in 2011 AM mock question 5 part c, the answers says client should have a lower allocation to equities because client is young and has a large amount of human capital relative to her financial capital.
Isn’t it the case for allocating more to equities when you are young ?
I would expect one of the reasons to be that her compensation is highly correlated with the equity markets and will be for the rest of her life. Not sure if that helps
Also noted this guidance answer and makes no sense. If it was the example with individual whose HC was equity like, I agree with Edison.
A far as I understand it it’s like this. HC is equity like, it’s like asset, so she already has a big portion of her assets in equity. Her risk tolerance is down (and this is crucial) due to her circumstances and to diversify risk she should lower the equity part of assets.
I think that the crucial part here are the unique circumstances. If you are young and unemployed you can’t have all your investable assets in equity (or large part of them). In “normal” circumstances - employed, educated, (HC is up as well), etc. you should invest bigger portion in equities.
And the correlation is the issue here as well.
But generally I agree, it’s a tricky question.
The point the first bullet might be trying to make about being “young” is that the risky HC that is highly correlated with equity returns is bigger in PV terms than it would be if someone were older, effectively reducing her risk tolerance on financial assets. This is definitely a tricky one as it defies the general rule of thumb that younger people should have more exposure to equities.
thank you, it is a tricky one.