Human Capital as a Risky Asset

CFAI volume 2, page 327, states that for young investors with equity-like Human Capital the financial assets should be invested predominantly in fixed-income assets. It goes on to state that “because the value of one’s human capital declines with age, the share of risk-free assets in the stockbroker’s portfolio will also decline and the share of risky assets (…) will rise until retirement”. Then, on the next page, figure 9 shows the opposite. In scenario 1 (that of Human Capital risk highly correlated with the risk of other risky financial assets) the proportion of the risk-free assets starts at about 10% for age 30 (that is, not predominant at all), and increases (instead of decreasing) until reaching a maximum of about 70% at age 65. The text explanation seems straightforward enough - but then why does the figure blatantly contradict the text? Any comments?

you work in the finance industry, if the finance industry goes down the panhole your human cap falls, similarly upturn affects you positively. However you are also quite young so can take short term losses in order to make lt gains. You can still hold lots of equity, you would just underweight financials. If you were in a job with practically 0 job security, or perhaps something 100% commission based, your hc is inherently riskier already, so in this case you may hold more fixed income compared to someone whos hc is less risky.

The question is: If I’m a young investor with equity-like human capital highly correlated with other risky financial assets, should I: a)invest predominantly in risk-free fixed-income assets (page 327) or b) invest only about 10% of my portfolio in risk-free assets (figure 9, page 328) What is the correct answer?

Jose G. Wrote: ------------------------------------------------------- > The question is: > > If I’m a young investor with equity-like human > capital highly correlated with other risky > financial assets, should I: > > a)invest predominantly in risk-free fixed-income > assets (page 327) > > or > > b) invest only about 10% of my portfolio in > risk-free assets (figure 9, page 328) > > What is the correct answer? A?

A the appropriate answer.