The Effects of the Capital Accumulation Ratio on Wealth

Abstract

The capital accumulation ratio (CAR) is commonly used in academic research as a measure of household portfolio quality. This study tested whether a higher initial CAR impacts change in wealth over a decade among households in the accumulation life cycle stage. Meeting the 25% CAR guideline resulted in a 28.1% increase in net worth between 1994 and 2004. When broken into quartiles, the relationship between CAR and wealth was monotonic and statistically significant. However, this increase comes at a cost; those who met the 25% threshold CAR increased their standard deviation of net worth from 1994 to 2004 by 8.1%, and those in the highest CAR quartile saw their wealth dispersion increase by 36%. Results from this study suggest that meeting the 25% CAR threshold leads to greater wealth over time at the tradeoff of higher variation in future wealth.

Keywords: capital accumulation ratio, net worth, personal financial ratio analysis