Series 66 · Cheat Sheet
| Ratio | Formula | What It Tells You | Exam Cue |
| P/E | Stock Price ÷ EPS | Valuation; growth expectations | High P/E = growth stock; Low P/E = value or distress |
|---|---|---|---|
| P/B | Stock Price ÷ Book Value/Share | Market vs. accounting value | <1.0 = potentially undervalued or distressed |
| D/E | Total Debt ÷ Total Equity | Financial leverage & risk | Higher = more risk; utilities/telecom higher than tech |
| ROE | Net Income ÷ Shareholders' Equity | Management efficiency | Higher = more profitable; measure of capital effectiveness |
| Phase | Leading Sectors | Defensive Sectors | |
| Expansion | Industrials, Consumer Discretionary, Tech | — | |
| Contraction | — | Utilities, Consumer Staples, Healthcare | |
| Type | Characteristics | Exam Use | Examples |
| Leading | Change *before* economy | Predict future activity | Stock prices, building permits, consumer confidence, LEI |
| Lagging | Change *after* trends confirm | Confirm trends after fact | Unemployment, interest rates, business loan volumes |
| Shape | Definition | Signal | |
| Normal (Upward) | Long yields > short yields | Economic growth expected | |
| Inverted | Short yields > long yields | Recession predictor (6–18 mo lag) | |
| Flat | Yields similar across maturities | Uncertainty about economy | |
| Rate Environment | Action | Why | |
| Rising Rates | Shorten duration | Reduce price decline risk; move to shorter maturities | |
| Falling Rates | Extend duration | Capture price appreciation; move to longer maturities | |
| Situation | Answer | ||
| Client asks how to protect bond portfolio from rising rates | Shorten duration | ||
| Question asks what signals recession *before* it's official | Leading indicators (stocks, permits, confidence) | ||
| P/E is high relative to peers | Growth stock or market expects strong earnings ahead | ||
| P/B is <1.0 | Potentially undervalued OR company/sector in distress | ||
| Short-term yields > long-term yields | Inverted curve = recession warning | ||
| Inflation rising, holding fixed-income bonds | Real return eroding; purchasing power declining | ||
| Concept A | Concept B | Difference | |
| Leading indicator | Lagging indicator | Leading *predicts*; lagging *confirms* | |
| Normal yield curve | Inverted yield curve | Normal = growth expected; inverted = recession risk | |
| Nominal rate | Real rate | Nominal = quoted; real = adjusted for inflation | |
| Current yield | YTM | Current = coupon ÷ price (ignores maturity); YTM includes all cash flows to maturity | |
| D/E high | ROE high | D/E high = risky leverage; ROE high = efficient management |
``
P/E Ratio = Market Price ÷ Earnings Per Share
P/B Ratio = Market Price ÷ Book Value Per Share
D/E Ratio = Total Debt ÷ Total Equity
ROE = Net Income ÷ Shareholders' Equity
Real Rate ≈ Nominal Rate − Inflation
Current Yield = Annual Coupon ÷ Market Price
``
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✓ Use financial ratios to assess company valuation and health ✓ Leading indicators (LEI) predict recessions; lagging confirm them ✓ Inverted yield curve = most reliable recession signal ✓ Rising rates → shorten duration; falling rates → extend duration ✓ Inflation erodes real returns on fixed income ✓ P/E, P/B, D/E, ROE are the four core equity analysis ratios
Aligned to the NASAA Series 66 content outline.
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