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

1. 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
   Show answer & explanation

   Answer: D
   This tests interest-rate risk. Existing fixed-coupon bonds move inversely to market rates: when rates rise, the fixed coupons are worth relatively less, so the bonds' market price falls. Long-term, high-quality bonds are especially sensitive to rate changes rather than credit changes.

2. 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
   Show answer & explanation

   Answer: B
   The risk-return tradeoff holds that investors generally must accept greater risk (variability of outcomes) to pursue higher expected returns. Investment A's higher expected return paired with greater variability directly illustrates this core relationship.

3. 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
   Show answer & explanation

   Answer: B
   Liquidity risk is the risk that an investor cannot sell an asset quickly at or near its fair value. Thinly traded securities with wide spreads force sellers to accept price concessions, which is the defining feature of liquidity risk.

4. 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
   Show answer & explanation

   Answer: B
   Standard deviation measures the dispersion, or volatility, of returns around the average. A higher standard deviation means returns were more spread out, indicating greater volatility—not a guarantee of future results and not a measure limited to downside only.

5. 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
   Show answer & explanation

   Answer: C
   Purchasing-power (inflation) risk is the erosion of the real value of fixed payments as prices rise. Fixed nominal income streams are especially vulnerable because the payments do not adjust for inflation, reducing what each payment can buy.

6. 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
   Show answer & explanation

   Answer: A
   Systematic (market) risk affects the entire market and cannot be diversified away. Unsystematic risk is specific to a particular company or industry and can be reduced by holding a diversified portfolio. Answer A reverses the two concepts.

7. 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
   Show answer & explanation

   Answer: A
   Common stock represents a residual ownership claim. In liquidation, creditors such as bondholders are paid before equity holders, so common stockholders are last in line and receive only what remains, if anything. This ordering is a key element of the risk difference between equity and debt.

8. 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
   Show answer & explanation

   Answer: C
   A call feature exposes the investor to reinvestment risk: issuers tend to call bonds when rates fall, returning principal that must then be reinvested at the lower prevailing rates, reducing future income. This is the primary drawback of a callable bond to the holder.

9. 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
   Show answer & explanation

   Answer: B
   Currency (exchange-rate) risk arises when investments are denominated in a foreign currency. If that currency weakens against the dollar, the dollar-value of the returns falls even when the local-currency performance is positive, reducing the investor's realized return.

10. 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
    Show answer & explanation

    Answer: C
    Only choice B is correctly matched: the passing score is 92 of 130 scored questions. The time limit is 180 minutes (not 130), the fee is $187 (not $180), and there are 130 scored questions (not 187). The incorrect options deliberately swap values among the exam parameters.

11. 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
    Show answer & explanation

    Answer: B
    Credit risk, also called default risk, is the possibility that the issuer will not meet its obligation to pay interest or repay principal. It is distinct from purchasing-power, liquidity, and reinvestment risk, which describe other exposures.

12. 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
    Show answer & explanation

    Answer: B
    The quick ratio divides current assets less inventory by current liabilities, testing liquidity without assuming inventory can be sold quickly. The current ratio includes inventory. Debt-to-equity measures leverage rather than liquidity, and return on equity measures profitability relative to shareholders' capital.

13. 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
    Show answer & explanation

    Answer: B
    The four phases run expansion, peak, contraction and trough. A contraction features falling real output, rising unemployment and declining profits, and two consecutive quarters of declining GDP is the common rule of thumb for a recession. The trough is the bottom, where decline stops before recovery begins.

14. 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
    Show answer & explanation

    Answer: C
    Leading indicators turn ahead of the economy and include building permits, new orders for durable goods, initial jobless claims, stock prices and the yield curve spread. Industrial production and personal income are coincident, moving with the economy. Average duration of unemployment and the prime rate are lagging, confirming a turn after it has occurred.

15. 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
    Show answer & explanation

    Answer: C
    Selling securities drains reserves from the banking system, reducing the money supply and pushing short-term rates up. Buying securities, lowering the discount rate and cutting reserve requirements are all easing actions. Open market operations are the Fed's most-used tool because they can be applied continuously and in fine increments.

16. 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
    Show answer & explanation

    Answer: D
    Stagflation combines stagnation and inflation, and it is difficult to address because the standard remedies conflict: stimulating growth worsens inflation while fighting inflation deepens the slowdown. Deflation is a general decline in prices, and disinflation is a slowing in the rate of inflation while prices still rise.

17. 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
    Show answer & explanation

    Answer: C
    TIPS adjust principal with the CPI, so both the inflation-adjusted principal at maturity and the semiannual coupon computed on that principal keep pace with inflation. STRIPS are zero-coupon Treasuries with no inflation adjustment and substantial reinvestment-free but high duration exposure. Fixed-rate corporates carry full purchasing power risk.

18. 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
    Show answer & explanation

    Answer: C
    Revenue bonds are serviced solely from the earnings of the financed project, so their credit depends on that project's economics rather than the issuer's tax base. General obligation bonds are backed by the full faith, credit and taxing power of the issuer. A double-barreled bond carries both a revenue pledge and a GO backstop.

19. 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
    Show answer & explanation

    Answer: C
    Earnings per share is net income divided by shares outstanding: 5 million divided by 2 million equals 2.50 dollars. The price-to-earnings ratio is price divided by EPS, so 40 divided by 2.50 equals 16. A higher P/E reflects greater expected growth, or a richer valuation, relative to current earnings.

20. 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
    Show answer & explanation

    Answer: C
    An inverted curve means investors accept lower yields to lock in longer maturities, typically because they expect rates and growth to fall, and it has preceded many recessions. A normal curve slopes upward, compensating for the greater risk of longer maturities, and a flat curve shows little yield difference across the maturity spectrum.

21. 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
    Show answer & explanation

    Answer: A
    The rule of 72 divides 72 by the annual rate to approximate the doubling period: 72 divided by 8 equals 9 years. It is an approximation that works well for rates roughly between 6 and 10 percent and is useful for quick client conversations about the effect of compounding.

22. 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
    Show answer & explanation

    Answer: A
    Systematic risk affects the whole market and includes market, interest rate, inflation and currency risk; diversification cannot remove it, which is why it is the risk investors are compensated for through beta. Unsystematic risks such as business, financial, liquidity and regulatory risk are issuer or industry specific and can be diversified away.

23. 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
    Show answer & explanation

    Answer: D
    CAPM expected return equals the risk-free rate plus beta times the equity risk premium. The premium is 9 minus 3, or 6 percent. Multiplying by beta gives 1.3 times 6, which is 7.8 percent, and adding the 3 percent risk-free rate produces 10.8 percent. Multiplying beta by the full market return rather than the premium yields 11.7 percent, the common error.

24. 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
    Show answer & explanation

    Answer: D
    Alpha measures performance beyond what the portfolio's systematic risk exposure would predict, and positive alpha suggests value added by the manager. Beta measures sensitivity to the market, the Sharpe ratio measures excess return per unit of total risk, and standard deviation measures dispersion of returns.

25. 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
    Show answer & explanation

    Answer: C
    Correlation ranges from negative 1.0 to positive 1.0. A coefficient of negative 1.0 means perfectly opposite movement, which theoretically permits elimination of portfolio volatility. Positive 1.0 means identical movement and no diversification benefit, and zero means the assets are uncorrelated, which still provides meaningful risk reduction.

26. 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
    Show answer & explanation

    Answer: C
    Weak form holds that past prices are already reflected, defeating technical analysis. Semi-strong adds all public information, defeating fundamental analysis as well. Strong form adds private information, implying even insiders cannot consistently profit. Each successive form subsumes the ones before it.

27. 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
    Show answer & explanation

    Answer: D
    The Sharpe ratio divides return above the risk-free rate by standard deviation, so it rewards return per unit of total volatility and is appropriate when the portfolio is an investor's entire holding. The Treynor ratio uses beta instead, which suits a portfolio held as one component of a larger diversified whole.

28. 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
    Show answer & explanation

    Answer: A
    Current yield is annual coupon income divided by current market price. A 5 percent coupon on a 1,000 dollar par bond pays 50 dollars, and a price of 90 means 900 dollars, so 50 divided by 900 equals 5.56 percent. Because the bond trades at a discount, current yield exceeds the nominal coupon and yield to maturity exceeds current yield.

29. 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
    Show answer & explanation

    Answer: D
    For a premium bond the ranking descends from the coupon: nominal, current, yield to maturity, then yield to call, because the premium is amortized away and an early call accelerates that loss. For a discount bond the order reverses entirely. At par all four are equal.

30. 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
    Show answer & explanation

    Answer: C
    Duration measures price sensitivity to rate changes and rises with maturity and falls with coupon. A longer bond has more cash flows discounted further out, so a given yield change moves its price more. This is interest rate risk, and it is why a client expecting rising rates is generally moved shorter in duration.

31. 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
    Show answer & explanation

    Answer: B
    The after-tax return on the corporate bond is 6 percent times one minus 0.32, which equals 4.08 percent. A municipal bond yielding more than 4.08 percent would leave this investor better off. The reverse calculation, tax-equivalent yield, divides the municipal yield by one minus the tax rate.

32. 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
    Show answer & explanation

    Answer: A
    A closed-end fund issues a fixed number of shares in an offering and thereafter trades in the secondary market, where supply and demand can push the price to a premium or discount to NAV. An open-end fund continuously issues and redeems at NAV computed after the order. A unit investment trust holds a fixed portfolio with a termination date and no active management.

33. 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
    Show answer & explanation

    Answer: D
    A publicly traded REIT holds income-producing real estate, trades on an exchange for liquidity, and must distribute the large majority of taxable income to shareholders to maintain its tax status. Direct participation programs and non-traded partnerships are illiquid, often with long holding periods and limited secondary markets.

34. 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
    Show answer & explanation

    Answer: A
    In a variable annuity the owner's account value fluctuates with the performance of the chosen subaccounts, so the owner bears investment risk, which is why the product is a security. In a fixed annuity the insurer guarantees the rate and bears that risk. The insurer bears mortality and expense risk in both.

35. 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
    Show answer & explanation

    Answer: A
    Roth contributions are not deductible, but qualified distributions of both contributions and earnings are tax free once the account has been open five years and a qualifying event such as reaching age 59 and a half occurs. The original owner of a Roth IRA is not subject to lifetime required minimum distributions, unlike a traditional IRA owner.

36. 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
    Show answer & explanation

    Answer: A
    A defined benefit plan promises an outcome, so the employer must fund whatever is required to deliver it and bears the investment and longevity risk. A defined contribution plan such as a 401(k) promises only the contribution, leaving the participant with the investment outcome. This distinction drives suitability discussions with plan sponsors.

37. 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
    Show answer & explanation

    Answer: C
    Section 404(c) relief requires that participants genuinely direct their own investments, that the menu offer a broad range of alternatives with materially different risk and return characteristics, and that participants receive sufficient information to make informed decisions. Concentrating a plan in employer stock creates the opposite of diversification and is a recurring source of fiduciary litigation.

38. 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
    Show answer & explanation

    Answer: A
    The wash sale rule disallows a loss when substantially identical securities are purchased within 30 days before or after the sale, a 61-day window centered on the sale date. The disallowed loss is not lost permanently; it is added to the basis of the replacement shares, deferring the deduction until they are sold.

39. 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
    Show answer & explanation

    Answer: D
    Inherited property generally receives a basis equal to fair market value at the date of death, eliminating the built-in capital gain for the heir. Gifted property, by contrast, generally carries over the donor's basis for gain purposes, which is why holding appreciated assets until death and gifting depreciated assets are different planning decisions.

40. 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
    Show answer & explanation

    Answer: C
    Strategic allocation sets long-term target weights reflecting the client's objectives and rebalances mechanically back to them, which enforces selling appreciated assets and buying depressed ones. Tactical allocation deliberately deviates from targets based on short-term market views. Dollar cost averaging concerns the timing of contributions rather than portfolio weights.

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