Series 66 Economic Factors and Business Information Practice Questions
Question 1
A portfolio has an expected annual return of 8% and a standard deviation of 12%. Assuming returns are normally distributed, in approximately what percentage of years should the portfolio's return be expected to fall between -4% and 20%?
- A. 68%
- B. 95%
- C. 50%
- D. 34%
Show answer and explanation
Correct answer: A. 68%
-4% to 20% is exactly one standard deviation below and above the 8% mean (8 - 12 = -4; 8 + 12 = 20). Under a normal distribution, approximately 68% of outcomes fall within one standard deviation of the mean. 95% corresponds to two standard deviations, which this range is not.
- A. Correct: -4% to 20% is exactly the mean (8%) plus or minus one standard deviation (12%), and under a normal distribution about 68% of outcomes fall within ±1 standard deviation.
- B. 95% corresponds to a ±2 standard deviation range (-16% to 32%), not the ±1 standard deviation range asked about here.
- C. 50% simply splits the distribution at the mean and doesn't reflect the specific ±1 standard deviation range given.
- D. 34% represents only half of the one-standard-deviation range (mean to +1 SD), not the full range from -4% to 20%.
Question 2
A research service consistently generates excess returns using only historical trading volume and price patterns. If verified after costs, which efficient-market form would this most directly challenge?
- A. The definition of systemic risk in banking
- B. Weak-form efficiency, based on past prices and volume
- C. Strong-form efficiency, which covers private information
- D. Semistrong efficiency, but not weak-form efficiency
Show answer and explanation
Correct answer: B. Weak-form efficiency, based on past prices and volume
Weak-form efficiency says past prices and trading volume are already reflected in prices, so technical analysis should not earn excess returns. Consistent after-cost excess returns from such data challenge it most directly.
- A. Systemic risk is unrelated to the informational efficiency of prices.
- B. Using only past price and volume patterns tests the weak form directly.
- C. The strong form concerns private information; this strategy uses only public price history.
- D. Semistrong efficiency covers public information; the test here targets the weak form, which is the more basic level.
Question 3
ABC Corporation reports current assets of $600,000 and current liabilities of $200,000 on its balance sheet. What is ABC's current ratio?
- A. 2:1
- B. 3:1
- C. 0.33:1
- D. 1:3
Show answer and explanation
Correct answer: B. 3:1
The current ratio is calculated as current assets divided by current liabilities: $600,000 divided by $200,000 equals 3, or 3:1. This ratio measures a company's ability to cover its short-term obligations with its short-term assets — a ratio above 1:1 generally indicates the company has more current assets than current liabilities.
- A. 2:1 doesn't match the correct division of $600,000 by $200,000.
- B. Correct: current ratio = current assets ÷ current liabilities = $600,000 ÷ $200,000 = 3:1.
- C. 0.33:1 inverts the calculation — that's current liabilities divided by current assets, not the current ratio.
- D. 1:3 also inverts the ratio and doesn't match dividing $600,000 by $200,000.
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An investment produced a nominal return of 9% over the past year, during which inflation (CPI) rose 3%. Using the approximation method tested on the exam, what was the investor's approximate real rate of return?
- A. 12%
- B. 9%
- C. 6%
- D. 3%
Show answer and explanation
Correct answer: C. 6%
The approximate real rate of return equals the nominal return minus the inflation rate: 9% - 3% = 6%. Choice D (12%) results from adding inflation instead of subtracting it, which overstates purchasing-power gains.
- A. Incorrect — 12% would result from adding inflation rather than subtracting it, the opposite of the correct approximation.
- B. Incorrect — 9% is the nominal return before adjusting for inflation; it overstates the real return.
- C. Correct — using the simple approximation, real return ≈ nominal return minus inflation = 9% − 3% = 6%.
- D. Incorrect — 3% is simply the inflation rate, not the real return.