Human Capital, Financial Capital, Excess Capital, Core Capital, Net Wealth?! Confused

CFA Level III Portfolio Management
#1

I am really confused with these terminology and their definitions in PWM, let me see if I have those correctly in a more simple mathematically form.

Human Capital (HC) = PV of expected future net employment income (ie, future income minus living expenses)

Financial Capital (FC) = sum of all other assets of an individual (anything that is not HC).

Total Assets (TA) = Total Wealth (TW) = FC + HC

Total Liabilities (TL) = current liabilities (CL) + PV of future liabilities (PVFL)

Excess Capital (EC) = equity capital (EC) = TA - TL

Core Capital (CC) = TL + a reserve for unexpected needs

Net Wealth = TA - CL ? or
= TA - TL?

Net Worth = FC - Current Financial Liability??

#2

Schweser Notes defines NW as the sum of the individual’s FC and HC less any liabilities owed by the individual.

So is it less Total liabilities or just current liabilities?

#3

omg Schweser Notes don’t given mention anything about Net Worth in the reading but it is in the module quiz.

An individual with negative net worth on a traditional balance sheet:
should reduce expenses.
should increase risk in their investment portfolio.
may have positive net wealth.

C.

Making changes based only on the traditional balance sheet analysis would be premature because it fails to consider all economic variables affecting the individual. The holistic balance sheet with all variables included could show positive net wealth. On the traditional balance sheet, negative balance may mean little. Individuals who are early in their career with college debt could have negative net worth. Even if both balance sheets show a negative balance, it does not mean immediate changes must be made, only that long-term plans may need revision.

(Module 14.1, LOS 32.d)

#4

I only have access to the curriculum so this is what I found:

  1. Human Capital (net employment capital): PV of mortality weighted net present value of future expected labor income
    HC_0 = sum ((p(s_t)*w_(t-1) (1+g_t)/(1+r_f+y)^t)

  2. Financial Capital: tangible and intangible (nonhuman capital) assets, or personal asset+investment asset and public/non-public marketable assets

  3. Net worth: difference between traditional assets and liabilities (today)

  4. Economic Net Worth: extends to include future asset (human capital, pension) and liabilities (pv of future consumption + bequest)

  5. Core capital: amount of capital required to fund spending to maintain a given lifestyle, fund these goals and provide adequate reserves for unexpected commitments. You can estimate core capital requirement based on mortality table (joint probability for couples etc, or ruin rate based monte carlo simualtion)

  6. Excess: remains after you subtract core capital, also the amount that you can consider pass on to others

#5

HC = PV of future income
FC = assets that are not HC
Net worth = Traditional Assets - Traditional Liabilities

Net Wealth = Traditional + economic asstets - traditional+ economic liabilities (eg. PV of future expenses)

Core capital = capital needed to fund lifestyle including safety reserves

Excess capital= Available capital- core capital