Human Capital and Popular Investment Advice

Posted: 1 Sep 2008

See all articles by Glenn Boyle

Glenn Boyle

University of Canterbury - Economics and Finance; Sapere Research Group

Graeme Guthrie

Victoria University of Wellington - School of Economics & Finance

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Abstract

Popular investment advice recommends that stock/bond and stock/wealth ratios should rise with investor risk tolerance and investment horizon respectively, prescriptions that are difficult to reconcile with the simple mean-variance model. We show that extending the mean-variance model to include human capital, without any other modifications, can simultaneously justify both recommendations, so long as the correlation between labour income and stock returns falls within a range determined by market and investor-specific parameters. Aggregate labour income data from 11 countries generally satisfy this requirement, as do plausible individual income processes. We also consider the implications of human capital for the optimal bond/wealth ratio over the investment horizon, and examine the sensitivity of the stock/bond mix to the volatility of labour income.

Suggested Citation

Boyle, Glenn and Guthrie, Graeme, Human Capital and Popular Investment Advice. Review of Finance, Vol. 9, Issue 2, pp. 139-164, 2005. Available at SSRN: https://ssrn.com/abstract=1260592 or http://dx.doi.org/10.1007/s10679-005-7595-1

Glenn Boyle (Contact Author)

University of Canterbury - Economics and Finance ( email )

Private Bag 4800
Christchurch
New Zealand

Sapere Research Group ( email )

Level 9, Pencarrow House
1 Willeston St
Wellington, 6140
New Zealand

Graeme Guthrie

Victoria University of Wellington - School of Economics & Finance ( email )

P.O. Box 600
Wellington 6140
New Zealand
64 4 463 5763 (Phone)

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