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

Question 1: The United States' Gini coefficient has decreased over the previous few decades.

Has begun to look like that of Europe
Has remained essentially unchanged
Has been declining
Has been increasing (Correct answer)

Correct answer: Has been increasing

The Gini coefficient is a measure of income inequality, where a higher value indicates greater inequality. Over the past several decades, the Gini coefficient in the United States has generally been increasing. This trend indicates a widening gap between the rich and the poor, signifying growing income disparity.

Question 2: Which SEBI regulation governs the registration and conduct of Portfolio Management Services (PMS) in India?

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

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 3: Which type of risk CANNOT be eliminated through diversification?

Credit risk
Liquidity risk
Business 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 4: Under the NASAA Model Rule, which unethical practice involves an adviser making false or misleading statements about a security?

Excessive trading
Suitability violation
Unauthorized trading
Misrepresentation (Correct answer)

Correct answer: Misrepresentation

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

Question 5: When an investment adviser has a personal financial interest in a security they recommend to clients, they must:

Disclose the personal interest before making the recommendation (Correct answer)
Avoid recommending that security entirely
Report it only to FINRA
Only recommend it to institutional clients

Correct answer: Disclose the personal interest before making the recommendation

Advisers must disclose any personal financial interest in securities they recommend so clients can assess potential bias.

Question 6: In a labor market with competition, the labor supply curve that each individual employer must deal with is

Downward sloping
Upward sloping
Horizontal (Correct answer)
Backward bending

Correct answer: Horizontal

In a perfectly competitive labor market, individual employers are wage takers, meaning they have no power to influence the market wage. They can hire as many workers as they want at the prevailing market wage without affecting it. Therefore, the labor supply curve faced by an individual competitive employer is perfectly elastic, appearing as a horizontal line at the market wage.

Question 7: The Treynor Ratio differs from the Sharpe Ratio primarily because it uses which denominator?

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

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 8: Insurance typically represents _________.

Risk Reduction
Risk transfer (Correct answer)
Risk Retention
Risk prevention

Correct answer: Risk transfer

Insurance is a mechanism where an individual or entity (the insured) pays a premium to an insurance company (the insurer) to transfer the financial burden of potential future losses. In exchange for the premium, the insurer agrees to compensate the insured for specified losses, effectively shifting the risk from the insured to the insurer. This allows the insured to protect themselves from significant financial impact due to unforeseen events.

Question 9: Which of the following is a key difference between a Portfolio Management Service (PMS) and an investment adviser?

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

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 10: An adviser recommends a client invest a lump sum in a liquid fund temporarily before deploying into equity via STP. The primary benefit of this strategy is:

Maximizing dividend income
Higher returns than a direct equity investment
Rupee-cost averaging combined with capital preservation during deployment (Correct answer)
Avoiding all market risk permanently

Correct answer: Rupee-cost averaging combined with capital preservation during deployment

Using an STP from a liquid fund into equity provides rupee-cost averaging over the deployment period while preserving capital in a low-risk instrument in the interim.

Question 11: What does 'systematic risk' refer to in portfolio management?

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

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

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

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

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

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

INR 25 lakh (Correct answer)
INR 1 crore
INR 50 lakh
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 15: Which practice violates an investment adviser's ethical obligations?

Disclosing all fees in the ADV brochure
Churning a client's account to generate commissions (Correct answer)
Rebalancing a portfolio annually
Charging a transparent management fee

Correct answer: Churning a client's account to generate commissions

Churning — excessive trading to generate commissions — violates the adviser's duty of loyalty and care by prioritizing adviser income over client interests.

Question 16: Modern Portfolio Theory (MPT) suggests that an investor should choose a portfolio on the efficient frontier based primarily on their:

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

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

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

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 18: In the context of portfolio performance, alpha represents:

The return above or below what is predicted by the portfolio's beta (Correct answer)
A portfolio's total return relative to the S&P 500
The correlation between the portfolio and its benchmark
The portfolio's standard deviation relative to the market

Correct answer: The return above or below what is predicted by the portfolio's beta

Alpha is the excess return a portfolio generates over its expected return based on its level of systematic risk (beta), and is considered a measure of manager skill.

Question 19: Which type of life insurance provides a death benefit for a specified term and has no cash value component?

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

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 20: 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)
Investing in too many different countries
Holding too many different securities
Over-diversifying across asset classes

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 21: A convertible bond allows the bondholder to:

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

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 22: The efficient frontier in portfolio theory represents portfolios that:

Have the lowest possible returns for a given level of risk
Offer the highest expected return for each level of risk (Correct answer)
Consist only of risk-free assets
Maximize trading activity

Correct answer: Offer the highest expected return for each level of risk

The efficient frontier represents the set of optimal portfolios offering the maximum expected return for each level of risk — no portfolio above it is achievable.

Question 23: An investment adviser discovers a material error in a client's portfolio report. Ethical conduct requires the adviser to:

Wait until the next quarterly review to mention it
Immediately correct and disclose the error to the client (Correct answer)
Only disclose if the error favors the adviser
Delete the erroneous report and issue a new one silently

Correct answer: Immediately correct and disclose the error to the client

Ethical and fiduciary standards require prompt disclosure and correction of material errors that affect a client's investment decisions.

Question 24: A stock's beta is 1.5. If the overall market rises by 10%, how much would this stock be expected to rise?

15% (Correct answer)
10%
150%
1.5%

Correct answer: 15%

Beta measures systematic risk relative to the market; a beta of 1.5 means the stock is expected to move 1.5 times the market's move, so 1.5 × 10% = 15%.

Question 25: Which asset allocation approach involves periodically resetting a portfolio to its original target weights?

Rebalancing (Correct answer)
Market timing
Buy-and-hold
Tactical asset allocation

Correct answer: Rebalancing

Rebalancing involves periodically buying and selling assets to restore the portfolio to its target allocation after market movements have shifted the weights.

Question 26: An example of this is the idea that a family of four lives in poverty if their annual income is less than $20,000.

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

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 27: Which account type is most appropriate for assets with high expected growth to maximize long-term after-tax wealth?

Traditional brokerage account
Traditional IRA or 401(k)
Money market account
Roth IRA or Roth 401(k) (Correct answer)

Correct answer: Roth IRA or Roth 401(k)

Roth accounts are ideal for high-growth assets because all gains grow and are withdrawn tax-free, maximizing after-tax wealth on appreciated investments.

Question 28: The Sharpe Ratio measures:

Portfolio correlation to a benchmark
The dividend yield of a portfolio
Total portfolio return
Excess return per unit of total risk (Correct answer)

Correct answer: Excess return per unit of total risk

The Sharpe Ratio calculates a portfolio's excess return above the risk-free rate per unit of standard deviation, measuring risk-adjusted performance.

Question 29: An investment adviser who provides advice on securities without SEBI registration is liable to:

No action if advice was not fee-based
Cancellation of CA/CFA license only
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 30: A client has a moderate risk profile and a 10-year horizon. Which asset allocation is MOST appropriate?

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

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 31: Which document must an investment adviser provide to a client before rendering any investment advice?

Disclosure document (Correct answer)
Portfolio statement
Agreement letter
Risk profiling questionnaire

Correct answer: Disclosure document

SEBI regulations require investment advisers to provide a disclosure document containing details about the adviser, services, fees, and conflicts of interest before advising.

Question 32: SEBI requires investment advisers to maintain records of client interactions and advice given for a minimum of:

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

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 33: Which valuation method estimates a stock's intrinsic value by discounting its projected future cash flows back to the present?

Price-to-book ratio analysis
Dividend yield analysis
Comparable company analysis
Discounted cash flow (DCF) analysis (Correct answer)

Correct answer: Discounted cash flow (DCF) analysis

DCF analysis values a security by discounting its expected future cash flows at an appropriate discount rate to arrive at a present value.

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: A 65-year-old retired client with no earned income and moderate expenses is MOST likely best served by a portfolio emphasizing:

100% growth stocks for maximum appreciation
A 100% bond portfolio regardless of yield
Income generation and capital preservation with moderate growth (Correct answer)
Speculative investments to outpace inflation

Correct answer: Income generation and capital preservation with moderate growth

A retired client with no earned income typically needs income generation and capital preservation, with modest growth to hedge inflation — not aggressive growth.

Question 36: Interest rate risk primarily affects which type of investment?

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

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 37: 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 38: Which ethical principle requires an investment adviser to treat all clients fairly and not favor certain clients at the expense of others?

Competence
Independence
Transparency
Fair dealing (Correct answer)

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 39: 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
A product recall affecting a single company's stock (Correct answer)
Interest rate risk

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

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

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 41: Which type of analysis focuses on evaluating a company's financial statements, management, and competitive position to determine intrinsic value?

Technical analysis
Fundamental analysis (Correct answer)
Macro analysis
Quantitative analysis

Correct answer: Fundamental analysis

Fundamental analysis examines a company's financial health, earnings, management quality, and competitive advantages to estimate its intrinsic value.

Question 42: Which of the following best describes a 'laddered' bond portfolio strategy?

Allocating bonds equally between government and corporate issuers
Purchasing bonds that mature at staggered intervals over time (Correct answer)
Buying only zero-coupon bonds
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 43: A portfolio has a beta of 1.4. If the market rises by 10%, the expected portfolio return (ignoring alpha) is:

14% (Correct answer)
16%
10%
12%

Correct answer: 14%

Expected return = Beta × Market return = 1.4 × 10% = 14%, assuming no alpha contribution.

Question 44: Which of the following is NOT a fiduciary duty of a SEBI-registered investment adviser?

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

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

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

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

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

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

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

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 48: Credit risk (default risk) is best described as:

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

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

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

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 50: 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
Defer RMDs on the amount used to purchase the QLAC until age 85 (Correct answer)
Convert pre-tax funds to Roth tax-free

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 51: 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 52: Jensen's Alpha measures:

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

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

Defining a basic asset allocation for the client
Churning investment portfolio often to achieve best returns (Correct answer)
Monitoring achievement of goals periodically
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 54: An investment adviser with less than $100 million AUM typically registers with:

The SEC only
State securities regulators (Correct answer)
FINRA directly
The Federal Reserve

Correct answer: State securities regulators

Investment advisers below the $100 million AUM threshold generally register with their state's securities regulator rather than the SEC.

Question 55: When performing relative valuation, an analyst compares a company's valuation multiples to those of its peers primarily to:

Predict future earnings growth with certainty
Calculate the company's weighted average cost of capital
Identify whether the company appears over- or undervalued relative to similar firms (Correct answer)
Determine the precise intrinsic value of the company

Correct answer: Identify whether the company appears over- or undervalued relative to similar firms

Relative valuation (comps analysis) benchmarks a company's multiples against industry peers to assess whether its current market price reflects a premium or discount.

Question 56: The riskiest investment is with __________.

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

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 57: Which factor is MOST important when determining the suitability of an investment recommendation for a client?

The client's individual financial situation, goals, and risk tolerance (Correct answer)
The popularity of the investment
The investment's past performance
The commission paid to the adviser

Correct answer: The client's individual financial situation, goals, and risk tolerance

Suitability is determined primarily by the client's specific financial situation, investment objectives, time horizon, and risk tolerance — not product characteristics alone.

Question 58: The monopsonistic employer keeps adding staff until it reaches the marginal level.

Revenue product equals marginal labor cost (Correct answer)
Physical product equals the wage
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 59: Longevity risk in retirement planning refers to:

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

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 60: 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 increases above par value
It doubles in value
It remains unchanged at par

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

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

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

Overconfidence bias
Loss aversion / Disposition effect (Correct answer)
Herding bias
Anchoring 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 63: 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%
10%
1%

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

spending decision by individuals and business firms
personal wealth
the economy's location in the business cycle
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 65: An investment adviser constructs a portfolio that closely tracks a market index with minimal active management. This approach is called:

Passive (index) investing (Correct answer)
Momentum investing
Concentrated portfolio management
Tactical investing

Correct answer: Passive (index) investing

Passive or index investing aims to replicate the returns of a market index with low costs and minimal active trading, contrasting with actively managed strategies.

Question 66: A bond with a face value of $1,000, a coupon rate of 6%, and a market price of $1,050 is said to be trading at:

A discount
A premium (Correct answer)
Par
Its intrinsic value

Correct answer: A premium

When a bond's market price exceeds its face (par) value, it is trading at a premium.

Question 67: Under the Investment Advisers Act of 1940, an investment adviser has a fiduciary duty to act in the best interest of whom?

The SEC
The broker-dealer
The client (Correct answer)
The adviser's employer

Correct answer: The client

Investment advisers owe a fiduciary duty to their clients, requiring them to act in the client's best interest at all times.

Question 68: A 401(k) plan's annual employee contribution limit for 2024 is:

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

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

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

Correct answer: Commission ban

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

Question 70: Which metric best captures the excess return of a portfolio per unit of total risk taken?

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

Correct answer: Sharpe Ratio

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

Question 71: The Capital Asset Pricing Model (CAPM) formula is: Expected Return = Rf + β × (Rm − Rf). What does 'Rm − Rf' represent?

Sharpe ratio
Market risk premium (Correct answer)
Alpha
Jensen's alpha

Correct answer: Market risk premium

Rm − Rf is the market risk premium — the excess return investors expect for bearing market risk over the risk-free rate.

Question 72: Which metric measures the percentage of a company's earnings paid out as dividends?

Dividend yield
Payout ratio (Correct answer)
Price-to-earnings ratio
Earnings per share

Correct answer: Payout ratio

The payout ratio is calculated as dividends per share divided by earnings per share, expressed as a percentage.

Question 73: 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?

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

Correct answer: 5.15%

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

Question 74: Which investment among them is most susceptible to inflation?

Bank deposits (Correct answer)
Equity shares
Real estate
Gold

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 75: The Sharpe ratio measures portfolio performance by:

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

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

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

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

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

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 78: A client who panics and sells investments during market downturns is exhibiting which behavioral bias?

Confirmation bias
Overconfidence bias
Anchoring bias
Loss aversion (Correct answer)

Correct answer: Loss aversion

Loss aversion, a core concept in behavioral finance, describes the tendency for people to feel the pain of losses more intensely than equivalent gains, driving panic selling.

Question 79: Soft dollar arrangements involve an adviser receiving research or services in exchange for directing client brokerage. These arrangements must be:

Approved by the IRS
Disclosed to clients (Correct answer)
Completely prohibited
Limited to $1,000 per year

Correct answer: Disclosed to clients

Soft dollar arrangements are permissible under Section 28(e) of the Securities Exchange Act but must be disclosed to clients due to the conflict of interest they create.

Question 80: In a labor market with monopsony, the labor supply curve that each individual employer must deal with is

Upward sloping (Correct answer)
Backward bending
Downward sloping
Horizontal

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 81: Under the Efficient Market Hypothesis (EMH) in its strong form, which type of analysis would be unable to consistently produce excess returns?

Both technical and fundamental analysis (Correct answer)
Fundamental analysis only
Technical analysis only
Neither; strong form EMH still allows alpha from insider knowledge

Correct answer: Both technical and fundamental analysis

Strong-form EMH states that all public and private information is already reflected in prices, making both technical and fundamental analysis unable to generate consistent excess returns.

Question 82: In fundamental analysis, which financial ratio measures how efficiently a company uses its assets to generate revenue?

Debt-to-equity ratio
Current ratio
Asset turnover ratio (Correct answer)
Profit margin

Correct answer: Asset turnover ratio

The asset turnover ratio (revenue ÷ total assets) indicates how effectively management uses the company's assets to produce sales.

Question 83: 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 3
Only 1 and 2

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

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

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 85: 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 supervision
The duty of competence
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 86: A company has a price-to-book (P/B) ratio of 0.8. This most likely indicates the stock is trading:

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

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

The time between coupon payments
The number of years until a bond matures
The period during which a bond is callable
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 88: Which technical analysis indicator compares the magnitude of recent gains to recent losses to identify overbought or oversold conditions?

Relative Strength Index (RSI) (Correct answer)
Fibonacci retracement
Bollinger Bands
Moving Average Convergence Divergence (MACD)

Correct answer: Relative Strength Index (RSI)

The RSI measures the speed and magnitude of price changes on a 0–100 scale; readings above 70 suggest overbought and below 30 suggest oversold conditions.

Question 89: Let's assume Jay has purchased a pure risk cover product, which means he has purchased ___________.

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

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 90: Modern Portfolio Theory (MPT) suggests that portfolio risk can be reduced through:

Diversification across assets with low correlations (Correct answer)
Timing the market based on technical signals
Investing only in government bonds
Concentrating assets in high-performing sectors

Correct answer: Diversification across assets with low correlations

MPT demonstrates that combining assets with low or negative correlations reduces overall portfolio volatility without necessarily sacrificing expected return.

Question 91: When assessing a client's risk capacity, which factor is most relevant?

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

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

$1 billion in assets under management
$100 million in assets under management (Correct answer)
$25 million in assets under management
$500 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 93: Yield to maturity (YTM) on a bond is best described as:

The coupon rate minus the current market yield
The annual coupon payment divided by face value
The total return anticipated if the bond is held until it matures (Correct answer)
The current yield adjusted for inflation

Correct answer: The total return anticipated if the bond is held until it matures

YTM is the total annualized return an investor will earn if the bond is purchased at its current price and held to maturity, accounting for coupon payments and capital gain or loss.

Question 94: Which of the following can cause a rightward change in the labor demand curve?

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

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 95: Under PMLA (Prevention of Money Laundering Act), investment advisers are classified as:

Scheduled financial institutions
Non-obligated entities
Supervisory authorities
Reporting entities (Correct answer)

Correct answer: Reporting entities

Investment advisers are designated as reporting entities under PMLA and must file suspicious transaction reports (STRs) with FIU-IND.

Question 96: A client insists on investing entirely in one sector despite the adviser's recommendation for diversification. The adviser should:

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

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 97: Labor demand is elastic when the product demand is

Low
Elastic
High
Inelastic (Correct answer)

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

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

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 99: What is the primary purpose of the Investment Advisers Act of 1940?

To establish capital requirements for banks
To regulate mutual fund expenses
To govern securities trading on exchanges
To regulate the activities of investment advisers and protect advisory clients (Correct answer)

Correct answer: To regulate the activities of investment advisers and protect advisory clients

The Investment Advisers Act of 1940 was enacted to regulate investment advisers and provide protections to their clients through registration and conduct requirements.

Question 100: An investor buys a stock at $50, receives a $2 dividend, and sells at $55. What is the total return?

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

Correct answer: 14%

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

Question 101: What is the key difference between a closed-end fund and an open-end mutual fund?

Closed-end funds issue a fixed number of shares that trade on an exchange (Correct answer)
Closed-end funds are not registered with the SEC
Closed-end funds never pay dividends
Open-end funds hold only stocks while closed-end funds hold bonds

Correct answer: Closed-end funds issue a fixed number of shares that trade on an exchange

Closed-end funds have a fixed share count and trade on exchanges at market-determined prices, which may differ from NAV, unlike open-end funds that issue/redeem at NAV.

Question 102: 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
Fiduciary duty and disclosure requirement (Correct answer)
Portfolio diversification mandate
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.

Question 103: Under the SEC's Regulation Best Interest (Reg BI), broker-dealers must act in whose best interest when making recommendations?

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

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 104: Which type of capital gain is taxed at preferential long-term rates in the US?

All capital gains regardless of holding period
Gains on assets held more than one year (Correct answer)
Gains on assets held less than 6 months
Gains on assets held exactly one year

Correct answer: Gains on assets held more than one year

Assets held for more than one year qualify for long-term capital gains tax rates, which are generally 0%, 15%, or 20% — lower than ordinary income rates.

Question 105: Which of the following is NOT a component of a comprehensive financial plan prepared by an investment adviser?

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

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 106: 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
Incompetence
Appropriate professional conduct within scope of registration (Correct answer)
Violation of fiduciary duty

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

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

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

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

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 109: 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 110: A Roth IRA conversion involves moving assets from a Traditional IRA to a Roth IRA. The converted amount is:

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

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

Reinvestment risk
Inflation (purchasing power) risk (Correct answer)
Liquidity risk
Credit 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 112: A stock trades at $50 per share with earnings per share of $2.50. What is its price-to-earnings (P/E) ratio?

15
25
20 (Correct answer)
10

Correct answer: 20

The P/E ratio is calculated by dividing the stock price ($50) by EPS ($2.50), which equals 20.

Question 113: Which investment product offers guaranteed returns and is regulated by the Insurance Regulatory and Development Authority of India (IRDAI)?

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

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

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

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 115: According to the Dividend Discount Model (DDM), what is the primary driver of a stock's intrinsic value?

Current book value of equity
Future earnings growth
Price-to-earnings expansion
Present value of expected future dividends (Correct answer)

Correct answer: Present value of expected future dividends

The DDM calculates intrinsic value as the present value of all expected future dividends, discounted at the required rate of return.

Question 116: Which exemption allows venture capital fund advisers to avoid full SEC registration?

The intrastate exemption
The family office exemption
The venture capital fund adviser exemption (Correct answer)
The de minimis 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 117: An investment adviser representative (IAR) who wants to work with retail clients must generally be registered in:

Only the state where the IAR's firm is headquartered
Each state where the IAR has clients or conducts business (Correct answer)
No registration is required for IARs
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 118: An ETF trades at a price above its net asset value (NAV). This condition is called:

Price dislocation
Arbitrage convergence
A discount
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 119: Which regulatory body oversees the registration of investment adviser representatives at the state level?

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

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 120: 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?

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

Correct answer: 14%

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

Question 121: Under the Dodd-Frank Act, family offices are excluded from the definition of investment adviser if they:

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

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 122: Which portfolio strategy involves adjusting asset allocation in response to changing market conditions, rather than maintaining a fixed target?

Passive indexing
Strategic asset allocation
Tactical asset allocation (Correct answer)
Dollar-cost averaging

Correct answer: Tactical asset allocation

Tactical asset allocation actively shifts portfolio weights based on short-term market opportunities or forecasts, deviating from the long-term strategic target.

Question 123: The duty of loyalty under fiduciary standards requires an investment adviser to:

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

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 124: Which type of annuity allows the accumulation value to be invested in sub-accounts, subjecting it to market risk?

Immediate annuity
Variable annuity (Correct answer)
Fixed indexed annuity
Fixed annuity

Correct answer: Variable annuity

Variable annuities allow contract holders to invest in sub-accounts similar to mutual funds, providing market participation but also market risk — unlike fixed or indexed annuities.

Question 125: Which part of Form ADV contains the adviser's brochure that must be delivered to clients?

Part 1
Part 3
Part 2 (Correct answer)
Part 4

Correct answer: Part 2

Form ADV Part 2 is the narrative brochure that must be provided to clients, disclosing the adviser's services, fees, conflicts, and disciplinary history.

Question 126: Which type of retirement plan requires the employer to fund benefits based on a formula using years of service and final salary?

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

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 127: Which SEBI regulation governs the registration and conduct of investment advisers in India?

SEBI (Research Analysts) Regulations, 2014
SEBI (Portfolio Managers) Regulations, 2020
SEBI (Mutual Funds) Regulations, 1996
SEBI (Investment Advisers) Regulations, 2013 (Correct answer)

Correct answer: SEBI (Investment Advisers) Regulations, 2013

The SEBI (Investment Advisers) Regulations, 2013 establish the framework for registration, conduct, and obligations of investment advisers.

Question 128: 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%
−1%
−5% (Correct answer)
+5%

Correct answer: −5%

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

Question 129: Under SEBI Investment Adviser Regulations, an investment adviser providing advice on securities must ensure the advice is based on which primary criterion?

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

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 130: 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:

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

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

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

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

CERSAI
SEBI
RBI
CKYCRR (Correct answer)

Correct answer: CKYCRR

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

Question 133: Rebalancing a portfolio means:

Realigning portfolio weights back to the target allocation after market movements (Correct answer)
Increasing equity allocation when markets rise
Switching entirely to a new asset class
Withdrawing profits at year-end

Correct answer: Realigning portfolio weights back to the target allocation after market movements

Rebalancing restores the original target asset allocation after market movements cause weights to drift, maintaining the intended risk profile.

Question 134: Which document must an investment adviser mandatorily provide to a new client BEFORE rendering any investment advice?

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

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

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

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 136: 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
Claiming at full retirement age
Delaying until age 70 to maximize monthly benefit (Correct answer)
Claiming at age 62 to maximize years of payment

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 137: 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:

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

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

7 years
5 years (Correct answer)
3 years
10 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 139: The 'sequence of returns risk' is most significant for:

Retired clients in the distribution phase who are withdrawing assets (Correct answer)
Young investors in the accumulation phase
Clients holding only bond funds
Investors in tax-deferred accounts only

Correct answer: Retired clients in the distribution phase who are withdrawing assets

Sequence of returns risk is greatest for retirees who are drawing down assets — poor early returns combined with withdrawals can permanently deplete a portfolio.

Question 140: Which of the following scenarios describes 'sequence of returns risk' for a retiree?

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

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 141: What is 'front-running' in the context of investment adviser ethics?

Trading in a security before executing a known client order that will affect the price (Correct answer)
Executing client orders before large institutional trades
Buying IPO shares for clients first
Placing stop-loss orders ahead of a market downturn

Correct answer: Trading in a security before executing a known client order that will affect the price

Front-running is the illegal practice of an adviser trading in a security for their own account before executing a client's pending order that will move the price.

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

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