S65 · Series 65: Uniform Investment Adviser Law Exam·UnitS65 · Unit 03Access: Premium
Module 3: Client Investment Recommendations and Strategies
Prepare for Module 3: Client Investment Recommendations and Strategies with practice questions covering 11 topics. Part of Series 65: Uniform Investment Adviser Law Exam — build your knowledge and track your progress with GoFINRA.
What’s in it.
11 topics- Topic 01
Types of Clients
133 questions - Topic 02
Client/Customer Profiles
102 questions - Topic 03
Capital Market Theory
125 questions - Topic 04
Portfolio Management Strategies
98 questions - Topic 05
Tax Considerations
85 questions - Topic 06
Retirement Plans
99 questions - Topic 07
ERISA Issues
100 questions - Topic 08
Special Account Types
94 questions - Topic 09
Ownership and Estate Planning Techniques
103 questions - Topic 10
Trading Securities
134 questions - Topic 11
Measuring Portfolio Performance
102 questions
Sample questions
3 of manyA few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.
What is a Section 529 college savings plan?
- A federal grant programme that provides matching funds to families who save a specified percentage of their income for college
- A Section 529 plan is another name for a Coverdell ESA; both terms refer to the same type of account under federal law
- A state-sponsored, tax-advantaged account for education savings where contributions grow tax-free and qualified distributions are tax-freeCorrect answer
- A trust account established by states to purchase US Treasury bonds earmarked specifically for college tuition payments
ExplanationA Section 529 plan (named for IRC Section 529) is a state-sponsored, tax-advantaged savings vehicle for education. Key features: contributions are after-tax (not federally deductible), earnings grow tax-free, and distributions for qualified expenses are tax-free. Plans are typically sponsored by individual states (e.g., New York 529 Direct Plan) but can be used at qualified institutions nationwide. Many states offer state income tax deductions for in-state plan contributions. There are no income limits on contributions, and contribution amounts can be substantial.
When is the CML appropriate and when does it not apply?
- The CML applies only to fully diversified efficient portfolios; it does not apply to individual securities or undiversified portfoliosCorrect answer
- The CML applies only in bull markets when standard deviation is compressed
- The CML applies to portfolios holding more than 30 securities
- The CML applies to any security as long as beta is known
ExplanationThe CML is the line connecting the risk-free asset to the market portfolio. It applies only to efficient, fully diversified portfolios on the efficient frontier. Individual securities and undiversified portfolios retain unsystematic risk, so they plot below the CML and cannot be validly evaluated using it.
Why might a high-income client still have low risk capacity?
- Risk capacity is generally proportional to income; high-income clients generally have high risk capacity
- Because risk capacity depends on net worth, debt levels, liquidity needs, and financial obligations — high income does not guarantee the ability to absorb investment lossesCorrect answer
- A high-income client generally has high risk capacity because they can rebuild losses through future earnings
- A high-income client has low risk capacity only if they are also self-employed
ExplanationRisk capacity is the objective financial ability to absorb losses without impairing goals or standard of living. A high-income client may still have low risk capacity if: they have significant debt obligations (mortgages, student loans); they have high fixed expenses that leave little discretionary saving; they have concentrated obligations (dependants, business risks); or they have little savings relative to their income. Income alone does not determine risk capacity — the full balance sheet and cash flow picture must be assessed.