human vs financial capital

Q3 CFAI SS4, Reading 14, Pg 424

Why in the following Q would the answer be Strategy C for Wu as opposed to Strategy D? If Wu’s income is equity like in nature with high correlation to the stock markets, sure you’d want less of an exposure in the financial capital portion of the portfolio correlated to equities?

Is the answer taking the opinion of because he’s 35, he can afford to take that extra risk in stock markets exposure? but what is a guidline as being young/old - or is it a question of as long as you justify you’re answer then you would be credited with marks

Smith is the financial advisor to Nancy Johnson and Michael Wu. Johnson is a 35-year old professor with a stable and secure annual income of $175,000. Wu is a 35-year old stockbroker with an income that averages $175,000 per annum and is highly correlated to risky asset returns. Johnson and Wu have compara- ble total wealth and exhibit moderate risk tolerance.

Recommend which of the following portfolio construction strategies are opti- mal for Johnson and Wu and justify the selections.

Strategy Strategy Strategy Strategy Strategy Allocation ABCDE

Stocks 100% 80% 65% 20% 0%

AAA-rated government bonds 0% 20% 35% 80% 100%

(Institute 424)

Institute, CFA. CFA Institute Level III 2014 Volume 2 Behavioral Finance, Individual Investors, and Institutional Investors. John Wiley & Sons P&T, 2013-07-12. VitalBook file.



AAA-rated government bonds

Strategy A

100% 0%

Strategy B

80% 20%

Strategy C

65% 35%

Strategy D

20% 80%

Strategy E

0% 100%

I have same question, the 2015 curriculumn book is referring to reading 13 after chapter question Q2. Nancy John vs Michael Wu.

Wu has human capital income like “stock”. If he has financial asset, he would put all in bond because the “stock” portfolio will be a big portion considering he is 35. Adding all bond may not balance the whole portfolio.

I don’t get how portfolio C makes sense!

these questions have been discussed multiple times before

read the 2 questions alongside the 2 graphs (fig 9 and fig 12) in the reading and associate the amount of equity with the age of the individuals and their current portfolio / earnings status.

I think the analysis of the figures is flawed. Without knowing the ratio of human capital / financial capital, it will be hard to come up a risk-free allocation based on return correlation and investor age. Think about from the portfolio perspective, If you run a min-var optimization, you will get a ratio like figure 9. But that would be H.Capital + F.Capital

I’m also stuck on this. Can anyone that is clear on this EOC question comment or is it really as simple as cpk123 mentioned i.e. just follow the graphs and memorize them for the test?


Because they are using concept 100 -your age concept that’s well known in finance . As per rule 100-age should be allocated to equity and remaining in debt .