Human Capital - Variable Income

CFA Level III
#1

As I understand it:

If you have a variable salary or commission type job, your human capital is reduced. The present value of your earnings are less that someone with a steady/secure job. An increased discount rate is applied to your PV of earnings. Your earnings are more equity like.

With your earnings being more equity like and having a higher discount rate, would you invest more in equities to meet the required return? Or would you invest more in fixed income since your wages have a higher “equity allocation”?

(This is related to Kaplan Mock exam 2 question 1)

Thanks!

#2

I would say you are correct, since he has somewhat of a risky job (based on commission which will have volatility), his earnings are more like equity so his risk tolerance should be lower and thus invest in fixed income (assuming he already has a good chunk in equities).

Obviously this will also depend on other factors such as his ability and willingness to take on risk, etc.