Free Series 65 Exam Flashcards

The total market value of all final goods and services produced within a country during a specific period. The primary measure of economic output. Rising GDP indicates economic growth; two consecutive quarters of negative GDP growth indicates a recession.

The recurring pattern of expansion and contraction in economic activity. Four phases: Expansion (rising GDP, employment), Peak (highest point), Contraction/Recession (declining GDP), Trough (lowest point). Understanding cycles helps with investment timing.

A measure of inflation that tracks the average change in prices paid by urban consumers for a fixed basket of goods and services. The most widely used inflation indicator. A rising CPI means purchasing power is declining.

The interest rate banks charge each other for overnight loans of reserves held at the Federal Reserve. The primary tool the Fed uses to implement monetary policy. Lower rates stimulate the economy; higher rates slow it down.

A graph showing the relationship between bond yields and maturities. Normal curve: upward sloping (long-term rates higher). Inverted curve: downward sloping (short-term rates higher)—often a recession predictor. Flat curve: similar rates across maturities.

Actions by the Federal Reserve to control money supply and interest rates. Expansionary policy: lower rates, buy securities (stimulates economy). Contractionary policy: raise rates, sell securities (slows inflation). Key tools: open market operations, discount rate, reserve requirements.

A negotiable certificate representing shares of a foreign company trading on U.S. exchanges in U.S. dollars. Allows U.S. investors to invest in foreign companies without dealing with foreign exchanges or currencies. Subject to currency risk.

A company that owns, operates, or finances income-producing real estate. Must distribute at least 90% of taxable income to shareholders as dividends. Provides real estate exposure with stock-like liquidity. Dividends taxed as ordinary income.

A pooled investment with a fixed, unmanaged portfolio of securities that terminates on a specific date. No active management—securities are purchased and held until termination. Investors receive pro-rata distributions and redemption proceeds.

A private investment partnership using advanced strategies (leverage, short-selling, derivatives) seeking absolute returns. Only available to accredited investors. Less regulated than mutual funds. Typically charges 2% management fee plus 20% of profits.

An insurance product where returns vary based on the performance of underlying subaccounts (similar to mutual funds). Tax-deferred growth, but withdrawals taxed as ordinary income. Subject to securities regulation. 10% penalty for withdrawals before 59½.

A bond sold at a deep discount that pays no periodic interest. The return is the difference between the purchase price and face value at maturity. Despite no cash interest payments, the imputed interest is taxable annually (phantom income).

A corporate bond that can be converted into a predetermined number of common shares. Offers fixed income plus equity upside potential. Typically pays lower interest than non-convertible bonds due to the conversion feature.

Investment framework developed by Harry Markowitz emphasizing diversification. Key concept: an efficient portfolio maximizes expected return for a given level of risk. Combines assets with low correlation to reduce overall portfolio risk without sacrificing returns.

The strategy of dividing investments among different asset classes (stocks, bonds, cash, alternatives) based on goals, risk tolerance, and time horizon. Studies show asset allocation determines approximately 90% of portfolio return variability.

A long-term approach establishing fixed target percentages for each asset class, rebalancing periodically to maintain targets. Based on investor's long-term goals and risk tolerance. Disciplined, passive approach.

A more active approach that temporarily deviates from strategic targets to capitalize on short-term market opportunities. Attempts to add value through market timing. More expensive and tax-inefficient than strategic allocation.

Investing a fixed dollar amount at regular intervals regardless of share price. Results in buying more shares when prices are low and fewer when high. Reduces timing risk and average cost per share over time.

Periodically adjusting portfolio holdings back to target allocations. Typically done annually or when allocations drift beyond a threshold (e.g., 5%). Forces disciplined selling of winners and buying of laggards—a contrarian approach.

A written document establishing investment objectives, constraints, and guidelines for managing a client's portfolio. Includes: return objectives, risk tolerance, time horizon, liquidity needs, tax considerations, legal constraints, and unique circumstances.

A client's willingness and ability to accept investment volatility and potential losses. Influenced by: personality, investment knowledge, time horizon, financial situation, and investment goals. Must assess both emotional and financial capacity for risk.

The expected length of time until an investor needs access to invested funds. Longer horizons allow more equity exposure (more time to recover from volatility). Short horizons require more conservative, liquid investments.

The requirement for quick access to cash without significant loss of value. Investors with high liquidity needs should hold more in money markets, short-term bonds, and liquid securities. Emergency funds typically 3-6 months of expenses.

An individual with net worth exceeding $1 million (excluding primary residence) OR annual income over $200,000 ($300,000 with spouse) for the past two years. Can invest in private placements, hedge funds, and other restricted offerings.

A statistical measure of investment volatility showing how much returns deviate from the average. Higher standard deviation = more risk. Approximately 68% of returns fall within 1 standard deviation of the mean; 95% within 2 standard deviations.

A measure of systematic (market) risk showing how volatile a security is relative to the overall market. Market beta = 1.0. Beta > 1 = more volatile than market. Beta < 1 = less volatile. Used in CAPM to calculate expected returns.

The excess return of an investment relative to a benchmark, measuring manager skill. Positive alpha = outperformance after adjusting for risk. Negative alpha = underperformance. Active managers seek to generate alpha.

A risk-adjusted return measure. Formula: (Portfolio Return - Risk-Free Rate) / Standard Deviation. Higher Sharpe ratios indicate better risk-adjusted performance. Useful for comparing portfolios with different risk levels.

A model calculating expected return based on systematic risk. Formula: Expected Return = Risk-Free Rate + Beta(Market Return - Risk-Free Rate). Only systematic (market) risk is rewarded; diversifiable risk is not compensated.

A bond's annual interest payment divided by its current market price. Formula: Annual Coupon / Market Price. Does not account for capital gains or losses. Higher than coupon rate if bond trades at discount; lower if at premium.

The total return anticipated if a bond is held until maturity, accounting for coupon payments, current price, face value, and time to maturity. The most comprehensive yield measure. Assumes all coupons reinvested at the YTM rate.

A measure of a bond's price sensitivity to interest rate changes, expressed in years. Higher duration = greater price volatility. Zero-coupon bonds have duration equal to maturity. Duration increases as coupon rate or yield decreases.

Market-wide risk that cannot be eliminated through diversification. Caused by factors affecting all securities: interest rates, inflation, recessions, political events, pandemics. Measured by beta. Investors are compensated for bearing this risk.

Company or industry-specific risk that CAN be eliminated through diversification. Also called diversifiable, specific, or idiosyncratic risk. Examples: management changes, product recalls, labor strikes. No compensation for bearing this risk.

The risk that inflation will erode the real value of investment returns. Fixed-income investments are most vulnerable. TIPS (Treasury Inflation-Protected Securities) and equities offer some inflation protection.

The risk of being unable to sell an investment quickly at a fair price. Affects thinly traded securities, real estate, private placements, and some bonds. Wide bid-ask spreads indicate liquidity risk.

The risk that changes in exchange rates will reduce the value of foreign investments when converted back to domestic currency. Affects ADRs, international funds, and foreign bonds. Can be hedged using currency derivatives.

Federal law requiring persons or firms receiving compensation for advising others about securities to register with the SEC (if AUM exceeds $110 million) or state regulators. Establishes fiduciary duty, disclosure requirements, and anti-fraud provisions.

An individual who makes recommendations, manages accounts, or solicits advisory services on behalf of an investment adviser. Must pass Series 65 (or Series 66 + SIE/Series 7) and register with state securities authorities.

The registration and disclosure document required for investment advisers. Part 1: firm information filed with regulators. Part 2A (Brochure): plain-English disclosure about services, fees, conflicts delivered to clients. Part 2B: information about advisory personnel.

A model state securities law adopted in various forms by all 50 states. Regulates state registration of securities, broker-dealers, agents, investment advisers, and IARs. Provides anti-fraud provisions at the state level.

An exemption allowing an adviser to have a limited number of clients in a state without registering there. Federal advisers: unlimited clients in states without a place of business. State advisers: typically 5 or fewer clients in 12 months without place of business.

The highest standard of care in law. Investment advisers must act in clients' BEST INTERESTS, placing client interests ahead of their own. Includes duties of loyalty (avoid conflicts) and care (act with competence and diligence).

A fiduciary obligation requiring advisers to act in the client's best interest. Must disclose and manage conflicts of interest, not use client assets for personal benefit, and seek best execution for client transactions.

A fiduciary obligation requiring advisers to act with the care, competence, and diligence expected of a prudent professional. Includes: making suitable recommendations, monitoring portfolios, and providing advice aligned with client objectives.

SEC rule requiring investment advisers to deliver Form ADV Part 2A (brochure) to clients. Must be delivered: before or at advisory contract signing, and annually offer updated brochures. Contains fees, services, conflicts, and disciplinary history.

SEC rule governing when advisers have custody of client assets. If adviser has custody: must use qualified custodian, provide account statements quarterly, and undergo annual surprise examination by independent accountant.

The prohibited practice of mixing client funds with the adviser's own money. Client assets must be held separately at a qualified custodian. Violation of custody rules and fiduciary duty.

Trading ahead of a client's order to profit from anticipated price movement. Example: buying stock before executing a large client buy order that will drive up the price. A serious violation of fiduciary duty and securities laws.

Using client brokerage commissions to pay for research and other services. Must benefit clients and be disclosed in Form ADV. Allowed for research under safe harbor (Section 28(e)) but must not compromise best execution.