Series 65 Practice Module – Risk and Return

🧾 Series 65 Practice Module – Risk and Return
📘 Sharpen Your Mastery of Risk, Return, and Portfolio Principles

This practice module targets a core exam area of the Series 65: Risk and Return. You’ll review definitions, calculations, and real-world applications through mini-cases and practice questions. This module helps reinforce key concepts tested on the exam such as standard deviation, beta, systematic vs. unsystematic risk, and risk-adjusted returns.

🎯 1. Key Concepts Summary

🧠 2. Practice Questions

Q1. An investor earns 4% interest income and 6% in capital gains on a $1,000 bond. What is the total return?

A) 4%
B) 6%
C) 10%
D) 5%

✅ Answer: C – Total return = (40 + 60) ÷ 1000 = 10%

Q2. Which type of risk cannot be reduced by diversification?

A) Credit risk
B) Business risk
C) Systematic risk
D) Regulatory risk

✅ Answer: C – Systematic risk (e.g., market crashes) affects all securities and can’t be diversified away.

Q3. A portfolio has a Sharpe ratio of 1.2. What does that indicate?

A) The portfolio has performed below the risk-free rate
B) The portfolio has outperformed the market significantly
C) The portfolio has good risk-adjusted returns
D) The portfolio has high unsystematic risk

✅ Answer: C – A Sharpe ratio over 1 is generally considered good; it shows excess return per unit of total risk.

Q4. A stock has a beta of 1.5. What does this tell us?

A) The stock is less volatile than the market
B) The stock has high unsystematic risk
C) The stock is 50% more volatile than the market
D) The stock will lose value during a bull market

✅ Answer: C – Beta of 1.5 means the stock moves 50% more than the market, up or down.

Q5. An adviser selects 3 non-correlated assets for a portfolio. The main goal of this strategy is to:

A) Increase returns through leverage
B) Reduce total return
C) Eliminate market risk
D) Reduce unsystematic risk

✅ Answer: D – Combining uncorrelated assets reduces unsystematic risk through diversification.

🔍 3. Mini Case Application

Case:
Sarah is building a retirement portfolio. She holds 50% in U.S. Treasuries (beta = 0.2), 30% in a large-cap stock fund (beta = 1.0), and 20% in an emerging markets ETF (beta = 2.1). The portfolio’s overall return was 9% over the past year. The risk-free rate is 2%.

Question: What can we infer about the portfolio’s risk profile?

• It has low total volatility due to diversification
• The weighted average beta is:
  (0.2 × 0.5) + (1.0 × 0.3) + (2.1 × 0.2) = 0.1 + 0.3 + 0.42 = 0.82

So the portfolio is slightly less volatile than the market overall, yet returns 9%, which indicates positive alpha if expected return was lower.

📊 4. Quick Reference Formula Sheet

🚀 Want More Series 65 Practice Modules?

You can continue with modules on portfolio theory, capital market assumptions, and types of risk, or get a full-length test experience.

Start practicing with full simulations and topic breakdowns:
👉 https://finra-exam-mastery.com

Train smarter. Focus deeper. Pass the Series 65.