Series 65 Exam Questions & Answers 2026 (21–30)

Question 1

A stock has a beta of 0.6. If the broad market rises by 10%, the stock is expected to:

TheoryPractice · Accepted Answer

Rise by 6%, because beta scales the market movement. Beta measures the expected change in a security's return for each 1% change in the market; a beta of 0.6 means the stock is expected to move 0.6 × 10% = 6% in the same direction as the market.

Question 2

Alpha in portfolio management represents:

TheoryPractice · Accepted Answer

The portion of a portfolio's return attributable to the manager's skill beyond what beta explains. Alpha (Jensen's alpha) is the return a portfolio generates above or below what CAPM predicts based on its beta; a positive alpha indicates the manager added value beyond the compensation for systematic risk taken.

Question 3

Which of the following is the BEST example of systematic risk?

TheoryPractice · Accepted Answer

The Federal Reserve raises interest rates across the economy. Systematic (market) risk arises from macroeconomic forces that affect all securities, such as a central bank interest rate change; the other options describe company- or industry-specific events that represent unsystematic risk and can be diversified away.

Question 4

Portfolio A has a Sharpe ratio of 1.2 and Portfolio B has a Sharpe ratio of 0.9. Both portfolios have the same expected return. Which conclusion is MOST accurate?

TheoryPractice · Accepted Answer

Portfolio A earns more excess return per unit of total risk than Portfolio B. The Sharpe ratio measures excess return (above the risk-free rate) per unit of standard deviation; if two portfolios have the same expected return, the one with the higher Sharpe ratio achieves that return with less total risk, making it more risk-efficient.

Question 5

An adviser is comparing two portfolios with identical Sharpe ratios but different betas. Which additional measure would BEST distinguish their risk-adjusted performance relative to the market benchmark?

TheoryPractice · Accepted Answer

Treynor ratio. The Treynor ratio divides excess return by beta (systematic risk only) rather than standard deviation; when Sharpe ratios are equal but betas differ, the Treynor ratio isolates performance per unit of market-related risk and distinguishes which portfolio compensates better for systematic risk taken.

Question 6

A well-diversified portfolio has a standard deviation of 18% and a correlation of 0.90 with the market index, which itself has a standard deviation of 20%. The portfolio's beta is approximately:

TheoryPractice · Accepted Answer

0.81. Beta = (Correlation × Portfolio Standard Deviation) / Market Standard Deviation = (0.90 × 18%) / 20% = 16.2% / 20% = 0.81; this formula links the three statistics and is a common CAPM calculation tested on the Series 65.

Question 7

According to modern portfolio theory, moving a portfolio from the interior of the feasible set to the efficient frontier will always:

TheoryPractice · Accepted Answer

Either increase expected return, reduce risk, or both, for no increase in the other dimension. By definition, an interior portfolio is dominated; shifting it to the efficient frontier means achieving a higher expected return at the same risk, lower risk at the same expected return, or an improvement in both dimensions — it does not guarantee any specific Sharpe ratio value.

Question 8

Which of the following best describes a closed-end fund?

TheoryPractice · Accepted Answer

A fund that issues a fixed number of shares at inception and trades on a secondary market exchange. A closed-end fund issues a fixed number of shares through an IPO and those shares trade on a stock exchange at market prices that may differ from NAV, unlike open-end mutual funds which continuously issue and redeem shares at NAV.

Question 9

An investor purchases a U.S. Treasury bill at a discount. Which of the following correctly describes the return the investor receives?

TheoryPractice · Accepted Answer

The difference between the purchase price and the face value received at maturity. Treasury bills are zero-coupon money market instruments; the investor's return is the discount from face value — the difference between the price paid and the par value received at maturity.

Question 10

Which characteristic distinguishes a variable annuity from a fixed annuity?

TheoryPractice · Accepted Answer

The accumulation value of a variable annuity fluctuates based on the performance of the chosen subaccounts. In a variable annuity the premium is allocated to separate-account subaccounts (similar to mutual funds), so the accumulation value rises and falls with market performance, meaning the investor bears the investment risk.

Series 65 Exam Questions & Answers 2026 (21–30)

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