Bond like human capital

Okay so text says that if financial wealth is limited and human capital is bond-like, a greater portion of financial wealth should be invested in the risky asset. As this investor’s financial wealth increases relative to human capital, a greater portion of financial wealth should be invested in the risk-free asset.

From a conceptual standpoint, as your financial wealth increases, why wouldn’t you want to continue to invest more in risky-assets, since you have more funds and likely are able to withstand some losses given those funds?

The concept is diversify. When you have more human capital (which is bond-like) in this question, you want risky assets - kind of having a balance between risky and less risky assets.

When your human capital decreases (relative to financial capital), if you continue to invest in risky asset, then your proportion of risky assets will be much higher than less risky asset. In order to diversify, you should remove from risky asset and move it to risk free asset.

The idea is to treat human capital like any other asset. So if human capital is bond like, treat it as bonds while deciding on the asset allocation. Therefore if the required asset allocation says 40% into bonds and 60% equity, the value of the human capital should be part of the 40%. As financial wealth increases, risky asset increases and this the proportion of bonds would fall below 40% so to keep the balance a greater portion of financial wealth will need to be invested in risk free asset Hope this helps