2011 morning session exam question 5 part C. The answer says Finnegan should have lower allocation to equities because Finnegan is young and has large amount of human capital relative to her financial capital.
Is it correct? I think allocation to equities should be high if human capital is large because people with large human capital can assume high volatility portfolio.
Yoour post lacks much details, theres no way anyone can tell u based on just that sentence.
But is it correct? I would think so, after publishing a 9 year old paper’s guideline answers.
From what I remember was she was working as an equity analyst so her pay and compensation is linked towards the market and therefore she would want a lower overall allocation to equity since her human capital already is equity like. Now if she was a teacher with a stable income “considered bond like” a higher equity allocation would be more justified.
Yes, she was working as an equity analyst so her pay and compensation is linked towards the market. The question asks to provide two reasons why she would want a lower overall allocation to equity. The first reason from their answer is her human capital already is equity like and has high correlation with equity. The second reason is she is young and has large amount of human capital relative to her financial capital. I am confused with the second reason.
This requires more of intuition first to solve. And I accept at times CFAI tease you …with a striptease.
Think this :
Total wealth = HC+ FC
Now HC already is substantially higher than FC here.
Also, the HC has a higher component of equity in it… which means in the overall TW, the porportion of equity is already high enough which lowers the need of further allocation of equity to TW.