CFP FUNDAMENTALS OF FINANCIAL
PLANNING COURSE EXAM QUESTIONS
WITH CORRECT ANSWERS
Behavioral Finance - ANSWER-Basic Premises:
1. Investors are normal people with cognitive biases and make errors
2. Markets are not efficient
3. Behavioral portfolio theory governs
4. Risk alone does not determine returns
Anchoring - ANSWER-Attaching one's thoughts to a reference point even though there
may be no relevance or is not pertinent to the issue at hand
Confirmation Bias - ANSWER-tendency to filter information that only supports your
opinion
Herding - ANSWER-People tend to follow the masses
Recency Bias - ANSWER-Too much weight to recent observations
Hindsight bias - ANSWER-the tendency to believe, after learning an outcome, that one
would have foreseen it
Overconfidence - ANSWER-the tendency to be more confident than correct
Overreaction - ANSWER-to react or respond more strongly than is necessary or
appropriate
Prospect theory - ANSWER-People value gains and losses differently. Decisions are
based on perceived gains rather than perceived losses
Disposition Effect - ANSWER-investors are willing to realize gains but unwilling to
realize losses
Mental Accounting - ANSWER-Valuing your money differently in your head based on
their proposed uses ie easier to spend on a vacation than on debt
Life cycle approach overview - ANSWER-- Data collection is quick, simple, and
nonthreatening
- Brief overview of financial profile to assist with initial conversation
- Used early in engagement
,Pie chart approach overview - ANSWER-- Visual representation of financial resources
and how they are utilized
- Revealing to client on cash flow sources and their uses
Financial statement and ratio analysis approach overview - ANSWER-- Establishes
financial snapshot as of today
- Opportunity to asses client's strengths, weaknesses, and deficiencies
- Easy to compare to benchmarks
Information collected during life cycle approach - ANSWER-- Ages of client and partner
- Marital status
- Number/ages of children/grandchildren
- Family income
- Family net worth
- Employment status
Asset accumulation phase - ANSWER-- Early 20s to mid 50s
- Discretionary cash flow for investing is low
- Debt to net worth ratio is high
Conservation (risk management) phase - ANSWER-- Late 20s to early 70s
- Cash flow, assets, net worth have increased
- Debts have decreased (somewhat)
- Risk management of catastrophic events
Distribution (gifting) phase - ANSWER-- Mid 402/early 50s through end of life
- High cash flow and net worth
- Low debt
Income statement pie chart - ANSWER-Breaks down the percentage of categorized
expenditures to gross income
- IE visualized what percent of your gross income is being spent where
Balance sheet pie chart - ANSWER-- One for assets and one for liabilities/net worth
- Depicts percentages of assets and liabilities as to compared to overall totals of each
Liquidity ratios - ANSWER-Measure client's ability to meet short-term obligations
Debt ratios - ANSWER-Indicates how well client manages debt and the quality of that
debt
Ratios for financial security goals - ANSWER-These ratios assess the progress that the
client is making toward achieving long-term financial security goals.
Performance ratios - ANSWER-Indicate adequacy of returns on investments given the
risks taken
, Emergency fund ratio - ANSWER-- Cash&equivalents/Monthly NONdiscretionary CFs
- Determines how long clients can pay nondiscretionary cash flows out of current cash
and equivalents
- Should cover at least 3-6 months of nondiscretionary CFs
- True amount is dependent upon client circumstances
Discretionary Cash Flows - ANSWER-Expenses which can be avoided in the event of
loss of income
Nondisretionary Cash Flows - ANSWER-Fixed obligations and expenses that are
required to be paid
Current Ratio - ANSWER-- Cash&Equiv/Current liabilities
- Client's ability to meet short-term obligations as they come due
- Larger ratio implies more liquidity
- Can be modified dependent upon how short-term obligatins are bet (ie C&E or current
income).
Housing Ratio 1 (HR1) - ANSWER-- Housing costs/gross pay
- Includes mortgage or rent payments, interest, insurance, taxes, and other due if
applicable
- Ratio covers basic housing expenses
Housing Ratio 2 (HR2) - ANSWER-- Housing costs+other debt repayments/gross pay
- Combines HR1 with all other debt repayments
Debt to Total Assets - ANSWER-- total debt/total assets
- Leverage ratio
- Young people have high ratios while older SHOULD have lower
- Considered best to monitor progress
Net Worth to total assets - ANSWER-- Net worth/total assets
- Percentage of total assets owner or paid for by clients
- Low for younger and higher for older
Savings rate - ANSWER-- Savings+ER match/Gross pay
- Indicates percentage of gross pay saved for financial goals on an annual basis
Investment Assets to gross pay - ANSWER-- Investment Assets + Cash&Equiv/Gross
pay
- Provides good information on current progress towards goals
Return on Investments - ANSWER-- I1 - (I0 + Savings)/I0
- Arithmetic Return calculation
PLANNING COURSE EXAM QUESTIONS
WITH CORRECT ANSWERS
Behavioral Finance - ANSWER-Basic Premises:
1. Investors are normal people with cognitive biases and make errors
2. Markets are not efficient
3. Behavioral portfolio theory governs
4. Risk alone does not determine returns
Anchoring - ANSWER-Attaching one's thoughts to a reference point even though there
may be no relevance or is not pertinent to the issue at hand
Confirmation Bias - ANSWER-tendency to filter information that only supports your
opinion
Herding - ANSWER-People tend to follow the masses
Recency Bias - ANSWER-Too much weight to recent observations
Hindsight bias - ANSWER-the tendency to believe, after learning an outcome, that one
would have foreseen it
Overconfidence - ANSWER-the tendency to be more confident than correct
Overreaction - ANSWER-to react or respond more strongly than is necessary or
appropriate
Prospect theory - ANSWER-People value gains and losses differently. Decisions are
based on perceived gains rather than perceived losses
Disposition Effect - ANSWER-investors are willing to realize gains but unwilling to
realize losses
Mental Accounting - ANSWER-Valuing your money differently in your head based on
their proposed uses ie easier to spend on a vacation than on debt
Life cycle approach overview - ANSWER-- Data collection is quick, simple, and
nonthreatening
- Brief overview of financial profile to assist with initial conversation
- Used early in engagement
,Pie chart approach overview - ANSWER-- Visual representation of financial resources
and how they are utilized
- Revealing to client on cash flow sources and their uses
Financial statement and ratio analysis approach overview - ANSWER-- Establishes
financial snapshot as of today
- Opportunity to asses client's strengths, weaknesses, and deficiencies
- Easy to compare to benchmarks
Information collected during life cycle approach - ANSWER-- Ages of client and partner
- Marital status
- Number/ages of children/grandchildren
- Family income
- Family net worth
- Employment status
Asset accumulation phase - ANSWER-- Early 20s to mid 50s
- Discretionary cash flow for investing is low
- Debt to net worth ratio is high
Conservation (risk management) phase - ANSWER-- Late 20s to early 70s
- Cash flow, assets, net worth have increased
- Debts have decreased (somewhat)
- Risk management of catastrophic events
Distribution (gifting) phase - ANSWER-- Mid 402/early 50s through end of life
- High cash flow and net worth
- Low debt
Income statement pie chart - ANSWER-Breaks down the percentage of categorized
expenditures to gross income
- IE visualized what percent of your gross income is being spent where
Balance sheet pie chart - ANSWER-- One for assets and one for liabilities/net worth
- Depicts percentages of assets and liabilities as to compared to overall totals of each
Liquidity ratios - ANSWER-Measure client's ability to meet short-term obligations
Debt ratios - ANSWER-Indicates how well client manages debt and the quality of that
debt
Ratios for financial security goals - ANSWER-These ratios assess the progress that the
client is making toward achieving long-term financial security goals.
Performance ratios - ANSWER-Indicate adequacy of returns on investments given the
risks taken
, Emergency fund ratio - ANSWER-- Cash&equivalents/Monthly NONdiscretionary CFs
- Determines how long clients can pay nondiscretionary cash flows out of current cash
and equivalents
- Should cover at least 3-6 months of nondiscretionary CFs
- True amount is dependent upon client circumstances
Discretionary Cash Flows - ANSWER-Expenses which can be avoided in the event of
loss of income
Nondisretionary Cash Flows - ANSWER-Fixed obligations and expenses that are
required to be paid
Current Ratio - ANSWER-- Cash&Equiv/Current liabilities
- Client's ability to meet short-term obligations as they come due
- Larger ratio implies more liquidity
- Can be modified dependent upon how short-term obligatins are bet (ie C&E or current
income).
Housing Ratio 1 (HR1) - ANSWER-- Housing costs/gross pay
- Includes mortgage or rent payments, interest, insurance, taxes, and other due if
applicable
- Ratio covers basic housing expenses
Housing Ratio 2 (HR2) - ANSWER-- Housing costs+other debt repayments/gross pay
- Combines HR1 with all other debt repayments
Debt to Total Assets - ANSWER-- total debt/total assets
- Leverage ratio
- Young people have high ratios while older SHOULD have lower
- Considered best to monitor progress
Net Worth to total assets - ANSWER-- Net worth/total assets
- Percentage of total assets owner or paid for by clients
- Low for younger and higher for older
Savings rate - ANSWER-- Savings+ER match/Gross pay
- Indicates percentage of gross pay saved for financial goals on an annual basis
Investment Assets to gross pay - ANSWER-- Investment Assets + Cash&Equiv/Gross
pay
- Provides good information on current progress towards goals
Return on Investments - ANSWER-- I1 - (I0 + Savings)/I0
- Arithmetic Return calculation
