Investment in Education and Strategic Asset Allocation
76 Pages Posted: 3 Sep 2012
Date Written: July 11, 2012
This work analyzes the optimal allocation of assets over the life cycle of an investor who has the option to invest in his education. We characterize the optimal spending rule for education, and compare the optimal asset allocation of such investors with the optimal portfolios of investors with no extra education. In particular, we are able to describe how the criteria for investing in risky assets change through time as investors acquire additional education. Our main findings are as follows. Investors undergoing the educational process tend to invest proportionally more in risky assets during that period than other investors. After the educational period investments in the risky asset usually decrease. In the working period after the investment in education a negative covariance between the working income and the returns of the risky asset induces the proportional investment of educated agents in the risky asset to be larger than the proportional investment of non-educated agents. For positive covariance, as it increases, the proportion of wealth invested in the risky asset decreases for both agents. Finally, in the retirement period the investments of people who invested in education earlier are not distinguishable from those of non-educated.
Keywords: Portfolio Choice, Saving, Investment, Education
JEL Classification: G11, E21, I22
Suggested Citation: Suggested Citation