Series 65 - Uniform Investment Adviser Law Examination — Questions and Answers

Question 1: Which investment among them is most susceptible to inflation?

Real estate
Gold
Bank deposits (Correct answer)
Equity shares

Correct answer: Bank deposits

Bank deposits, especially those with fixed interest rates, are highly susceptible to inflation because inflation erodes the purchasing power of money. If the inflation rate is higher than the interest rate earned on the deposit, the real return becomes negative, meaning the money can buy less in the future. Assets like gold, real estate, and equity shares are often considered hedges against inflation as their values tend to rise with or outperform inflation over the long term.

Question 2: Credit risk (default risk) is best described as:

The risk that a bond issuer will fail to make promised payments (Correct answer)
The risk that interest rates will change
The risk that inflation will outpace returns
The risk that an investment will be difficult to sell at fair value

Correct answer: The risk that a bond issuer will fail to make promised payments

Credit risk is the risk that a bond issuer will default on interest payments or fail to repay principal, resulting in loss to bondholders.

Question 3: Which of the following describes the concept of 'duration' in fixed income investing?

The number of years until a bond matures
The period during which a bond is callable
The time between coupon payments
A measure of a bond's price sensitivity to interest rate changes (Correct answer)

Correct answer: A measure of a bond's price sensitivity to interest rate changes

Duration measures how much a bond's price will change for a 1% change in interest rates; it is expressed in years but represents price sensitivity.

Question 4: Which exemption allows venture capital fund advisers to avoid full SEC registration?

The venture capital fund adviser exemption (Correct answer)
The intrastate exemption
The de minimis exemption
The family office exemption

Correct answer: The venture capital fund adviser exemption

The Dodd-Frank Act created a specific exemption for advisers solely to venture capital funds, allowing them to be exempt reporters rather than fully registered advisers.

Question 5: An investor in the 32% marginal tax bracket compares a municipal bond yielding 3.5% to a taxable bond. What taxable equivalent yield does the muni represent?

5.15% (Correct answer)
6.00%
4.75%
3.50%

Correct answer: 5.15%

Taxable equivalent yield = muni yield / (1 - tax rate) = 3.5% / (1 - 0.32) = 5.15%.

Question 6: Under the SEBI IA Regulations, how often must an investment adviser conduct a formal review of a client's financial plan?

Quarterly
At least once a year (Correct answer)
Only when the client requests
Monthly

Correct answer: At least once a year

SEBI requires investment advisers to review each client's financial plan at least annually to ensure it remains suitable.

Question 7: Under SEC rules, investment advisers must maintain client records for a minimum of how many years?

10 years
5 years (Correct answer)
7 years
3 years

Correct answer: 5 years

SEC rules require investment advisers to maintain most records for a minimum of five years, with certain records kept for the life of the firm plus five years.

Question 8: Under the net present value (NPV) rule, an investment project should be accepted when:

NPV is negative
The payback period exceeds five years
NPV equals zero
NPV is positive (Correct answer)

Correct answer: NPV is positive

A positive NPV indicates the project generates returns exceeding the required rate of return, creating value for the investor.

Question 9: An investment adviser who breaches their fiduciary duty by placing their own interests ahead of clients may be subject to what action?

Civil liability and potential regulatory sanctions (Correct answer)
A tax penalty only
Only a verbal warning from the SEC
Mandatory retirement

Correct answer: Civil liability and potential regulatory sanctions

Breaching fiduciary duty can result in civil lawsuits from clients and regulatory enforcement actions including fines and license revocation.

Question 10: An investment adviser who provides advice on securities without SEBI registration is liable to:

Cancellation of CA/CFA license only
No action if advice was not fee-based
Monetary penalty and imprisonment under SEBI Act (Correct answer)
A civil warning only

Correct answer: Monetary penalty and imprisonment under SEBI Act

Providing unregistered investment advisory services violates the SEBI Act, 1992 and is subject to both monetary penalties and criminal prosecution.

Question 11: Duration is a measure used to estimate a bond's sensitivity to changes in interest rates. A bond with a duration of 5 years will approximately lose how much in value if rates rise by 1%?

5% (Correct answer)
3%
1%
10%

Correct answer: 5%

Duration approximates the percentage price change per 1% change in interest rates — a duration of 5 means approximately a 5% price change for a 1% rate move.

Question 12: Which of the following is considered an 'investment adviser' under the Investment Advisers Act of 1940?

A firm that manages client portfolios for a fee (Correct answer)
A newspaper financial columnist
A bank providing trust services only
A licensed attorney giving incidental investment advice

Correct answer: A firm that manages client portfolios for a fee

A firm that manages client portfolios for compensation meets all three prongs of the adviser definition: advice, about securities, for compensation.

Question 13: SEBI requires investment advisers to maintain records of client interactions and advice given for a minimum of:

3 years
7 years
2 years
5 years (Correct answer)

Correct answer: 5 years

SEBI IA Regulations mandate that investment advisers retain records of client interactions, risk profiling, and advice for at least 5 years.

Question 14: Under the National Securities Markets Improvement Act (NSMIA), mid-sized advisers with AUM between $25 million and $100 million:

Must register with FINRA
Are exempt from all registration
Generally register only with their state (Correct answer)
Must register with both the SEC and their state

Correct answer: Generally register only with their state

NSMIA generally requires mid-sized advisers with AUM between $25 million and $100 million to register with state regulators rather than the SEC.

Question 15: An investment adviser building a liability-driven investment (LDI) strategy for a client is primarily focused on:

Minimizing investment costs
Maximizing total return without regard to obligations
Matching portfolio assets to the timing and amount of specific future liabilities (Correct answer)
Maximizing dividend income

Correct answer: Matching portfolio assets to the timing and amount of specific future liabilities

LDI strategies design the portfolio to match the duration and cash flows of specific future obligations (liabilities), reducing the risk that assets will be insufficient to meet those obligations.

Question 16: Which type of retirement plan requires the employer to fund benefits based on a formula using years of service and final salary?

SIMPLE IRA
Defined benefit plan (pension) (Correct answer)
SEP IRA
Defined contribution plan (401k)

Correct answer: Defined benefit plan (pension)

Defined benefit plans (traditional pensions) promise a specific retirement benefit calculated using years of service and final salary, with the employer bearing investment risk.

Question 17: Which SEBI regulation governs the registration and conduct of Portfolio Management Services (PMS) in India?

SEBI (Portfolio Managers) Regulations, 2020 (Correct answer)
SEBI (Investment Advisers) Regulations, 2013
SEBI (Mutual Funds) Regulations, 1996
SEBI (Intermediaries) Regulations, 2008

Correct answer: SEBI (Portfolio Managers) Regulations, 2020

PMS providers are governed by SEBI (Portfolio Managers) Regulations, 2020, which is separate from the IA Regulations.

Question 18: The Sharpe Ratio measures portfolio performance by comparing excess return to:

Beta
Alpha
Duration
Standard deviation (Correct answer)

Correct answer: Standard deviation

The Sharpe Ratio = (Portfolio Return − Risk-Free Rate) / Standard Deviation, measuring return per unit of total risk.

Question 19: Which of the following is NOT a fiduciary duty of a SEBI-registered investment adviser?

Maintaining confidentiality
Acting in the client's best interest
Disclosing conflicts of interest
Ensuring client portfolio always generates profit (Correct answer)

Correct answer: Ensuring client portfolio always generates profit

Advisers owe fiduciary duties including best-interest advice and disclosure, but cannot guarantee profits as markets involve inherent risk.

Question 20: A portfolio has a beta of 1.4. If the market rises 10%, how much would this portfolio be expected to gain, assuming no alpha?

18%
12%
10%
14% (Correct answer)

Correct answer: 14%

Expected portfolio return = beta × market return = 1.4 × 10% = 14%; beta measures sensitivity to market movements.

Question 21: Labor demand is elastic when the product demand is

Elastic
Low
Inelastic (Correct answer)
High

Correct answer: Inelastic

While typically, elastic product demand leads to elastic labor demand, other factors also influence labor demand elasticity. For instance, if a firm with inelastic product demand faces high labor costs relative to total costs and has readily available substitutes for labor, its demand for labor could still be elastic. In such a scenario, even a small change in wages might lead to a significant adjustment in the quantity of labor demanded, despite consumers being less sensitive to product price changes.

Question 22: The Social Security full retirement age (FRA) for individuals born in 1960 or later is:

65 years old
62 years old
67 years old (Correct answer)
66 years old

Correct answer: 67 years old

For individuals born in 1960 or later, the Social Security full retirement age is 67, though benefits can be claimed as early as 62 at a reduced amount.

Question 23: A convertible bond allows the bondholder to:

Convert the fixed coupon to a floating rate
Exchange the bond for a fixed number of common stock shares (Correct answer)
Transfer the bond to another investor at par
Demand early repayment at a predetermined price

Correct answer: Exchange the bond for a fixed number of common stock shares

A convertible bond gives the holder the right to convert the bond into a specified number of common shares, allowing participation in equity upside while receiving fixed income.

Question 24: A mutual fund with a 12b-1 fee primarily uses that fee to cover:

Portfolio management expenses
Custodian fees
Audit and legal expenses
Marketing and distribution costs (Correct answer)

Correct answer: Marketing and distribution costs

12b-1 fees are SEC-authorized charges used to pay for a fund's marketing, advertising, and distribution expenses.

Question 25: A client with low risk tolerance is invested in mid-cap equity funds. The adviser's FIRST recommended action should be:

Continue the investment since returns are good
Review suitability and recommend reallocation to lower-risk instruments (Correct answer)
Add more mid-cap funds to average the cost
Immediately liquidate all holdings

Correct answer: Review suitability and recommend reallocation to lower-risk instruments

When a client's holdings do not match their risk profile, the adviser must first review suitability and recommend appropriate reallocation.

Question 26: Which concept refers to the tendency of investors to hold on to losing investments too long, hoping for a recovery?

Disposition effect (Correct answer)
Overconfidence bias
Anchoring bias
Herding

Correct answer: Disposition effect

The disposition effect is the behavioral tendency to sell winning investments too early and hold losing investments too long.

Question 27: Let's assume Jay has purchased a pure risk cover product, which means he has purchased ___________.

Endowment policy
Whole life policy
Unit linked insurance policy
Term insurance policy (Correct answer)

Correct answer: Term insurance policy

A pure risk cover product, also known as pure protection, focuses solely on providing financial protection against a specific risk without any savings or investment component. Term insurance policies fit this description perfectly. They provide coverage for a defined period, paying a death benefit only if the insured dies within that term, and do not accumulate cash value.

Question 28: An investment adviser must promptly amend their Form ADV when which of the following occurs?

A client changes their risk tolerance
A material change in the information previously disclosed occurs (Correct answer)
A new employee joins the firm
Office rent increases

Correct answer: A material change in the information previously disclosed occurs

Advisers must promptly update Form ADV when material changes occur, ensuring clients and regulators have accurate current information about the adviser's business.

Question 29: What is the main characteristic of a 'zero-coupon bond'?

It pays interest monthly rather than semi-annually
It adjusts its coupon rate with changes in short-term interest rates
It is sold at a deep discount and pays no periodic interest, returning face value at maturity (Correct answer)
It is issued only by the U.S. federal government

Correct answer: It is sold at a deep discount and pays no periodic interest, returning face value at maturity

Zero-coupon bonds are issued at a discount to face value, make no periodic coupon payments, and return the full face value at maturity; the difference represents the investor's return.

Question 30: Which asset class has historically provided the best long-term hedge against unexpected inflation?

Common equities and real assets (Correct answer)
Long-term government bonds
Cash equivalents
Fixed annuities

Correct answer: Common equities and real assets

Common stocks and real assets (real estate, commodities) tend to appreciate with inflation over the long run, unlike fixed-income instruments whose real value erodes.

Question 31: Under SEBI IA Regulations, investment advisers are prohibited from receiving commissions or referral fees from product manufacturers. This principle is called:

Fee transparency
Best execution
Commission ban (Correct answer)
Arms-length dealing

Correct answer: Commission ban

SEBI mandates a commission-free, fee-only model for investment advisers to eliminate distributor-linked conflicts of interest.

Question 32: An investor in the 37% marginal income tax bracket would generally prefer which type of bond for taxable accounts?

Municipal bonds with tax-exempt interest (Correct answer)
Corporate bonds with high coupon rates
High-yield junk bonds
Treasury Inflation-Protected Securities (TIPS)

Correct answer: Municipal bonds with tax-exempt interest

Municipal bond interest is generally exempt from federal income tax, making them particularly attractive for investors in high marginal tax brackets.

Question 33: Which regulatory body oversees the registration of investment adviser representatives at the state level?

The SEC
State securities regulators (NASAA members) (Correct answer)
The CFTC
FINRA

Correct answer: State securities regulators (NASAA members)

State securities regulators, operating under the framework of NASAA, oversee the registration and regulation of investment adviser representatives at the state level.

Question 34: A client asks about protecting against the risk of a major stock market decline in their portfolio. Which strategy provides the most direct hedge?

Moving all assets to money market funds
Purchasing put options on a stock index (Correct answer)
Buying more equities to lower average cost
Increasing the portfolio's beta

Correct answer: Purchasing put options on a stock index

Put options on a stock index increase in value when the index declines, providing a direct hedge against portfolio losses from market downturns.

Question 35: Which type of risk CANNOT be eliminated through diversification within a domestic equity portfolio?

Systematic (market) risk (Correct answer)
Liquidity risk of individual stocks
Company-specific risk
Industry-specific risk

Correct answer: Systematic (market) risk

Systematic risk is inherent to the entire market and persists even in a well-diversified portfolio.

Question 36: Which factor describes the client's ability to withstand losses, separate from their willingness to do so?

Risk aversion
Risk appetite
Risk capacity (Correct answer)
Risk tolerance

Correct answer: Risk capacity

Risk capacity refers to a client's financial ability to absorb investment losses, while risk tolerance refers to their psychological willingness to accept risk.

Question 37: A company has a price-to-book (P/B) ratio of 0.8. This most likely indicates the stock is trading:

Above its intrinsic value
At exactly its book value
Below its book value (Correct answer)
At a significant premium to its assets

Correct answer: Below its book value

A P/B ratio below 1.0 means the stock is priced below the company's net asset (book) value per share.

Question 38: Under the Dodd-Frank Act, family offices are excluded from the definition of investment adviser if they:

File Form 13F with the SEC
Manage less than $100 million
Are registered as broker-dealers
Advise only family members and have no public clients (Correct answer)

Correct answer: Advise only family members and have no public clients

The Dodd-Frank Act created a family office exclusion for entities that advise only family members, employ no non-family clients, and are not publicly known as investment advisers.

Question 39: Which of the following MS Excel functions can be used to calculate an EMI for a loan?

EMI
PV
PMT (Correct answer)
NPV

Correct answer: PMT

The PMT function in MS Excel is specifically designed to calculate the payment for a loan based on constant payments and a constant interest rate, which is precisely what an Equated Monthly Installment (EMI) represents. It takes arguments like the interest rate, number of periods, and present value (loan amount) to determine the fixed periodic payment. Other functions like PV or NPV serve different financial calculations.

Question 40: A client with a high risk tolerance and a 30-year time horizon is generally most appropriate for a portfolio weighted toward:

Short-term Treasury bills
Certificates of deposit only
Money market funds
Equities with a small fixed income allocation (Correct answer)

Correct answer: Equities with a small fixed income allocation

Long time horizons and high risk tolerance support heavier equity allocations, as equity markets tend to outperform fixed income over long periods despite short-term volatility.

Question 41: Longevity risk in retirement planning refers to:

The risk of dying too soon and leaving dependents without income
The risk of inheriting a large estate
The risk of outliving one's retirement assets (Correct answer)
The risk of low stock market returns

Correct answer: The risk of outliving one's retirement assets

Longevity risk is the risk that a retiree will outlive their savings — a key concern as life expectancies continue to increase.

Question 42: Which SEC rule requires investment advisers to adopt written compliance policies and procedures?

Rule 204-2
Rule 203A-1
Rule 205-3
Rule 206(4)-7 (Correct answer)

Correct answer: Rule 206(4)-7

SEC Rule 206(4)-7 requires registered investment advisers to adopt and implement written compliance policies and procedures and designate a Chief Compliance Officer.

Question 43: What does the Sharpe ratio measure?

Correlation between two asset classes
Total return relative to a benchmark index
Risk-adjusted return per unit of total risk (Correct answer)
Portfolio beta relative to the market

Correct answer: Risk-adjusted return per unit of total risk

The Sharpe ratio divides a portfolio's excess return over the risk-free rate by its standard deviation to measure return per unit of risk.

Question 44: An adviser learns that a client is being defrauded by another party. Ethical standards suggest the adviser should:

Do nothing unless directly asked
Notify the client and recommend appropriate action (Correct answer)
Report it only after the fraud is complete
Profit from the information

Correct answer: Notify the client and recommend appropriate action

An adviser's duty of loyalty and care includes protecting clients from known harm, requiring notification and guidance when fraud is discovered.

Question 45: An adviser who simultaneously recommends a stock to clients and short-sells the same stock for personal gain is violating which duty?

The duty of loyalty (Correct answer)
The duty of competence
The duty of supervision
The duty of recordkeeping

Correct answer: The duty of loyalty

Simultaneously recommending a stock to clients while personally short-selling it is a direct violation of the duty of loyalty as the adviser profits from client losses.

Question 46: The 'wash sale rule' prevents an investor from claiming a tax loss if they purchase a substantially identical security within how many days before or after the sale?

15 days
90 days
30 days (Correct answer)
60 days

Correct answer: 30 days

The IRS wash sale rule disallows a tax loss if the investor buys the same or substantially identical security within 30 days before or after the loss sale.

Question 47: An adviser who makes trades in client accounts without authorization is committing what violation?

Front-running
Best execution failure
Unauthorized trading (Correct answer)
Excessive trading

Correct answer: Unauthorized trading

Unauthorized trading occurs when an adviser executes trades in client accounts without obtaining proper client authorization.

Question 48: Which organization sets ethical standards for Certified Financial Planners (CFP) practicing as investment advisers?

The Department of Labor
The Federal Reserve
The IRS
The CFP Board (Correct answer)

Correct answer: The CFP Board

The CFP Board sets and enforces the code of ethics and standards of conduct for CFP certificants, including those acting as investment advisers.

Question 49: Under SEBI Investment Adviser Regulations, an investment adviser providing advice on securities must ensure the advice is based on which primary criterion?

Current market trends and momentum
Recommendations from research analysts
Maximizing the adviser's commission income
The client's risk profile and investment objective (Correct answer)

Correct answer: The client's risk profile and investment objective

SEBI regulations mandate that investment advice must be grounded in the client's individual risk profile and stated investment objectives.

Question 50: Performance-based fees are generally permissible for investment advisers only when charged to:

Clients with taxable accounts only
Any retail investor
Qualified clients meeting specific net worth or AUM thresholds (Correct answer)
Non-US investors only

Correct answer: Qualified clients meeting specific net worth or AUM thresholds

Under SEC Rule 205-3, performance-based fees are permitted only for 'qualified clients' who meet minimum net worth ($2.2 million) or AUM ($1.1 million) thresholds.

Question 51: The riskiest investment is with __________.

Low beta
Low market volatility
High beta (Correct answer)
High credit rating

Correct answer: High beta

Beta is a measure of a stock's volatility in relation to the overall market. An investment with a high beta (e.g., greater than 1) indicates that it is more volatile and thus riskier than the market as a whole. Such investments tend to experience larger price swings, both up and down, compared to the broader market, making them more susceptible to significant losses.

Question 52: Interest rate risk primarily affects which type of investment?

Stocks
Real estate investment trusts
Commodities
Fixed-income (bond) investments (Correct answer)

Correct answer: Fixed-income (bond) investments

Bond prices move inversely to interest rates — when rates rise, existing bond prices fall — making fixed-income investments most exposed to interest rate risk.

Question 53: A client's 'investment policy statement' (IPS) typically includes all of the following EXCEPT:

Return objectives
Risk tolerance
Time horizon
The adviser's personal investment preferences (Correct answer)

Correct answer: The adviser's personal investment preferences

An IPS documents the client's objectives, constraints, and guidelines — it reflects the client's needs, not the adviser's personal preferences.

Question 54: A bond with a 5% coupon is trading at a premium. Its yield to maturity is therefore:

Less than 5% (Correct answer)
Not determinable without duration
Greater than 5%
Equal to 5%

Correct answer: Less than 5%

When a bond trades at a premium (above par), its YTM is lower than the coupon rate because the investor pays more than face value.

Question 55: A client with a 2-year investment horizon and low risk tolerance is best suited for which asset allocation?

20% equity, 80% debt (Correct answer)
50% equity, 50% real estate
100% equity
80% equity, 20% debt

Correct answer: 20% equity, 80% debt

Short horizons and low risk tolerance call for a predominantly debt-oriented portfolio to preserve capital.

Question 56: Which risk describes the possibility that inflation will erode the purchasing power of a portfolio's returns?

Credit risk
Inflation (purchasing power) risk (Correct answer)
Reinvestment risk
Liquidity risk

Correct answer: Inflation (purchasing power) risk

Inflation risk (purchasing power risk) is the risk that investment returns will not keep pace with inflation, reducing the real value of wealth over time.

Question 57: Which investment vehicle allows an investor to gain exposure to commodity prices without directly owning physical commodities?

Fixed annuities
Commodity futures ETFs (Correct answer)
Treasury STRIPS
Money market funds

Correct answer: Commodity futures ETFs

Commodity futures ETFs hold futures contracts on commodities, providing price exposure without the need to store or take physical delivery of the underlying asset.

Question 58: Under SEBI guidelines, an investment adviser registered as an individual can have a maximum of how many clients?

100 (Correct answer)
50
150
75

Correct answer: 100

Individual investment advisers registered with SEBI may advise a maximum of 150 clients at any given time per regulatory guidelines.

Question 59: When assessing a client's risk capacity, which factor is most relevant?

Client's income, liabilities, and financial obligations (Correct answer)
Client's age alone
Client's past investment choices
Client's investment preferences

Correct answer: Client's income, liabilities, and financial obligations

Risk capacity is determined by objective financial factors — income, assets, debts, and obligations — not by stated preferences.

Question 60: A 50-day moving average crossing above a 200-day moving average is commonly known as a:

Bearish divergence
Support breakout
Death cross
Golden cross (Correct answer)

Correct answer: Golden cross

A golden cross occurs when a short-term moving average (e.g., 50-day) crosses above a long-term moving average (e.g., 200-day), which is considered a bullish signal.

Question 61: The Efficient Market Hypothesis (EMH) in its strong form asserts that:

Stock prices reflect all public and private (insider) information (Correct answer)
Stock prices reflect only publicly available information
Stock prices reflect all historical price data
Active management can consistently outperform passive indexing

Correct answer: Stock prices reflect all public and private (insider) information

The strong form of EMH holds that all information — including non-public insider information — is already incorporated into stock prices, making it impossible to earn consistent excess returns.

Question 62: Which of the following best describes free cash flow (FCF)?

Operating cash flow minus capital expenditures (Correct answer)
EBITDA minus interest expense
Gross profit minus operating expenses
Net income plus depreciation and amortization

Correct answer: Operating cash flow minus capital expenditures

Free cash flow is calculated as operating cash flow minus capital expenditures, representing the cash a company can use for dividends, debt repayment, or reinvestment.

Question 63: A client wants to minimize current taxable income while building retirement savings. Which strategy is MOST effective?

Investing in a Roth IRA only
Purchasing municipal bonds
Investing in a taxable brokerage account
Maximizing pre-tax contributions to a 401(k) (Correct answer)

Correct answer: Maximizing pre-tax contributions to a 401(k)

Maximizing pre-tax 401(k) contributions directly reduces current taxable income, deferring taxes until retirement when income (and tax rates) may be lower.

Question 64: Which of the following scenarios describes 'sequence of returns risk' for a retiree?

Receiving dividends that increase faster than inflation during the accumulation phase
Experiencing large portfolio losses early in retirement while taking withdrawals (Correct answer)
Holding too much cash relative to equities throughout retirement
Earning consistent 6% returns for 30 years regardless of market timing

Correct answer: Experiencing large portfolio losses early in retirement while taking withdrawals

Sequence of returns risk means that large losses early in retirement, combined with ongoing withdrawals, can permanently deplete a portfolio even if average long-term returns are acceptable.

Question 65: What does 'systematic risk' refer to in portfolio management?

Risk associated with foreign currency fluctuations only
Risk that can be eliminated through diversification
The risk of a specific company defaulting
Market-wide risk that cannot be diversified away (Correct answer)

Correct answer: Market-wide risk that cannot be diversified away

Systematic risk (market risk) affects the entire market and cannot be eliminated through diversification — examples include recessions, interest rate changes, and geopolitical events.

Question 66: A defined contribution plan is _________.

Voluntary Retirement Scheme
Unrecognized Provident Fund (Correct answer)
Leave salary
Gratuity

Correct answer: Unrecognized Provident Fund

A Defined Contribution (DC) plan is a retirement plan where the employer and/or employee contribute a specific amount regularly, but the final benefit depends on the investment performance of these contributions. An Unrecognized Provident Fund (UPF) in India is a type of provident fund that operates as a defined contribution scheme where contributions are made, but it doesn't receive the same tax benefits as a recognized fund. The other options are different forms of employee benefits or separation packages, not defined contribution plans.

Question 67: Which metric best captures the excess return of a portfolio per unit of total risk taken?

Sharpe Ratio (Correct answer)
Information Ratio
Treynor Ratio
Jensen's Alpha

Correct answer: Sharpe Ratio

The Sharpe Ratio divides excess return (over the risk-free rate) by standard deviation, which represents total risk.

Question 68: The Sharpe ratio measures portfolio performance by:

Calculating return per unit of systematic risk
Dividing total return by standard deviation
Comparing a portfolio's alpha to its beta
Dividing excess return over the risk-free rate by portfolio standard deviation (Correct answer)

Correct answer: Dividing excess return over the risk-free rate by portfolio standard deviation

The Sharpe ratio = (Portfolio Return − Risk-Free Rate) ÷ Standard Deviation, expressing how much excess return is earned per unit of total risk.

Question 69: Which of the following best describes a 'laddered' bond portfolio strategy?

Allocating bonds equally between government and corporate issuers
Buying only zero-coupon bonds
Purchasing bonds that mature at staggered intervals over time (Correct answer)
Concentrating all bonds in a single maturity date

Correct answer: Purchasing bonds that mature at staggered intervals over time

A bond ladder spreads maturities over multiple time periods, reducing reinvestment risk and providing regular liquidity as each rung matures.

Question 70: An investor who is 'long' a put option on a stock profits when:

The stock price rises above the strike price
The stock price falls below the strike price (Correct answer)
The stock pays a higher-than-expected dividend
Implied volatility decreases sharply

Correct answer: The stock price falls below the strike price

A long put gives the holder the right to sell shares at the strike price; the option gains intrinsic value when the stock price falls below that strike.

Question 71: A client has a moderate risk profile and a 10-year horizon. Which asset allocation is MOST appropriate?

100% liquid funds
20% equity, 80% debt
60% equity, 40% debt (Correct answer)
100% direct equity in small-cap stocks

Correct answer: 60% equity, 40% debt

A 60/40 equity-debt split balances growth potential with stability, suitable for a moderate-risk investor with a medium-to-long horizon.

Question 72: Which one of the following is not a component of personal financial planning?

Monitoring achievement of goals periodically
Churning investment portfolio often to achieve best returns (Correct answer)
Defining a basic asset allocation for the client
Risk profiling of client

Correct answer: Churning investment portfolio often to achieve best returns

Churning an investment portfolio, which involves excessive buying and selling of securities, is generally detrimental to a client's financial well-being due to high transaction costs and potential tax implications. A core principle of personal financial planning is to create a well-defined, long-term strategy, including appropriate asset allocation and risk profiling, and then monitor it periodically, rather than engaging in frequent, speculative trading. Churning is often associated with unethical practices by advisors seeking to generate commissions.

Question 73: An investment adviser that has custody of client assets must undergo what type of annual examination?

An internal audit only
A FINRA examination
A surprise examination by an independent public accountant (Correct answer)
An IRS audit

Correct answer: A surprise examination by an independent public accountant

Under the SEC Custody Rule, advisers with custody of client assets must arrange for an annual surprise examination by an independent public accountant to verify client assets.

Question 74: Which of the following is impacted by financial market activity?

the economy's location in the business cycle
spending decision by individuals and business firms
personal wealth
All of the above (Correct answer)

Correct answer: All of the above

Financial market activity, such as changes in interest rates, stock prices, or bond yields, significantly influences various aspects of the economy. It affects individuals' and businesses' spending decisions by altering borrowing costs and investment returns. Furthermore, financial markets play a crucial role in determining the economy's position within the business cycle and directly impact personal wealth through changes in investment values.

Question 75: Which of the following is an example of systematic risk?

A rise in nationwide interest rates (Correct answer)
Fraud discovered at a single firm
A company's CEO resigns unexpectedly
A product recall by a specific manufacturer

Correct answer: A rise in nationwide interest rates

Systematic risk affects the entire market — like interest rate changes — and cannot be eliminated through diversification.

Question 76: A client who wants to maintain their current lifestyle throughout retirement and leave a significant estate would have what type of primary objectives?

Maximum short-term gains
Capital appreciation and speculation
Income, capital preservation, and growth (Correct answer)
Tax deferral only

Correct answer: Income, capital preservation, and growth

Balancing current income needs, preserving capital, and achieving modest growth to fund an estate legacy requires a blended objective strategy.

Question 77: The Gordon Growth Model (constant-growth DDM) values a stock as:

Next year's dividend divided by (required return minus the constant growth rate) (Correct answer)
Earnings per share divided by the required return
Book value per share multiplied by the P/E ratio
Current dividend multiplied by (1 + growth rate)

Correct answer: Next year's dividend divided by (required return minus the constant growth rate)

The Gordon Growth Model formula is P = D1 ÷ (r − g), where D1 is the next dividend, r is the required rate of return, and g is the constant dividend growth rate.

Question 78: The monopsonistic employer keeps adding staff until it reaches the marginal level.

Physical product equals the wage
Revenue product equals marginal labor cost (Correct answer)
Physical product is zero
Revenue product equals wage

Correct answer: Revenue product equals marginal labor cost

A monopsonistic employer, being the sole buyer of labor, maximizes profit by hiring workers up to the point where the marginal revenue product of labor equals the marginal labor cost. The marginal revenue product represents the additional revenue generated by hiring one more worker. The marginal labor cost is the additional cost incurred to hire that worker, which includes any wage increases for existing staff.

Question 79: Which of the following statements about the efficient frontier is CORRECT?

Portfolios on the efficient frontier always have zero correlation among assets
Portfolios below the efficient frontier are overvalued
The efficient frontier includes only fixed-income assets
Portfolios on the efficient frontier offer the highest possible return for any given level of risk (Correct answer)

Correct answer: Portfolios on the efficient frontier offer the highest possible return for any given level of risk

The efficient frontier represents the set of optimal portfolios that maximize expected return for each level of risk (standard deviation).

Question 80: A stock's P/E ratio is 25 and the industry average P/E is 15. This most likely suggests the market believes the stock:

Is undervalued relative to peers
Will cut its dividend in the near term
Has higher-than-average expected earnings growth or lower risk (Correct answer)
Has below-average growth prospects

Correct answer: Has higher-than-average expected earnings growth or lower risk

A premium P/E relative to peers typically reflects market expectations of faster earnings growth or lower perceived risk for that company.

Question 81: Which document must an investment adviser mandatorily provide to a new client BEFORE rendering any investment advice?

Annual performance statement
Disclosure document as specified by SEBI (Correct answer)
Portfolio review report
Risk profiling questionnaire only

Correct answer: Disclosure document as specified by SEBI

SEBI regulations require investment advisers to furnish a SEBI-prescribed disclosure document to clients before the advisory relationship begins.

Question 82: Under SEBI IA Regulations, an individual investment adviser must meet which minimum qualification requirement?

10 years of financial industry experience only
Chartered Accountant designation only
Any graduate degree
Post-graduate degree or professional qualification in finance/economics plus NISM certification (Correct answer)

Correct answer: Post-graduate degree or professional qualification in finance/economics plus NISM certification

SEBI requires individual IAs to hold a post-graduate degree or equivalent professional qualification in a relevant field AND pass the NISM-Series-X-A certification.

Question 83: A qualified longevity annuity contract (QLAC) can be purchased within a Traditional IRA to:

Increase annual contribution limits
Eliminate all investment risk in the IRA
Convert pre-tax funds to Roth tax-free
Defer RMDs on the amount used to purchase the QLAC until age 85 (Correct answer)

Correct answer: Defer RMDs on the amount used to purchase the QLAC until age 85

A QLAC allows IRA owners to use a portion of IRA funds to purchase a deferred annuity that starts paying at a later age (up to 85), with that amount excluded from RMD calculations.

Question 84: At what age must holders of Traditional IRAs begin taking Required Minimum Distributions (RMDs)?

73 (Correct answer)
59½
72
65

Correct answer: 73

The SECURE 2.0 Act changed the RMD starting age to 73 for individuals who reach age 72 after December 31, 2022.

Question 85: A client insists on investing entirely in one sector despite the adviser's recommendation for diversification. The adviser should:

Comply immediately without comment
Document the client's decision and provide advice noting concentration risk (Correct answer)
Transfer the client to another adviser
Refuse to advise the client

Correct answer: Document the client's decision and provide advice noting concentration risk

Advisers must document client instructions that deviate from recommendations and note the associated risks while respecting client autonomy.

Question 86: Jensen's Alpha measures:

Excess return above what CAPM predicts given the portfolio's beta (Correct answer)
Portfolio turnover efficiency
Total return relative to a peer group
The ratio of return to standard deviation

Correct answer: Excess return above what CAPM predicts given the portfolio's beta

Jensen's Alpha is the portfolio's actual return minus the CAPM-expected return, indicating the manager's skill in generating abnormal returns.

Question 87: In a labor market with monopsony, the labor supply curve that each individual employer must deal with is

Downward sloping
Backward bending
Horizontal
Upward sloping (Correct answer)

Correct answer: Upward sloping

In a monopsony labor market, there is a single dominant employer who is the sole buyer of labor. To attract and hire more workers, this employer must offer a higher wage, not just to the new workers but often to existing workers as well. Therefore, the labor supply curve faced by a monopsonist is upward sloping, reflecting that they must pay more to increase their labor force.

Question 88: Under the NASAA Model Rule, which unethical practice involves an adviser making false or misleading statements about a security?

Unauthorized trading
Misrepresentation (Correct answer)
Suitability violation
Excessive trading

Correct answer: Misrepresentation

Misrepresentation involves making false or misleading statements about securities and is explicitly prohibited under state and federal adviser regulations.

Question 89: Which Social Security claiming strategy generally results in the highest lifetime benefit for a healthy individual with a long life expectancy?

Claiming at age 65 to align with Medicare
Delaying until age 70 to maximize monthly benefit (Correct answer)
Claiming at age 62 to maximize years of payment
Claiming at full retirement age

Correct answer: Delaying until age 70 to maximize monthly benefit

Delaying Social Security benefits until age 70 earns delayed retirement credits (8% per year after FRA), maximizing the monthly benefit for those with long life expectancies.

Question 90: The practice of an investment adviser executing large personal trades in a security just before recommending it to clients is called:

Window dressing
Front running (Correct answer)
Churning
Wash trading

Correct answer: Front running

Front running involves trading on advance knowledge of client or advisory orders to profit personally before the market reacts.

Question 91: An investment adviser representative (IAR) who wants to work with retail clients must generally be registered in:

No registration is required for IARs
Only the state where the IAR's firm is headquartered
Each state where the IAR has clients or conducts business (Correct answer)
Only federally through the SEC

Correct answer: Each state where the IAR has clients or conducts business

IARs must be registered in each state where they have clients or conduct advisory business, regardless of where their firm is based.

Question 92: An investor holds a bond with a 5% coupon rate when market interest rates rise to 7%. What happens to the bond's market price?

It falls below par value (Correct answer)
It remains unchanged at par
It increases above par value
It doubles in value

Correct answer: It falls below par value

Bond prices move inversely to interest rates; when rates rise above the coupon rate, the bond becomes less attractive and trades at a discount.

Question 93: Which type of risk CANNOT be eliminated through diversification?

Business risk
Credit risk
Liquidity risk
Systematic risk (Correct answer)

Correct answer: Systematic risk

Systematic (market) risk affects all securities and cannot be diversified away, unlike unsystematic risks tied to individual companies or sectors.

Question 94: Which of the following is NOT a component of a comprehensive financial plan prepared by an investment adviser?

Tax planning
Retirement planning
Filing of income tax returns on behalf of the client (Correct answer)
Insurance needs analysis

Correct answer: Filing of income tax returns on behalf of the client

Filing tax returns is the domain of a tax consultant or CA; investment advisers provide planning advice but do not execute tax compliance on behalf of clients.

Question 95: A client aged 60 with no liabilities and a pension income wants to grow wealth for the next 15 years. The most appropriate equity allocation would be:

100% since risk capacity is high
20–30% to reduce risk
50–60% given the long horizon and stable income (Correct answer)
0% — equities are unsuitable at 60

Correct answer: 50–60% given the long horizon and stable income

A 15-year horizon with stable pension income supports moderate-to-aggressive equity exposure; a balanced 50–60% allocation aligns risk capacity with growth objectives.

Question 96: A stock's high turnover is a sign of higher _________.

Volatility
Price
Returns
Liquidity (Correct answer)

Correct answer: Liquidity

High stock turnover indicates that a large number of shares are being traded frequently, meaning there's a strong market for that stock. This high trading volume directly translates to higher liquidity, as investors can easily buy or sell their shares without significantly impacting the stock's price. While high turnover can sometimes be associated with volatility, its primary and most direct implication is the ease with which the asset can be converted to cash.

Question 97: A portfolio returned 10% while the market returned 8%. If the portfolio's beta is 1.0 and the risk-free rate is 4%, what is the portfolio's Jensen's alpha?

2% (Correct answer)
4%
-2%
0%

Correct answer: 2%

Alpha = Actual Return − [Rf + β(Rm−Rf)] = 10% − [4% + 1.0×(8%−4%)] = 10% − 8% = 2%.

Question 98: Which type of life insurance provides a death benefit for a specified term and has no cash value component?

Variable life insurance
Universal life insurance
Term life insurance (Correct answer)
Whole life insurance

Correct answer: Term life insurance

Term life insurance provides pure death benefit protection for a defined period (e.g., 20 years) with no savings or cash value component, making it the most affordable option.

Question 99: Value at Risk (VaR) is a risk measure that estimates:

The maximum possible loss under any circumstances
The portfolio's average annual return
The minimum guaranteed return
The maximum loss expected within a specified confidence level over a defined period (Correct answer)

Correct answer: The maximum loss expected within a specified confidence level over a defined period

VaR estimates the maximum loss likely to be exceeded with a given probability (e.g., 5%) over a specified time horizon, helping quantify downside risk.

Question 100: An investment adviser uses a Monte Carlo simulation in retirement planning to:

Determine the optimal tax filing status
Calculate the exact amount of Social Security benefits
Guarantee a specific retirement income level
Model thousands of potential market scenarios to estimate the probability of retirement success (Correct answer)

Correct answer: Model thousands of potential market scenarios to estimate the probability of retirement success

Monte Carlo simulations run thousands of random market scenario models to estimate the probability that a retirement plan will succeed across a wide range of possible outcomes.

Question 101: What does 'beta' measure in portfolio management?

The portfolio's absolute return
The portfolio's sensitivity to market movements (Correct answer)
The portfolio's dividend yield
The portfolio's expense ratio

Correct answer: The portfolio's sensitivity to market movements

Beta measures how much a portfolio or security moves relative to the overall market — a beta of 1.2 means the portfolio typically moves 20% more than the market.

Question 102: The Treynor Ratio differs from the Sharpe Ratio primarily because it uses which denominator?

Tracking error
Duration of the portfolio
Beta of the portfolio (Correct answer)
Standard deviation of portfolio returns

Correct answer: Beta of the portfolio

The Treynor Ratio uses beta (systematic risk) in the denominator, while the Sharpe Ratio uses standard deviation (total risk).

Question 103: Modern Portfolio Theory (MPT) suggests that an investor should choose a portfolio on the efficient frontier based primarily on their:

Tax bracket
Risk tolerance and desired return trade-off (Correct answer)
Age and employment status
Investment time horizon only

Correct answer: Risk tolerance and desired return trade-off

MPT's efficient frontier shows the best possible return for each level of risk; the investor's position on it is determined by their individual risk-return preference.

Question 104: In a client needs analysis, 'liquidity needs' refer to:

The preference for liquid stock markets
The need for readily accessible funds to cover short-term obligations (Correct answer)
The client's desire for dividend income
The client's desire to avoid real estate investments

Correct answer: The need for readily accessible funds to cover short-term obligations

Liquidity needs represent how much of the client's portfolio must be readily accessible for near-term spending, emergencies, or obligations.

Question 105: Which ethical principle requires an investment adviser to treat all clients fairly and not favor certain clients at the expense of others?

Fair dealing (Correct answer)
Transparency
Competence
Independence

Correct answer: Fair dealing

The principle of fair dealing requires advisers to treat all clients equitably, including allocation of investment opportunities and pricing of services.

Question 106: A bond's duration is primarily used to measure:

The bond's sensitivity to changes in interest rates (Correct answer)
The bond's liquidity in secondary markets
Credit risk relative to government bonds
The likelihood of issuer default

Correct answer: The bond's sensitivity to changes in interest rates

Duration measures a bond's price sensitivity to interest rate changes; a higher duration means greater price volatility when rates move.

Question 107: A Roth IRA conversion involves moving assets from a Traditional IRA to a Roth IRA. The converted amount is:

Subject to capital gains tax
Tax-free because it is a transfer between IRAs
Subject to ordinary income tax in the year of conversion (Correct answer)
Subject to the 10% early withdrawal penalty

Correct answer: Subject to ordinary income tax in the year of conversion

A Roth conversion is taxable — the pre-tax Traditional IRA funds converted are included in ordinary income in the conversion year.

Question 108: An investment adviser recommending a client purchase disability income insurance is primarily addressing which risk?

Market risk
Interest rate risk
Longevity risk
The risk of loss of earned income due to illness or injury (Correct answer)

Correct answer: The risk of loss of earned income due to illness or injury

Disability income insurance replaces a portion of income lost when a client cannot work due to illness or injury, protecting their most important financial asset — their earning capacity.

Question 109: Which of the following can cause a rightward change in the labor demand curve?

Decrease in wages
Decrease in product price
Increase in wages
Increase in productivity (Correct answer)

Correct answer: Increase in productivity

The labor demand curve shifts rightward when employers are willing to hire more workers at any given wage. An increase in worker productivity means that each worker can produce more output, making them more valuable to the firm. This increased value translates into a higher demand for labor at every wage level.

Question 110: Which of the following is a key difference between a Portfolio Management Service (PMS) and an investment adviser?

PMS cannot invest in equities
PMS managers directly manage client assets; investment advisers only provide advice (Correct answer)
Only PMS providers can charge fees
Investment advisers must hold client funds in custody

Correct answer: PMS managers directly manage client assets; investment advisers only provide advice

PMS providers take discretionary control of client assets, while investment advisers only give advice; execution remains the client's decision.

Question 111: An adviser discussing 'concentration risk' with a client is warning about the danger of:

Having too large a proportion of assets in a single security or sector (Correct answer)
Holding too many different securities
Over-diversifying across asset classes
Investing in too many different countries

Correct answer: Having too large a proportion of assets in a single security or sector

Concentration risk arises when too much of a portfolio is invested in a single company, sector, or asset type, making the portfolio highly vulnerable to that specific position.

Question 112: A client approaches an investment adviser seeking advice only on direct equity stocks. The adviser is not registered for this and refers the client elsewhere. This action demonstrates:

Solicitation of business
Violation of fiduciary duty
Incompetence
Appropriate professional conduct within scope of registration (Correct answer)

Correct answer: Appropriate professional conduct within scope of registration

Referring clients to appropriately registered professionals for services outside one's scope is correct professional behavior.

Question 113: Under the SEC's Regulation Best Interest (Reg BI), broker-dealers must act in whose best interest when making recommendations?

Their retail customers (Correct answer)
Their compliance department
Their parent company
Their clearing firm

Correct answer: Their retail customers

Regulation Best Interest requires broker-dealers to act in the best interest of retail customers when making investment recommendations.

Question 114: Which of the following best describes 'dollar-cost averaging' as an investment strategy?

Selling assets when prices rise by a fixed percentage
Investing fixed amounts at regular intervals regardless of price (Correct answer)
Rebalancing the portfolio quarterly
Investing a lump sum during market lows

Correct answer: Investing fixed amounts at regular intervals regardless of price

Dollar-cost averaging involves investing a fixed amount periodically, buying more units when prices are low and fewer when prices are high.

Question 115: Under the Investment Advisers Act of 1940, which threshold generally requires an investment adviser to register with the SEC?

$500 million in assets under management
$1 billion in assets under management
$100 million in assets under management (Correct answer)
$25 million in assets under management

Correct answer: $100 million in assets under management

Investment advisers with $100 million or more in assets under management generally must register with the SEC rather than state regulators.

Question 116: A 401(k) plan's annual employee contribution limit for 2024 is:

$46,000
$16,000
$23,000 (Correct answer)
$7,000

Correct answer: $23,000

The 2024 employee contribution limit for 401(k) plans is $23,000, with an additional $7,500 catch-up contribution allowed for those age 50 and older.

Question 117: Duration of a bond is best described as:

The coupon payment frequency
The weighted average time to receive the bond's cash flows (Correct answer)
The bond's credit rating tenure
The remaining time to maturity

Correct answer: The weighted average time to receive the bond's cash flows

Duration (Macaulay Duration) is the weighted average time to receive cash flows, used to measure interest rate sensitivity.

Question 118: Dollar-cost averaging is best described as:

Selling investments when they reach a target price
Investing a lump sum when markets are at their lowest
Buying only dividend-paying stocks
Investing fixed amounts at regular intervals regardless of market price (Correct answer)

Correct answer: Investing fixed amounts at regular intervals regardless of market price

Dollar-cost averaging involves investing a fixed dollar amount at regular intervals, automatically buying more shares when prices are low and fewer when prices are high.

Question 119: Which of the following is an example of tactical asset allocation?

Temporarily overweighting equities because valuations appear attractive (Correct answer)
Setting asset class weights based on the client's age
Rebalancing back to target weights after market movements
Maintaining a fixed 60/40 equity-debt ratio regardless of market conditions

Correct answer: Temporarily overweighting equities because valuations appear attractive

Tactical asset allocation involves short-term, opportunistic deviations from the strategic target based on market outlook or valuations.

Question 120: An investor buys a stock at $50, receives a $2 dividend, and sells at $55. What is the total return?

10%
12%
14% (Correct answer)
4%

Correct answer: 14%

Total return = (price gain + dividend) / purchase price = ($5 + $2) / $50 = 14%.

Question 121: An ETF trades at a price above its net asset value (NAV). This condition is called:

Arbitrage convergence
A discount
Price dislocation
A premium (Correct answer)

Correct answer: A premium

When an ETF's market price exceeds its NAV, it is trading at a premium; authorized participants can create new shares to arbitrage this difference.

Question 122: Rebalancing a portfolio back to its target asset allocation primarily serves which purpose?

Minimizing tax liability
Maintaining the client's intended risk exposure over time (Correct answer)
Reducing brokerage commissions
Maximizing short-term returns

Correct answer: Maintaining the client's intended risk exposure over time

Rebalancing restores the original risk-return profile by trimming outperforming assets and adding to underperforming ones, keeping risk aligned with the client's tolerance.

Question 123: Which of the following constitutes a conflict of interest that an investment adviser MUST disclose to clients?

Charging a flat advisory fee
Receiving distribution commissions from a mutual fund house (Correct answer)
Holding SEBI registration
Having a CFA designation

Correct answer: Receiving distribution commissions from a mutual fund house

Receiving distribution commissions creates a conflict of interest because it may bias advice toward higher-commission products, and must be disclosed.

Question 124: Which of the following is an example of unsystematic (company-specific) risk that can be reduced through diversification?

A recession causing broad market declines
Inflation risk
Interest rate risk
A product recall affecting a single company's stock (Correct answer)

Correct answer: A product recall affecting a single company's stock

Unsystematic risk is idiosyncratic to a particular company or industry (such as a product recall) and can be largely eliminated by holding a diversified portfolio.

Question 125: Which investment product offers guaranteed returns and is regulated by the Insurance Regulatory and Development Authority of India (IRDAI)?

Guaranteed Return Insurance Plans (Correct answer)
Debt Mutual Funds
Government Securities
Fixed Maturity Plans

Correct answer: Guaranteed Return Insurance Plans

Guaranteed return insurance plans (like traditional endowment or whole life plans) fall under IRDAI regulation and promise contractually guaranteed returns.

Question 126: Which of the following has experience working with several insurance providers?

Corporate insurance agent
Insurance broker (Correct answer)
Insurance agent and broker
Bank assurance channel

Correct answer: Insurance broker

An insurance broker acts as an intermediary between clients and multiple insurance companies. Unlike an insurance agent who typically represents one or a limited number of insurers, a broker works for the client, searching various providers to find the best policies and rates that meet the client's specific needs. This broad access to different insurers is a defining characteristic of an insurance broker.

Question 127: An investor invests in the underlying asset of __________ in order to receive a variable annuity. <br> 1. Debt Instruments <br> 2. Equity <br> 3. Gold

Only 2 and 3 (Correct answer)
All of the above
Only 1 and 2
Only 1 and 3

Correct answer: Only 2 and 3

A variable annuity's value fluctuates based on the performance of its underlying investment options, which are typically sub-accounts invested in various securities. These sub-accounts commonly include equity funds (stocks) and sometimes commodity funds (like gold), allowing for growth potential. Debt instruments (bonds) are more characteristic of fixed annuities or certain types of mutual funds, but variable annuities specifically offer investment in market-linked assets like equities and commodities for variable returns.

Question 128: Which one of the following asset allocations is market-dependent?

Tactical asset allocation (Correct answer)
Strategic asset allocation
None of the above

Correct answer: Tactical asset allocation

Tactical asset allocation is a dynamic strategy that involves making short-term adjustments to a portfolio's asset mix based on current market conditions and economic outlook. Unlike strategic asset allocation, which sets long-term target percentages, tactical allocation actively seeks to capitalize on perceived market inefficiencies or short-term opportunities, making it inherently market-dependent.

Question 129: Modified duration of a bond fund is 5 years. If interest rates rise by 1%, the approximate change in the fund's NAV is:

−1%
+5%
−5% (Correct answer)
+1%

Correct answer: −5%

NAV change ≈ −Modified Duration × Change in yield = −5 × 1% = −5%; bond prices fall when rates rise.

Question 130: A client's portfolio has a standard deviation of 15% and the risk-free rate is 3%. If the portfolio returned 12%, what is the Sharpe Ratio?

1.20
0.80
0.40
0.60 (Correct answer)

Correct answer: 0.60

Sharpe Ratio = (Portfolio Return - Risk-Free Rate) / Standard Deviation = (12% - 3%) / 15% = 9% / 15% = 0.60.

Question 131: An investment adviser recommending insurance products to clients should consider the client's insurance needs as part of which planning area?

Estate planning only
Investment selection only
Tax planning only
Comprehensive risk management within the financial plan (Correct answer)

Correct answer: Comprehensive risk management within the financial plan

Insurance is a key component of comprehensive risk management — protecting a client's human capital, assets, and estate — and should be integrated into the overall financial plan.

Question 132: What does a negative convexity in a mortgage-backed security (MBS) typically indicate?

The MBS will outperform Treasuries in all interest rate environments
The security has no call features or prepayment options
Price appreciation is limited when rates fall due to prepayment risk (Correct answer)
Duration increases as interest rates rise

Correct answer: Price appreciation is limited when rates fall due to prepayment risk

Negative convexity means that when rates fall, homeowners prepay mortgages early, causing the MBS to be 'called away' and limiting price appreciation.

Question 133: Which strategy is most commonly recommended to hedge longevity risk in retirement?

Spending down assets as quickly as possible
Holding all assets in money market funds
Purchasing an annuity that provides guaranteed lifetime income (Correct answer)
Investing entirely in short-term bonds

Correct answer: Purchasing an annuity that provides guaranteed lifetime income

Annuities that guarantee income for life are the primary tool for hedging longevity risk, ensuring retirement income regardless of how long the retiree lives.

Question 134: Under SEBI (Investment Advisers) Regulations, 2013, what is the minimum net worth requirement for a non-individual investment adviser?

INR 1 crore
INR 50 lakh
INR 25 lakh (Correct answer)
INR 2 crore

Correct answer: INR 25 lakh

Non-individual investment advisers must maintain a minimum net worth of INR 25 lakh as per SEBI IA Regulations.

Question 135: The duty of loyalty under fiduciary standards requires an investment adviser to:

Prioritize the adviser's firm revenue
Maximize commissions on each trade
Follow all client instructions regardless of suitability
Avoid or disclose all conflicts of interest (Correct answer)

Correct answer: Avoid or disclose all conflicts of interest

The duty of loyalty requires advisers to avoid or fully disclose conflicts of interest so clients can make informed decisions.

Question 136: Which investment strategy involves buying securities in proportion to their market-cap weighting in an index?

Tactical asset allocation
Passive indexing (Correct answer)
Factor investing
Active management

Correct answer: Passive indexing

Passive indexing replicates an index by holding securities in the same proportions as their market-cap weights, minimizing tracking error and costs.

Question 137: An example of this is the idea that a family of four lives in poverty if their annual income is less than $20,000.

A relative measure of poverty
None of the above
An absolute measure of poverty (Correct answer)
An excessive level of income to be considered poverty

Correct answer: An absolute measure of poverty

An absolute measure of poverty defines a fixed income threshold below which a household is considered poor, regardless of the overall economic conditions or living standards of the rest of society. The example of a specific dollar amount ($20,000) for a family of four illustrates this fixed standard. This contrasts with relative poverty, which defines poverty based on a comparison to the median income of a society.

Question 138: Which investment constraint refers to restrictions on the types of investments a client is legally or ethically permitted to hold?

Liquidity constraint
Legal and regulatory constraint (Correct answer)
Tax constraint
Time horizon constraint

Correct answer: Legal and regulatory constraint

Legal and regulatory constraints include rules that prohibit certain investments — such as insiders restricted from trading company stock or pension funds subject to ERISA investment limits.

Question 139: Under the Know Your Client (KYC) process, which authority maintains the central KYC registry in India?

CKYCRR (Correct answer)
RBI
SEBI
CERSAI

Correct answer: CKYCRR

The Central KYC Records Registry (CKYCRR) managed by CERSAI maintains the central repository of KYC records in India.

Question 140: Which of the following behavioral biases causes investors to hold losing investments too long hoping to break even?

Overconfidence bias
Anchoring bias
Loss aversion / Disposition effect (Correct answer)
Herding bias

Correct answer: Loss aversion / Disposition effect

The disposition effect (driven by loss aversion) leads investors to hold losing positions to avoid realizing a loss while prematurely selling winners.

Question 141: An investment adviser recommends a product in which the adviser's associate holds a significant stake without disclosing this to the client. This violates which principle?

KYC compliance
Portfolio diversification mandate
Fiduciary duty and disclosure requirement (Correct answer)
Suitability obligation

Correct answer: Fiduciary duty and disclosure requirement

Failing to disclose a related-party interest breaches the adviser's fiduciary duty and SEBI's mandatory disclosure requirements.

Series 65 - Uniform Investment Adviser Law Examination

The Series 65 exam, administered by NASAA, tests the competency of investment adviser representatives across economic factors, investment vehicle characteristics, client recommendations and strategies, and securities laws and regulations. Passing qualifies candidates to act as investment adviser representatives in states requiring this license.

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