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Practice and exam technique

Practice questions: investment planning

Compiled by the Sitonce editorial team from CFP Board sources listed belowUpdated 4 min readFacts verified 1 September 2026
The short answer

Investment planning is 17 per cent of the exam. These five cover choosing between risk-adjusted measures, correlation and diversification, duration, asset location and the concentrated position problem.

Answer each before reading the explanation. Several of these turn on choosing the right tool rather than on computing anything.

Question 1

Fund A returned 11 per cent with a standard deviation of 14 and a beta of 0.9. Fund B returned 12 per cent with a standard deviation of 20 and a beta of 1.1. Fund B has an R-squared of 0.35. Which measure should be used to compare them?

  1. Treynor, because both have a beta
  2. Jensen's alpha, because both have a beta
  3. Sharpe, because Fund B is not well diversified
  4. Either, since both give the same ranking
Answer: C. An R-squared of 0.35 means very little of Fund B's movement is explained by the market, so its beta is unreliable and any measure built on beta is unreliable with it. Standard deviation and the Sharpe ratio are the appropriate tools when a portfolio is not well diversified.
Question 2

A client holds a portfolio with a standard deviation of 12 per cent. An adviser proposes adding an asset class with a standard deviation of 22 per cent and a correlation of 0.1 with the existing portfolio. What is the likely effect on portfolio risk?

  1. It will rise, because the new asset is riskier
  2. It will rise proportionally to the allocation
  3. It may fall, because the correlation is low
  4. It will be unchanged
Answer: C. Adding an asset with higher standard deviation can reduce total portfolio risk where its correlation with the existing portfolio is low enough. Any correlation below one produces a diversification benefit, and 0.1 is very low. This is the most examined idea in portfolio theory.
Question 3

A client holds a bond fund with a duration of 6.5 and asks what happens if rates rise by one percentage point. The best short answer is:

  1. The fund will fall by about 6.5 per cent
  2. The fund will rise by about 6.5 per cent
  3. The fund will fall by about 1 per cent
  4. Duration does not predict price movement
Answer: A. Duration approximates price sensitivity to a change in yield, in the opposite direction. A duration of 6.5 implies roughly a 6.5 per cent fall for a one percentage point rise. Convexity means the real fall is slightly smaller, which is a refinement rather than a different answer.
Question 4

A client holds a taxable brokerage account, a traditional IRA and a Roth IRA, with a target allocation already agreed. Where should a taxable bond fund be held?

  1. Taxable account, for liquidity
  2. Traditional IRA
  3. Roth IRA, for tax-free growth
  4. Split evenly to maintain balance in each account
Answer: B. Taxable bonds generate ordinary income and belong in a tax-deferred account. The Roth should hold the highest expected return assets, since growth there is never taxed. Option D describes maintaining the allocation within each account, which sacrifices asset location for no benefit.
Question 5

A client holds a single stock worth 60 per cent of her portfolio, with a very low basis and a large embedded gain. She is charitably inclined. Which approach best addresses the concentration?

  1. Sell immediately and diversify, accepting the tax
  2. Hold until death for the step-up in basis
  3. A charitable remainder trust funded with the stock
  4. Buy put options on the position
Answer: C. A charitable remainder trust is tax exempt, so it can sell the position without immediate capital gains tax, pay her an income stream from the full proceeds, and generate a deduction for the present value of the remainder. Her stated charitable intent is what makes it the best answer rather than merely a possible one.

What these five test

Three of them test tool selection rather than calculation, which is the shape of this domain. Knowing that beta needs a high R-squared matters more than being able to compute either.

And question five is really a case study in miniature: investment concentration, tax, charitable planning and income need in one scenario, which is what the exam is built around.

Figures are for the 2026 tax year

Dollar limits and thresholds are indexed annually. Confirm current figures before relying on them; the exam tests the rule rather than the number.

Common questions

When should you use Sharpe rather than Treynor?

When R-squared is low and the portfolio is not well diversified. Beta is then unreliable, and any measure built on it is unreliable with it.

Can a riskier asset reduce portfolio risk?

Yes, where its correlation with the existing portfolio is low enough. Any correlation below one produces a diversification benefit, which is the most examined idea in portfolio theory.

What does duration tell you?

Approximate price sensitivity to a change in yield, in the opposite direction. A duration of 6.5 implies roughly a 6.5 per cent fall for a one percentage point rise in rates.

Where should taxable bonds be held?

In a tax-deferred account, because they generate ordinary income. The Roth should hold the highest expected return assets, since growth there is never taxed.

How do you address a concentrated low-basis position?

It depends on the client. Where there is genuine charitable intent, a charitable remainder trust diversifies without immediate tax, produces income and generates a deduction at once.

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