Mock exam Essay 2011

CFA Level III
#1

Question 9 Part C

I dont understand why guideline answer said

“She is young and has a large amount of HC relative to financial capital”

is it enough to say this is the reason that she should reduce equity portion in her port??"

my answer is

“because her HC now is uncertainty , so she should allocate more financial capital to fixed-income.”

is it justified?

thx in advance

#2

actually her HC does not face uncertainty . The long time horizon kind of gaurantees it . So the risk ( i.e. discount rate ) is lower for HC in her case.

The point is one should strive for balance between financial assets and human capital assets unless they really are the same thing due to correlations. She has plenty of human capital , almost nothng in financial capital. so the balance favors moe risky financial capital a.k.a equities

#3

so why reduce equity portion with this reason as the answer said?

#4

I think like you . I’d never get it right in the exam . Let them have it

#5

Finnegan’s human capital is closely related to Equities.

so having both financial and human capital in Equities would increase the risk.

so human capital needs to become bond like.

#6

i agree with you but it’s just one reason , another the mock exam answer guideline is not intuitive, isnt it?