Reading 13 EOC Question #3

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?


asked and answered multiple times before.

read these two questions along with the 2 graphs in the reading (9 and 12 if I remember right) and then make the linkage. The two questions seem to have been answered completely based on those 2 figures - look at the age, type of human capital and the amount of assets there on.

I had the feeling that the answers do not seem right even for question 2.

A simple argument would be that can an investor with “moderate risk tolerance” have a portfolio which is 100% stocks - Strategy A for Johnson.

Further, if the data from questions 2 and 3 are seen together albeit independently, Johnson has a stable income of 175k (moderate risk profile), while Hernandez has an income of 200k, with financial wealth of 200k (or 1M in a month) - how can we suggest a 100% stock portfolio for Johnson and 65% stocks/ 35% govt bonds to Hernandez