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Human Capital, Asset Allocation, and Life Insurance

Roger G. Ibbotson

Yale School of Management; Zebra Capital Management, LLC

Peng Chen

Ibbotson Associates

Moshe A. Milevsky

York University - Schulich School of Business

Xingnong Zhu

Ibbotson Associates

May 2005

Yale ICF Working Paper No. 05-11

Financial planners and advisors have recently started to recognize that human capital must be taken into account when building optimal portfolios for individual investors. But human capital is not just another pre-endowed asset class that must be included as part of the portfolio frontier. An investor's human capital contains a unique mortality risk, which is the loss of all future income and wages in the unfortunate event of premature death. However, life insurance in its various guises and incarnations can hedge against this mortality risk. Thus, human capital affects both the optimal asset allocation and the optimal demand for life insurance. Yet historically, asset allocation and life insurance decisions have consistently been analyzed separately both in theory and practice. In this paper, we develop a unified framework based on human capital in order to enable individual investors to make both decisions jointly. We investigate the impact of the magnitude of human capital, its volatility, and its correlation with other assets as well as bequest preferences and subjective survival probabilities on the optimal portfolio of life insurance and traditional asset classes. We do this through five case studies that implement our model. Indeed, our analysis validates some intuitive rules of thumb but provides additional results that are not immediately obvious.

Number of Pages in PDF File: 21

Keywords: Human Capital, Asset Allocation, Life Insurance

JEL Classification: J2, J4, G1

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Date posted: May 13, 2005  

Suggested Citation

Ibbotson, Roger G. and Chen, Peng and Milevsky, Moshe A. and Zhu, Xingnong, Human Capital, Asset Allocation, and Life Insurance (May 2005). Yale ICF Working Paper No. 05-11. Available at SSRN: http://ssrn.com/abstract=723167

Contact Information

Roger G. Ibbotson (Contact Author)
Yale School of Management ( email )
165 Whitney Avenue
P.O. Box 208200
New Haven, CT 06520-8200
United States
203-432-6021 (Phone)
203-432-6970 (Fax)

Zebra Capital Management, LLC ( email )
612 Wheelers Farms Road
Milford, CT 06461
United States
Peng Chen
Ibbotson Associates ( email )
225 North Michigan Avenue
Suite 700
Chicago, IL 60601
United States
(312) 616-1620 (Phone)
(312) 616-0404 (Fax)
Moshe Arye Milevsky
York University - Schulich School of Business ( email )
4700 Keele Street
Toronto, Ontario M3J 1P3
Xingnong Zhu
Ibbotson Associates ( email )
225 North Michigan Avenue
Suite 700
Chicago, IL 60601
United States
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References:  29
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