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ChFC Investment Planning Practice Questions

Official outline
The American College ChFC designation (courses)
Questions on this page
7
Updated
Nov 3, 2026

  1. Question 1, hard

    A client's target allocation is 60% equities/40% bonds. After a strong equity market run, the portfolio has drifted to 75% equities/25% bonds, all held in a taxable brokerage account. The client wants to rebalance back to target. Which consideration is most important for the planner to address before executing the trades?

    • A.Selling appreciated equity positions to rebalance will likely trigger realized capital gains, so the planner should evaluate tax-lot selection, use of new cash contributions, or available losses to offset the gains
    • B.Rebalancing in a taxable account has no tax consequences since it merely restores the original allocation, so the planner can sell positions in any order without regard to cost basis or holding period, and no gain or loss would be reported to the IRS
    • C.Rebalancing should be deferred until the market direction is clear, because adjusting the allocation after an equity run-up constitutes market timing that a fiduciary planner must avoid
    • D.The client should first sell a portion of the bond position before making any equity trades, to raise cash for the rebalance
    Show answer and explanationHide answer

    Correct answer: A. Selling appreciated equity positions to rebalance will likely trigger realized capital gains, so the planner should evaluate tax-lot selection, use of new cash contributions, or available losses to offset the gains

    In a taxable account, selling appreciated securities to rebalance realizes capital gains and creates a current tax liability. Rebalancing is not a tax-free event just because the destination allocation matches the original policy. A prudent planner evaluates strategies to minimize the tax drag: selecting specific tax lots (e.g., higher-basis shares), directing new contributions or dividends toward the underweighted asset class instead of selling, or harvesting available losses elsewhere to offset the gains. This is a core distinction between rebalancing in taxable versus tax-deferred/qualified accounts, where such trades have no immediate tax impact.

    • A. Correct. Trimming the overweighted equities will likely realize capital gains, so the planner should consider tax-lot selection (e.g., highest-cost lots), directing new contributions to underweight bonds, and harvesting available losses to offset the gain before trading.
    • B. Selling appreciated shares in a taxable account to rebalance does have tax consequences. It realizes capital gains that must be reported, which weren't triggered simply by the market drifting the allocation.
    • C. Periodic rebalancing to a stated target allocation is a routine, disciplined risk-management practice, not market timing; waiting for market direction to become clear would be the timing decision.
    • D. Bonds are underweight, not overweight, so selling bonds moves the portfolio further from target and creates unnecessary transactions and tax consequences of its own.

  2. Question 2, hard

    Using the Capital Asset Pricing Model (CAPM), a stock has a beta of 1.4, the risk-free rate is 4%, and the expected return on the market portfolio is 10%. What is the stock's required rate of return under CAPM?

    • A.8.4%
    • B.10.0%
    • C.12.4%
    • D.14.0%
    Show answer and explanationHide answer

    Correct answer: C. 12.4%

    Under CAPM, required return = risk-free rate + beta × (expected market return − risk-free rate) = 4% + 1.4 × (10% − 4%) = 4% + 1.4 × 6% = 4% + 8.4% = 12.4%.

    • A. This is beta times the market risk premium alone (1.4 × 6%), omitting the risk-free rate. A common calculation error.
    • B. Equals the market return itself; ignores the stock's higher-than-market beta entirely.
    • C. Correct. The full CAPM formula, including the risk-free rate addback, yields 12.4%.
    • D. Overstates the result; does not correspond to any correct or partial application of the CAPM formula with these inputs.

  3. Question 3, medium

    Using the Capital Asset Pricing Model (CAPM), if the risk-free rate is 3%, the expected market return is 9%, and a stock has a beta of 1.5, the stock's required rate of return is:

    • A.9%
    • B.12%
    • C.13.5%
    • D.15%
    Show answer and explanationHide answer

    Correct answer: B. 12%

    CAPM: required return = risk-free rate + beta × (market return - risk-free rate) = 3% + 1.5 × (9% - 3%) = 3% + 1.5 × 6% = 3% + 9% = 12%.

    • A. Incorrect. This is simply the market return, ignoring the stock's beta entirely.
    • B. Correct. 3% + 1.5(9% - 3%) = 12%.
    • C. Incorrect. This results from multiplying beta by the market return directly (1.5 × 9%) instead of by the risk premium.
    • D. Incorrect. This does not correspond to a standard CAPM calculation error path using the given inputs; it overstates the required return.

  4. Question 4, medium

    A client begins investing a fixed dollar amount into an equity mutual fund every month regardless of the share price. Which statement about this dollar-cost averaging strategy is most accurate?

    • A.It produces a profit whenever the investor keeps contributing for several years, because the average cost is lowered below the market price
    • B.It guarantees the investor will outperform a lump-sum investment made at the start of the same period
    • C.It results in purchasing more shares when prices are low and fewer shares when prices are high, without guaranteeing a profit
    • D.It removes the investor's exposure to market price fluctuations by spreading purchases across different months
    Show answer and explanationHide answer

    Correct answer: C. It results in purchasing more shares when prices are low and fewer shares when prices are high, without guaranteeing a profit

    Dollar-cost averaging (DCA) involves investing a fixed dollar amount at regular intervals, which mathematically results in buying more shares when prices are lower and fewer shares when prices are higher. Potentially lowering the average cost per share over time. However, DCA does not guarantee a profit or protect against loss in a declining market, and it does not guarantee outperformance versus lump-sum investing (in fact, lump-sum investing historically outperforms DCA more often in rising markets, since more money is exposed to growth sooner).

    • A. Dollar-cost averaging doesn't ensure a profit; if the fund's price trends downward, the investor can still lose money even while contributing consistently.
    • B. DCA doesn't guarantee outperformance versus a lump sum; in a steadily rising market, lump-sum investing often outperforms DCA.
    • C. Because the fixed dollar amount buys more shares when prices are low and fewer when prices are high, DCA can lower the average cost per share over time, but it never guarantees a profit or eliminates loss potential.
    • D. DCA doesn't remove market risk; spreading purchases over time smooths the entry price, but the investor remains fully exposed to price fluctuations.

  5. Question 5, hard

    A 62-year-old client plans to retire in three years and will need to begin systematic withdrawals from her portfolio immediately upon retirement to cover living expenses. She has a moderate risk tolerance but expresses significant anxiety about short-term market declines. Which asset allocation approach is most appropriate given her time horizon and objectives?

    • A.A gradual shift toward a higher allocation of fixed income and cash equivalents to reduce sequence-of-returns risk
    • B.100% growth stocks to maximize returns before retirement
    • C.100% cash to eliminate all market risk
    • D.Maintain the same aggressive allocation she used at age 40, since she still has a long retirement ahead, which preserves growth potential
    Show answer and explanationHide answer

    Correct answer: A. A gradual shift toward a higher allocation of fixed income and cash equivalents to reduce sequence-of-returns risk

    As a client approaches the point where she will begin drawing down assets, sequence-of-returns risk becomes critical: a market decline in the years immediately before or after retirement, combined with withdrawals, can permanently impair portfolio longevity even if long-run average returns are fine. A glide-path shift toward more fixed income and cash reduces short-term volatility and protects near-term withdrawal needs, while still allowing some growth exposure for a multi-decade retirement horizon. Appropriately balancing her moderate risk tolerance and stated anxiety. All-stock or all-cash extremes ignore either the growth need or the near-term withdrawal risk.

    • A. Correct. Gradually shifting toward more fixed income and cash as retirement and withdrawals approach reduces the risk of being forced to sell depressed assets early in retirement (sequence-of-returns risk), matching both her time horizon and risk concerns.
    • B. An all-growth-stock allocation ignores both her short time horizon to needing withdrawals and her stated anxiety about market declines, exposing her to serious sequence-of-returns risk right at retirement.
    • C. Going to 100% cash eliminates market risk but sacrifices growth needed to sustain a retirement that could last decades, and is an overcorrection given she only has moderate (not zero) risk tolerance.
    • D. Keeping an age-40-style aggressive allocation to preserve growth ignores that her time horizon to first withdrawal has shortened dramatically and disregards her expressed anxiety about downside volatility.

  6. Question 6, easy

    Parents save for two children with different college start dates, six and twelve years away. They hold both balances in a single high-equity account. Which advice best reflects goal-based planning?

    • A.Maintain the same aggressive equity exposure for both goals until the younger child graduates, since the combined horizon exceeds fifteen years.
    • B.Separate each funding goal, project inflation-adjusted costs, and de-risk the nearer tuition liability earlier.
    • C.Use the older child's balance as a backstop so that any losses in the younger child's portfolio are made up automatically.
    • D.Skip any measurement of shortfall probability, since college costs cannot be predicted exactly and projections would be unreliable.
    Show answer and explanationHide answer

    Correct answer: B. Separate each funding goal, project inflation-adjusted costs, and de-risk the nearer tuition liability earlier.

    Different horizons justify different allocations and savings paths. Liability timing and projected education inflation matter more than managing one undifferentiated pool.

    • A. The older child's tuition is only six years away and needs earlier de-risking.
    • B. Goal-based planning separates the goals and reduces risk as each tuition date nears.
    • C. Using one child's funds to cover the other's losses shifts the shortfall and endangers the nearer goal.
    • D. Imperfect forecasts still support probability-based shortfall estimates.

  7. Question 7, medium

    A bond fund manager wants to reduce the portfolio's price sensitivity to rising interest rates. Which action would most directly accomplish this?

    • A.Increase the portfolio's average duration
    • B.Shift into bonds with lower coupon rates while holding maturity constant
    • C.Purchase more long-term zero-coupon bonds
    • D.Decrease the portfolio's average duration
    Show answer and explanationHide answer

    Correct answer: D. Decrease the portfolio's average duration

    Duration measures a bond portfolio's price sensitivity to changes in interest rates. The higher the duration, the greater the price decline for a given rise in rates. To reduce sensitivity to rising rates, the manager should decrease the portfolio's average duration (e.g., by shifting toward shorter maturities or higher-coupon bonds).

    • A. Increasing duration would increase, not decrease, sensitivity to rising rates. The opposite of the stated goal.
    • B. Lower coupon bonds (holding maturity constant) actually have higher duration than higher-coupon bonds, increasing rate sensitivity.
    • C. Long-term zero-coupon bonds have among the highest durations of any bond type, which would increase rate sensitivity, not reduce it.
    • D. Correct. Lowering average duration reduces interest rate sensitivity.

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