Financial Terms

Series 65 Section 1: Economics & Business

Economic Factors and Business Information - 15% of the exam, 20 of 130 questions.

Business cycles, monetary and fiscal policy, economic indicators, financial statements, time value of money, statistics, ratios, and types of risk.

The Series 65 has 130 scored questions (plus 10 unscored), runs 180 minutes, and requires 92 correct answers to pass (70.8%). This section covers 57 of the terms in our glossary.

Sample questions

Answers and explanations are shown below each question. The study app has 20 questions for this section, with timed full-length exams.

Which of the following are considered leading economic indicators? I. Building permits II. Average duration of unemployment III. New orders for manufactured goods IV. Industrial production

  1. I and III only
  2. I and IV only
  3. II and III only
  4. II, III, and IV only

Answer: I and III only — Building permits and new orders turn before the economy does. Average duration of unemployment is a lagging indicator, and industrial production is coincident - it moves with the economy.

If the US dollar weakens significantly against major foreign currencies, which of the following is most likely to benefit?

  1. A US retailer that imports most of its merchandise
  2. A US company that sells most of its products overseas
  3. An American family planning a vacation in Europe
  4. A European investor holding US Treasury bonds

Answer: A US company that sells most of its products overseas — A weaker dollar makes US exports cheaper for foreign buyers and raises the dollar value of foreign sales. Importers and US travelers pay more, and a European holding dollar-denominated bonds loses value in euro terms.

Which action by the Federal Reserve would most likely reduce the money supply?

  1. Buying Treasury securities in the open market
  2. Lowering bank reserve requirements
  3. Selling Treasury securities in the open market
  4. Lowering the discount rate

Answer: Selling Treasury securities in the open market — When the Fed sells securities, buyers pay with bank reserves, draining money from the system. The other three choices are easing actions that expand the money supply.

Which of the following is an example of fiscal policy?

  1. The FOMC raises its target for the federal funds rate
  2. The Federal Reserve purchases mortgage-backed securities
  3. The Federal Reserve raises the discount rate
  4. Congress enacts a temporary cut in individual income tax rates

Answer: Congress enacts a temporary cut in individual income tax rates — Fiscal policy is government taxing and spending, set by Congress and the President. Every other choice is a Federal Reserve action, which is monetary policy.

Practice this section Study its terms

Terms in this section

Systematic Risk (Market Risk) Risk affecting the whole market that diversification cannot remove. Unsystematic Risk (Specific Risk) Company- or industry-specific risk that diversification can eliminate. Beta How much a security moves relative to the overall market. Alpha Return above what the portfolio's risk exposure would predict. Standard Deviation How widely returns disperse around their average. Sharpe Ratio Excess return per unit of total volatility. Correlation How closely two assets move together, from -1 to +1. Diversification Spreading capital across assets so no single failure is fatal. Maximum Drawdown The largest peak-to-trough decline over a period. Inflation Risk (Purchasing Power Risk) The risk that returns fail to keep pace with rising prices. Interest Rate Risk The risk that rising rates push existing bond prices down. Credit Risk (Default Risk) The risk a borrower fails to make promised payments. Liquidity Risk The risk you cannot exit at a fair price when you need to. Market Capitalization Share price times shares outstanding - the equity value of a company. Earnings Per Share (EPS) Net income attributable to each share of common stock. Price-to-Earnings (P/E) Ratio Price per share divided by earnings per share. Payout Ratio The share of earnings paid out as dividends. Book Value Assets minus liabilities - the accounting value of equity. Free Cash Flow Operating cash flow minus capital expenditures. EBITDA Earnings before interest, taxes, depreciation, and amortization. Return on Equity (ROE) Net income divided by shareholders' equity. Debt-to-Equity Ratio Total liabilities divided by shareholders' equity. Net Present Value (NPV) Present value of inflows minus the initial cost. Internal Rate of Return (IRR) The discount rate at which an investment's NPV equals zero.

See all 57 terms in the glossary

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