Series 65 Practice Questions with Explanations

🧾 Series 65 Practice Questions with Explanations
📘 Sharpen Your Skills with Key Questions from the Investment Adviser Exam

The Series 65 exam covers critical topics in economics, investment recommendations, portfolio management, ethics, and regulatory guidelines. Below are 10 practice questions modeled after the real exam, complete with explanations to help you understand the logic behind the correct answers.

✅ Question 1: Risk-Free Rate and Return

An investor earns 6% on their portfolio, and the risk-free rate is 2%. What is their risk premium?

A) 2%
B) 4%
C) 6%
D) Cannot be determined

✅ Answer: B) 4%

Explanation:
Risk premium = portfolio return – risk-free rate = 6% – 2% = 4%.

✅ Question 2: Investment Adviser Definition

Which of the following is considered an investment adviser under the Uniform Securities Act (USA)?

A) A bank giving investment advice to clients
B) A publisher offering general investment info to the public
C) A person giving tailored investment advice for compensation
D) A broker-dealer executing trades only

✅ Answer: C) A person giving tailored investment advice for compensation

Explanation:
To be an IA under the USA, the individual must:

1. Provide advice on securities
2. Be in the business of giving advice
3. Receive compensation

✅ Question 3: Systematic vs. Unsystematic Risk

Which of the following is a form of systematic risk?

A) Business risk
B) Market risk
C) Liquidity risk
D) Credit risk

✅ Answer: B) Market risk

Explanation:
Systematic risk affects the entire market and cannot be diversified away. Market risk is a classic example. The rest are unsystematic and firm-specific.

✅ Question 4: Taxation of Municipal Bonds

Which investor would benefit most from a municipal bond investment?

A) Investor in a low tax bracket
B) Investor in a high tax bracket
C) Retiree with no income
D) Investor holding a 401(k)

✅ Answer: B) Investor in a high tax bracket

Explanation:
Municipal bond interest is typically federal tax-free, making them more attractive to high-income investors.

✅ Question 5: Fiduciary Duty

An investment adviser must always:

A) Offer the lowest-cost investment
B) Recommend the most profitable security
C) Act in the best interest of the client
D) Follow client instructions even if illegal

✅ Answer: C) Act in the best interest of the client

Explanation:
Fiduciary duty means placing the client’s interests above your own. Following illegal orders or chasing profits violates this.

✅ Question 6: Inflation and Bond Prices

What happens to bond prices when inflation rises?

A) Bond prices increase
B) Bond prices remain unchanged
C) Bond prices fall
D) Bond coupon rates rise

✅ Answer: C) Bond prices fall

Explanation:
When inflation increases, interest rates typically rise, causing existing bond prices to drop to offer competitive yields.

✅ Question 7: Net Present Value (NPV)

A project has an NPV of $5,000. What does this imply?

A) The project should be rejected
B) The discount rate is too low
C) The project is expected to add value
D) The internal rate of return is negative

✅ Answer: C) The project is expected to add value

Explanation:
A positive NPV means the project is expected to generate returns above the discount rate—it’s a good investment.

✅ Question 8: Client Suitability

Which of the following is most appropriate for a 75-year-old investor needing monthly income and low risk?

A) Small-cap growth funds
B) High-yield corporate bonds
C) Income-focused mutual fund
D) International equity fund

✅ Answer: C) Income-focused mutual fund

Explanation:
This investor needs income and low risk—an income-focused mutual fund is most appropriate. The others are too aggressive.

✅ Question 9: Efficient Market Hypothesis (EMH)

The Efficient Market Hypothesis suggests that:

A) Insider trading is always profitable
B) Market prices reflect all available information
C) Investors can always beat the market using technical analysis
D) Bonds outperform stocks over the long term

✅ Answer: B) Market prices reflect all available information

Explanation:
EMH argues that all known info is priced in, making consistent outperformance very difficult.

✅ Question 10: Regulatory Filing Requirements

An IA with $150 million AUM must file with:

A) The state administrator only
B) The SEC only
C) Both SEC and state
D) Neither

✅ Answer: B) The SEC only

Explanation:
IAs with ≥ $110M AUM must register with the SEC, not the state. State-registered IAs manage under $100M.

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