A Mean-Variance Benchmark for Household Portfolios over the Life Cycle
43 Pages Posted: 24 May 2016 Last revised: 6 Feb 2020
Date Written: February 5, 2020
We embed human capital as an innate, illiquid asset in Markowitz' one-period mean-variance framework. By solving the Markowitz problem for different values of the ratio of human capital to financial wealth, we emulate life-cycle effects in household portfolio decisions. The portfolio derived with this simple approach matches the optimal portfolio from the much more complicated dynamic life-cycle models. An application illustrates that young households may optimally refrain from stock investments because a house investment combined with a mortgage is more attractive from a pure investment perspective. Another application examines the theoretical support for the observed growth/value tilts in households' portfolios.
Keywords: Life-cycle portfolio decisions, human capital, housing, stock market participation, growth/value tilts
JEL Classification: G11, D15
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