CFP® MCQ: Investment Planning

Try 10 focused CFP® MCQ questions on Investment Planning, with answers and explanations, then continue with Securities Prep.

Topic snapshot

Sample questions

These questions are original Securities Prep practice items aligned to this topic area. They are designed for self-assessment and are not official exam questions.

Question 1

Topic: Investment Planning

Jordan, age 57, asks her CFP professional to move the fixed-income portion of her RRSP into a technology sector ETF after a strong year for technology stocks. She says she accepts the risk and does not want to revisit the investment policy statement (IPS).

Exhibit: Portfolio review extract

Which next action is most appropriate?

• A. Execute the switch because Jordan accepts the risk.
• B. Treat the tech ETF as diversified equity exposure.
• C. Pause, reassess suitability, and explain the IPS conflict.
• D. Revise the IPS limits to match the request.

Best answer: C

What this tests: Investment Planning

Explanation: The exhibit shows the portfolio already exceeds the IPS equity and sector limits. Jordan’s request would increase concentration and move further away from her documented moderate risk profile, so the planner’s next step is suitability communication and reassessment, not implementation based only on preference.

Portfolio suitability requires more than recording a client’s latest investment preference. When a requested change conflicts with the IPS and the documented risk tolerance and capacity, the planner should pause implementation, clearly explain the mismatch, confirm whether objectives or constraints have genuinely changed, and document the discussion and any revised recommendation. A client’s willingness to “accept the risk” does not by itself make an unsuitable recommendation appropriate.

If reassessment still shows the trade is unsuitable, the planner should recommend a suitable alternative, such as rebalancing toward the IPS, rather than accommodating the requested concentration.

• Verbal acceptance does not override the planner’s obligation to address suitability and documented constraints.
• Changing the IPS to fit the trade skips the required reassessment of objectives, risk capacity, and tolerance.
• Diversification label misreads the exhibit because a technology sector ETF increases sector concentration.

The request would worsen existing equity and sector-limit breaches, so suitability must be revisited and documented before any implementation.

Question 2

Topic: Investment Planning

Leila, 45, has CAD 600,000 from selling part of her corporation. She must hold CAD 120,000 for tax instalments within 12 months and wants the rest invested for retirement in about 15 years. Her risk discussion indicates moderate tolerance and discomfort with a one-year loss greater than 15%.

Short-listed choices:

• Growth ETF model: expected return 6.5%, volatility 14%, daily liquidity, estimated 1-in-20 one-year downside of -23%.
• Balanced ETF model: expected return 5.1%, volatility 9%, daily liquidity, estimated 1-in-20 one-year downside of -14%.
• Private credit fund: expected return 7.0%, reported volatility 5%, quarterly redemptions with gates, downside estimate not provided.

She asks you to “pick the best return option today.” What is the best next step?

• A. Delay analysis until the tax instalments are paid
• B. Compare and document fit across return, volatility, liquidity, and downside risk
• C. Recommend private credit for its return and low reported volatility
• D. Recommend growth ETF because it has daily liquidity

Best answer: B

What this tests: Investment Planning

Explanation: A CFP professional should not jump from a high expected return to an implementation decision. The next step is to compare the portfolio choices against Leila’s stated liquidity requirement, risk tolerance, and downside-risk limits, then document the suitability rationale before recommending a portfolio.

The core workflow is investment suitability analysis before recommendation. Expected return is only one input; volatility, downside risk, liquidity, and time horizon must be weighed together. Leila has a known 12-month liquidity need and a stated discomfort with a one-year loss beyond 15%. The growth model’s downside estimate exceeds that comfort level, while the private credit fund has liquidity gates and no clear downside estimate despite a high expected return and low reported volatility. The planner should document a side-by-side comparison and use it to support any later recommendation. The key takeaway is that process discipline prevents a return-driven choice from overriding liquidity and downside-risk constraints.

• Private credit shortcut fails because high expected return and low reported volatility do not resolve gated liquidity or unclear downside risk.
• Growth model shortcut fails because daily liquidity does not address a downside estimate beyond Leila’s stated loss comfort.
• Waiting for tax payment misorders the process because the known short-term liquidity need should be incorporated into the analysis now.

This places analysis and documentation before recommendation and tests each choice against Leila’s return, liquidity, and loss constraints.

Question 3

Topic: Investment Planning

Leila, 42, asks you to invest a CAD 150,000 non-registered inheritance “as aggressively as possible” because her online risk questionnaire scored high. In the same meeting, she says she may need CAD 70,000 within 18 months for parental care costs and has only one month of expenses in cash. You have not yet documented her investment objective. What is the best next step before recommending a portfolio?

• A. Document objective, horizon, liquidity, tolerance, and capacity first.
• B. Invest aggressively based on her questionnaire score.
• C. Treat the 18-month need as proof of low tolerance.
• D. Draft an IPS and revisit constraints after implementation.

Best answer: A

What this tests: Investment Planning

Explanation: The questionnaire result is evidence of risk tolerance, not a complete investor profile. Before recommending investments, the planner must clarify and document the objective, time horizon, liquidity need, and risk capacity, especially given the possible short-term cash requirement.

In CFP workflow, a questionnaire is only one input to the investor profile. Leila’s aggressive preference reflects risk tolerance: her willingness to accept volatility. It does not determine whether she can absorb loss, when money is needed, how much cash must remain available, or what outcome the portfolio is meant to fund. Before any asset allocation, the planner should document the investment objective and constraints, including the 18-month possible cash need and limited emergency reserve. That may lead to separate treatment of short-term liquidity and longer-term investing, but only after the profile is complete. The key takeaway is sequence: collect and analyze the full profile before recommending or implementing.

• Questionnaire-only investing confuses willingness with suitability and ignores risk capacity, time horizon, and liquidity.
• Low tolerance label misstates the issue; the short-term cash need is a constraint, not necessarily a change in willingness.
• Post-implementation review reverses the planning sequence and weakens documentation of suitability.

This completes the investor profile by separating willingness to take risk from ability, timing, cash needs, and purpose.

Question 4

Topic: Investment Planning

Priya, 57, is an incorporated physiotherapist and wants to slow her practice at 60. Her spouse, Mark, 59, may start a defined benefit pension then, but the survivor option, indexing, and bridge benefit are unknown. They hold RRSPs, TFSAs, a joint non-registered portfolio with material unrealized gains, and an investment account inside Priya’s professional corporation. They support Priya’s mother, have limited cash reserves, and want to treat children from prior relationships fairly. They ask whether all accounts should be transferred into one balanced model portfolio immediately. Which additional fact-gathering action is the best next step before making an investment recommendation?

• A. Collect market values and fees for each existing investment account.
• B. Collect ownership, designations, holdings, ACBs, contribution room, pension options, and corporate tax attributes.
• C. Request only the pension estimate and planned retirement date.
• D. Confirm their household risk score and implement the balanced model portfolio.

Best answer: B

What this tests: Investment Planning

Explanation: The missing information is account-specific, not just product or risk-profile data. Registered, non-registered, pension, and corporate assets have different tax, access, ownership, and estate implications, so the planner needs detailed account facts before recommending transfers or asset location.

The core collection issue is account fact completeness. A single balanced model may fit their risk profile in broad terms, but implementation depends on where assets are held and what tax and legal constraints apply. Registered-plan room and designations affect contribution, withdrawal, and estate choices; non-registered ACB and unrealized gains affect rebalancing tax; pension options affect reliable income and survivor protection; corporate tax attributes and liquidity affect extracting or investing corporate funds. Since they have limited cash, tax sensitivity, family support obligations, and blended-family estate wishes, the planner cannot responsibly recommend transfers or account-level implementation until these facts are documented. Risk tolerance and market values matter, but they are not enough.

• Risk score shortcut fails because it does not reveal tax cost, liquidity, ownership, beneficiary, or pension constraints.
• Pension-only focus misses the corporate investments and non-registered gains that may drive implementation.
• Market values and fees help assess portfolios but do not provide ACB, beneficiary, registered-plan, or corporate tax information.

These facts determine asset location, tax costs, pension cash flow, liquidity, and whether transfers or rebalancing are appropriate.

Question 5

Topic: Investment Planning

Yasmin, 57, plans to retire in five years and describes her risk tolerance as moderate. She asks you, her CFP professional, to confirm that her investment statement is “balanced” and suitable because it includes stocks, bonds, and cash. All amounts are in CAD.

Portfolio summary

Which action best aligns with FP Canada expectations?

• A. Ignore the U.S. ETF because it is Canadian-listed.
• B. Recommend selling all employer shares before discussing tax or goals.
• C. Accept the account statement label as sufficient suitability evidence.
• D. Explain and document the risks, then analyze diversification alternatives.

Best answer: D

What this tests: Investment Planning

Explanation: The portfolio summary shows risks that the account label does not capture. A CFP professional should objectively identify, explain, and document the concentration, currency, and interest-rate exposures before concluding suitability or recommending changes.

The core concept is risk interpretation within professional advice. The 42% employer-share position creates concentration risk, especially because employment income and investment wealth may be tied to the same company. The unhedged U.S. equity ETF creates currency exposure even if it appears on a Canadian account statement. The long-term Government of Canada bond ETF has meaningful interest-rate risk because longer maturities are more sensitive to rate changes. FP Canada expectations require the planner to act with loyalty, objectivity, and competence by raising these issues clearly, documenting them, and analyzing suitable alternatives rather than relying on a product label or jumping to a transaction.

• Statement label reliance fails because “balanced” does not prove diversification or suitability.
• Immediate full sale fails because it skips tax, goal, employment, and behavioural considerations.
• Canadian-listed ETF assumption fails because a Canadian listing does not remove USD currency exposure.

This recognizes material concentration, currency, and interest-rate risks while applying objectivity, competence, and clear documentation.

Question 6

Topic: Investment Planning

Noah retires at 65 with a CAD 1,000,000 portfolio and plans to withdraw CAD 50,000 at the start of each year, indexed to inflation. His planner compares two projections with the same 20-year average return, fees, asset mix, and total volatility. Projection A has the worst three market returns in years 1 to 3; Projection B has those same three poor returns in years 18 to 20. Which interpretation best reflects sequence risk?

• A. Both projections are equivalent because average returns are identical.
• B. Neither projection is affected because sequence risk ends at retirement.
• C. Projection A is riskier because early losses magnify withdrawals.
• D. Projection B is riskier because late losses leave less recovery time.

Best answer: C

What this tests: Investment Planning

Explanation: Sequence risk is most damaging when withdrawals begin near retirement and poor returns occur early. In Projection A, Noah is taking withdrawals while the portfolio is depressed, leaving fewer dollars invested to recover later.

Sequence risk means the order of investment returns matters once cash is being withdrawn. With no withdrawals, two return sequences with the same compound return may end in the same place. With withdrawals, early negative returns force the client to fund spending from a smaller portfolio, which reduces the capital available for later market gains. Late losses are still unpleasant, but they occur after more years of compounding and withdrawals have already been funded from a stronger base. The key takeaway is that average return alone can understate retirement-income risk when withdrawals start near a market downturn.

• Late-loss focus is tempting, but losses after many years of growth usually do less damage to withdrawal sustainability than losses at the start.
• Average-return shortcut fails because withdrawals make the timing of returns materially affect the ending portfolio value.
• Pre-retirement-only view is incorrect because sequence risk becomes especially important when withdrawals begin.

Early withdrawals during market declines reduce the capital base, making later recovery less effective even if average returns match.

Question 7

Topic: Investment Planning

Harjit, 72, has $250,000 in a non-registered account he does not expect to spend. His planner is comparing two products with the same 60/40 mandate: a balanced ETF with a 0.25% MER and no capital guarantee, and a segregated fund contract with a 2.4% MER, daily liquidity at market value, a named beneficiary, and a stated 100% death benefit guarantee of deposits. Harjit’s overriding concern is that, if markets fall and he dies, his daughter receive at least the original deposit directly. Which recommendation best fits this differentiator?

• A. Use the ETF with a stop-loss order.
• B. Use the ETF and rely on the will.
• C. Recommend the segregated fund contract despite the higher MER.
• D. Recommend the ETF because its MER is much lower.

Best answer: C

What this tests: Investment Planning

Explanation: Harjit’s decisive objective is not lowest expected cost; it is a product-level death benefit guarantee and direct beneficiary payment. The segregated fund contract is the only option described that provides the stated guarantee, even though it has a substantially higher MER.

The core product-fit issue is the trade-off between cost and guarantee. A non-registered balanced ETF has a much lower MER, which improves expected net returns, but it leaves Harjit exposed to market declines and does not provide a product-level capital guarantee. The stated segregated fund contract has higher fees, but it directly addresses the key differentiator: a 100% death benefit guarantee of deposits and payment to a named beneficiary. Because Harjit does not expect to spend the funds and has prioritized this death benefit outcome, the guarantee outweighs the lower-cost ETF in this scenario. If his main goal were low-cost accumulation, the ETF would be more compelling.

• Lower MER is attractive, but it does not provide the stated death benefit guarantee if markets decline before death.
• Stop-loss protection is not a guarantee of original capital and may trigger a sale after a market drop.
• Will-based transfer does not create a product-level guarantee or direct beneficiary payment from the ETF account.

The segregated fund is the only described product that matches Harjit’s required death benefit guarantee and direct beneficiary payment.

Question 8

Topic: Investment Planning

Priya, 62, plans to retire in 9 months to help care for her father. For the first three retirement years she needs about $50,000 after tax annually from her portfolio until she starts CPP and OAS at 65; the spending is not very flexible because she is also helping a daughter with tuition. Her $900,000 RRSP/non-registered portfolio is still 80% equities and is down 14% this year. A $150,000 non-registered GIC with minimal accrued interest matures at retirement, and she will be in a high marginal tax bracket until then. She says she can accept market volatility but is worried about selling at the bottom. What is the best recommendation to address the main investment risk created by the planned withdrawals?

• A. Shift the full portfolio to cash.
• B. Maintain 80% equities until markets recover.
• C. Start CPP early to avoid portfolio withdrawals.
• D. Use the maturing GIC for a withdrawal reserve.

Best answer: D

What this tests: Investment Planning

Explanation: Sequence risk is highest when withdrawals begin during or soon after a market decline. Priya has inflexible early cash needs and an equity-heavy portfolio, so using the maturing GIC as a withdrawal reserve reduces forced sales of depressed assets while leaving the rest of the portfolio available for recovery and longer-term growth.

Sequence of returns risk is most acute when a retiree must take withdrawals near the start of retirement, because losses plus withdrawals leave less capital to participate in a later recovery. Priya has fixed near-term cash-flow needs, a recently declined equity-heavy portfolio, and a behavioural concern about selling after a fall. Using the maturing low-tax GIC to fund a near-term reserve can cover the first retirement withdrawals without forced equity sales; the remaining portfolio can then be rebalanced to a sustainable retirement allocation. This respects her tax position and caregiving/tuition commitments while preserving growth assets for later retirement. Simply waiting for markets to recover does not remove the withdrawal timing risk.

• Waiting for recovery ignores that early withdrawals can lock in losses and permanently reduce the portfolio.
• Early CPP may reduce lifetime government benefits and cannot reliably fund the three-year after-tax gap.
• All-cash shift reduces short-term volatility but creates inflation and longevity risk for a 62-year-old retiree.

This funds early withdrawals without forced equity sales after a downturn, directly reducing sequence risk while preserving long-term growth assets.

Question 9

Topic: Investment Planning

Alex, a CFP professional, is comparing two investment strategies for Maya’s $160,000 non-registered account: a 90% equity ETF portfolio with higher expected return, or a lower-risk ladder of cashable GICs and short-term bond funds with lower expected return. Maya’s risk questionnaire shows high tolerance, but she needs the money in about 18 months for a home down payment and says a 10% decline would force her to postpone the purchase. Which recommendation best fits the decisive differentiator?

• A. Use the lower-risk strategy only if Maya rejects all market volatility.
• B. Recommend the lower-risk strategy and document the time-horizon rationale.
• C. Recommend the 90% equity strategy because her questionnaire shows high tolerance.
• D. Split the account equally between both strategies without further documentation.

Best answer: B

What this tests: Investment Planning

Explanation: Risk tolerance is not the only suitability factor. Maya’s near-term home purchase creates low risk capacity, so the planner should recommend the lower-risk strategy and clearly document why expected return was sacrificed for capital preservation and liquidity.

The core concept is documenting the rationale when a lower-risk recommendation is made because another suitability factor overrides stated risk tolerance. Here, Maya can emotionally tolerate risk, but she cannot practically absorb a material decline before her home purchase. A short time horizon, liquidity need, and specific consequence of loss make capital preservation the decisive factor. The planner should record the competing strategies considered, the client facts supporting the lower-risk recommendation, and how the recommendation was communicated. This supports suitability, objectivity, and clear client-file documentation.

• Questionnaire reliance fails because risk tolerance does not override time horizon and capacity for loss.
• Equal split may still expose essential funds to avoidable market risk and lacks a documented rationale.
• Zero-volatility standard is too strict; lower-risk recommendations can be appropriate even when a client accepts some volatility.

The short time horizon and low loss capacity justify the lower-risk strategy despite Maya’s stated high risk tolerance.

Question 10

Topic: Investment Planning

Jaspreet, age 59, plans to retire in seven years. Her IPS states moderate risk, a maximum 15% in any one issuer, and no more than 35% Canadian equities. Her portfolio is 46% employer shares in a Canadian energy producer, 24% Canadian bank stocks, 20% global equity ETF, and 10% short-term GICs. Her employment income and deferred stock units also depend on the same employer. Two strategies are being compared: keep the employer shares and direct new savings to a Canadian equity ETF, or sell employer shares over 12 months and buy global equity and Canadian bond ETFs. Which strategy best fits her diversification constraint?

• A. Use the staged sale only if expected return rises
• B. Use the staged sale and global/bond replacement
• C. Keep the shares because she knows the company well
• D. Keep the shares and add the Canadian equity ETF

Best answer: B

What this tests: Investment Planning

Explanation: The portfolio is not diversified enough for Jaspreet’s stated constraints. The decisive issue is concentration risk: her employer stock alone exceeds the IPS issuer limit, and her salary and deferred stock units increase exposure to the same company.

Diversification should be evaluated against the client’s objectives and constraints, not just the number of holdings. Jaspreet’s portfolio breaches the IPS issuer limit and has additional correlated risk because her human capital and deferred compensation depend on the same employer. The Canadian bank exposure also adds home-market concentration. A staged reduction of employer shares, with proceeds moved into global equity and Canadian bond ETFs, better aligns the portfolio with the stated risk tolerance, retirement timing, and concentration limits. The key takeaway is that familiarity with a company or adding more Canadian equity does not solve a material single-issuer concentration problem.

• Canadian ETF addition fails because new savings do not quickly reduce the existing employer-stock breach.
• Company familiarity is not diversification and can increase behavioural overconfidence.
• Expected return focus misses that diversification is primarily about reducing uncompensated concentration risk, not maximizing forecast return.

The staged sale directly reduces issuer, sector, country, and employment-linked concentration that conflicts with the IPS.

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