Series 66 Test

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Series 66 Study Guide

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The Series 66 test, also known as the Uniform Combined State Law Examination, is a challenging and comprehensive assessment for men and women looking to enter this rewarding and fast-paced field of financial management. This exam qualifies people to become investment adviser representatives and securities agents.

The exam consists of 110 multiple-choice questions, 10 of which do not contribute to the final score. These are pretest questions, used to develop future versions of the exam. The examination requires 150 minutes to complete.

Scores are made available immediately after the exam. To pass, candidates must answer at least 75 percent of the questions correctly.

The Series 66 test is divided into four general content areas:

  1. In the economic factors and business information content area (5 items, 5 percent of the test), questions address financial reporting, quantitative methods, and types of risk.
  2. The investment vehicle characteristics content area (15 items, 15 percent) covers the methods used to determine the value of fixed income, the types and characteristics of derivative securities, alternative investments, and insurance-based products.
  3. The content area on client investment recommendations and strategies (30 items, 30 percent) reviews issues that include types of clients, client profiles, capital market theory, portfolio management styles and strategies, portfolio management techniques, tax considerations, retirement plans, ERISA issues, special types of accounts, trading securities, and performance measures.

The laws, regulations, and guidelines content area of the Series 66 test, which includes prohibition on unethical business practices (50 items, 50 percent), covers state and federal securities acts and related rules and regulations as well as ethical practices and fiduciary obligations.

Series 66 Test Practice Questions

1. Which of the following is true regarding types of risks related to a client’s portfolio?

a. The level of unsystematic risk will decrease as more securities are added to the portfolio
b. The level of systematic risk will decline as more securities are added to the portfolio
c. Unsystematic risk can be measured by a portfolio’s beta
d. Default risk is an example of systematic risk

2. The Securities and Exchange Commission requires foreign private issuers to file which of the following forms annually?

a. 10-K
b. 11-K
c. 20-F
d. 20-K

3. Which statement regarding quick ratios and current ratios is true?

a. The current ratio measures a company’s long-term liquidity while a quick ratio measures a company’s short-term liability
b. A company’s quick ratio is a more conservative measurement than the current ratio
c. In general, it’s better for a company to have a lower quick ratio
d. A company with a current ratio under 1 is likely to receive an investment grade rating on a new bond issue

4. Which statement(s) regarding derivatives are true?

I. A derivative derives its value from the value of some underlying security
II. Derivatives provide investors with an opportunity for hedging
III. Derivatives provide investors with an opportunity for increased leveraging
IV. A convertible bond is an example of a derivative security

a. I only
b. I and IV only
c. I, II and III only
d. I, II, III, IV

5. A futures contract agreement specifies which of the following terms?

I. Place of delivery
II. Quality of the commodity
III. Unit Price
IV. Time of delivery

a. III only
b. II, III and IV only
c. I, III and IV only
d. I, II, III and IV

Answers

1. A: The level of unsystematic risk will decrease as more securities are added to the portfolio. Unsystematic risk is the risk associated with a specific security, such as a union strike to a car company. It can be decreased through diversification of one’s portfolio. As more securities are added, the portfolios unsystematic risk declines. Examples of unsystematic risk include financial risk, business risk, default risk, political risk, and country risk. Systematic risk, measured by beta, is the risk that comes with investing in the general market. Sources of systematic risk range from domestic interest rates to foreign wars. It’s also known as non-diversifiable risk because it can’t be avoided through diversifying a portfolio. Systematic risk includes interest rate risk, market risk, purchasing power risk, reinvestment risk and exchange rate risk.

2. C: 20-F. Securities and Exchange Commission (SEC) Form 20-F is used by private foreign issuers to report annually to the SEC, pursuant to Sections 13 or 15(d) of the Act. 20-F filers must submit their annual reports within six months of the end of their fiscal years. Form 10-K is for domestic companies’ annual reports, due within 60 days of the end of their fiscal years. Form 11-K is used by companies to report employee stock purchase, savings and similar plans. There is no SEC Form 20-K.

3. B: A company’s quick ratio is a more conservative measurement than the current ratio. While both the quick and current ratios measure a company’s short-term ability to meet debt obligations, the quick ratio is a more conservative measure because its formula excludes inventory from current assets. The quick ratio is calculated as: Current Assets – Inventories / Current liabilities. The current ratio does not subtract a company’s inventory from the numerator, thus expressing a less conservative ratio. The higher the ratio, the more liquidity in the company, which is generally preferred, thus a company with a ratio below 1 would be unlikely to receive an investment grade rating for a new bond issue.

4. D: I, II, III, IV A derivative derives its value from the value of an underlying investment, with a convertible bond being a prime example since it derives its value from the stock into which it is convertible. The most common types of derivatives are options, warrants, and futures. Benefits to investors include an opportunity for hedging and for additional leverage. However, derivatives can also create additional risk to investors because of such features.

5. D: I, II, III and IV. Futures are a type of derivative investment in which two parties agree to terms as outlined in a futures contract to make or take delivery of a certain commodity, of certain quality, at a future time, place and price. Thus, the contract will include all such details of the agreement. In each contract, there is only one buyer and one seller. Futures contracts trade on exchanges and are mostly written on commodities and financial assets.

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Last Updated: 04/12/2014

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