Series 65 Portfolio Management Practice Questions

Correct answer: B. Time-weighted return, using subperiod linking around material cash flows.

Time-weighted return links subperiod returns and so removes the effect of the timing and size of external cash flows, isolating manager performance. Money-weighted return reflects the investor's own experience.

• AA. Wrong. Money-weighted return is the IRR of the account, so it gives more weight to the periods when the most money was invested. A large deposit just before a decline drags it down, which is why it reflects client cash-flow timing and does not isolate the manager.
• BB. Correct: time-weighted return neutralizes external cash flow timing.
• CC. A change in dollar balance mixes deposits, withdrawals and investment results.
• DD. Wrong. Dividing the total dollar gain by the ending balance ignores when deposits arrived and how large they were. It blends client cash-flow decisions with investment results and is not comparable to a composite return.

• Source: Exam outline: NASAA Series 65 Test Specifications (June 2023), accessed October 2026

Correct answer: D. -1.0

Correlation coefficients range from −1.0 to +1.0. A correlation near −1.0 (perfect negative correlation) means the two assets tend to move in opposite directions, so combining them can substantially reduce overall portfolio volatility for a given level of expected return. The maximum diversification benefit. A correlation near +1.0 means the assets move together and provide little to no diversification benefit; 0 (no correlation) still offers some benefit but less than a strongly negative correlation.

• AA. Incorrect. +1.0 correlation means the assets move perfectly together, providing no diversification benefit.
• BB. Incorrect. +0.5 is still positively correlated and offers only modest diversification benefit, not the greatest.
• CC. Incorrect. 0 correlation offers some diversification benefit but not as much as perfect negative correlation.
• DD. Correct. A correlation coefficient near −1.0 provides the maximum diversification benefit, since the assets tend to move in opposite directions.

• Source: Exam outline: NASAA Series 65 Test Specifications (June 2023), accessed October 2026

Correct answer: B. Systematic (market-related) risk is greater than the market's, tending to move about 1.6% for every 1% market move, but this says nothing about the stock's unsystematic risk

Beta measures sensitivity to systematic (market/non-diversifiable) risk only. A beta of 1.6 suggests the stock tends to move about 1.6% for every 1% market move, but says nothing about total risk, which also includes unsystematic risk captured by standard deviation, not beta. A and C wrongly equate beta with total risk/standard deviation; D wrongly treats beta as a guarantee of realized return.

• AA. Beta measures only systematic risk, not total risk; it says nothing about company-specific risk.
• BB. Correct. Beta of 1.6 means the stock's systematic risk is 60% greater than the market's, tending to move about 1.6% for each 1% market move, but beta is silent on unsystematic, company-specific risk.
• CC. Beta and standard deviation are not interchangeable; standard deviation also reflects unsystematic risk, so beta is not a direct measure of total volatility.
• DD. Beta describes historical sensitivity to market moves, not a proportional return in every market; it does not predict realized return.

• Source: Exam outline: NASAA Series 65 Test Specifications (June 2023), accessed October 2026

Correct answer: D. 26.0%.

Subperiod returns are 120/100 - 1 = 20% and 231/220 - 1 = 5%. Linked: 1.20 x 1.05 - 1 = 26%. Time weighting removes the effect of the client's deposit.

• AA. This is not the linked return; the subperiods must be compounded, not averaged or otherwise approximated.
• BB. This treats the whole ending balance less total money in as gain relative to the starting balance, mixing in the deposit.
• CC. This is only the second-half return; the first-half 20% must also be linked.
• DD. Linking 20% and 5% gives 1.20 x 1.05 - 1 = 26%.

• Source: Exam outline: NASAA Series 65 Test Specifications (June 2023), accessed October 2026

Correct answer: C. Strategic asset allocation

Strategic asset allocation sets a long-term target mix based on the investor's goals, time horizon, and risk tolerance, with rebalancing back to that fixed target over time. Tactical asset allocation permits short-term deviations from the target to exploit perceived market opportunities.

• AA. Tactical asset allocation involves short-term deviations from a target mix to exploit perceived opportunities, not maintaining a fixed long-term target.
• BB. Market timing involves shifting in and out of markets based on predictions, which contradicts maintaining and rebalancing to a fixed target.
• CC. Correct. Setting a long-term target mix based on goals, time horizon, and risk tolerance, then periodically rebalancing back to that target, describes strategic asset allocation.
• DD. Sector rotation shifts holdings among industry sectors based on economic cycles, rather than rebalancing to one static overall target mix.

• Source: Exam outline: NASAA Series 65 Test Specifications (June 2023), accessed October 2026

Correct answer: A. Correlation is positive and can rise under stress, so joint losses remain possible

A correlation of 0.6 is positive, so the funds tend to move together, and correlations often rise in market stress. Diversification reduces but does not remove the chance of simultaneous losses.

• AA. Positive and unstable correlation means both funds can fall together, so diversification is imperfect.
• BB. A correlation below 1 reduces risk but does not remove downside risk.
• CC. Foreign domicile does not produce negative correlation; here the measured correlation is positive.
• DD. Correlations change over time, so past figures are an imperfect guide.

• Source: Exam outline: NASAA Series 65 Test Specifications (June 2023), accessed October 2026

Correct answer: B. Value investing

Value investing targets securities that appear underpriced relative to fundamentals, commonly identified by low P/E and P/B ratios, on the belief the market will eventually recognize their true worth. Growth investing instead targets companies with above-average earnings growth potential, often at higher valuations.

• AA. Growth investing targets companies with above-average earnings/revenue growth prospects, typically at higher valuation multiples, the opposite of the low-ratio approach described.
• BB. Buying stocks with low P/E and P/B ratios relative to fundamentals, on the belief the market will eventually recognize their true worth, is the classic definition of value investing. The correct answer.
• CC. GARP blends growth and value criteria (seeking growth at a reasonable price), which isn't the pure low-multiple approach described here.
• DD. Momentum investing chases stocks with strong recent price trends, unrelated to valuation multiples like P/E and P/B.

• Source: Exam outline: NASAA Series 65 Test Specifications (June 2023), accessed October 2026

Correct answer: B. -2.6%

Approximate % price change ≈ −Duration × Δyield = −6.5 × 0.40% = −2.6%. Bond prices move inversely to interest rates, so a rate increase produces an estimated 2.6% decline in value. A has the correct magnitude but wrong sign; C mistakenly uses duration itself as the answer without multiplying by the yield change; D just restates the yield change without applying duration.

• AA. The sign is wrong: bond prices fall, not rise, when interest rates rise.
• BB. Approximate % price change ≈ −duration × change in yield = −6.5 × 0.40% = −2.6%, reflecting the inverse relationship between rates and bond prices.
• CC. This uses the duration figure itself as the percentage change rather than multiplying it by the actual rate change.
• DD. This is just the raw basis-point change in rates, not the duration-scaled price impact.

• Source: Exam outline: NASAA Series 65 Test Specifications (June 2023), accessed October 2026