CFP Ultimate Certified Financial Planner 5 — Questions and Answers
Question 1: Which investment risk measure captures the variability of returns below a target return threshold, making it particularly relevant for goals-based financial planning?
- Standard deviation
- Beta
- Semivariance (downside deviation) (Correct answer)
- Sharpe ratio
Correct answer: Semivariance (downside deviation)
Semivariance or downside deviation measures only the volatility of returns that fall below a target, making it more relevant than standard deviation for investors focused on avoiding shortfalls.
Question 2: A client is 67 years old and still working. They are covered by their employer's group health plan. How does Medicare coordinate with their employer coverage?
- Medicare is always primary; employer plan is secondary
- Employer plan is primary; Medicare is secondary for employers with 20+ employees (Correct answer)
- The client must drop employer coverage when enrolling in Medicare
- Medicare Part A only applies; Part B is not available while working
Correct answer: Employer plan is primary; Medicare is secondary for employers with 20+ employees
For employers with 20 or more employees, the employer group health plan is the primary payer and Medicare acts as secondary coverage when an active employee is covered by both.
Question 3: A client has $200,000 in a 529 plan for a child who receives a full athletic scholarship. Which option avoids the 10% penalty on earnings when withdrawing the funds?
- Rollover to the child's Roth IRA up to $35,000 lifetime limit
- Withdraw up to the scholarship amount penalty-free, though earnings are still taxable
- Transfer to a sibling's 529 account
- Both B and C are penalty-free options (Correct answer)
Correct answer: Both B and C are penalty-free options
Withdrawals up to the scholarship amount are exempt from the 10% penalty (earnings are still taxable as income), and the account can also be transferred to a qualifying family member's 529 account penalty-free.
Question 4: In a defined benefit pension plan, which party bears the investment risk?
- The employee/participant
- The employer/plan sponsor (Correct answer)
- The plan trustee
- Both employer and employee share equally
Correct answer: The employer/plan sponsor
In a defined benefit plan, the employer bears the investment risk because they are obligated to pay the promised benefit regardless of investment performance.
Question 5: A client exercises non-qualified stock options (NQSOs) when the fair market value is $50/share and the exercise price is $20/share. What is the tax treatment of the $30/share spread at exercise?
- Long-term capital gain at preferential rates
- Ordinary income taxed in the year of exercise (Correct answer)
- No tax until the shares are sold
- Alternative Minimum Tax (AMT) preference item only
Correct answer: Ordinary income taxed in the year of exercise
The spread on NQSO exercise ($30/share) is treated as ordinary income and is subject to income tax and FICA withholding in the year of exercise.
Question 6: A client is comparing a 15-year mortgage at 5.5% versus a 30-year mortgage at 6.0% for a $400,000 home. What is the most important planning consideration beyond the monthly payment difference?
- The 30-year mortgage always results in higher total interest paid
- The difference in monthly payments should be evaluated against the opportunity cost of investing the savings (Correct answer)
- The 15-year mortgage is always the better financial choice
- Mortgage interest deductibility eliminates the cost difference
Correct answer: The difference in monthly payments should be evaluated against the opportunity cost of investing the savings
The key planning consideration is whether investing the monthly payment difference from the 30-year mortgage could generate returns that exceed the interest cost, making the opportunity cost analysis critical.
Question 7: Under ERISA, which of the following is a fiduciary responsibility of a 401(k) plan sponsor when selecting investment options?
- Guaranteeing that selected funds will generate positive returns
- Selecting investments solely based on the lowest expense ratios
- Conducting a prudent process to evaluate and monitor plan investments (Correct answer)
- Offering at least 20 investment choices to ensure diversification
Correct answer: Conducting a prudent process to evaluate and monitor plan investments
ERISA requires plan fiduciaries to follow a prudent process when selecting and monitoring investments, not to guarantee outcomes or adhere to any specific number of fund choices.
CFP Ultimate Certified Financial Planner 5
Which investment risk measure captures the variability of returns below a target return threshold, making it particularly relevant for goals-based financial planning?