CFAI: "An important concern for ESOP partcipants is that their overall investments (both financial and human capital) reflect adequate diversification"
can somebody pls explain above statement ?
ESOP----> reflects both HC & FC-----> if sal increases—HC increases–> if high part is received as ESOP–>FC increases but not diversified.
HC risk should be diversified with FC----> should be uncorrelated
Most ESOP Participants are working in the company where they received their options from. So their financial capital is mostly vested in the company. So is their human capital, as more often than not they are working in the same company. So inadequate diversification.
are we saying if HC and FC are diversified. it’s a good thing ?
isn’t that the whole premise of the chapter.
They keep talking about - if HC is Stock like - your FC should be Bond Like
[haven’t done that review in some time, other things like behavioral keep getting in the way. … and I go all over the place].
Exactly…
so concern should be that for ESOP participants, diversification is inadequate ? because if company goes down both ESOP(fin cap) and HC should go down.
or am I missing something here?
the sentence means that
The participants should ensure that the HC and FC is adequately diversified.
If it is not - it is a matter of concern.
diversification is key, just remember that.