2011 CFAI AM 5C

Can someone please explain why one of the CFAI model answers (in order to justify a decrease in allocation to equities based on HC) is because Finnegan is young and has a lot of HC relative to FC?

I understand the second reasoning on correlation, but if she is young and has a lot of HC, doesn’t that mean you would increase exposure to equities?

Thank you in advance.

Does it say that her HC is correlated with the equity market (working as a stock analyst, etc)? or that her future career prospects are volatile?

Even if you have a lot of HC you have to determine if it is bond like or equity like.

double post

Yeah, it mentioned that - which is 1 of the reasons, but why is the 2nd reason because she is young and has a lot of HC?

Won’t the 2 answers be based on correlation then? (as she was a stock equity analyst).

Just a little confused.

statement 2: she worked as a equity analyst for 10 years, lost her job in the bear market.

statement 3: her compensation was strongly correlated with the equity markets, and she expects it will be so for the rest of her working life.

she has lost her job - not yet got a new one. she also has variable rate mortgage payment, quasillabilities. - so needs assets more closely matched to her liabilities - hence fixed income.

additionally - given her human capital is equity like - she needs to reduce the amount of risk on her financial portfolio - so change to more fixed income.

Her human capital is highly correlated with the equity market and (because of her long time frame) she has a lot of this equity like HC. Since equity like HC makes up a large portion of her Total Capital (Financial Capital + Human Capital) she should reduce her financial equity allocations and increase fixed income allocations so as to better diversify her total capital.

I’d be really surprised if anyone got this second reason right before reading the answer.

Came across this today. I think this answer is terribly written by CFAI which conflicts with the curriculum concepts. I’m wondering how they justified andidates’ answers on this in 2011.