Analyse the different risks that can threaten a person's human capital
The idea
Human capital is the present value of expected future earnings, each year's earnings weighted by the probability of surviving to receive them and discounted at the risk-free rate plus a premium for how risky the occupation's earnings are, including how they move with markets. Risks to it include earnings risk from job loss, wage cuts or skill obsolescence; premature death; disability and illness; and the correlation of earnings with markets, the employer or an industry. Longevity risk is the mirror image, arising once human capital has run down and savings must last. Analysis weighs each risk's size, likelihood and interaction with financial capital. The trap is treating all human capital as bond-like when a risky, market-linked career is closer to equity.
In the app: 2 practice questions on this outcome, a narrated walkthrough with diagrams, spaced review that brings it back before you forget it.
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