private wealth management (human capital)

In Curriculum book Volume 2, page 424, the answers to problem #2 and #3 seem to contradict each other.

In number 2, Michael Wu, whose job is highly correlated to risky assets, is recommended to allocate 35% to bonds in his portfolio. I initially thought 80% to bonds was more appropriate because of his equity-like HC, but soon accepted this recommendation given his relatively young age, and (probably) relatively smaller FC.

In number 3, however Michael Lee, an equity trader, whose position is .9 correlated to the risky assets, is recommended to allocate only 20% to bonds in his portfolio. Given such a high correlation to the risky assets, I thought his allocation to bonds should be equal to, if not greater, than that of Michael Wu’s in problem #2. The answer states: “A higher correlation between human capital and the stock market results in less diversification and higher risk for the total portfolio. To reduce this risk, an investor must invest more financial wealth in the risk-free asset. At a 0.90 correlation between Lee’s human capital and the stock market, the optimal allocation is 20% to the risk free asset and 80% to stocks.”

If they suggest investing more financial wealth in the risk-free asset, why only 20% to the risk free asset???

I personally think the answer to problem #2 is more consistent with the reading.

(However I found another disturbing, and unclear, comment in Schweisser page 394 (Study Session 4): “As FC increases over time, the risk taken with the FC should be positively related to the riskiness of the HC. In other words, if the remaining HC is risky, invest more FC in equity but if the remaining HC is lower risk, take less risk with the FC.”) Please help!

This has been covered many times here. (You can search for the threads; good luck.) The upshot is that we think that the answers are incosistent, but CFA Institute disagrees.

It’s insoluble.

totally weird. I came for the same issue, I don’t understand.

Questions 2 and 3 seem to be hard to solve. Why strategy B is not good for Nancy J. (in question 2), she is 35 years, she could be a little exposed to the government bonds, no?

I’m confused about this reading, I think 2 people can interprate not the same way but both have the good analysis.

I came here to ask the same question. Also add in question 6 of the same section- recommend either equities or bonds to the 23 year old stockbroker, they recommend bonds.

Bobby, it’s because he wants to become a professor, so when he will be professor his human capital is no more correlated with stock market. He will need to be more exposed to a less risky asset.