Series 66 — FINRA practice for the NASAA Uniform Combined State Law Exam

Which of the following is classified as a LAGGING economic indicator?

1. Average duration of unemployment among unemployed workers
2. New building permits issued for private housing units
3. Average weekly hours worked in manufacturing industries
4. The spread between long-term and short-term Treasury yields

Answer: A — Average duration of unemployment among unemployed workers

A) Correct — average duration of unemployment lags the cycle. B) Leading indicator. C) Leading indicator. D) Leading indicator (yield spread).

A flat yield curve, where short- and long-term yields converge, is BEST interpreted as signaling:

1. A rapid economic expansion with substantial near-term investor gains
2. A likely transition point where the economic outlook is uncertain
3. A confirmed recession that has already begun across all sectors
4. No relationship at all between economic activity and interest rates

Answer: B — A likely transition point where the economic outlook is uncertain

A) More consistent with a steep, normal curve. B) Correct — flat curves often mark a transition point. C) 'Confirmed' overstates the signal — it's not a confirmed recession. D) Yield curve shape does relate to growth expectations.

Which of the following is NOT one of the four components in the expenditure approach to calculating GDP?

1. Personal consumption expenditures by households on goods and services
2. Gross private domestic investment including business and residential spending
3. Corporate retained earnings held by publicly traded companies each year
4. Net exports, calculated as the value of exports minus imports

Answer: C — Corporate retained earnings held by publicly traded companies each year

A) Real component (C). B) Real component (I). C) Correct — retained earnings isn't a GDP expenditure component. D) Real component (NX); government spending (G) is the fourth.

The Consumer Price Index (CPI) is best described as which of the following measures?

1. Change in aggregate wage rates paid to nonfarm workers on private payrolls
2. Change in gross domestic product produced by consumer-facing industries only
3. Change in wholesale prices charged by producers to their downstream customers
4. Change in average prices of a fixed basket of consumer goods and services

Answer: D — Change in average prices of a fixed basket of consumer goods and services

A) That's average hourly earnings. B) That's GDP components, not CPI. C) That's PPI. D) Correct — CPI is a consumer-basket price index.

Fiscal policy — as distinguished from monetary policy — is implemented primarily through which of the following actions?

1. Setting the federal funds target range through periodic FOMC policy decisions
2. Changing the reserve requirements applied to depository institution liabilities
3. Buying or selling Treasury securities in the secondary market to move reserves
4. Adjusting federal taxation and spending levels enacted by Congress and Treasury

Answer: D — Adjusting federal taxation and spending levels enacted by Congress and Treasury

A) Monetary. B) Monetary (Fed Board). C) Monetary (OMO). D) Correct — fiscal is Congress + Treasury.

A key risk of private equity investing that distinguishes it from publicly traded equity is:

1. Daily mark-to-market pricing that creates excessive short-term volatility
2. Illiquidity, since capital is typically locked up for years with limited exit options
3. Mandatory quarterly dividend distributions required under private fund rules
4. Guaranteed capital preservation due to the limited partnership structure

Answer: B — Illiquidity, since capital is typically locked up for years with limited exit options

A) Private equity lacks daily mark-to-market pricing — the opposite issue. B) Correct — long lockups and limited secondary markets are defining risks. C) No such mandatory distribution rule exists. D) No capital preservation guarantee exists.

An Exchange-Traded Note (ETN) is best characterized as which of the following instruments?

1. Series of derivative contracts settled daily through a central clearing counterparty
2. Equity ownership in a portfolio of stocks held by a registered investment company
3. Pass-through certificate representing an undivided interest in real estate assets
4. Unsecured debt of an issuing bank whose return tracks a specified reference index

Answer: D — Unsecured debt of an issuing bank whose return tracks a specified reference index

A) That's futures/swaps. B) That's an ETF/mutual fund. C) That's a REIT. D) Correct — ETN = senior unsecured note of a bank.

The characteristic that distinguishes preferred stock from common stock is that preferred typically:

1. Carries no dividend but a share in unlimited earnings growth of the issuer over time
2. Carries voting rights on all matters submitted to the shareholders for a formal vote
3. Carries a fixed dividend rate and priority over common stock in liquidation payouts
4. Carries a junior claim below common stock in the event of the issuer's liquidation

Answer: C — Carries a fixed dividend rate and priority over common stock in liquidation payouts

A) That's common. B) Preferred usually lacks voting. C) Correct. D) Reverses the priority.

A hedge fund's 'lockup period' refers to:

1. The time a fund manager must wait before charging a performance fee
2. The interval between a fund's initial offering and its first NAV calculation
3. A minimum holding period during which investors cannot redeem their investment
4. A regulatory waiting period before the fund may begin trading securities

Answer: C — A minimum holding period during which investors cannot redeem their investment

A) Not related to performance fee timing. C) Correct — lockups restrict early redemption by investors. B) Not what a lockup period means. D) Not a regulatory trading restriction.

A zero-coupon Treasury bond compared to a coupon Treasury with the same maturity typically exhibits:

1. Equivalent duration because both securities share the same stated final maturity date
2. Lower duration and therefore lower price sensitivity to changes in market yields
3. Higher duration and therefore greater price sensitivity to changes in market yields
4. Zero duration because there are no interim coupon payments to weight in the calculation

Answer: C — Higher duration and therefore greater price sensitivity to changes in market yields

A) Coupons reduce duration. B) Reverses. C) Correct — zeros have duration equal to maturity, the maximum. D) Duration is not zero; it equals maturity for a zero-coupon.

A retiree needing steady income, low volatility, AND inflation protection over 20 years should generally receive which allocation approach?

1. 100% laddered investment-grade bond portfolio with no equity or inflation-linked component
2. 100% money market fund to eliminate volatility and preserve principal for daily needs
3. Diversified mix of investment-grade bonds, TIPS, and dividend-paying equities
4. 100% growth equity portfolio to maximize long-term real return over the horizon

Answer: C — Diversified mix of investment-grade bonds, TIPS, and dividend-paying equities

A) Half-right — no inflation protection or equity. B) Cash loses to inflation. C) Correct — hits all three goals. D) Too much volatility for a retiree.

The Capital Asset Pricing Model's expected return formula is expressed as:

1. Expected return equals the market return divided by the security's beta coefficient value
2. Expected return equals the risk-free rate multiplied by the security's beta coefficient
3. Expected return equals beta times the market return minus the standard deviation value
4. Expected return equals risk-free rate plus beta times the equity risk premium value

Answer: D — Expected return equals risk-free rate plus beta times the equity risk premium value

A) Wrong. B) Wrong operation. C) Wrong. D) Correct — E(R) = Rf + β(Rm − Rf).

The Capital Market Line (CML) is best described as:

1. Curve traced by the efficient frontier of all-risky-asset portfolios in mean-variance space
2. Straight line connecting individual stock expected returns as a function of each stock's beta
3. Straight line from the risk-free rate tangent to the efficient frontier at the market portfolio
4. Line showing the total return of the aggregate stock market over the historical measurement period

Answer: C — Straight line from the risk-free rate tangent to the efficient frontier at the market portfolio

A) Efficient frontier is a curve, not the CML. B) That's the Security Market Line. C) Correct. D) Not the CML.

When a client's stated risk tolerance is HIGH but risk capacity is LOW, the adviser should generally construct a portfolio that:

1. Reflects the stated tolerance because the client has expressed clear willingness to bear risk
2. Averages tolerance and capacity to split the difference between the client's inputs
3. Reflects the lower of tolerance and capacity because both must align for suitability
4. Reflects the higher of tolerance and capacity to maximize the client's long-run outcome

Answer: C — Reflects the lower of tolerance and capacity because both must align for suitability

A) Ignoring capacity is unsuitable. B) Averaging can still leave the client over-exposed. C) Correct — binding constraint is the lower. D) Reversed.

The Treynor ratio differs from the Sharpe ratio in that Treynor uses which measure in the denominator?

1. Total portfolio standard deviation to capture both systematic and unsystematic risk
2. Tracking error against a benchmark index to capture active management risk taken
3. Portfolio beta to capture only systematic (nondiversifiable) risk of the portfolio
4. Downside deviation to capture only losses below the risk-free rate minimum threshold

Answer: C — Portfolio beta to capture only systematic (nondiversifiable) risk of the portfolio

A) That's Sharpe. B) That's information ratio. C) Correct — Treynor uses beta. D) That's Sortino.

Custody under Investment Advisers Act Rule 206(4)-2 is generally deemed to exist when the adviser has:

1. Direct or indirect access to client funds or securities, including the ability to deduct fees
2. A written advisory contract that provides for discretionary management of client accounts
3. Any relationship with the client's qualified custodian involving joint bank references
4. The right to exercise investment discretion over securities held at a qualified custodian

Answer: A — Direct or indirect access to client funds or securities, including the ability to deduct fees

A) Correct — custody = access. B) Discretion alone isn't custody. C) Wrong. D) Discretion without access ≠ custody.

A broker-dealer's obligation to maintain books and records such as order tickets, trade blotters, and customer account records exists primarily to:

1. Provide regulators and the firm with an accurate, auditable record of customer activity
2. Allow the firm to calculate its annual bonus pool for registered representatives
3. Satisfy a purely voluntary industry best practice with no regulatory requirement
4. Replace the need for any customer account statements to be sent periodically

Answer: A — Provide regulators and the firm with an accurate, auditable record of customer activity

A) Correct — recordkeeping supports regulatory oversight and an accurate audit trail. B) Not the purpose of recordkeeping rules. C) Recordkeeping is a mandatory requirement, not voluntary. D) Statements are a separate, additional obligation, not replaced by recordkeeping.

An investment adviser may charge a performance-based fee to a retail client only if the client qualifies as a 'qualified client,' which generally requires:

1. At least $1.1 million in assets under management with the adviser or $2.2 million net worth
2. A minimum of $50,000 in assets under management with no net worth requirement
3. Institutional status only, since no individual client may ever pay a performance fee
4. A signed waiver of fiduciary duty protections filed with the state Administrator

Answer: A — At least $1.1 million in assets under management with the adviser or $2.2 million net worth

A) Correct — the current qualified-client thresholds, subject to periodic inflation adjustment. B) Understates the required threshold substantially. C) Individual clients CAN pay performance fees if they qualify. D) No such fiduciary-duty waiver mechanism exists.

Under the SEC's Marketing Rule (Rule 206(4)-1), an investment adviser using a client testimonial in its advertising must:

1. Never use testimonials under any circumstance, since they remain absolutely prohibited
2. Provide required disclosures about compensation and the relationship, and maintain related records
3. Obtain testimonials only from clients who have never paid a fee to the adviser
4. Publish testimonials solely on the adviser's own website with no other distribution

Answer: B — Provide required disclosures about compensation and the relationship, and maintain related records

A) The prior blanket prohibition was replaced; testimonials are now conditionally permitted. B) Correct — the Marketing Rule permits testimonials/endorsements with required disclosure, oversight, and recordkeeping. C) No such fee-history restriction applies to who may give a testimonial. D) There's no restriction limiting testimonials to the adviser's own website.

Which of the following is NOT considered a security under the Uniform Securities Act?

1. Certificate of interest in an oil, gas, or mineral title or lease held for profit
2. Variable annuity contract issued by an insurer registered under the 1940 Act
3. Pre-organization certificate or subscription issued before a corporation exists
4. Whole-life insurance contract issued by an insurer domiciled in the same state

Answer: D — Whole-life insurance contract issued by an insurer domiciled in the same state

A) O&G interests are included. B) Variable annuity IS a security. C) Pre-organization subscription is included. D) Correct — fixed/whole life is insurance, NOT a security.

What is tactical asset allocation?

Short-term active deviations from strategic targets to exploit perceived opportunities. Requires market-timing skill; higher costs.

Define 'churning' and the rule prohibiting it.

Excessive trading in a customer's account primarily to generate commissions. Violates suitability (FINRA 2111 quantitative prong) and USA Section 102 (fraud).

What is quantitative easing (QE)?

A Fed policy of large-scale asset purchases (Treasuries, MBS) to inject reserves and lower long-term rates when the fed funds rate is already near zero. Expands the Fed's balance sheet.

What is tax-loss harvesting?

Selling losing positions to realize capital losses for tax purposes; offsets gains and up to $3,000 of ordinary income annually. Beware the wash-sale rule.

What is correlation in portfolio context?

Statistical measure of co-movement between assets (-1 to +1). Lower correlation = better diversification benefit.

What is a money market mutual fund?

An open-end fund investing in short-term, high-quality debt (T-bills, commercial paper, CDs) seeking stability and liquidity. Not FDIC-insured; historically priced near a stable $1 NAV.