Certified Financial Planner (CFP)
Practice Exam Questions And Correct
Answers (Verified Answers) Plus
Rationales 2025|2026 Q&A | Instant
Download Pdf
1. Which of the following is a key step in the financial planning process?
A. Ignoring client goals
B. Establishing and defining the client–planner relationship
C. Investing before setting goals
D. Avoiding documentation
Rationale: The first step in the CFP process is establishing and defining
the relationship, which includes roles, responsibilities, and
compensation.
2. Which type of risk refers to the possibility that an investment’s return
will be affected by market-wide factors?
, A. Unsystematic risk
B. Systematic risk
C. Business risk
D. Default risk
Rationale: Systematic risk affects the entire market and cannot be
diversified away.
3. What is the primary purpose of diversification?
A. To increase returns
B. To increase risk
C. To reduce unsystematic risk
D. To eliminate systematic risk
Rationale: Diversification spreads investments across assets to reduce
company-specific (unsystematic) risk.
4. What is the main advantage of a Roth IRA?
A. Pre-tax contributions
B. Tax-free withdrawals in retirement
C. Employer match
D. Required minimum distributions
Rationale: Roth IRAs are funded with after-tax dollars, and qualified
withdrawals are tax-free.
,5. Which financial statement shows a client’s assets, liabilities, and net
worth?
A. Balance sheet
B. Income statement
C. Cash flow statement
D. Budget
Rationale: The balance sheet provides a snapshot of net worth by
listing assets and liabilities.
6. What is the main goal of insurance planning?
A. Increase investment returns
B. Manage financial risk
C. Avoid all risk
D. Lower taxes
Rationale: Insurance planning is about transferring or mitigating
financial risks.
7. Which of the following is a qualified retirement plan?
A. Roth IRA
B. 401(k) plan
C. Nonqualified deferred comp plan
, D. Brokerage account
Rationale: A 401(k) is a tax-advantaged, employer-sponsored qualified
plan.
8. Which investment is most liquid?
A. Real estate
B. Certificate of deposit
C. Corporate bond
D. Money market fund
Rationale: Money market funds can be quickly converted to cash with
minimal loss.
9. Which estate planning document allows an individual to appoint
someone to make financial decisions if incapacitated?
A. Will
B. Living trust
C. Durable power of attorney
D. Living will
Rationale: A durable power of attorney grants authority to handle
finances if the individual becomes incapacitated.
Practice Exam Questions And Correct
Answers (Verified Answers) Plus
Rationales 2025|2026 Q&A | Instant
Download Pdf
1. Which of the following is a key step in the financial planning process?
A. Ignoring client goals
B. Establishing and defining the client–planner relationship
C. Investing before setting goals
D. Avoiding documentation
Rationale: The first step in the CFP process is establishing and defining
the relationship, which includes roles, responsibilities, and
compensation.
2. Which type of risk refers to the possibility that an investment’s return
will be affected by market-wide factors?
, A. Unsystematic risk
B. Systematic risk
C. Business risk
D. Default risk
Rationale: Systematic risk affects the entire market and cannot be
diversified away.
3. What is the primary purpose of diversification?
A. To increase returns
B. To increase risk
C. To reduce unsystematic risk
D. To eliminate systematic risk
Rationale: Diversification spreads investments across assets to reduce
company-specific (unsystematic) risk.
4. What is the main advantage of a Roth IRA?
A. Pre-tax contributions
B. Tax-free withdrawals in retirement
C. Employer match
D. Required minimum distributions
Rationale: Roth IRAs are funded with after-tax dollars, and qualified
withdrawals are tax-free.
,5. Which financial statement shows a client’s assets, liabilities, and net
worth?
A. Balance sheet
B. Income statement
C. Cash flow statement
D. Budget
Rationale: The balance sheet provides a snapshot of net worth by
listing assets and liabilities.
6. What is the main goal of insurance planning?
A. Increase investment returns
B. Manage financial risk
C. Avoid all risk
D. Lower taxes
Rationale: Insurance planning is about transferring or mitigating
financial risks.
7. Which of the following is a qualified retirement plan?
A. Roth IRA
B. 401(k) plan
C. Nonqualified deferred comp plan
, D. Brokerage account
Rationale: A 401(k) is a tax-advantaged, employer-sponsored qualified
plan.
8. Which investment is most liquid?
A. Real estate
B. Certificate of deposit
C. Corporate bond
D. Money market fund
Rationale: Money market funds can be quickly converted to cash with
minimal loss.
9. Which estate planning document allows an individual to appoint
someone to make financial decisions if incapacitated?
A. Will
B. Living trust
C. Durable power of attorney
D. Living will
Rationale: A durable power of attorney grants authority to handle
finances if the individual becomes incapacitated.
