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CFP Board · CFP

CFP practice questions with answers

15 free practice questions for the CFP® Certification Examination (CFP), spread across the exam's topics. Try each one, then open the answer to see why every option is right or wrong.

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  1. Question 1 · Professional Conduct and Regulation

    CFP Board's Procedural Rules primarily address which of the following?

    • AThe fiduciary and other duties CFP® professionals owe to their clients
    • BHow alleged violations of CFP Board's standards are investigated and adjudicated
    • CThe education, examination, and experience requirements for initial certification
    • DThe rules for properly displaying the CFP® certification marks
    Show answer and explanation

    Answer: B) How alleged violations of CFP Board's standards are investigated and adjudicated

    CFP Board's Procedural Rules set out the enforcement process: investigation by Enforcement Counsel and hearings and sanctions by the Disciplinary and Ethics Commission. The duties owed to clients themselves are in the Code of Ethics and Standards of Conduct.

    • AIncorrect. The duties owed to clients, including the fiduciary duty, are set out in the Code of Ethics and Standards of Conduct. The Procedural Rules govern how those standards are enforced.
    • BCorrect. The Procedural Rules govern CFP Board's enforcement process. Enforcement Counsel investigates potential violations, and the Disciplinary and Ethics Commission holds hearings and issues orders and sanctions, which can be appealed.
    • CIncorrect. Initial certification requirements are part of CFP Board's certification requirements, not the Procedural Rules. The Procedural Rules deal with enforcement and discipline.
    • DIncorrect. Proper use of the certification marks is covered by CFP Board's trademark usage guidance. Misuse can lead to enforcement, but the Procedural Rules themselves set out the disciplinary process.

  2. Question 2 · General Principles of Financial Planning

    A lender offers a lower mortgage rate if the borrower pays 2 points on a $300,000 loan. The cost of the points is:

    • A$6,000
    • B$600, at 0.1% per point
    • C$60,000, at 10% per point
    • D$2,000, at a flat $1,000 per point
    Show answer and explanation

    Answer: A) $6,000

    • ACorrect. Each point is 1% of the loan amount.
    • BIncorrect. A point is 1%.
    • CIncorrect. A point is 1%.
    • DIncorrect. Points are a percentage of the loan.

  3. Question 3 · General Principles of Financial Planning

    A $250,000, 30-year mortgage at 6% interest has a monthly principal and interest payment of about:

    • A$694, principal only with no interest
    • B$1,250, simple interest on the full balance
    • C$1,499
    • D$2,110, using a 15-year term
    Show answer and explanation

    Answer: C) $1,499

    • AIncorrect. Interest must be included.
    • BIncorrect. That isn't amortization.
    • CCorrect. A standard amortization calculation.
    • DIncorrect. That's the 15-year payment.

  4. Question 4 · Risk Management and Insurance Planning

    Which statement best describes how workers' compensation generally operates?

    • ABenefits are paid for job-related injuries regardless of fault, and the employee generally cannot also sue the employer
    • BBenefits are paid once the employee proves that the employer's negligence caused the job-related injury
    • CBenefits are reduced in proportion to the employee's own share of fault for the job-related injury
    • DBenefits are paid, and the employee may also sue the employer in tort for full damages for the same injury
    Show answer and explanation

    Answer: A) Benefits are paid for job-related injuries regardless of fault, and the employee generally cannot also sue the employer

    Workers' compensation is a no-fault system that pays benefits for job-related injuries. In exchange, it's generally the employee's exclusive remedy against the employer.

    • ACorrect. Workers' compensation is a no-fault system: benefits are payable whether or not anyone was at fault. In exchange, it's generally the employee's exclusive remedy against the employer, so a negligence suit is barred.
    • BIncorrect. Workers' compensation doesn't require the employee to prove employer negligence. Benefits are payable regardless of fault.
    • CIncorrect. Reducing an award by the plaintiff's share of fault is comparative negligence, a tort concept. Workers' compensation benefits generally don't depend on fault.
    • DIncorrect. Workers' compensation is generally the exclusive remedy against the employer and replaces the right to sue for negligence. Narrow exceptions exist, such as when an employer fails to carry required coverage.

  5. Question 5 · Risk Management and Insurance Planning

    A client is choosing between an HMO and a PPO offered by an employer. Compared with the PPO, the HMO generally:

    • ACharges higher monthly premiums in exchange for a wider choice of providers
    • BCovers routine out-of-network care, but with higher member cost-sharing
    • CLimits coverage to network providers and uses primary care referrals to specialists
    • DLets members see specialists directly without choosing a primary care provider
    Show answer and explanation

    Answer: C) Limits coverage to network providers and uses primary care referrals to specialists

    HMOs generally restrict coverage to in-network providers, except in emergencies, and use a primary care provider as gatekeeper for specialist referrals, usually with lower premiums. PPOs cost more but allow out-of-network care and direct specialist access.

    • AIncorrect. This describes a PPO. MedlinePlus notes that PPO members pay more in premiums than HMO members in return for more freedom to see providers. HMOs are generally associated with lower premiums.
    • BIncorrect. This is a PPO feature: members can see out-of-network providers for more money. HMOs generally don't cover out-of-network care except in an emergency.
    • CCorrect. An HMO usually limits coverage to providers who work for or contract with the plan. It typically requires a referral from the member's primary care provider before the member sees a specialist.
    • DIncorrect. This describes a PPO, where referrals aren't needed. In an HMO, a chosen primary care provider manages care and refers members to specialists.

  6. Question 6 · Investment Planning

    A portfolio returned 12% over the past year with a standard deviation of 20%. The risk-free rate was 2%. What is the portfolio's Sharpe ratio?

    • A2.00
    • B0.60
    • C0.70
    • D0.50
    Show answer and explanation

    Answer: D) 0.50

    The Sharpe ratio subtracts the risk-free rate from the portfolio return and divides the result by the standard deviation of portfolio returns: (12% − 2%) ÷ 20% = 0.50.

    • AIncorrect. This flips the ratio, dividing standard deviation by excess return (20% ÷ 10%).
    • BIncorrect. This divides the total return by standard deviation (12% ÷ 20%) without subtracting the risk-free rate.
    • CIncorrect. This adds the risk-free rate to the return ((12% + 2%) ÷ 20%) instead of subtracting it.
    • DCorrect. Sharpe ratio = (portfolio return − risk-free rate) ÷ standard deviation = (12% − 2%) ÷ 20% = 0.50.

  7. Question 7 · Investment Planning

    The semi-strong form of the efficient market hypothesis says prices reflect:

    • ANo information
    • BOnly past prices, so charting fails
    • CAll public and private information
    • DAll public information
    Show answer and explanation

    Answer: D) All public information

    • AIncorrect. It reflects public information.
    • BIncorrect. That's the weak form.
    • CIncorrect. That's the strong form.
    • DCorrect. So fundamental analysis can't consistently beat the market.

  8. Question 8 · Investment Planning

    The greatest diversification benefit comes from combining assets with a correlation of:

    • A+1.0, moving perfectly together
    • B−1.0
    • C+0.5
    • D0.9
    Show answer and explanation

    Answer: B) −1.0

    • AIncorrect. That gives no diversification.
    • BCorrect. Perfectly negative correlation.
    • CIncorrect. Lower correlation diversifies more.
    • DIncorrect. Lower correlation diversifies more.

  9. Question 9 · Tax Planning

    A nonbusiness bad debt that becomes totally worthless is generally treated as a:

    • AShort-term capital loss
    • BLong-term capital gain
    • CFully deductible ordinary loss
    • DNondeductible personal expense
    Show answer and explanation

    Answer: A) Short-term capital loss

    • ACorrect. Regardless of how long the debt was held.
    • BIncorrect. It's a loss.
    • CIncorrect. Nonbusiness bad debts are capital losses.
    • DIncorrect. It's deductible as a capital loss.

  10. Question 10 · Tax Planning

    An investor sells a stock at a loss in a taxable account and buys the same stock in their IRA within 30 days. Under IRS guidance, the loss is:

    • ADoubled for tax purposes, since two accounts are involved
    • BFully deductible, since IRAs are separate accounts
    • CDisallowed, and the IRA basis isn't increased
    • DAdded to the IRA's contribution limit
    Show answer and explanation

    Answer: C) Disallowed, and the IRA basis isn't increased

    • AIncorrect. That isn't a rule.
    • BIncorrect. The IRS treats it as a wash sale.
    • CCorrect. The loss may be permanently lost.
    • DIncorrect. That isn't how it works.

  11. Question 11 · Retirement Savings and Income Planning

    A widow is the sole beneficiary of her late husband's traditional IRA. Which of the following choices is available to her as a surviving spouse but would NOT be available to a non-spouse designated beneficiary, such as the couple's adult son?

    • ATaking the entire balance as a lump-sum distribution
    • BElecting to treat the inherited IRA as her own IRA
    • CEmptying the account under the 10-year rule
    • DKeeping the assets in an inherited IRA titled in the decedent's name
    Show answer and explanation

    Answer: B) Electing to treat the inherited IRA as her own IRA

    A surviving spouse who is the sole beneficiary has more options than other beneficiaries. In particular, only the spouse can treat the inherited IRA as her own, for example by rolling it into her own IRA.

    • AIncorrect. Any beneficiary, spouse or non-spouse, may take a lump-sum distribution of an inherited IRA.
    • BCorrect. Only a surviving spouse who is the sole beneficiary may treat the IRA as her own or roll it into her own IRA. She is then treated as the owner, not as a beneficiary.
    • CIncorrect. The 10-year rule is one of the spouse's options, but it is also the general rule for non-spouse designated beneficiaries, so it is not unique to the spouse.
    • DIncorrect. Non-spouse beneficiaries also keep inherited assets in an inherited (beneficiary) IRA, so this is not unique to a spouse.

  12. Question 12 · Retirement Savings and Income Planning

    To qualify for Social Security retirement benefits on their own record, a worker generally needs:

    • A40 credits, about 10 years of covered work
    • B5 credits, about one year of work
    • C100 credits, about 25 years of work
    • DNo work history at all
    Show answer and explanation

    Answer: A) 40 credits, about 10 years of covered work

    • ACorrect. Credits are earned from covered earnings.
    • BIncorrect. That isn't enough.
    • CIncorrect. That's more than required.
    • DIncorrect. Credits are required for own benefits.

  13. Question 13 · Retirement Savings and Income Planning

    A sole proprietor with no employees wants high contribution limits and the option of Roth deferrals. A suitable plan is:

    • AA SIMPLE IRA, which has the highest limits
    • BA solo 401(k)
    • CA 403(b), which is for nonprofits
    • DA 457(b), which is for governments
    Show answer and explanation

    Answer: B) A solo 401(k)

    • AIncorrect. Its limits are lower.
    • BCorrect. It allows employee deferrals, including Roth, plus employer contributions.
    • CIncorrect. It isn't available.
    • DIncorrect. It isn't available.

  14. Question 14 · Estate Planning

    Tenancy by the entirety is a form of ownership available only to:

    • ATrusts
    • BBusiness partners in any state
    • CSiblings
    • DMarried couples
    Show answer and explanation

    Answer: D) Married couples

    • AIncorrect. It's for married couples.
    • BIncorrect. It's for married couples.
    • CIncorrect. It's for married couples.
    • DCorrect. In states that recognize it.

  15. Question 15 · Psychology of Financial Planning

    A client who keeps an old default investment option without review shows:

    • AStatus quo bias
    • BRecency bias
    • CConfirmation bias
    • DAnchoring
    Show answer and explanation

    Answer: A) Status quo bias

    • ACorrect. Preferring the current state.
    • BIncorrect. It's status quo bias.
    • CIncorrect. It's status quo bias.
    • DIncorrect. It's status quo bias.

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