Correlation between wage growth and risky asset returns

CFA Level III Portfolio Management
#1

Hello,

“She has a higher correlation between wage growth and risky-asset returns because she is employed in a financial firm and part of her income is based on equity returns. Ignoring salary level differential, Her higher wage growth correlation implies lower human capital as her wages are riskier and thus should be subject to a higher discount rate. Therefore, higher wage growth correlation is a factor that reduces life insurance need.”

Can someone please explain this to me? I don’t understand why a high correlation between wages and risky-asset returns would reduce her life insurance need.

Thanks

#2

A higher discount rate equates to a lower PV of Human Capital. Human Capital risk is mitigated through life insurance. Lower HC = lower need for life insurance. Instead, she should “self insure” this lower HC with financial assets and since her income is highly correlated to the equity markets (and as such probably highly sensitive to the business cycle) she would want to do this with a high allocation to fixed income and a low allocation to equities.

#3

I get it now. Thanks a lot !