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FINRA Series 65 Practice Exam & Test Questions - Review



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Series 65 Uniform Registered Investment Adviser Law Exam - Reviews


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See why our users from 154 countries love us for their exam prep! Including 100 reviews for the Series 65 RIA exam.

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Series 65 Uniform Registered Investment Adviser Law Exam - Test Reviews Sample Questions

The modern portfolio theory has four basic premises. Which of the following is not one of them?

Correct Answer:
investors like to take risks.


the question presented asks which of the statements is not a basic premise of the modern portfolio theory (mpt). to address this, it is essential to understand what mpt actually proposes. formulated by harry markowitz in the 1950s, mpt is a foundational concept in the field of finance and investment management, which assists investors in making decisions about portfolio diversification to maximize returns for a given level of risk.

the first statement, "securities are traded in efficient markets," aligns with one of the assumptions of mpt. it assumes that the markets are efficient and all available information is reflected in the stock prices, which means that no securities are consistently overpriced or underpriced. though this assumption can be debated, it remains a fundamental part of mpt reasoning.

the second statement, "investors like to take risks," is incorrect in the context of mpt. contrary to this statement, mpt is based on the premise that investors are risk-averse. mpt doesn't assume that investors seek out risk; rather, it suggests that investors are willing to take on a higher risk only if they expect to be compensated with higher returns. thus, the theory focuses on how risk-averse investors can construct portfolios to optimize or maximize expected returns based on a given level of market risk.

the third statement, "risk should be analyzed in terms of an investor’s overall portfolio, rather than by individual assets," is indeed one of the central tenets of mpt. this principle advocates for portfolio diversification, suggesting that by combining different types of assets, an investor can achieve a favorable risk-return trade-off. mpt encourages looking at the portfolio as a whole rather than focusing on individual securities.

the fourth statement, "for every level of risk, there is an optimal portfolio of assets that will have the highest expected returns," correctly summarizes another key premise of mpt. this concept is related to the efficient frontier theory, which posits that for every given amount of risk, there exists a portfolio that maximizes expected returns.

in conclusion, among the options given, the statement "investors like to take risks" is the one that does not align with the basic premises of modern portfolio theory. this statement inaccurately represents the risk behavior of investors according to mpt, which actually assumes that investors are inherently risk-averse and seek to maximize returns for a given level of acceptable risk.