Estimating the Present Value of Human Capital - Discount rate conflict

CFA Level III
#1

The example in the curriculum (Reading 12; Example 1,second blue box) seems to conflict with equation (2) given for computing Human Capital. In the example, the discount rate is obtained by adding wage growth rate (G), risk free rate, and occupational income volatility. However equation two doesn’t include the wage growth rate in the computation of the discount rate. Can anyone tell me why the difference?

#2

It’s an erratum.

https://www.cfainstitute.org/Eratta/2017_level_III_errata.pdf

#3

Pretty important mistake. Thanks

#4

Is it the same issue with question 15 of the AM mock exam?

Furthermore, the probability of surviving 2 years, should it be 0.9872 = 0.9941 * 0.9931?

#5

The probability of survive in 2 years is (1 - probability of death in 2 years).

#6

Thanks a lot. Really important one

#7

So for AM Mock what is final we don’t include wage growth rate for Disc rate calculation?

#8

There is Errata for the Mock also, right below the link for the PDF. States the discount rate should NOT include wage growth and also changes the number for A. Which is the correct answer.

#9

Schweser’s Blue Box example makes this concept way easier to understand.

#10

Exactly what is the final solution

#11

Exactly what is the final solution