I quite enjoyed this reading, but even so find one of the Eoc answers a little spurious!
I understand the guy is an equity trader and his earnings have a high correlation to Stocks and that he is 35.
On that basis, I went with 65% to stocks an 35% to Govt bonds.
The correct answer is 80% stocks and 20% Govt bonds.
With such a high correlation of earnings to stocks I thought 80% seemed high,On that basis I assumed he should be nearer the safety first 60/40%.
Is it due to his age…any thoughts?
seems to be using one of the exhibits in the reading (I believe Fig. 11) which shows 80/20 for a 0.9 correlation between portfolio and stock market returns.
Same case for the other question 2B I believe where the 65/35 is coming directly from the Figure 9.
For Michael Wu problem:
Figure 11 applies to a 45 year old investor , while Mr. Wu is only 35 .
CFA use the table in figure 11 , disregarding table in Figure 9 , which shows different allocation at different ages.
It seems to be anybody’s guess.
At 35, age triumphs income correlation. 30years to retirement - price appreciation more important than income.
Tks…so on that basis the high correlation of 0.9 of a job in equity trading to the S&P is nothing more than a “trick”?