why when human capital is stocklike more financial wealth calls for more aggressive portfolios? Am i missing something?
Remember that the two are inverses and add to 100%. At the start of your career, human capital is nearly 100% and financial capital is nearly 0% (i.e. you have lots of income potential but you are currently poor. When you are young, human capital behinds bondlike (safe, long term, etc.), so therefore financial capital calls for the inverse–equity like investments. When you are older, human capital is more equitylike, and financial capital should be more towards safer fixed income investments.
I got ur point… that part is not my concern. If you have more financial wealth and you are bond like, you should go for lesser equity allocation absent possession of risky assets. Now if have risky assets and your HC is stocklike, why should it warrant more aggressive investing!!! that is more investment in risky assets Refer to at the end of p.335 volume 2 CFAI text
It wouldn’t. If I work for a financial firm, my human capital correlates with the stock market, so even though I am young, I should allocate more of my funds to bonds
That’s I’m talking about. Either CFA text is erring (I checked Errata, this is not marked as error) or i’m missing some important point…
let me check the book, give me a second
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hmm. Yea that’s confusing. check out pg 330 number 3
Ok that makes sense. I think that model is strictly talking about life insurance
That chapter is related to “Life Insurance” model but the particular segment i’m referring to related to general concepts of Human capital
Yea I read that section or paragraph at the bottom the page and I am confused as well lol
If this isnt an errate then my only guess is that there is an assumption about the stage of life u r in. The paragraph states “more financial wealth also indicates more conservative portfolios when human capital is bondlike”. Which to me would suggest someone who has a lot of job security and that would normally happen at a later stage in ur life at which point your ability to take risks declines. Thus if your human capital is stocklike you are likely to be younger (excluding those who get tenure in their 20s) and if you have a lot of financial wealth when your young you hav a greater ability to take on more risks. I’m kinda clutching at straws here so I think it’s probably an error in the text.
Those are 2 different indicators 1) HC is stock like --> decreases risk tolerance 2) Huge wealth --> increases risk tolerance --> Overall: depends on the level of 2) If wealth if really huge it outrumps the income (look for clues “would not nee to work anymore” or simply 50k per year salary against 2m income a.t. from portfolio) Also, stage of life is an indicator like the 2 above. While you generally invest in less risky securities as you grow older, with huge wealth you are still able to take on more risk.