Series 65 – Uniform Investment Adviser Law Exam — Questions and Answers

Question 1: What is a closed-end fund?

An investment company that issues a fixed number of shares that trade on an exchange at market prices (Correct answer)
A fund that only invests in closed companies
A fund with a fixed investment term and guaranteed return
A mutual fund that stops accepting new investors after a set date

Correct answer: An investment company that issues a fixed number of shares that trade on an exchange at market prices

Closed-end funds issue a fixed number of shares through an IPO and trade on exchanges like stocks, with prices determined by market supply and demand rather than NAV.

Question 2: What does a high correlation between two asset classes suggest about their diversification benefit?

High correlation maximizes the diversification benefit of combining the two assets
Correlation has no bearing on diversification benefit
High correlation only matters for bond portfolios, not equity portfolios
High correlation reduces the diversification benefit because the assets tend to move together in the same direction (Correct answer)

Correct answer: High correlation reduces the diversification benefit because the assets tend to move together in the same direction

When two assets are highly correlated, they tend to rise and fall together, providing little diversification benefit; low or negative correlation is what reduces portfolio risk.

Question 3: What is the main risk associated with a callable bond from an investor's perspective?

The issuer may call the bond when interest rates fall, forcing reinvestment at lower rates (Correct answer)
The bondholder loses all accrued interest when the bond is called
The bond's price will rise sharply when called
The bond may default at maturity

Correct answer: The issuer may call the bond when interest rates fall, forcing reinvestment at lower rates

Callable bonds expose investors to reinvestment risk because issuers typically call bonds when rates fall, forcing investors to reinvest proceeds at lower prevailing rates.

Question 4: Under the Uniform Securities Act, which of the following is NOT exempt from the definition of a broker-dealer?

A bank effecting securities transactions
A person who has no place of business in the state and deals only with issuers
A firm that regularly buys and sells securities for its own account with the public (Correct answer)
An agent trading only for their own account

Correct answer: A firm that regularly buys and sells securities for its own account with the public

A firm that regularly buys and sells securities with the public for its own account as a dealer is not exempt from broker-dealer registration requirements.

Question 5: What is a 'registration by coordination' under the Uniform Securities Act?

A method where a security registered with the SEC can be simultaneously registered at the state level by coordinating with the federal filing (Correct answer)
A procedure allowing broker-dealers to operate in multiple states with one registration
A method of registering only after receiving approval from every state where the security will be sold
A process where multiple states jointly register a single adviser

Correct answer: A method where a security registered with the SEC can be simultaneously registered at the state level by coordinating with the federal filing

Registration by coordination allows issuers filing a registration statement with the SEC to use that same filing to coordinate state registration, becoming effective at the same time as the federal registration.

Question 6: What must an investment adviser do before charging an advisory fee more than six months in advance?

Obtain written consent and be prepared to refund the pro-rated unearned portion if the contract is terminated (Correct answer)
Obtain a surety bond equal to the total prepaid fees
File a special form with the SEC
Register the prepayment arrangement with the state

Correct answer: Obtain written consent and be prepared to refund the pro-rated unearned portion if the contract is terminated

If an adviser collects fees more than six months in advance, the client must provide written consent and the adviser must refund the unearned, pro-rated portion if the contract is terminated.

Question 7: What does 'sector rotation' as an investment strategy involve?

Diversifying equally across all market sectors at all times
Selling international sector funds and buying domestic equivalents
Shifting portfolio allocations toward sectors expected to outperform during different phases of the business cycle (Correct answer)
Rotating positions within a single sector to reduce concentration risk

Correct answer: Shifting portfolio allocations toward sectors expected to outperform during different phases of the business cycle

Sector rotation involves tactically reallocating assets toward sectors historically associated with outperformance during each phase of the business cycle (expansion, peak, contraction, trough).

Question 8: Under the Uniform Securities Act, how long does a securities registration remain effective?

Indefinitely unless revoked
Until all registered shares are sold
One year, until December 31 of the year of registration (Correct answer)
Two years from the date of effectiveness

Correct answer: One year, until December 31 of the year of registration

Under the Uniform Securities Act, a securities registration is effective for one year and expires on December 31 of the year it was granted.

Question 9: What is a characteristic unique to preferred stock compared to common stock?

Preferred stockholders can convert shares to bonds
Preferred stockholders benefit more from capital appreciation
Preferred stockholders receive dividends before common stockholders (Correct answer)
Preferred stockholders have voting rights

Correct answer: Preferred stockholders receive dividends before common stockholders

Preferred stockholders have priority over common stockholders in receiving dividends and in asset distribution during liquidation.

Question 10: What is Monte Carlo simulation used for in financial planning?

To model the probability of various outcomes by running thousands of random scenarios using historical data (Correct answer)
To determine the optimal asset allocation for a specific client
To calculate the exact future value of a portfolio
To replicate the performance of a market index

Correct answer: To model the probability of various outcomes by running thousands of random scenarios using historical data

Monte Carlo simulation runs thousands of scenarios with random variations in returns and other variables to estimate the probability distribution of portfolio outcomes over time.

Question 11: Which type of mutual fund charges a fee when shares are purchased?

No-load fund
Front-end load fund (Correct answer)
12b-1 fund
Back-end load fund

Correct answer: Front-end load fund

A front-end load fund charges a sales commission at the time of purchase, reducing the amount of money actually invested.

Question 12: What is the primary purpose of the money supply (M1, M2) measurement?

To track stock market growth
To calculate tax revenues
To measure the total amount of money available in the economy (Correct answer)
To measure corporate profitability

Correct answer: To measure the total amount of money available in the economy

Money supply measures (M1, M2) track the total amount of money circulating in the economy, which helps assess inflationary pressures and monetary policy effectiveness.

Question 13: What is the primary purpose of a hedge fund?

To provide tax-free income to qualified investors
To use diverse and often complex strategies to generate absolute returns regardless of market conditions (Correct answer)
To replicate the performance of a broad market index
To provide guaranteed returns with no risk

Correct answer: To use diverse and often complex strategies to generate absolute returns regardless of market conditions

Hedge funds use a wide range of strategies including leverage, short selling, and derivatives to seek absolute returns that are not necessarily correlated with market performance.

Question 14: What does a yield curve inversion typically signal?

A potential recession (Correct answer)
Federal Reserve rate cuts
Rising inflation
Strong economic growth ahead

Correct answer: A potential recession

An inverted yield curve, where short-term rates exceed long-term rates, has historically been a reliable predictor of recession.

Question 15: What is the typical notice filing requirement for a federally covered investment adviser in a state?

Filing a copy of Form ADV and paying a state fee, but not full state registration (Correct answer)
Filing Form U4 for each IAR located in the state
Full state registration as if they were a state-registered adviser
No filing required in any state

Correct answer: Filing a copy of Form ADV and paying a state fee, but not full state registration

Federally covered advisers (SEC-registered) must file a notice with each state where they have a place of business, typically submitting Form ADV and paying a fee, rather than registering as a state adviser.

Question 16: What is a 'benchmark' used for in portfolio management?

A model portfolio constructed by regulators
The regulatory standard for investment adviser performance
A minimum return guaranteed by the adviser
A standard index or reference point used to evaluate the relative performance of a portfolio (Correct answer)

Correct answer: A standard index or reference point used to evaluate the relative performance of a portfolio

A benchmark (typically a market index) serves as the reference point against which a portfolio's performance is compared to assess whether the manager added value.

Question 17: Which of the following securities is exempt from registration under the Uniform Securities Act?

A new corporate IPO
U.S. government securities (Correct answer)
Shares of a new startup company
A variable annuity contract

Correct answer: U.S. government securities

U.S. government securities are exempt from registration under the Uniform Securities Act because they are issued by the federal government and subject to federal oversight.

Question 18: What does standard deviation measure in the context of investments?

The total variability or dispersion of investment returns around the average return (Correct answer)
The maximum loss a portfolio has experienced
The correlation between a security and the broad market
The average annual return of a portfolio

Correct answer: The total variability or dispersion of investment returns around the average return

Standard deviation measures the degree to which returns fluctuate around their average, making it a key measure of total investment risk or volatility.

Question 19: What is the 'anti-fraud' provision that applies to all investment advisers under the Investment Advisers Act?

Rule 10b-5
Section 17(a)
Section 206 (Correct answer)
Section 12(a)

Correct answer: Section 206

Section 206 of the Investment Advisers Act prohibits investment advisers from engaging in fraudulent, deceptive, or manipulative practices with clients, regardless of registration status.

Question 20: What is the difference between technical analysis and fundamental analysis?

Technical analysis uses financial statements; fundamental analysis uses price charts
Technical analysis uses price and volume data to forecast future prices; fundamental analysis evaluates a company's financial health and intrinsic value (Correct answer)
There is no meaningful difference between the two approaches
Technical analysis is used for bonds; fundamental analysis is used for stocks

Correct answer: Technical analysis uses price and volume data to forecast future prices; fundamental analysis evaluates a company's financial health and intrinsic value

Technical analysts study historical price and volume patterns to predict future price movements, while fundamental analysts evaluate financial statements, management, and economic factors to determine intrinsic value.

Question 21: Which of the following is considered a lagging economic indicator?

The unemployment rate (Correct answer)
Stock prices
Building permits
New orders for consumer goods

Correct answer: The unemployment rate

The unemployment rate is a lagging indicator because it typically rises or falls after the economy has already changed direction.

Question 22: What is the primary benefit of a 529 college savings plan?

Contributions are federally tax-deductible for all taxpayers
There are no contribution limits
The account can be used for any purpose without penalty
Earnings grow tax-deferred and qualified withdrawals for education are federal tax-free (Correct answer)

Correct answer: Earnings grow tax-deferred and qualified withdrawals for education are federal tax-free

529 plans offer tax-deferred growth and tax-free withdrawals when funds are used for qualified higher education expenses.

Question 23: Which of the following best describes a wrap fee account?

An account that charges a fee for each transaction executed
A savings account with a guaranteed wrap-around interest rate
An account designed exclusively for tax-exempt investors
An account that bundles advisory, brokerage, and custodial services into a single annual fee based on assets under management (Correct answer)

Correct answer: An account that bundles advisory, brokerage, and custodial services into a single annual fee based on assets under management

Wrap fee accounts charge a single all-inclusive annual fee (typically a percentage of AUM) that covers advisory services, brokerage commissions, and custodial costs.

Question 24: Under the Investment Advisers Act, what is required before an investment adviser can charge a performance-based fee?

The client must be a 'qualified client' with at least $1.1 million under management or a net worth exceeding $2.2 million (Correct answer)
The fee must be capped at 20% of profits
The client must have a minimum account balance of $100,000
The client must be an accredited investor with net worth over $1 million

Correct answer: The client must be a 'qualified client' with at least $1.1 million under management or a net worth exceeding $2.2 million

Under Rule 205-3, performance-based fees may only be charged to 'qualified clients,' generally those with at least $1.1 million under management with the adviser or a net worth over $2.2 million.

Question 25: What does a company's debt-to-equity ratio indicate?

A company's dividend yield
A company's total revenue relative to its market cap
The proportion of a company's financing from debt relative to equity (Correct answer)
The proportion of a company's assets financed by shareholders versus creditors

Correct answer: The proportion of a company's financing from debt relative to equity

The debt-to-equity ratio shows how much of a company's financing comes from debt compared to equity, with a higher ratio indicating greater financial leverage.

Question 26: What authority does a state securities administrator have under the Uniform Securities Act?

The authority to register securities, advisers, and broker-dealers, investigate violations, issue cease-and-desist orders, and seek civil and criminal penalties (Correct answer)
The authority to set national securities regulations
Only the authority to collect registration fees
Only the authority to approve or deny new securities offerings

Correct answer: The authority to register securities, advisers, and broker-dealers, investigate violations, issue cease-and-desist orders, and seek civil and criminal penalties

State administrators have broad authority including registration oversight, investigation of fraud and violations, administrative penalties, and referral of cases for civil or criminal action.

Question 27: What is a put option?

A bond that gives the issuer the right to repay early
An obligation to buy a security at the current market price
The right to sell a security at a specified price before expiration (Correct answer)
The right to buy a security at a specified price before expiration

Correct answer: The right to sell a security at a specified price before expiration

A put option gives the holder the right, but not the obligation, to sell an underlying security at the strike price before or at expiration.

Question 28: What is the difference between systematic and unsystematic risk?

Systematic risk is company-specific; unsystematic risk is market-wide
There is no meaningful difference between the two types of risk
Systematic risk is only relevant for bonds; unsystematic risk applies only to stocks
Systematic risk affects the entire market and cannot be diversified away; unsystematic risk is specific to individual companies and can be reduced through diversification (Correct answer)

Correct answer: Systematic risk affects the entire market and cannot be diversified away; unsystematic risk is specific to individual companies and can be reduced through diversification

Systematic (market) risk affects all investments and cannot be diversified away, while unsystematic (company-specific) risk can be reduced by holding a diversified portfolio.

Question 29: What is a real estate investment trust (REIT)?

A mutual fund that invests only in real estate stocks
A private equity fund that buys and sells real estate
A government program to subsidize real estate development
A company that owns income-producing real estate and passes at least 90% of taxable income to shareholders (Correct answer)

Correct answer: A company that owns income-producing real estate and passes at least 90% of taxable income to shareholders

REITs must distribute at least 90% of their taxable income to shareholders as dividends, providing investors with real estate exposure and regular income.

Series 65 – Uniform Investment Adviser Law Exam

The Series 65 (NASAA Uniform Investment Adviser Law Examination) tests knowledge required to act as an investment adviser representative, covering economic factors, investment vehicles, client strategies, and securities laws and regulations.

140

Questions

180 min

Time Limit

71%

To Pass

Checking for saved progress...

Exam Rules

You can skip questions and return to them later
Flag questions for review before submitting
No feedback shown until you submit the entire exam
Unanswered questions count as wrong — answer everything
10 pretest questions are mixed in and don't affect your score
Timer auto-submits when time runs out
Your progress is auto-saved every 30 seconds