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?
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.
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.