Can someone please explain if the solution in CFA’s curriculum is incorrect? If not, can someone please explain? The question is from reading 13 #3.

For Hernanderz, his Human Capital appears to be bond-like. he is also fairly young. Therefore, shouldn’t he invest his financial capital into very risky asset such as stock? I can see someone may argue that strategy A (100% stock) is too risjy, but I can’t understand why strategy C (65% stock and 35% bond according to the solution) is better than strategy B (80% stock and 20% bond).

For Lee, it is even more puzzling that B (80% stock and 20% bond) is the most optimal strategy. Lee’s income is highly correlated to the equity market, so, in my option, he should invest in bond for his financial capital. In my opinion, strategy D or E would be far more appropriate. The first part of the solution appears to agree with this assessment, “A higher correlation between human capital and the stock market results in less diversification and higher risk for the total portfolio. Tp reduce this risk, an investor must invest more financial wealth in the risk-free assets.”

However, later, the solution states “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.”

The statements above appear t obe conttridicting. Can someone please help?

Thanks