Q2 & Q3 both mention about a 35 year old stockbroker/equity trader whose income is highly correlated to risky asset returns/exhibits a 0.9 correlation to performance of S&P 500. Both questions ask to recommend the optimal portfolio. Q2 recommends a 65% Stocks & 35% Bonds srategy while Q3 recommends an 80%Stocks & 20%Bonds strategy…

Given the same time horizon & proffessions shouldn’t the optimal allocation be the same for both questions??

i have got tottaly different views for this,since the equity trader has his HC as risky (hes earning out of equity trading and assuming his salary is linked to performance)why do we allocate him 80% stocks?? just coz he is 35? the 0.9 correlation with s&p 500 also suggest this to be a bad allocation.

the solution too says at the end that this allocation assuming low correlation but the question has mentioned 0.9!!

I also just read the solution to this and head nearly exploded…

the first part of the solution is what you would expect “the optimal allocation of financial welath becomes more weighted towards risk-free assets, than would otherwise be indicated based on age, as income and stock market returns become increasingly correlated. A higher correlation between HC and the stock market results in less diversification and higher risk for the toal portfolio”

I’m not sure why you would invest 80% of someones FC in stocks if their HC is almost perfectly correlated with said stocks…

the two questions seem to be using the charts on Exhibit 9 and 12 - though I am clearly not certain what and how they expect us to remember from charts.

and are they also somewhere implying that S&P 500 is broad market index - so you are investing in the market - and so not risky? so 0.9 correlation with S&P 500 is not really risky?