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NASAA Series 66 Uniform Combined State Law Exam

1. Economic Factors and Business Information: practice questions

Our Series 66 bank has 24 questions on this topic. Here are 5 of them with answers; the full mock exam draws from every topic, like the real one.

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Question 1

A portfolio manager's alpha is best described as:

  1. The correlation between the portfolio and its benchmark
  2. The portfolio's volatility relative to the market
  3. Return above what was expected for the risk taken
  4. The return of the benchmark index
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C. Return above what was expected for the risk taken — Alpha is excess return relative to the return predicted for the portfolio's level of risk (e.g., by CAPM). Positive alpha suggests value added by the manager.

Question 2

The Sharpe ratio measures:

  1. The fund's expense ratio relative to its peers
  2. Excess return per unit of systematic risk only
  3. Excess return per unit of total risk
  4. Return relative to the S&P 500
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C. Excess return per unit of total risk — Sharpe divides return above the risk-free rate by standard deviation (total risk). The Treynor ratio uses beta (systematic risk) instead.

Question 3

Which statistic measures how widely returns are spread around their average?

  1. Correlation coefficient
  2. Standard deviation
  3. Median
  4. Beta
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B. Standard deviation — Standard deviation measures total volatility around the mean. Beta measures sensitivity to the market; correlation measures how two series move together.

Question 4

Compared with the market average, a stock with a much higher P/E ratio is most likely:

  1. A growth stock investors expect to raise earnings quickly
  2. A defensive utility stock
  3. Undervalued relative to its earnings and likely to be a bargain
  4. A company with no earnings at all
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A. A growth stock investors expect to raise earnings quickly — Investors pay a high multiple of current earnings when they expect fast earnings growth. A company with no earnings has no meaningful P/E.

Question 5

A stock's price is $30 and its book value per share is $20. Its price-to-book ratio is:

  1. 10
  2. 600
  3. 0.67
  4. 1.5
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D. 1.5 — P/B = market price per share / book value per share = 30 / 20 = 1.5. Value investors often look for low price-to-book stocks.

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