Private Wealth Mgmt - What to invest? Ryan Mathews Case Scenario from IFT

CFA Level III Portfolio Management
#1

I came across this question and find it a bit confusing.

Case Fact, Duffee recently graduated with a degree in finance and just started a career as a stockbroker. He collects an annual base salary of $40,000 per year. His father owns a multi-million fishing business and Duffee expects to receive a very large inheritance upon his father’s death.

Question, Considering Duffee’s circumstances, the advisor is most likely to recommend which of the following investments? A. Investment grade bonds B. Equities C. Deep discount bonds I understand the case is trying to highlight the fact that his income is equity-like. Thus, he should be investing in IG bonds. However, he has a long time horizon, shouldn’t he invest in equities?

#2

Recently graduated = young=huge human capital=all invested in equity likes

Given this disproportion, the advisor likely recommends= fixed income

say in future he changes jobs and now its more fixed income likes, then rebalance to a commensurate equity quantity

#3

On an exam i would answer:

Ability to take risk : Above average ability due to 1) Long time horizon that enable him to cope with adverse return in a specific period 2) Likely large amount of additional money in future due to expected inheritance.

Recommendation: B. Equities as risk tolerance concluded as above average.

Can someone explain why this would be incorrect?