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Series 65 · Cheat Sheet

Client Investment Recommendations

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CLIENT INVESTMENT RECOMMENDATIONS — SERIES 65 CHEAT SHEET

SECTION WEIGHT & SCOPE

30% of exam (≈39 questions) | Practical synthesis: client profiling → portfolio theory → strategy selection

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KYC: SIX CLIENT DIMENSIONS

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Cue: No recommendation is suitable without completing all six dimensions first.

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CLIENT CLASSIFICATIONS

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MODERN PORTFOLIO THEORY & CAPM

Core Formula

$$E(R_i) = R_f + \beta(R_m - R_f)$$

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Security Market Line (SML): Graphical depiction of CAPM; securities on line are fairly priced; above = undervalued; below = overvalued.

Capital Market Line (CML): Optimal efficient frontier combining risk-free asset + market portfolio; used for asset allocation decisions.

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RISK-ADJUSTED PERFORMANCE METRICS

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PORTFOLIO CONSTRUCTION STRATEGIES

Active vs. Passive

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Growth vs. Value

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Fixed Income Strategies

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Cue: As rates rise → intermediate bonds hurt most; barbells + ladders reduce concentration risk.

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EFFICIENT MARKET HYPOTHESIS (EMH)

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Exam note: Most advisers assume weak/semi-strong EMH; strong-form is rarely testable.

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TAX OPTIMIZATION PRINCIPLES

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DimensionKey QuestionsRed Flags
Financial PositionIncome, assets, liabilities, net worthInsufficient liquidity for stated goals
Investment ObjectivesGrowth, income, capital preservation, speculationConflicting objectives (max growth + safety)
Risk ToleranceVolatility tolerance, loss capacity, psychological comfortClaims high tolerance but panics in downturns
Time HorizonShort, intermediate, long-term; multiple goals with different timelinesMismatch: short horizon + 100% equities
Liquidity NeedsEmergency reserves, upcoming expenses, redemption frequencyIlliquid portfolio for high near-term needs
Tax SituationIncome level, tax bracket, loss harvesting potential, holding periodsHigh earner in illiquid low-yield securities
TypeRequirementAdvisory Implications
Accredited Investor$200K+ individual income OR $300K+ joint OR $1M+ net worth (excl. primary residence)Required for certain private offerings
Qualified Purchaser$5M+ net worth in investments OR $25M+ family wealthRequired for hedge fund access
Qualified Client$750K+ AUM with adviser OR $1.5M+ net worth OR accredited + ≥5yr relationshipPermit performance-based fees
ComponentMeaningRange
$E(R_i)$Expected return on security/portfolio
$R_f$Risk-free rate (Treasury yield)
$\beta$Systematic risk relative to market<1: defensive; >1: aggressive
$R_m - R_f$Market risk premium≈5–8% historical
MetricFormulaWhen to UseInterpretation
Sharpe Ratio$(R_p - R_f) / \sigma_p$Compare portfolios with different risk levelsHigher = better risk-adjusted return
Treynor Ratio$(R_p - R_f) / \beta_p$Compare portfolio to market indexFocuses on systematic risk only
Jensen's Alpha$R_p - [R_f + \beta_p(R_m - R_f)]$Measure active manager value-addPositive alpha = outperformance
StrategyApproachCostTax EfficiencySuitable For
ActiveBeat benchmark via security selection/timingHigh feesLower (turnover)Complex, opportunities in mispricings
PassiveTrack index, buy-and-holdLow feesHigherBelief in efficient markets, cost-conscious
StyleP/EDividendVolatilitySuitable For
GrowthHighLow/noneHigherLong horizon, can tolerate swings
ValueLowOften higherLowerIncome focus, shorter horizon
StrategyStructureInterest Rate RiskReinvestment RiskUse Case
LadderingBonds maturing across years (e.g., 1, 3, 5, 7, 10)ModerateReduced (staggered reinvestment)Stable income, known liabilities
BarbellSplit: long + short duration bonds; avoid intermediateDual (high + low)ReducedUncertainty about rate direction
BulletConcentrate in one maturity near target dateHighest near maturityConcentratedImmunization of known liability
ImmunizationMatch duration of bond portfolio to liability dateMinimalControlledPension obligations, future expenses
FormDefinitionImplication
WeakAll past price/volume data reflected in current priceTechnical analysis ineffective
Semi-strongAll public info reflected; fundamental analysis ineffectiveActive management unlikely to beat market
StrongAll public + private info reflected; no one beats marketEven insiders cannot outperform
ConceptActionBenefit
Tax Loss HarvestingRealize losses to offset gainsReduce taxable income
Asset LocationTax-inefficient securities in tax-deferred accountsHigher after-tax return
Long-term Capital GainsHold >1 year for lower rate (15–20%) vs. short-term (ordinary income)Significant tax savings for high earners
Qualified DividendsHold qualified stocks

Aligned to the NASAA Series 65 content outline.

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