CFP EXAM QUESTIONS & ANSWERS 2025
What are the Laws of Agency (insurance)? - Answers :Express authority, Implied
Authority, Apparent authority
What are the Exemptions to Filing as an Investment Adviser? - Answers :- Advisor
whose only clients are insurance companies
- Family office
What are the Exceptions to Filing as an Investment Adviser? - Answers :- Banks that
are not also investment companies
- Lawyers, accountants, teachers - advice is incidental
- Broker/dealers or registered reps whose performance is incidental and who get no
special compensation for advice.
- Publishers of bona fide newspapers
- Those who give advice solely relating to U.S. government securities.
(BLAT)
How does an Investment Adviser register with the SEC? - Answers :- Initially, files the
ADV Part I and II with the SEC
- Pays a minimum filing fee of $150
- RIA must submit Part I of ADV and Schedule I annually
What is Gross Domestic Product (GDP)? - Answers :- Total dollar value of all goods and
services produced within the US ONLY.
- counts economic activity without regard to yearly price fluctuations.
- Does NOT include any income generated outside the U.S. or adjustments for foreign
currencies.
The challenge of reconciling two opposing beliefs.
Example: Remembering the positive part of an experience but forgetting the negative.
(Getting drunk and a hangover) - Answers :What is Cognitive Dissonance?
Holding onto an investment for emotional reasons rather than considering more
practical applications.
Example: My grandfather left me this stock so I can never sell it. - Answers :What is
Attachment Bias?
The tendency to take no action rather than risk making the wrong one.
Example: An investor holds onto a stock that's losing value, because if they sold it and
rebounded, they would feel even worse. - Answers :What is Fear of Regret?
,Investors tend to diversify evenly across whatever options are presented to them.
Example: consider the style-box mania where investors feel compelled to own a piece
of each box in order to feel diversified. 401K participants tend to spread their money
across whatever options they have. - Answers :What is Diversification Errors?
An individual erroneously believes that the onset of a certain random event is likely to
happen following an event or a series of events.
Example: Some investors believe that they should liquidate a position after it has gone
up in a series of subsequent trading sessions because they do not believe that the
position is likely to continue going up. Conversely, other investors might hold on to a
stock that has fallen in multiple sessions because they view further declines as
improbable. The solution is investors should base their decisions on analysis. - Answers
:What is Gambler's Fallacy?
Couples or partners with shared money or finances being dishonest with each other.
Example: one partner hiding excessive spending, debt, etc. from the other person. -
Answers :What is Financial Infidelity?
The 20/20 vision we have when looking at a past event and thinking we understand it,
when in reality we may not. - Answers :What is Hindsight Bias?
The belief that when something goes right, it is because you were smart and made the
right decision. If it does not work out, it is someone else's fault or simply bad luck. -
Answers :What is Self-Affirmation Bias?
Investors emotionally react towards new market information.
Example: Good news comes out on a stock that should raise the price accordingly.
However, participants overreact to the new information creating a larger-than-
appropriate effect on the security. But the truth is new information should more or less
be reflected instantly in the security's price. Although the change is usually sudden and
sizable, the surge erodes over time. - Answers :What is Overreaction?
Experiences and biases that can facilitate problem-solving and probability judgements.
Examples in daily life are "trial and error" and "rules of thumb"
These strategies are generalizations that can result in inaccurate or irrational
conclusions. - Answers :What is Heuristics?
What is Behavioral Finance? - Answers :The study of how psychology affects finance.
The tendency of investors to do nothing when action is actually called for.
,Example: None necessary, it is an everyday occurrence. - Answers :What is Status Quo
Bias?
The tendency for individuals to mimic the actions of a larger group. Can also be
described as Fear of Missing Out (FOMO).
Example: This was exhibited in the late 1900's as venture capitalists and private
investors were frantically investing huge amounts of money into internet-related
companies. Avoiding is steering clear of a bandwagon. Those overvalued investments
took a big hit from which many have not recovered. - Answers :What is Herd Behavior?
Investors seek patterns that help support decisions sometimes without adequate
confirming research.
Example: When the NFC wins the Super Bowl is not a basis for an investment decision.
- Answers :What is Spotting Trends that are not there?
The tendency to make a decision based on the desired outcome rather than on the
probability of that outcome.
Example: The investor wants to double his money in an investment without doing
adequate research. - Answers :What is Outcome Bias?
This is the tendency to place too much emphasis on one's own abilities. - Answers
:What is Overconfidence?
The feeling that because you own an asset, it is more valuable and special since it is
yours. In reality, you might not even purchase the asset if you didn't already own it.
Example: You inherited the family summer home and wouldn't ever sell it even though it
has become a money pit. - Answers :What is endowment bias?
The tendency of investors to become attached to a specific price as the fair market
value of a holding.
Example: You bought a stock at $100 a share. It drops to $50. You believe that the
stock's "real" value is around $100 and based on this expectation you are inclined to
hang on since it "should" come back. - Answers :What is Anchoring?
The natural human tendency to accept any information that confirms our preconceived
position or opinion and to disregard any information that does not support that
preconceived notion.
Example: An investor hears about a hot stock from an unverified source and is intrigued
by the potential returns. That investor might choose to research the stock in order to
, prove its touted potential is real by focusing only on the positive aspects of the stock
and disregarding any negative aspects. - Answers :What is Confirmation Bias?
This entails looking at sums of money differently, depending on their source or intended
use.
Example: Some investors divide their investments between a safe investment portfolio
and a speculative portfolio in order to prevent the negative returns that speculative
investments may have from affecting the entire portfolio. All money is the same. You
invest in CD's (low interest) but you still have outstanding debt in your house at 5%
(worse vet credit cards). The interest on your debt will erode any interest you can earn.
While savings is important, sometimes it makes more sense to forego your savings in
order to pay off debt. - Answers :What is Mental Accounting?
The tendency to look at recent events (or market performance) and assume that those
events or conditions will continue indefinitely.
Example: The bond market has outperformed the stock market for the past year and will
continue to do so for the future because of the continued economic downturn. - Answers
:What is Inappropriate Extrapolation?
After a prolonged period of solid returns, the stock market declines by 15%. Immediately
thereafter, all kinds of "experts" appear on television and in the mass media,
proclaiming that we were long overdue for a correction, as if the decline were obvious
and inevitable. But where were these experts before the event? If it was so obvious,
why weren't they speaking up before the market took a dive? If it was so obvious, why
didn't investors start cashing out just prior to the sell-off? Hindsight biases also regularly
manifest themselves between investment advisors and their clients. Once the reasons
why an investment performed poorly are understood, it becomes difficult to understand
why it wasn't avoided. - Answers :What is an example of Hindsight Bias?
Investors like patterns, and recent past represents a nice, easy-to-find pattern that can
become the basis for an investment decision. A fund that just had a great year, or a
stock that has had a great recent run, can influence investors to pull the trigger based
on the assumption that the recent past will repeat itself in the future, but they make this
decision with little real research. The same holds true for broader trends. The problem is
that while some tend to persist, others tend to revert to the mean, and there is no way to
gauge which is more likely without doing research. - Answers :What is Over-weighting
the recent past?
An investor reads a study that says short-term mutual fund winners tend to persist. On
that basis he decides to invest in several top funds from the prior year, and to revisit his
holdings the following year. A few funds do well, but one collapses as its highly specific
investment and aggressive style falls out of favor, leading to poor overall results. -
Answers :What is an example of Overweighting the Recent Past?
What are the Laws of Agency (insurance)? - Answers :Express authority, Implied
Authority, Apparent authority
What are the Exemptions to Filing as an Investment Adviser? - Answers :- Advisor
whose only clients are insurance companies
- Family office
What are the Exceptions to Filing as an Investment Adviser? - Answers :- Banks that
are not also investment companies
- Lawyers, accountants, teachers - advice is incidental
- Broker/dealers or registered reps whose performance is incidental and who get no
special compensation for advice.
- Publishers of bona fide newspapers
- Those who give advice solely relating to U.S. government securities.
(BLAT)
How does an Investment Adviser register with the SEC? - Answers :- Initially, files the
ADV Part I and II with the SEC
- Pays a minimum filing fee of $150
- RIA must submit Part I of ADV and Schedule I annually
What is Gross Domestic Product (GDP)? - Answers :- Total dollar value of all goods and
services produced within the US ONLY.
- counts economic activity without regard to yearly price fluctuations.
- Does NOT include any income generated outside the U.S. or adjustments for foreign
currencies.
The challenge of reconciling two opposing beliefs.
Example: Remembering the positive part of an experience but forgetting the negative.
(Getting drunk and a hangover) - Answers :What is Cognitive Dissonance?
Holding onto an investment for emotional reasons rather than considering more
practical applications.
Example: My grandfather left me this stock so I can never sell it. - Answers :What is
Attachment Bias?
The tendency to take no action rather than risk making the wrong one.
Example: An investor holds onto a stock that's losing value, because if they sold it and
rebounded, they would feel even worse. - Answers :What is Fear of Regret?
,Investors tend to diversify evenly across whatever options are presented to them.
Example: consider the style-box mania where investors feel compelled to own a piece
of each box in order to feel diversified. 401K participants tend to spread their money
across whatever options they have. - Answers :What is Diversification Errors?
An individual erroneously believes that the onset of a certain random event is likely to
happen following an event or a series of events.
Example: Some investors believe that they should liquidate a position after it has gone
up in a series of subsequent trading sessions because they do not believe that the
position is likely to continue going up. Conversely, other investors might hold on to a
stock that has fallen in multiple sessions because they view further declines as
improbable. The solution is investors should base their decisions on analysis. - Answers
:What is Gambler's Fallacy?
Couples or partners with shared money or finances being dishonest with each other.
Example: one partner hiding excessive spending, debt, etc. from the other person. -
Answers :What is Financial Infidelity?
The 20/20 vision we have when looking at a past event and thinking we understand it,
when in reality we may not. - Answers :What is Hindsight Bias?
The belief that when something goes right, it is because you were smart and made the
right decision. If it does not work out, it is someone else's fault or simply bad luck. -
Answers :What is Self-Affirmation Bias?
Investors emotionally react towards new market information.
Example: Good news comes out on a stock that should raise the price accordingly.
However, participants overreact to the new information creating a larger-than-
appropriate effect on the security. But the truth is new information should more or less
be reflected instantly in the security's price. Although the change is usually sudden and
sizable, the surge erodes over time. - Answers :What is Overreaction?
Experiences and biases that can facilitate problem-solving and probability judgements.
Examples in daily life are "trial and error" and "rules of thumb"
These strategies are generalizations that can result in inaccurate or irrational
conclusions. - Answers :What is Heuristics?
What is Behavioral Finance? - Answers :The study of how psychology affects finance.
The tendency of investors to do nothing when action is actually called for.
,Example: None necessary, it is an everyday occurrence. - Answers :What is Status Quo
Bias?
The tendency for individuals to mimic the actions of a larger group. Can also be
described as Fear of Missing Out (FOMO).
Example: This was exhibited in the late 1900's as venture capitalists and private
investors were frantically investing huge amounts of money into internet-related
companies. Avoiding is steering clear of a bandwagon. Those overvalued investments
took a big hit from which many have not recovered. - Answers :What is Herd Behavior?
Investors seek patterns that help support decisions sometimes without adequate
confirming research.
Example: When the NFC wins the Super Bowl is not a basis for an investment decision.
- Answers :What is Spotting Trends that are not there?
The tendency to make a decision based on the desired outcome rather than on the
probability of that outcome.
Example: The investor wants to double his money in an investment without doing
adequate research. - Answers :What is Outcome Bias?
This is the tendency to place too much emphasis on one's own abilities. - Answers
:What is Overconfidence?
The feeling that because you own an asset, it is more valuable and special since it is
yours. In reality, you might not even purchase the asset if you didn't already own it.
Example: You inherited the family summer home and wouldn't ever sell it even though it
has become a money pit. - Answers :What is endowment bias?
The tendency of investors to become attached to a specific price as the fair market
value of a holding.
Example: You bought a stock at $100 a share. It drops to $50. You believe that the
stock's "real" value is around $100 and based on this expectation you are inclined to
hang on since it "should" come back. - Answers :What is Anchoring?
The natural human tendency to accept any information that confirms our preconceived
position or opinion and to disregard any information that does not support that
preconceived notion.
Example: An investor hears about a hot stock from an unverified source and is intrigued
by the potential returns. That investor might choose to research the stock in order to
, prove its touted potential is real by focusing only on the positive aspects of the stock
and disregarding any negative aspects. - Answers :What is Confirmation Bias?
This entails looking at sums of money differently, depending on their source or intended
use.
Example: Some investors divide their investments between a safe investment portfolio
and a speculative portfolio in order to prevent the negative returns that speculative
investments may have from affecting the entire portfolio. All money is the same. You
invest in CD's (low interest) but you still have outstanding debt in your house at 5%
(worse vet credit cards). The interest on your debt will erode any interest you can earn.
While savings is important, sometimes it makes more sense to forego your savings in
order to pay off debt. - Answers :What is Mental Accounting?
The tendency to look at recent events (or market performance) and assume that those
events or conditions will continue indefinitely.
Example: The bond market has outperformed the stock market for the past year and will
continue to do so for the future because of the continued economic downturn. - Answers
:What is Inappropriate Extrapolation?
After a prolonged period of solid returns, the stock market declines by 15%. Immediately
thereafter, all kinds of "experts" appear on television and in the mass media,
proclaiming that we were long overdue for a correction, as if the decline were obvious
and inevitable. But where were these experts before the event? If it was so obvious,
why weren't they speaking up before the market took a dive? If it was so obvious, why
didn't investors start cashing out just prior to the sell-off? Hindsight biases also regularly
manifest themselves between investment advisors and their clients. Once the reasons
why an investment performed poorly are understood, it becomes difficult to understand
why it wasn't avoided. - Answers :What is an example of Hindsight Bias?
Investors like patterns, and recent past represents a nice, easy-to-find pattern that can
become the basis for an investment decision. A fund that just had a great year, or a
stock that has had a great recent run, can influence investors to pull the trigger based
on the assumption that the recent past will repeat itself in the future, but they make this
decision with little real research. The same holds true for broader trends. The problem is
that while some tend to persist, others tend to revert to the mean, and there is no way to
gauge which is more likely without doing research. - Answers :What is Over-weighting
the recent past?
An investor reads a study that says short-term mutual fund winners tend to persist. On
that basis he decides to invest in several top funds from the prior year, and to revisit his
holdings the following year. A few funds do well, but one collapses as its highly specific
investment and aggressive style falls out of favor, leading to poor overall results. -
Answers :What is an example of Overweighting the Recent Past?
