock currently trading at 50 dollars and wants to automatically trigger a sale if the price falls to 45 dollars, to help limit potential losses. Which order type is designed for this purpose?

• A. A stop order, which becomes a market order once the stock trades at or through 45 dollars
• B. A short sale order requiring an uptick
• C. A limit order to sell at 45 dollars, guaranteeing execution at that exact price
• D. An immediate-or-cancel order requiring instant full execution

123. A client's advisory account bundles investment advice, trade execution, and custody into a single all-inclusive asset-based fee rather than paying separate commissions for each transaction. What is this type of arrangement called?

• A. A wrap fee account
• B. A prime brokerage account
• C. A margin account
• D. A cash management account

124. An investment adviser representative tells a prospective client, 'I guarantee this managed account will never lose money.' This statement is:

• A. Acceptable, as long as it is put in writing and signed by both parties
• B. Acceptable only for accounts holding solely U.S. Treasury securities
• C. Acceptable, as long as the adviser has a strong historical track record
• D. A prohibited practice, since advisers generally may not guarantee against loss in a securities account

125. A securities issuer seeks to register an offering with a state securities administrator. Under the Uniform Securities Act, registration may generally be accomplished by which of the following methods?

• A. Registration by qualification, coordination, or notification, depending on the offering's circumstances
• B. Registration only through a self-certification filed with the issuer's transfer agent
• C. Registration solely through federal covered exemption
• D. Registration only by direct petition to NASAA

126. An investment adviser has no place of business in a particular state but has a small number of retail clients who happen to reside there. Many states provide an exemption from adviser registration in this scenario known as:

• A. The federal covered exemption
• B. The institutional-only exemption
• C. The accredited investor exemption
• D. The de minimis exemption, based on having very few clients in the state

127. A firm provides advice about securities to others for compensation as part of a regular business. Under securities law, this firm generally meets the definition of:

• A. An investment adviser
• B. A broker-dealer, regardless of whether it effects securities transactions
• C. An underwriter
• D. A transfer agent

128. A broker-dealer provides investment advice to clients, but that advice is solely incidental to its brokerage business, and it receives no special compensation specifically for the advice. Under this circumstance, the broker-dealer is generally:

• A. Automatically deemed a fiduciary identical to a registered adviser
• B. Required to deliver a brochure identical to that of a registered adviser
• C. Required to register as an investment adviser regardless of compensation structure
• D. Excluded from the definition of investment adviser under the incidental advice exclusion

129. An investment adviser manages assets under management above a certain threshold set by federal law. As a result, the adviser is generally required to register with which regulator rather than with individual states?

• A. The Financial Industry Regulatory Authority
• B. Every state in which it has a single client
• C. The Municipal Securities Rulemaking Board
• D. The Securities and Exchange Commission, becoming a federal covered adviser

130. A state securities administrator wants to confirm that a registered investment adviser is maintaining accurate transaction records, client agreements, and financial statements. This oversight activity relies on the adviser's compliance with which requirement?

• A. The soft dollar safe harbor
• B. The custody surprise examination requirement
• C. The books and records requirement
• D. The proxy voting requirement

131. An investment adviser makes a materially misleading statement to a client about the risks of a recommended investment. This conduct is prohibited under which broad category of provisions applicable to all investment advisers, whether or not they are registered?

• A. Registration provisions
• B. Advertising safe harbor provisions
• C. Anti-fraud provisions, which apply broadly regardless of registration status
• D. Recordkeeping provisions

132. An investment adviser pays a third party a cash fee for referring new clients to the adviser. Under the applicable marketing rules, what must generally happen for this arrangement to be permissible?

• A. The solicitor must be a registered broker-dealer with no other qualification needed
• B. The referral must be verbal only, with no written agreement
• C. The fee must be paid entirely by the referred client rather than the adviser
• D. The arrangement must be disclosed to the client, generally through a written agreement describing the compensation

133. A state securities administrator adopts a model rule listing specific practices, such as unauthorized trading and misrepresentation of qualifications, that constitute dishonest or unethical conduct by investment advisers. This type of guidance is typically issued by:

• A. The Public Company Accounting Oversight Board
• B. NASAA, through its model rules adopted by state administrators
• C. The Federal Reserve Board
• D. The Municipal Securities Rulemaking Board

134. A client believes she was defrauded by her investment adviser in connection with the purchase of a security. Under the Uniform Securities Act framework, the client generally has which type of remedy available, in addition to any regulatory enforcement action?

• A. A private right of action allowing the client to sue for rescission or damages
• B. No remedy, since only state administrators may pursue fraud claims
• C. Only the right to request FDIC reimbursement
• D. Only the right to file a complaint with the IRS

135. An investment adviser's compliance policy requires that client account records and correspondence be retained for a specified minimum number of years and be readily accessible during that period. This policy exists primarily to satisfy:

• A. A voluntary industry guideline with no compliance consequence
• B. A marketing best-practice with no regulatory basis
• C. Recordkeeping requirements imposed by securities regulators for examination purposes
• D. A tax withholding requirement imposed by the IRS

136. A federal covered adviser has clients residing in a particular state. Even though the adviser registers with the SEC rather than the state, what is the state generally permitted to require of the adviser?

• A. Nothing at all, since federal registration preempts any state involvement
• B. Full state registration identical to a state-registered adviser
• C. A notice filing and payment of applicable state fees
• D. A separate state examination for all advisory representatives

137. An individual is registered in a state as an investment adviser representative. To maintain that registration in good standing over time, the representative is generally subject to which ongoing obligation, in addition to initial qualification?

• A. Annual re-examination of the same initial qualification exam with no other requirement
• B. No ongoing obligation once initial registration is granted
• C. Periodic registration renewal and compliance with any applicable continuing education requirements
• D. Mandatory rotation to a different employing firm every few years