Your FREE Series 66 Flashcards 2026 – 200+ Cards

A fiduciary duty of full and fair disclosure — act in the client's best interest and disclose (and where possible eliminate) all material conflicts of interest.

The Uniform Securities Act (USA), the Investment Advisers Act of 1940, and NSMIA. Section IV is ~45% of the exam and the top failure-driver.

An Investment Adviser (IA) and a Broker-Dealer (BD) are firms (entities). An IAR and an agent are the natural persons who work for them.

You're an IA only if all three prongs are met: you give Advice on securities, you are in the Business of doing so, and you receive Compensation. Drop any prong and you're excluded.

Lawyers, Accountants, Teachers, and Engineers are excluded from IA status, but only while advice is incidental and not separately compensated. The exclusion vanishes if they charge a fee for the advice itself.

Suitability and the SEC's Regulation Best Interest (Reg BI), a best-interest standard at the point of recommendation. Reg BI is NOT the same as fiduciary duty.

No. Reg BI is a best-interest standard for BDs/agents at recommendation; fiduciary duty (IA/IAR) is broader, requiring ongoing full and fair disclosure of all conflicts.

An IAR is a natural person who registers with the state via Form U4. Agents (RRs) also register via Form U4 at the state level.

One or the other, never both for registration; AUM decides which. NSMIA split adviser oversight between the SEC and the states and created federal-covered securities.

90/100/110: SEC-eligible at $100M, mandatory SEC registration at $110M, and must drop to state registration only if AUM falls below $90M. The $100M-$110M band is the adviser's choice.

Mandatory SEC (federal-covered) registration is required once AUM reaches $110M. Between $100M and $110M, the adviser may choose SEC or state.

Only when AUM falls below $90M. The $90M floor gives a buffer so advisers near $100M don't bounce between regulators.

Yes — it files a notice filing and pays a fee in states where it does business. A trap answer says it owes the state nothing; the state keeps anti-fraud and notice-filing authority.

An IA/IAR is exempt from state registration if it has five or fewer retail clients in 12 months AND no place of business in that state. It applies to advisers only.

No. There is no de minimis for BDs or agents — even one retail client triggers registration. It is an adviser-only exemption.

A four-part test for a security: an investment of money in a common enterprise with an expectation of profit from the efforts of others. Per the 2023 outline it reaches digital assets/crypto.

Yes — variable annuities and variable life are securities (their value depends on a separate account). Fixed annuities and whole life are NOT securities.

No. Fixed annuities and whole life insurance are not securities. Only variable annuities and variable life qualify (Howey-style investment risk).

An exempt security is exempt because of WHAT IT IS; an exempt transaction is exempt because of HOW or BY WHOM it is sold. Decide the security first, then the transaction.

An exclusion means the law's definition was never met (e.g., a LATE professional). An exemption means the definition WAS met but registration is released. Swapping them is a common failure point.

No. Exempt never means exempt from fraud. The Administrator's anti-fraud authority applies to every security and transaction, registered or exempt.

US government/agency, municipal, bank/S&L, insurer, and nonprofit issues, money-market instruments, and commercial paper under 9 months / $50K+ / top-3 rated. Exempt because of what they are.

Isolated non-issuer trades, unsolicited customer orders, fiduciary/sheriff sales, and sales to institutional buyers. Exempt because of how or by whom they're sold.

A security preempted from state registration by NSMIA — e.g., exchange-listed securities, investment-company (mutual fund) shares, and Reg D Rule 506 offerings. States keep only anti-fraud and notice filing.

Yes — an unsolicited customer order is an exempt transaction (exempt by how/by whom it's sold, not by what the security is).

The Administrator may deny/suspend/revoke registrations, issue cease-and-desist orders without a prior hearing, and subpoena witnesses and records across state lines.

Lack of experience alone is NOT grounds to deny. However, lack of experience combined with other factors can support a denial.

At noon of the 30th day after filing. The exam interchanges this number, so memorize 'noon of the 30th day.'

A hearing must be granted within 15 days of a written request. A final order may then be appealed within 60 days.

60 days. (Compare: a hearing must be granted within 15 days of a written request.)

Max $5,000 fine and 3 years in prison, with a 5-year statute of limitations. Don't confuse the 3-year max sentence with the 5-year SOL.

Up to a $10,000 fine and 5 years in prison, with a 5-year statute of limitations. (USA is the lower $5,000 / 3 years.)

The sooner of three years from the sale/advice OR two years from discovery of the violation.

A violating firm offers to buy back the security plus interest. The client has 30 days to accept, or the right to rescission lapses.

A 'person' is any entity or individual EXCEPT a deceased individual, a minor, or someone declared mentally incompetent.

Written client consent on each individual trade. A principal transaction is the IA trading from its own account with a client; blanket consent is NOT allowed.

Blanket, prospective consent with disclosure is permitted. The IA arranges both sides of the trade. Don't let a stem use one blanket consent to cover principal trades.

An adviser uses client brokerage commissions to obtain research and brokerage services that benefit clients. Items like office furniture or rent are NOT permissible soft-dollar uses.

No. Section 28(e) soft dollars cover research and brokerage services that benefit clients only — not office furniture, rent, or overhead.

Use of a qualified custodian, plus heightened rules. Inadvertently-received client funds must be returned within three business days to avoid being deemed to have custody.

A bank, broker-dealer, or similar institution authorized to hold client assets when an adviser has custody of client funds or securities.

Deliver Form ADV Part 2 at least 48 hours before the contract, OR deliver it at signing if the client gets a 5-business-day penalty-free right to withdraw.

Yes, under the alternative prong, but the client must get the right to terminate the advisory contract without penalty within 5 business days of signing.

Within 120 days of the IA's fiscal year-end (deliver the updated brochure or a summary of material changes).

Form ADV Part 2 — the plain-English disclosure brochure delivered to advisory clients under the brochure rule.

Excessive trading in a client's account primarily to generate commissions for the rep. A prohibited and unethical practice.

Trading for one's own account ahead of a client's known large (block) order to profit from the expected price move. Prohibited.

An agent effecting private securities transactions outside the supervision of their broker-dealer. A prohibited practice.

No. Guaranteeing a client against loss is a prohibited practice, as are market manipulation via wash trades or matched orders.

For the first 10 business days while the signed written power of attorney is en route. After that, written authority must be in hand.

No. An agent/BD may never trade on discretion until written authority is in hand. The 10-day oral grace period is for IA/IAR only — a classic role-swap trap.

Only if the client is in the lending business (e.g., a bank). Otherwise borrowing from a client is prohibited.

Only with written BD approval and in proportion to the agent's own contribution. An IAR may NEVER share in a client's account.

No — an IAR may never share in a client's account. (An agent can, with written BD approval and proportional contribution.)

Exploitation of vulnerable adults, IAR continuing education, business continuation/succession planning, and cybersecurity/data protection — areas older prep often under-covers.

Financial abuse of senior or impaired clients. A 2023-added topic with reporting and account-hold provisions to protect at-risk investors.

NASAA's. NASAA's ethical standards are stricter than FINRA's, and the exam favors manipulation and conflict-of-interest scenarios.

Decide capacity (the actor) first: IA/IAR (fiduciary) vs. BD/agent (Reg BI/suitability). The exam swaps the actor to bait misapplication of the wrong standard.

Read it twice for double negatives, rephrase positively, then pick the most complete best answer — not the first technically-true option.

It can — per the 2023 outline, a digital asset meeting the Howey test (investment in a common enterprise expecting profit from others' efforts) is a security.

The fiduciary duty (IA/IAR). A fiduciary must put the client first and disclose and, where possible, eliminate conflicts. Several adviser conflicts require specific client consent.

In joint tenants with right of survivorship, the deceased owner's share passes automatically to the surviving owner(s), bypassing probate. It does not go to the decedent's estate.

In tenants in common, each owner holds a divisible fractional interest that passes to that owner's estate at death, not to the surviving co-owner(s). Owners may hold unequal percentages.

A joint ownership form limited to married spouses that requires both spouses' consent to transact or transfer. It also offers creditor protection against one spouse's individual debts.

Transfer on death registration is available only on individual and JTWROS accounts. It names beneficiaries who receive assets outside probate.

A custodial account that is an irrevocable gift to a minor, managed by a custodian until the minor reaches the state age of majority. Earnings may trigger the kiddie tax.

No. A custodial gift is irrevocable once made; the assets belong to the minor and must be turned over at the age of majority. The custodian cannot take them back.

The prudent-investor standard, which requires care, skill, and diversification judged at the portfolio level rather than security by security, plus adherence to any governing document.

In a defined-benefit plan the employer bears investment risk and promises a set benefit. In a defined-contribution plan (401(k), 403(b), 457) the employee bears the investment risk.

Income, net worth, tax bracket, and liquidity needs. These quantify the client's ability to take risk and absorb losses.

Age, time horizon, risk tolerance, dependents, and (added in 2023) ESG or religious screening preferences. These shape willingness to take risk and product selection.

Objectives, constraints, and risk tolerance. You must gather all three before making any recommendation.

Growth, income, preservation of capital, and speculation. The recommendation must match the client's stated objective.

Time horizon, liquidity needs, tax status, and legal or unique circumstances. Constraints limit which otherwise-suitable products can be recommended.

Unsuitable. An illiquid, long-dated product does not match an elderly client's short time horizon. Match product liquidity and term to the client's horizon and tolerance.

Combining imperfectly (less than perfectly) correlated assets reduces overall portfolio risk for a given expected return. Diversification is the core benefit.

The set of portfolios offering the maximum expected return for each level of risk. Portfolios below the frontier are inefficient; none lie above it.

Diversification removes unsystematic (company-specific) risk but cannot remove systematic (market) risk. Beta measures the systematic risk that remains.

Required return = Rf + beta x (Rm - Rf), where Rf is the risk-free rate and (Rm - Rf) is the market risk premium. It prices an asset for its systematic risk.

The security or portfolio is more volatile than the overall market. A beta below 1.0 means it is less volatile than the market.

The excess return investors demand over the risk-free rate for bearing market risk: (Rm - Rf). It is multiplied by beta in CAPM.

Prices reflect all past price data, so technical analysis (chart/price-history based) cannot consistently produce excess returns.

Prices reflect all publicly available information, so fundamental analysis of public data cannot consistently beat the market.

Prices reflect all information, public and non-public (inside). Under it, even insider information cannot produce consistent excess returns.

Strategic allocation sets long-term target weights and rebalances back to them. Tactical allocation makes short-term shifts to exploit perceived market opportunities.

Buying out-of-favor assets and selling popular ones, betting against prevailing market sentiment. It assumes the crowd overshoots.

Investing a fixed dollar amount at regular intervals, buying more shares when prices are low and fewer when high, lowering the average cost per share over time.

Active management seeks to beat a benchmark through selection/timing. Passive (indexing) seeks to match a benchmark at lower cost.

Risk-adjusted return using total risk: (portfolio return - risk-free rate) / standard deviation. Higher is better per unit of total risk.

Total risk (variability of returns). It feeds the Sharpe ratio. Higher standard deviation means greater dispersion of returns.

Sharpe divides excess return by standard deviation (total risk); Treynor divides excess return by beta (systematic risk). Use Treynor for well-diversified portfolios.

A bond's price sensitivity to interest-rate changes. Higher duration means greater interest-rate risk. Duration is not the same as maturity.

Contributions may be tax-deductible and grow tax-deferred; withdrawals are taxed as ordinary income. RMDs begin at age 73 under SECURE Act 2.0.

Contributions are after-tax (not deductible), grow tax-free, and qualified withdrawals are tax-free. The owner has no lifetime RMDs.

At age 73 under SECURE Act 2.0 for traditional retirement accounts. Roth IRAs have no required minimum distributions during the owner's lifetime.

Employees of nonprofit and tax-exempt organizations (e.g., schools, hospitals, churches). It is a defined-contribution plan like a 401(k).

Employees of state and local governments (and some nonprofits). It is a defined-contribution deferred-compensation plan.

Private-sector employer retirement plans. It requires an investment policy, vesting schedules, and fiduciary standards; it does not cover government or church plans.

A provision giving fiduciaries liability relief when participants direct their own investments among a diversified menu of options, with adequate information provided.

State-sponsored education savings with high contribution limits and tax-free growth for qualified education expenses. There is no age limit on use of funds.

Contributions cap near $2,000 per year per beneficiary, and funds generally must be used by age 30. It covers qualified K-12 and higher-education expenses.

Paired with a high-deductible health plan, an HSA is triple-tax-advantaged: deductible contributions, tax-free growth, and tax-free withdrawals for qualified medical expenses.

Total return = income (dividends/interest) plus capital appreciation, relative to the amount invested. It captures both yield and price change.

Nominal return minus the inflation rate. It measures the change in actual purchasing power, not just dollar gains.

Time-weighted return judges the manager by ignoring client cash flows. Dollar-weighted return (IRR) reflects the client's actual experience including deposits and withdrawals.

Time-weighted return, because it strips out the timing and size of client deposits and withdrawals, which the manager does not control.

Long-term gains apply to assets held more than one year and get preferential rates. Short-term gains (held one year or less) are taxed at ordinary income rates.

Net losses offset capital gains, then up to $3,000 of ordinary income per year. Any remainder is carried forward to future years.

A capital loss is disallowed if a substantially identical security is bought within 30 days before or after the loss sale (a 61-day window). The disallowed loss adjusts the new basis.

The recipient takes the donor's carryover basis (the donor's original cost). This preserves the unrealized gain for the recipient.

Inherited securities receive a stepped-up basis to fair market value at the date of death, reducing future taxable gain for the heir.

Income-Related Monthly Adjustment Amount: higher Medicare premiums driven by higher income. It surfaces in retirement distribution-planning items.

A rule taxing a minor's unearned (investment) income above a threshold at the parents' marginal rate, often relevant to UTMA/UGMA account earnings.

Client Investment Recommendations and Strategies is about 30% of the Series 66, the second-largest section behind the Laws/Regulations content.

The total return earned over the entire time an investment is held, combining income and price change relative to the purchase price.

The employer promises a specified retirement benefit (often based on salary and years of service) and bears the investment risk to fund that promise.

A defined-contribution plan where the employee directs contributions and bears the investment risk; the eventual benefit depends on contributions and investment results.

Gathering the complete client profile (objectives, constraints, risk tolerance, and financial/non-financial facts). You cannot recommend without it.

A return expressed on a yearly basis so periods of different lengths can be compared. It standardizes performance to an annual rate.

CAPM says required return compensates only for systematic (non-diversifiable) risk via beta; unsystematic risk earns no premium because it can be diversified away.

Many items have two defensible answers. Eliminate clearly unsuitable choices first, then pick the most complete answer fitting the client's stated horizon and risk tolerance.

No. Roth contributions are made with after-tax dollars. The benefit comes later as tax-free qualified withdrawals and no owner RMDs.

529 plans have high contribution limits and no annual federal cap on growth; Coverdell ESAs cap near $2,000 per year per beneficiary with an age-30 use rule.

Yes. Its value floats with a separate account, so the client bears market risk — making it a security that requires a securities license to sell.

No. The insurer guarantees the rate and bears the investment risk, so it is NOT a security and needs no securities license.

No. It is a fixed product that credits a guaranteed floor plus a share of an index's gain; the insurer bears the risk, so it is NOT a security — a classic exam trap.

Variable life is a security because its cash value is invested in a separate account at the holder's risk. Whole life has fixed cash value and is NOT a security.

Who bears the investment risk. If the client bears market risk (separate account), it's a security; if the insurer or bank bears it, it's not.

Carries voting rights and the largest growth potential, but ranks last in a liquidation. It is perpetual with residual ownership.

Like a bond — its price moves inversely with interest rates. It pays a fixed dividend and has priority over common stock.

Preferred stock on which missed (skipped) dividends accrue and must be paid in full before any common dividend is paid.

Preferred stock that shares in extra company profits beyond its stated fixed dividend rate.

Preferred stock that can be swapped (converted) into a set number of the issuer's common shares.

Rights are short-term (weeks), letting holders buy at a discount to keep proportional ownership. Warrants are long-term (years) sweeteners with a strike set above the current market price.

An American Depositary Receipt — a U.S.-dollar-denominated receipt representing shares of a foreign company. It exposes the holder to currency risk.

ISOs (incentive stock options) are qualifying and can trigger AMT exposure. NQSOs (non-qualified) are taxed as ordinary income at exercise.

Fundamental analysis uses financial statements, ratios, and dividend models to estimate intrinsic value. Technical analysis charts price and volume for trends, support, and resistance.

Nominal > current > YTM > YTC. The premium price drags every yield below the coupon rate.

YTC > YTM > current > nominal — the reverse of a premium bond. At par, all four yields are equal.

Annual coupon divided by the bond's current market price. It is the one yield you may actually have to compute on the exam.

$60 $\div$ $1,200 = 5.0%. Since it trades at a premium, the ranking is nominal 6.0% > current 5.0% > YTM > YTC.

A bond's price sensitivity to interest-rate changes — NOT its time to maturity. Longer maturity and lower coupon both raise duration.

The lower-coupon bond has higher duration and is more sensitive to interest-rate changes (given the same maturity).

The curvature in the price-yield relationship that refines duration's estimate for large interest-rate moves.

They move inversely. When interest rates rise, bond prices fall, and vice versa.

It continuously issues redeemable shares priced once daily at NAV. The public pays the POP (NAV plus any front-end sales charge).

Net asset value — a fund's assets minus liabilities, divided by shares outstanding, calculated once per day.

Public offering price = NAV plus the front-end sales charge.

It issues a fixed share count that trades on an exchange at a market price that can be above or below NAV.

Front-end load, reduced by breakpoints, a letter of intent, or rights of accumulation. Best for large investments and long horizons.

Back-end contingent deferred sales charge (CDSC) that declines to zero over years. Suited to smaller amounts held long-term.

Level load with an ongoing 12b-1 fee and no front-end load. Best for short holding periods.

An investment-dollar threshold at which a Class A fund's front-end sales charge is reduced.

A nonbinding pledge to invest enough within 13 months to earn a breakpoint discount on Class A shares.

A feature letting an investor's prior fund holdings count toward reaching a breakpoint on new purchases.

An annual asset-based fee for distribution and marketing, most prominent in level-load Class C shares.

A unit investment trust — a fixed, unmanaged portfolio of securities with a set termination date.

An ETF tracks an index and trades intraday. An ETN is an unsecured debt note, adding issuer credit risk on top of index risk.

At least 90% of taxable income to keep pass-through status. Dividends are generally taxed as ordinary income, not qualified.

They reset daily, so returns compound away from the index over time — making them unsuitable as long-term holds.

2-and-20: 2% of assets plus 20% of profits, often above a hurdle rate. They also impose lock-up periods.

3(c)(1) allows up to 100 investors; 3(c)(7) requires all investors be qualified purchasers. Both keep the fund private (unregistered).

The minimum return a hedge-fund manager must beat before earning the performance (incentive) fee.

A period during which hedge-fund investors cannot redeem (withdraw) their capital.

A direct participation program — a pass-through vehicle whose income, gains, and losses flow to investors individually. It is illiquid.

A security packaging a bond with a derivative; returns depend on a reference asset and carry the issuer's credit risk.

A special-purpose acquisition (blank-check or blind-pool) company that raises IPO cash to acquire an unidentified target later. Added to the 2023 outline.

A fund or venture-capital manager's share of profits, generally taxed at favorable capital-gains rates.

A futures contract obligates both parties to transact at a set price and date. An option grants a right, not an obligation.

The measure of a variable annuity owner's interest during the pay-in (accumulation) phase, when growth is tax-deferred.

A fixed number of units set at annuitization whose dollar value floats with separate-account performance relative to the AIR.

Assumed interest rate — the benchmark return for a variable annuity payout. Beating it raises the check; lagging it lowers the check.

LIFO — earnings (gains) come out first, taxed as ordinary income, with a 10% penalty if taken before age 59$\frac{1}{2}$.

A tax-free swap of one annuity or life insurance policy for another under IRC Section 1035, with no current tax.

The portion of each annuitized payment that is a tax-free return of the original cost basis; the rest (earnings) is taxable.

Only the earnings portion of each check is taxable as ordinary income; the cost-basis portion (set by the exclusion ratio) is tax-free.

Term = pure protection, no cash value. Whole = fixed cash value. Universal = flexible premium. Variable = cash value in a separate account and IS a security.

Yes. Per the 2023 outline, digital assets and crypto can be securities if they meet the Howey test (investment contract analysis).

No. The bank bears the investment risk and guarantees the return, so a bank CD is a non-security.

Determining whether an instrument is a security — an investment of money in a common enterprise with an expectation of profit from others' efforts.

ADRs, preferred-stock types, money-market instruments, employee stock options, SPACs, non-traded REITs, and digital assets.

Viatical settlements and investment real estate were removed from the Investment Vehicle Characteristics outline.

Yes. The annuity unit value floats versus the AIR — if separate-account returns exceed the AIR, the check rises; if they lag, it falls.

No. Non-traded REITs are non-liquid (added in the 2023 outline). They don't trade on an exchange, unlike traded REITs.

Insurance-based products and annuities. Over-study accumulation vs. annuity units, the AIR, the exclusion ratio, and the indexed-annuity-is-not-a-security trap.

Approximate years to double money = 72 $\div$ annual rate. At 8%, money doubles in ~9 years. Rearranged, 72 $\div$ years = the approximate rate.

Money doubled twice (2k→4k→8k), so each double took ~5 years. $72 \div 5 \approx 14.4\%$ compounded annual return.

Today's worth of a future sum, discounted at a required rate. Higher discount rate or longer time horizon = lower PV. Answers 'how much to deposit now to reach a future goal.'

What a present sum grows to over time at a given compound rate. FV rises with a higher rate or longer time horizon; it is the mirror image of present value.

A dollar today is worth more than a dollar in the future because it can be invested to earn a return. Underlies PV, FV, NPV, and IRR calculations.

PV of all expected cash inflows minus the initial investment (cost). Positive NPV = invest; negative = reject. NPV = PV of cash flows − purchase price.

The investment's internal rate of return exceeds the required rate of return, so the security is attractively priced (a buy). PV of inflows exceeds the price paid.

The IRR is below the investor's required rate of return; the price paid exceeds the PV of future cash flows. The investment should be rejected.

The discount rate that makes NPV equal zero. It is the security's expected annualized return; compare it to the required rate to decide buy/sell.

The IRR exactly equals the required (discount) rate of return. For a bond, this happens when its yield to maturity equals the discount rate.

Positive. Because IRR (6.32%) exceeds the required rate (6%), NPV is greater than zero, signaling an attractive investment.

Negative. The IRR (5.75%) is below the required rate (6%), so NPV is less than zero and the investment should be rejected.

A bond held to maturity — its IRR is the yield to maturity, computable from price, coupon, and maturity. Equity cash flows are uncertain, so IRR is hard to determine.

The initial cost (purchase price) of the investment. NPV = present value of future cash flows minus that upfront cost.

Buy when the security's market price is below the present value of its discounted future cash flows (i.e., it is undervalued / NPV is positive).

The total annualized return earned if a bond is held to maturity, accounting for coupon income plus any gain or loss versus par. It is the bond's IRR.

Premium. The bond yields less than its coupon, so its price is above par because its fixed 7% coupon beats the lower market yield.

Bond prices and market interest rates move in opposite directions. When new bonds offer higher coupons, existing lower-coupon bonds fall in price (and vice versa).

PV = annual payment $\div$ discount rate. A $40,000 perpetual scholarship at 4% requires $40,000 $\div$ 0.04 = $1,000,000 endowment.

$40,000 $\div$ 0.042 $\approx$ $952,381. Perpetuity PV = payment divided by the rate of return.

Zero. At par, the coupon yield (10%) equals the discount rate (10%), so PV of cash flows equals the price and NPV is zero.

The simple average: sum of all returns divided by the number of observations. A measure of central tendency used to summarize portfolio returns.

Sum = 37%; divide by 5 = 7.4% arithmetic mean. It adds all observations and divides by the count.

The middle value when observations are ranked in order (or the average of the two middle values). A measure of central tendency less skewed by outliers than the mean.

The value that occurs most frequently in a data set. One of the three measures of central tendency along with mean and median.

Mean, median, and mode. Standard deviation is NOT central tendency — it measures dispersion (spread) around the mean.

How much an investment's returns fluctuate around their average — a measure of total risk/volatility. Higher standard deviation means greater variability and risk.

In a normal distribution, ~68% of returns fall within $\pm 1$ standard deviation of the mean, ~95% within $\pm 2$, and ~99.7% within $\pm 3$.

One standard deviation = 14% (12% $\pm$ 14%). The $\pm 1$ SD band captures ~68% of outcomes in a normal distribution.

$\pm 2$ standard deviations: 8.7% $\pm$ 29.2%, i.e., roughly -20.5% to +37.9%. 95% of returns fall within two SDs of the mean.

A measure of a security's systematic (market) risk — its volatility relative to the overall market. The market itself has a beta of 1.0.

The security is 20% more volatile than the market. If the market rises or falls 10%, the security is expected to move ~12%.

Expected to fall about 8.5% ($0.85 \times 10\%$). A beta below 1.0 means lower volatility than the market.

The security is less volatile than the market; it moves less than the market in both directions. Defensive stocks (utilities) typically have low betas.

Beta is measured against the overall market, typically the S&P 500. The benchmark market index has a defined beta of 1.0.

A security uncorrelated with the market, such as a risk-free T-bill. Its return doesn't move with market swings.

The portion of return above (or below) what beta/the market would predict — a measure of risk-adjusted excess return, often crediting the manager's skill.

Expected ABC return = $1.4 \times 12\% = 16.8\%$; actual 18.8% gives alpha = +2.0%. Alpha is actual return minus beta-predicted return.

Capital Asset Pricing Model gives expected return = risk-free rate + beta $\times$ (market return - risk-free rate). It prices an asset for its systematic risk.

The yield on short-term U.S. Treasury bills (90-day T-bills). It represents return with virtually no default or market risk.

Risk-adjusted return per unit of total risk: (portfolio return - risk-free rate) $\div$ standard deviation. Used to evaluate an active manager's performance.

Sharpe uses standard deviation (total risk); beta-based measures (like Treynor/alpha) use systematic risk only. Sharpe suits non-diversified portfolios.

Systematic (market) risk affects all securities and can't be diversified away (measured by beta). Unsystematic (business-specific) risk can be reduced through diversification.

Expansion, peak, contraction (recession), and trough — then recovery back to expansion. GDP rises in expansion and falls in contraction.

Two or more consecutive quarters of declining real GDP. A prolonged, severe contraction lasting 18+ months or with sharp GDP drops is a depression.

Predict future activity: stock prices (S&P 500), building permits, new orders for durable goods, initial jobless claims, and money supply (M2).

Confirm a trend after it occurs: average duration of unemployment, corporate profits, and the prime rate charged by banks.

Move with the overall economy: industrial production, nonfarm payrolls/employment, and personal income. They show the economy's current state.

Gross Domestic Product: the total market value of all final goods and services produced within a country in a year. Real GDP is adjusted for inflation.

The Consumer Price Index tracks the average change in prices of a basket of consumer goods/services — the primary gauge of inflation.

Inflation erodes purchasing power and hurts fixed-income (bond) values; deflation is a general decline in prices that can signal recession and raise real debt burdens.

Conducted by the Federal Reserve. Tools: open market operations (buying/selling Treasuries), the discount rate, and reserve requirements to control money supply and rates.

The Fed sells Treasuries, draining reserves from banks, shrinking the money supply, and pushing interest rates up to slow the economy or fight inflation.

The interest rate the Federal Reserve charges member banks for short-term loans. Raising it tightens credit; lowering it eases credit.

The rate banks charge each other for overnight loans of reserves. It is the most volatile short-term rate and a key Fed policy target.

Conducted by Congress and the President through government spending and taxation. Cutting taxes or raising spending stimulates the economy (Keynesian view).

M1 = currency plus checking/demand deposits (most liquid). M2 = M1 plus savings accounts, retail money-market funds, and small time deposits.

Upward sloping: long-term rates exceed short-term rates. It is the typical curve, reflecting compensation for longer-maturity risk.

Short-term rates exceed long-term rates (downward slope). Often viewed as a recession warning and usually signals tight monetary policy.

The base rate banks charge their most creditworthy corporate customers for loans. It is a lagging indicator that tracks Fed policy.

A strong dollar makes imports cheaper but U.S. exports costlier abroad (hurting exporters); a weak dollar boosts exports but makes imports more expensive.

A record of all economic transactions between a country and the rest of the world. A trade deficit (imports > exports) is a major component of a payments deficit.