{"id":27663,"date":"2023-06-25T05:34:46","date_gmt":"2023-06-25T05:34:46","guid":{"rendered":"https:\/\/analystprep.com\/study-notes\/?p=27663"},"modified":"2024-03-18T11:43:25","modified_gmt":"2024-03-18T11:43:25","slug":"asset-allocation-relative-to-an-investors-economic-balance-sheet","status":"publish","type":"post","link":"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/asset-allocation-relative-to-an-investors-economic-balance-sheet\/","title":{"rendered":"Asset Allocation Relative to an Investor&#8217;s Economic Balance Sheet"},"content":{"rendered":"<p><iframe loading=\"lazy\" src=\"\/\/www.youtube.com\/embed\/vyLJwRncCBw\" width=\"611\" height=\"343\" allowfullscreen=\"allowfullscreen\"><\/iframe><\/p>\n<p><em>An economic balance<\/em> sheet differs from a traditional balance sheet as it includes tradable financial assets and non-tradable extended assets and liabilities. <em>Extended assets<\/em> often include the relatively large values of residential real estate and the present value of human capital. Including these assets in the investor\u2019s portfolio will increase the ability to take risks. This means many asset allocations based solely on financial assets may be too conservative.<\/p>\n<h2>Modeling Extended Assets \u2013 Human Capital<\/h2>\n<p>Modeling the present value of human capital begins with determining the makeup of the investor&#8217;s earnings. Suppose the cash flows come from steady employment in relatively stable industries. In that case, the analyst will likely determine that the present value of this cash flow stream will most closely resemble <em>fixed income<\/em>. Think government jobs, teachers, engineers, etc.<\/p>\n<p>On the other hand, seasonal, sales-oriented employment, which works on commissions, bonuses, or prizes, may be treated more like <em>equity<\/em> rather than fixed income. Think hedge fund managers or race car drivers. <\/p>\n<p>After determining the properties of the investor&#8217;s human capital, the analyst must use the present value to determine the <em>fixed<\/em> weight in the portfolio. This is necessary as human capital is a non-tradeable asset. <\/p>\n<h2>Modeling Extended Assets \u2013 Residential Real Estate<\/h2>\n<p>Residential real estate often represents a significant portion of an investor&#8217;s wealth. The most straightforward way to include real estate in an investor&#8217;s economic balance sheet\u2014and thus determine asset allocation\u2014would be to use a residential real estate index.<\/p>\n<blockquote>\n<h2>Question<\/h2>\n<p>Including extended assets in asset allocation is <em>most likely<\/em> to increase:<\/p>\n<ol type=\"A\">\n<li>Time horizon.<\/li>\n<li>Ability to take risks.<\/li>\n<li>Liquidity.<\/li>\n<\/ol>\n<h4>Solution<\/h4>\n<p><strong>The correct answer is B:<\/strong><\/p>\n<p>By including extended assets (expected inheritances, present value of future earnings, residential real estate, etc.), an investor will experience an increased capacity to take on risk. This comes about due to a more significant amount of total wealth owned by the investor than the previous consideration of only considering financial assets. These extended assets will often show an increased exposure to fixed income and real estate, leaving more room for riskier equities in the portfolio.<\/p>\n<p><strong>A is incorrect<\/strong>. Time horizon concerns the investor&#8217;s aspirations for retirement and cash flow needs, not necessarily the makeup of the investor&#8217;s assets.<\/p>\n<p><strong>C is incorrect<\/strong>. Liquidity is not likely to be increased as neither houses nor future earnings are liquid.<\/p>\n<\/blockquote>\n<p>Reading 5: Principles of Asset Allocation<\/p>\n<p>Los 5 (c) Interpret and critique an asset allocation in relation to an investor&#8217;s economic balance sheet<\/p>\n","protected":false},"excerpt":{"rendered":"<p>An economic balance sheet differs from a traditional balance sheet as it includes tradable financial assets and non-tradable extended assets and liabilities. Extended assets often include the relatively large values of residential real estate and the present value of human&#8230;<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[571],"tags":[],"class_list":["post-27663","post","type-post","status-publish","format-standard","hentry","category-cfa-level-iii","blog-post","no-post-thumbnail","animate"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v27.4 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>Asset Allocation Relative to an Investor&#039;s Economic Balance Sheet - CFA, FRM, and Actuarial Exams Study Notes<\/title>\n<meta name=\"description\" content=\"Explore a question regarding the impact of including extended assets on time horizon, risk-taking ability, and liquidity.\" \/>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/asset-allocation-relative-to-an-investors-economic-balance-sheet\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Asset Allocation Relative to an Investor&#039;s Economic Balance Sheet - CFA, FRM, and Actuarial Exams Study Notes\" \/>\n<meta property=\"og:description\" content=\"Explore a question regarding the impact of including extended assets on time horizon, risk-taking ability, and liquidity.\" \/>\n<meta property=\"og:url\" content=\"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/asset-allocation-relative-to-an-investors-economic-balance-sheet\/\" \/>\n<meta property=\"og:site_name\" content=\"CFA, FRM, and Actuarial Exams Study Notes\" \/>\n<meta property=\"article:published_time\" content=\"2023-06-25T05:34:46+00:00\" \/>\n<meta property=\"article:modified_time\" content=\"2024-03-18T11:43:25+00:00\" \/>\n<meta name=\"author\" content=\"AnalystPrep Team\" \/>\n<meta name=\"twitter:card\" content=\"summary_large_image\" \/>\n<meta name=\"twitter:label1\" content=\"Written by\" \/>\n\t<meta name=\"twitter:data1\" content=\"AnalystPrep Team\" \/>\n\t<meta name=\"twitter:label2\" content=\"Est. reading time\" \/>\n\t<meta name=\"twitter:data2\" content=\"2 minutes\" \/>\n<script type=\"application\/ld+json\" class=\"yoast-schema-graph\">{\"@context\":\"https:\\\/\\\/schema.org\",\"@graph\":[{\"@type\":\"Article\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-iii\\\/asset-allocation-relative-to-an-investors-economic-balance-sheet\\\/#article\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-iii\\\/asset-allocation-relative-to-an-investors-economic-balance-sheet\\\/\"},\"author\":{\"name\":\"AnalystPrep Team\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#\\\/schema\\\/person\\\/ed0c939f3f12a02c5a193708b713d89e\"},\"headline\":\"Asset Allocation Relative to an Investor&#8217;s Economic Balance Sheet\",\"datePublished\":\"2023-06-25T05:34:46+00:00\",\"dateModified\":\"2024-03-18T11:43:25+00:00\",\"mainEntityOfPage\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-iii\\\/asset-allocation-relative-to-an-investors-economic-balance-sheet\\\/\"},\"wordCount\":423,\"articleSection\":[\"Level III of the CFA\u00ae Program\"],\"inLanguage\":\"en-US\"},{\"@type\":\"WebPage\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-iii\\\/asset-allocation-relative-to-an-investors-economic-balance-sheet\\\/\",\"url\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-iii\\\/asset-allocation-relative-to-an-investors-economic-balance-sheet\\\/\",\"name\":\"Asset Allocation Relative to an Investor's Economic Balance Sheet - CFA, FRM, and Actuarial Exams Study Notes\",\"isPartOf\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#website\"},\"datePublished\":\"2023-06-25T05:34:46+00:00\",\"dateModified\":\"2024-03-18T11:43:25+00:00\",\"author\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#\\\/schema\\\/person\\\/ed0c939f3f12a02c5a193708b713d89e\"},\"description\":\"Explore a question regarding the impact of including extended assets on time horizon, risk-taking ability, and liquidity.\",\"breadcrumb\":{\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-iii\\\/asset-allocation-relative-to-an-investors-economic-balance-sheet\\\/#breadcrumb\"},\"inLanguage\":\"en-US\",\"potentialAction\":[{\"@type\":\"ReadAction\",\"target\":[\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-iii\\\/asset-allocation-relative-to-an-investors-economic-balance-sheet\\\/\"]}]},{\"@type\":\"BreadcrumbList\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/cfa-level-iii\\\/asset-allocation-relative-to-an-investors-economic-balance-sheet\\\/#breadcrumb\",\"itemListElement\":[{\"@type\":\"ListItem\",\"position\":1,\"name\":\"Home\",\"item\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/\"},{\"@type\":\"ListItem\",\"position\":2,\"name\":\"Asset Allocation Relative to an Investor&#8217;s Economic Balance Sheet\"}]},{\"@type\":\"WebSite\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#website\",\"url\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/\",\"name\":\"CFA, FRM, and Actuarial Exams Study Notes\",\"description\":\"Question Bank and Study Notes for the CFA, FRM, and Actuarial exams\",\"potentialAction\":[{\"@type\":\"SearchAction\",\"target\":{\"@type\":\"EntryPoint\",\"urlTemplate\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/?s={search_term_string}\"},\"query-input\":{\"@type\":\"PropertyValueSpecification\",\"valueRequired\":true,\"valueName\":\"search_term_string\"}}],\"inLanguage\":\"en-US\"},{\"@type\":\"Person\",\"@id\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/#\\\/schema\\\/person\\\/ed0c939f3f12a02c5a193708b713d89e\",\"name\":\"AnalystPrep Team\",\"image\":{\"@type\":\"ImageObject\",\"inLanguage\":\"en-US\",\"@id\":\"https:\\\/\\\/secure.gravatar.com\\\/avatar\\\/0828fe7fdfdcf636b2061b4c563e20cc9b7453f7cd1641b4c43edbfba896727a?s=96&d=mm&r=g\",\"url\":\"https:\\\/\\\/secure.gravatar.com\\\/avatar\\\/0828fe7fdfdcf636b2061b4c563e20cc9b7453f7cd1641b4c43edbfba896727a?s=96&d=mm&r=g\",\"contentUrl\":\"https:\\\/\\\/secure.gravatar.com\\\/avatar\\\/0828fe7fdfdcf636b2061b4c563e20cc9b7453f7cd1641b4c43edbfba896727a?s=96&d=mm&r=g\",\"caption\":\"AnalystPrep Team\"},\"url\":\"https:\\\/\\\/analystprep.com\\\/study-notes\\\/author\\\/analystprep-team\\\/\"}]}<\/script>\n<meta property=\"og:video\" content=\"https:\/\/www.youtube.com\/embed\/vyLJwRncCBw\" \/>\n<meta property=\"og:video:type\" content=\"text\/html\" \/>\n<meta property=\"og:video:duration\" content=\"4457\" \/>\n<meta property=\"og:video:width\" content=\"480\" \/>\n<meta property=\"og:video:height\" content=\"270\" \/>\n<meta property=\"ya:ovs:adult\" content=\"false\" \/>\n<meta property=\"ya:ovs:upload_date\" content=\"2023-06-25T05:34:46+00:00\" \/>\n<meta property=\"ya:ovs:allow_embed\" content=\"true\" \/>\n<!-- \/ Yoast SEO plugin. -->","yoast_head_json":{"title":"Asset Allocation Relative to an Investor's Economic Balance Sheet - CFA, FRM, and Actuarial Exams Study Notes","description":"Explore a question regarding the impact of including extended assets on time horizon, risk-taking ability, and liquidity.","robots":{"index":"index","follow":"follow","max-snippet":"max-snippet:-1","max-image-preview":"max-image-preview:large","max-video-preview":"max-video-preview:-1"},"canonical":"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/asset-allocation-relative-to-an-investors-economic-balance-sheet\/","og_locale":"en_US","og_type":"article","og_title":"Asset Allocation Relative to an Investor's Economic Balance Sheet - CFA, FRM, and Actuarial Exams Study Notes","og_description":"Explore a question regarding the impact of including extended assets on time horizon, risk-taking ability, and liquidity.","og_url":"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/asset-allocation-relative-to-an-investors-economic-balance-sheet\/","og_site_name":"CFA, FRM, and Actuarial Exams Study Notes","article_published_time":"2023-06-25T05:34:46+00:00","article_modified_time":"2024-03-18T11:43:25+00:00","author":"AnalystPrep Team","twitter_card":"summary_large_image","twitter_misc":{"Written by":"AnalystPrep Team","Est. reading time":"2 minutes"},"schema":{"@context":"https:\/\/schema.org","@graph":[{"@type":"Article","@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/asset-allocation-relative-to-an-investors-economic-balance-sheet\/#article","isPartOf":{"@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/asset-allocation-relative-to-an-investors-economic-balance-sheet\/"},"author":{"name":"AnalystPrep Team","@id":"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/ed0c939f3f12a02c5a193708b713d89e"},"headline":"Asset Allocation Relative to an Investor&#8217;s Economic Balance Sheet","datePublished":"2023-06-25T05:34:46+00:00","dateModified":"2024-03-18T11:43:25+00:00","mainEntityOfPage":{"@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/asset-allocation-relative-to-an-investors-economic-balance-sheet\/"},"wordCount":423,"articleSection":["Level III of the CFA\u00ae Program"],"inLanguage":"en-US"},{"@type":"WebPage","@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/asset-allocation-relative-to-an-investors-economic-balance-sheet\/","url":"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/asset-allocation-relative-to-an-investors-economic-balance-sheet\/","name":"Asset Allocation Relative to an Investor's Economic Balance Sheet - CFA, FRM, and Actuarial Exams Study Notes","isPartOf":{"@id":"https:\/\/analystprep.com\/study-notes\/#website"},"datePublished":"2023-06-25T05:34:46+00:00","dateModified":"2024-03-18T11:43:25+00:00","author":{"@id":"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/ed0c939f3f12a02c5a193708b713d89e"},"description":"Explore a question regarding the impact of including extended assets on time horizon, risk-taking ability, and liquidity.","breadcrumb":{"@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/asset-allocation-relative-to-an-investors-economic-balance-sheet\/#breadcrumb"},"inLanguage":"en-US","potentialAction":[{"@type":"ReadAction","target":["https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/asset-allocation-relative-to-an-investors-economic-balance-sheet\/"]}]},{"@type":"BreadcrumbList","@id":"https:\/\/analystprep.com\/study-notes\/cfa-level-iii\/asset-allocation-relative-to-an-investors-economic-balance-sheet\/#breadcrumb","itemListElement":[{"@type":"ListItem","position":1,"name":"Home","item":"https:\/\/analystprep.com\/study-notes\/"},{"@type":"ListItem","position":2,"name":"Asset Allocation Relative to an Investor&#8217;s Economic Balance Sheet"}]},{"@type":"WebSite","@id":"https:\/\/analystprep.com\/study-notes\/#website","url":"https:\/\/analystprep.com\/study-notes\/","name":"CFA, FRM, and Actuarial Exams Study Notes","description":"Question Bank and Study Notes for the CFA, FRM, and Actuarial exams","potentialAction":[{"@type":"SearchAction","target":{"@type":"EntryPoint","urlTemplate":"https:\/\/analystprep.com\/study-notes\/?s={search_term_string}"},"query-input":{"@type":"PropertyValueSpecification","valueRequired":true,"valueName":"search_term_string"}}],"inLanguage":"en-US"},{"@type":"Person","@id":"https:\/\/analystprep.com\/study-notes\/#\/schema\/person\/ed0c939f3f12a02c5a193708b713d89e","name":"AnalystPrep Team","image":{"@type":"ImageObject","inLanguage":"en-US","@id":"https:\/\/secure.gravatar.com\/avatar\/0828fe7fdfdcf636b2061b4c563e20cc9b7453f7cd1641b4c43edbfba896727a?s=96&d=mm&r=g","url":"https:\/\/secure.gravatar.com\/avatar\/0828fe7fdfdcf636b2061b4c563e20cc9b7453f7cd1641b4c43edbfba896727a?s=96&d=mm&r=g","contentUrl":"https:\/\/secure.gravatar.com\/avatar\/0828fe7fdfdcf636b2061b4c563e20cc9b7453f7cd1641b4c43edbfba896727a?s=96&d=mm&r=g","caption":"AnalystPrep Team"},"url":"https:\/\/analystprep.com\/study-notes\/author\/analystprep-team\/"}]},"og_video":"https:\/\/www.youtube.com\/embed\/vyLJwRncCBw","og_video_type":"text\/html","og_video_duration":"4457","og_video_width":"480","og_video_height":"270","ya_ovs_adult":"false","ya_ovs_upload_date":"2023-06-25T05:34:46+00:00","ya_ovs_allow_embed":"true"},"_links":{"self":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts\/27663","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/comments?post=27663"}],"version-history":[{"count":10,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts\/27663\/revisions"}],"predecessor-version":[{"id":36781,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/posts\/27663\/revisions\/36781"}],"wp:attachment":[{"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/media?parent=27663"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/categories?post=27663"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/analystprep.com\/study-notes\/wp-json\/wp\/v2\/tags?post=27663"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}