Free Series 66 Practice Exam — 25-Question Diagnostic

Question 1

While reviewing the most recent balance sheet of a closely held manufacturing company on behalf of a client, an investment adviser representative notes current assets of $600,000, which include $240,000 of inventory, and current liabilities of $300,000. The company's quick ratio is closest to:

Accepted Answer

1.2 — Correct. The quick (acid-test) ratio equals (current assets − inventory) ÷ current liabilities, or ($600,000 − $240,000) ÷ $300,000 = 1.2. It measures the company's ability to cover short-term obligations without having to sell inventory.

Question 2

An investment adviser representative uses the constant-growth dividend discount model to estimate the value of a common stock. The stock is expected to pay a dividend of $2.00 per share one year from now, dividends are expected to grow at 4% annually thereafter, and the IAR requires a 9% rate of return. The model's estimated value per share is closest to:

Accepted Answer

$40.00 — Under the constant-growth (Gordon) model, value = next year's dividend divided by (required return minus growth rate): $2.00 / (0.09 − 0.04) = $40.00. The denominator must be the spread between r and g.

Question 3

A client's fixed-income portfolio holds a bond with a duration of 6.5. If market interest rates rise by 40 basis points across the yield curve, the approximate change in the bond's market price will be:

Accepted Answer

a decrease of about 2.6% — Duration approximates the percentage price change as −duration × change in yield: −6.5 × 0.40% ≈ −2.6%. Because rates rose, the price falls by roughly 2.6%.

Question 4

While reviewing a new client's brokerage statement, an investment adviser representative notices a pooled investment that trades intraday on a stock exchange at a price persistently about 12% below its net asset value. This investment is most likely a(n):

Accepted Answer

closed-end investment company — Closed-end funds issue a fixed number of shares that trade on exchanges at prices set by supply and demand, so persistent discounts (or premiums) to NAV are a defining characteristic.

Question 5

An investor holds 500 shares of a listed stock with a large unrealized gain. He is concerned the stock could decline sharply over the next three months, but he does not want to sell the shares or give up potential appreciation. Which options strategy best meets his objective?

Accepted Answer

Buy 5 put options on the stock — Buying puts (a protective put) gives the investor the right to sell his shares at the strike price, establishing a price floor while leaving the upside on the stock unlimited — exactly matching both stated objectives.

Question 6

A client in the highest marginal tax bracket wants an investment in income-producing real estate and specifically wants any operating losses the investment generates to flow through to her personal return, where they may offset passive income from other investments. Which vehicle can accomplish this objective?

Accepted Answer

A real estate limited partnership — A limited partnership DPP is not taxed at the entity level, and under the Internal Revenue Code both income and losses flow through to the limited partners; under the Section 469 passive activity rules those losses may offset the client's passive income from other sources.

Question 7

An investment adviser representative (IAR) of a state-registered adviser meets with a prospective advisory client. The client declines to complete the firm's risk-tolerance questionnaire and will not disclose the holdings she maintains at other firms. Under NASAA's model rule on unethical business practices, the IAR's best course of action is to:

Accepted Answer

Obtain sufficient profile information by interview before making any recommendation — NASAA Model Rule 102(a)(4)-1 makes it unethical for an adviser to recommend a securities transaction without reasonable grounds to believe it is suitable based on information furnished by the client after reasonable inquiry. A questionnaire is not itself required, but sufficient profile information — gathered by interview or otherwise — is a precondition to advice.

Question 8

An IAR manages a client portfolio with a long-term target allocation of 60% equities and 40% fixed income. After a prolonged equity rally, the portfolio has drifted to 72% equities and 28% fixed income. Without any change in market outlook, the IAR sells equities and buys bonds to restore the original targets. This activity is best described as:

Accepted Answer

Systematic rebalancing consistent with a strategic asset allocation — Strategic asset allocation sets long-term target weights based on the client's objectives, and periodic rebalancing restores those weights after market drift. Note the discipline is inherently contrarian: it forces selling the appreciated asset class and buying the lagging one.

Question 9

A client invested $100,000 with a discretionary portfolio manager. The portfolio returned +25% in the first year. Impressed, the client deposited an additional $200,000 at the start of the second year, after which the portfolio declined 10%. In assessing this manager's investment skill, which statement is most accurate?

Accepted Answer

Time-weighted return is the appropriate measure, and it will be higher than the account's dollar-weighted return — Time-weighted return strips out the effect of client-directed cash flows, so it is the standard for judging a manager who does not control deposit timing. Because the large deposit arrived just before the losing period, more dollars experienced the −10% year, dragging the dollar-weighted (IRR) return below the time-weighted result — here roughly −2% dollar-weighted versus about +6% annualized time-weighted.

Question 10

In a taxable brokerage account, a client sells 500 shares of ABC common stock on December 15 and realizes a $6,000 loss. On January 5 of the following year, the client repurchases 500 shares of ABC. Which statement best describes the federal tax treatment of the loss?

Accepted Answer

The loss is disallowed, and the $6,000 is added to the cost basis of the repurchased shares — Under IRC Section 1091, a loss is disallowed when substantially identical securities are purchased within 30 days before or after the loss sale. The disallowed $6,000 is added to the basis of the replacement shares, deferring — not eliminating — the tax benefit.

Question 11

A 45-year-old client changes employers and asks that her $80,000 401(k) balance be paid directly to her by check, intending to deposit the money into a rollover IRA. Which statement best describes the consequences of this choice?

Accepted Answer

The plan must withhold 20%, and she must use other funds to replace the withheld portion to roll over the full amount within 60 days — The plan withholds $16,000 and pays her $64,000. To roll over the full $80,000 within the 60-day window she must add $16,000 from other sources; any shortfall is treated as a taxable distribution and, because she is under 59½, is also subject to the 10% early-distribution penalty.

Question 12

Each of the following statements about a Coverdell education savings account (ESA) is accurate EXCEPT:

Accepted Answer

Contributions may continue to be made regardless of the beneficiary's age — This is the inaccurate statement and the correct answer: contributions generally may not be made after the beneficiary reaches age 18, and the account generally must be distributed by age 30 (exceptions apply for special-needs beneficiaries). By contrast, 529 plans have no beneficiary age limits.

Question 13

A client purchased XYZ stock at $30 per share, and it now trades at $50. To protect the unrealized gain while leaving room for further appreciation, the client's agent enters a sell stop order at $45. Which statement about this order is accurate?

Accepted Answer

It becomes a market order once the stock trades at or below $45 — A sell stop lies dormant until the stock trades at or below the $45 stop price; it then becomes a market order, so in a fast-moving or gapping market the actual fill may be below $45.

Question 14

An agent opens a brokerage account for an irrevocable trust. The trust instrument names a bank as trustee, the grantor's adult daughter as income beneficiary, and the daughter's children as remainder beneficiaries. Who may direct trading in the account, and under what standard?

Accepted Answer

The trustee, who must invest in accordance with the trust instrument and its duty to all beneficiaries — Legal title and investment authority rest with the trustee, who must invest within the powers granted by the trust document and, under prudent investor standards, must balance impartially the interests of the income beneficiary and the remainder beneficiaries — for example, not maximizing current income at the expense of principal growth.

Question 15

Amara is an agent registered in State A with First Meridian Securities, a broker-dealer registered in both State A and State B. Her longtime customer sells his home in State A and permanently relocates to State B, where he wants Amara to continue handling his brokerage account. Under the Uniform Securities Act, which statement is accurate?

Accepted Answer

Amara must be registered as an agent in State B before effecting further transactions for this customer. — Correct. Under Section 201(a) of the Uniform Securities Act of 1956, it is unlawful for an individual to transact business as an agent in a state unless registered there. Because the customer is now a permanent State B resident and the broker-dealer is already registered in State B, Amara must also register in State B before continuing to service the account.

Question 16

Granite Trading Co. is a broker-dealer whose only office is in State X, where it is properly registered. It executes securities transactions exclusively with banks, insurance companies, and other broker-dealers located in State Y, and it has no office in State Y. Under the Uniform Securities Act, Granite:

Accepted Answer

Is not a broker-dealer in State Y and therefore is not required to register there. — Correct. Under Section 401(c) of the Uniform Securities Act of 1956, 'broker-dealer' does not include a firm with no place of business in the state that effects transactions exclusively with or through institutions such as banks, savings institutions, trust companies, insurance companies, and other broker-dealers. A person excluded from the definition has no registration obligation in that state.

Question 17

Sycamore Capital Advisors, an investment adviser registered in State M where it maintains its principal office, reports regulatory assets under management of $112 million on its annual updating amendment. Under the Investment Advisers Act of 1940, as amended by the Dodd-Frank Act, Sycamore:

Accepted Answer

Must register with the SEC because its assets under management exceed $110 million. — Correct. Under SEC Rule 203A-1's buffer, an adviser may register with the SEC once regulatory AUM reaches $100 million, and it must register with the SEC when regulatory AUM reaches $110 million or more, withdrawing its state registration (it may later remain SEC-registered as long as AUM stays at $90 million or above).

Question 18

Priya is an investment adviser representative of Lakeshore Advisers, a federal covered investment adviser. Her only office is in State J, but she remotely advises 12 retail clients who reside in State K. Under the Uniform Securities Act, Priya must register as an IAR in:

Accepted Answer

State J only, because IARs of federal covered advisers register only where they maintain a place of business. — Correct. Under Section 203A(b)(1)(A) of the Investment Advisers Act (as added by NSMIA) and the Uniform Securities Act, a state may require IAR registration for a representative of a federal covered adviser only if the individual has a place of business in that state. Priya's only place of business is in State J.

Question 19

The Administrator of State Q suspects that a registered broker-dealer is engaging in ongoing dishonest practices. Which of the following actions requires the Administrator to apply to a court rather than act under the Administrator's own authority?

Accepted Answer

Obtaining an injunction to enjoin the firm from continuing the practice — Correct. Under Section 408 of the Uniform Securities Act of 1956, an injunction is a judicial remedy — the Administrator must bring an action in a court of competent jurisdiction, which may grant injunctive relief and appoint a receiver.

Question 20

Brightline Foods, Inc. files a registration statement with the SEC under the Securities Act of 1933 for its initial public offering and simultaneously seeks to register the offering in State W. Assuming all filing conditions are satisfied, which state registration method applies, and when does the state registration become effective?

Accepted Answer

Coordination, effective at the moment the federal registration statement becomes effective — Correct. Under Section 303 of the Uniform Securities Act of 1956, an offering being registered under the Securities Act of 1933 may register at the state level by coordination, which becomes effective automatically at the moment the federal registration statement becomes effective, provided the state filing has been on file the required period and pricing information has been filed.

Question 21

Under the Uniform Securities Act of 1956, each of the following is an exempt transaction EXCEPT:

Accepted Answer

An issuer's offer of unregistered stock to 25 retail residents of the state over three months, all purchasing for investment — Correct — this is NOT exempt. The private placement exemption in Section 402(b)(9) of the 1956 Act is limited to offers directed to no more than 10 persons (other than institutional investors) in the state during any 12 consecutive months; offering to 25 retail residents exceeds the limit even though the buyers purchase for investment.

Question 22

During a sharp midday market decline, an agent buys 200 shares of a blue-chip stock in a customer's nondiscretionary account without contacting the customer, reasoning that the customer 'would obviously want it at this price.' The stock rises 8% by the close. Under NASAA's prohibited business practices guidelines, the agent's action is:

Accepted Answer

Unauthorized trading, which is a prohibited practice regardless of the trade's profitability. — Correct. Executing a transaction without the customer's prior authorization (or prior written discretionary authority) is unauthorized trading, a dishonest or unethical business practice under NASAA's model rules; only time-and-price discretion on a customer-specified security and amount is excepted from the written-authorization requirement.

Question 23

Over dinner, the CFO of a publicly traded company tells his neighbor that the company will announce an unexpected acquisition next week, adding that the neighbor should 'consider himself lucky.' The neighbor buys the stock and earns a $50,000 profit after the announcement. Under the Insider Trading and Securities Fraud Enforcement Act of 1988, which statement is TRUE?

Accepted Answer

Both the CFO and the neighbor may be liable, each facing a civil penalty of up to three times the profit. — Correct. Under Section 21A of the Securities Exchange Act of 1934 (added by ITSFEA), both tippers and tippees who trade on material nonpublic information may face civil penalties of up to three times the profit gained or loss avoided, and the tipper is liable even though only the tippee traded.

Question 24

Shortly after her initial registration becomes effective, an agent posts on her public social media profile: 'Officially approved by the state securities Administrator — you can trust that my recommendations are backed by the state.' Under the Uniform Securities Act, this post is:

Accepted Answer

Prohibited, because it implies the Administrator has approved or endorsed her qualifications. — Correct. Section 405 of the Uniform Securities Act of 1956 makes it unlawful to represent that a person's registration means the Administrator has passed upon, approved, or endorsed that person's qualifications; implying that recommendations are 'backed by the state' is exactly this prohibited representation.

Question 25

In July 2026, a small broker-dealer discovers that an intruder gained unauthorized access to a database containing customers' Social Security numbers and account numbers, and misuse of the information is reasonably likely. Under SEC Regulation S-P, as amended in 2024, the firm must:

Accepted Answer

Notify affected individuals as soon as practicable, and no later than 30 days after becoming aware of the incident. — Correct. The SEC's May 2024 amendments to Regulation S-P (17 CFR 248.30) require covered institutions to maintain an incident response program and to notify affected individuals as soon as practicable, but no later than 30 days after becoming aware that unauthorized access to or use of sensitive customer information occurred or is reasonably likely to have occurred; the compliance date for smaller entities passed in June 2026, so the rule fully applies.

Free Series 66 Practice Exam — with an explanation for every answer

While reviewing the most recent balance sheet of a closely held manufacturing company on behalf of a client, an investment adviser representative notes current assets of $600,000, which include $240,000 of inventory, and current liabilities of $300,000. The company's quick ratio is closest to:

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