Series 65 Exam Questions & Answers 2026 (11–20)

Question 1

Stagflation is characterized by which combination of economic conditions?

TheoryPractice · Accepted Answer

Slow or negative economic growth, high unemployment, and rising prices. Stagflation describes the unusual coexistence of stagnant economic growth (or recession), high unemployment, and persistent inflation, which defies the traditional Phillips Curve trade-off.

Question 2

During a period of deflation, an investment adviser should be MOST concerned that a client holding long-duration fixed-rate bonds will face which of the following risks?

TheoryPractice · Accepted Answer

Credit risk escalation, as deflation increases corporate default rates and reduces bond values. Deflation raises the real burden of corporate debt, compresses revenues and profit margins, and increases the probability of issuer default, making credit (default) risk the primary concern for corporate bond holders.

Question 3

A company has total assets of $2,400,000, total liabilities of $1,440,000, and net income of $192,000. What is its return on equity (ROE)?

TheoryPractice · Accepted Answer

20.0%. Shareholders' equity equals total assets minus total liabilities ($2,400,000 - $1,440,000 = $960,000), and ROE = net income / equity = $192,000 / $960,000 = 0.20, or 20.0%.

Question 4

Which type of risk can be eliminated through diversification across a sufficient number of securities?

TheoryPractice · Accepted Answer

Unsystematic risk. Unsystematic (company-specific) risk is diversifiable because individual stock price movements are not perfectly correlated, so combining enough securities causes their unique risks to offset each other, while systematic risk affects the entire market and cannot be diversified away.

Question 5

Beta measures a security's:

TheoryPractice · Accepted Answer

Sensitivity of returns to movements in the overall market. Beta is a measure of systematic (market) risk that quantifies how much a security's return tends to move relative to a one-unit move in the broad market index, with a beta of 1.0 indicating movement in lock-step with the market.

Question 6

A portfolio lies on the efficient frontier if it offers:

TheoryPractice · Accepted Answer

The highest possible return for any given level of risk. Harry Markowitz defined the efficient frontier as the set of portfolios that deliver the maximum expected return for each level of portfolio risk (standard deviation), or equivalently, the minimum risk for each expected return level.

Question 7

Standard deviation is best described as a measure of:

TheoryPractice · Accepted Answer

The dispersion of returns around their mean value. Standard deviation quantifies total risk by measuring how widely individual periodic returns are spread around the average (mean) return; a higher standard deviation indicates greater variability and therefore greater total risk.

Question 8

According to the Capital Asset Pricing Model (CAPM), the expected return of a security equals the risk-free rate PLUS:

TheoryPractice · Accepted Answer

The security's beta multiplied by the market risk premium. CAPM states: Expected Return = Risk-Free Rate + Beta × (Market Return − Risk-Free Rate), where (Market Return − Risk-Free Rate) is the market risk premium, reflecting compensation only for non-diversifiable systematic risk.

Question 9

An investment has an expected return of 12%, a risk-free rate of 3%, and a standard deviation of 15%. Its Sharpe ratio is closest to:

TheoryPractice · Accepted Answer

0.60. The Sharpe ratio = (Portfolio Return − Risk-Free Rate) / Standard Deviation = (12% − 3%) / 15% = 9% / 15% = 0.60, measuring the excess return earned per unit of total risk.

Question 10

If two assets have a correlation coefficient of −1.0, combining them in a portfolio will:

TheoryPractice · Accepted Answer

Allow portfolio risk to be reduced all the way to zero. A correlation of −1.0 means the two assets move in perfectly opposite directions; at the correct weighting, their gains and losses exactly offset each other, theoretically reducing portfolio standard deviation to zero.

Series 65 Exam Questions & Answers 2026 (11–20)

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