Behavioral Finance - Reading 12 - Questions 2 and 3 - Wrong answer?

These two seem to contradict each other AND the answer for question 3 states Strategy B for Michael Lee but the solution outlines something that is more geared towards Strategy D. I think it should’ve said strategy D and listed the same solution

To the first point - Wu from question 2 exhibits the same characterisitics as Lee in question 3. 35 years old and both have human capital highly correlated with the stock market. From this we should assume both would reduce the risk to a more bond like portfolio BUT at the same time take into consideration the young age which allows them to take more risk. So for Wu they used Strategy C at 65% stock and 35% bond which seemed reasonable to me.

But in Question 3, where Lee has the same characteristics they go on to say The optimal allocation becomes more weighted towards RISK free assets. A higher correlation between human capital and sthe stock market results in less deiversifcation and higher risk for the portfolio. To reduce this risk, investors must invest more financial wealth in risk free asset ---- This solution DOES NOT make sense for the Strategy B selection which is 80% stock and 20% Bond.

This has to be WRONG NO?

Really I would say both of the are 65% stock and 35% bond. Think both Lee and Wu exhibit all the same traits.

any help is much appreciated.

I don’t have the material with me so I can’t provide my own answer to this but this has already been “treated” here (it seems that the question did not inspire a lot of people though):

Thanks Myriam. Can’t believe you found that. Impressive.

I looked at it again. I think that answer is wrong and asked a couple other people and they agreed as well. I’m sticking with my logic. Makes no sense otherwise.

Again thanks for that.

No problem. Just a simple key word search using the box above (using the names of the characters of the case often works quite well).

I also find in general that the consistency between the various cases does not always follow a compelling logic. Which is what I often call “the subjectivity of Level III”. But that’s ok, we’ll figure it out. And I promised to Arbtrgr that I would not complain about it but rather try to work on a solution :wink: