Perhaps this specific questions has been discussed, but I can’t locate anything on it.
One of the guideline answers as to why the woman should have a lower equity allocation is that “Finnegan is young and has a large amount of HC relative to her financial capital”. This reason on its own (without considering the correlation aspect, which is stated as the second ‘reason’) doesn’t agree with my understanding of HC. Saying she’s young and has a large amount of HC, on its own, to me would inodcate that she should have a high allocation to equity, as her HC is like a FI holding. I get that it’s correlated with equity markets and for that reason it should be lower, but by just saying she’s young so her equity allocation should be lower doesn’t make sense to me.
you need to read both parts of the answer with what is stated at the bottom … in common I guess
Finnegan is young and her entire Human capital is invested in Equity Like investments and will be for her working life. [Unwritten part - So her Financial capital also being invested in Equities causes extra risk].
Her Human Capital has high correlation with Equities. [Unwritten - when the equities (stock market) suffers losses both her financial capital and human capital are affected simultaneously.
1 and 2 sound very similar. They do not show any distinction from a risk perspective . I like it when you add color to teh answer by giving at least slightly different perspectives of risk in each of the two point.
In fact 1 sounds like two different things being combined.
If she is young that does not have anything to do with her working in equities management . Also being in the equities industry has nothing to do with being young.
1.She is young but her career is going to be in equities management , so investments in equities should be small , because she should diversify. This is desirable from a long term risk perspective
2.From a risk perspective it is undesirable to be heavily invested in equities , because her job is so correlated with the fortunes of the industry, that she might not be able to meet any short term obligations such as her mortgage paymenst . She has a shortfall risk in meeting her objectives
Replying to 5 year old post – but 2nd pass through this Q and also totally dissatisfied with part 1 of guideline answer.
She is young – if that fact is read in isolation, it should not imply less equity allocation
Her being young implies high HC in a career that’s correlated with equities – if you don’t read “she is young” in isolation, the 1st guideline answer is little more than an exclamation mark to 2nd guideline answer. If they ask for two things, you can’t say “He’s tall and also his head is above others’ when standing.”
This is a classic example of what to do when you clearly need to list two reasons but you can only think of one reason. Do you just omit it knowing full well you will get half of the marks? Nah.
You just fire away a random statement and pretend it is relevant. You could write it as the second bullet point but putting it first creates a flow to the second bullet point and if your second statement is very powerful you will get full marks.