Free CFP Exam Investment Planning Practice Questions
Investment planning on the CFP exam covers asset classes, modern portfolio theory, security analysis, strategic and tactical asset allocation, and the regulatory environment for investment advisors. This is one of the most heavily tested domains (CFP Board).
Sample Questions
Question 1
Easy
A portfolio had the following annual returns: Year 1: +20%, Year 2: -10%, Year 3: +15%. What is the arithmetic mean return?
Solution
A is correct.
The arithmetic mean return is calculated by summing all period returns and dividing by the number of periods: (20% + (-10%) + 15%) / 3 = 25% / 3 = 8.33%. The arithmetic mean is the simple average and tends to overstate the compound growth rate when returns are volatile. The geometric mean (which accounts for compounding) would be lower than 8.33% due to the volatility of returns.
The arithmetic mean return is calculated by summing all period returns and dividing by the number of periods: (20% + (-10%) + 15%) / 3 = 25% / 3 = 8.33%. The arithmetic mean is the simple average and tends to overstate the compound growth rate when returns are volatile. The geometric mean (which accounts for compounding) would be lower than 8.33% due to the volatility of returns.
Question 2
Medium
Tax-loss harvesting is most beneficial for investors who:
Solution
C is correct.
Tax-loss harvesting is most beneficial for investors who have realized capital gains in taxable accounts because the harvested losses can offset those gains, reducing the current-year tax liability. The strategy involves selling depreciated securities to realize losses and reinvesting in similar (but not substantially identical) securities to maintain market exposure.
Tax-loss harvesting is most beneficial for investors who have realized capital gains in taxable accounts because the harvested losses can offset those gains, reducing the current-year tax liability. The strategy involves selling depreciated securities to realize losses and reinvesting in similar (but not substantially identical) securities to maintain market exposure.
Question 3
Hard
A planner is evaluating venture capital for a client's portfolio. Which characteristic MOST distinguishes venture capital from other alternative investments in terms of liquidity risk?
Solution
C is correct.
Venture capital's distinctive liquidity characteristic is the J-curve effect: investors fund capital calls over several years with no distributions, and returns are heavily dependent on a few portfolio companies achieving successful exits (IPO or acquisition). Most investments in a VC fund may fail, with total fund returns driven by a small number of winners — creating both extreme illiquidity and uncertain timing of any cash flows.
Venture capital's distinctive liquidity characteristic is the J-curve effect: investors fund capital calls over several years with no distributions, and returns are heavily dependent on a few portfolio companies achieving successful exits (IPO or acquisition). Most investments in a VC fund may fail, with total fund returns driven by a small number of winners — creating both extreme illiquidity and uncertain timing of any cash flows.