The Risk-Return Trade-Off in Human Capital Investment
University of Aarhus Department of Economics Working Paper No. 2006-2
41 Pages Posted: 20 Feb 2006
Date Written: February 2006
In this paper we analyze investments in human capital assets in a way which is standard for financial assets, but not (yet) for human capital assets. We study mean-variance plots of human capital assets. We compare the properties of human capital returns using a performance measure and by using tests for mean-variance spanning. A risk-return trade-off is revealed, which is not only related to the length of education but also to the type of education. We identify a range of educations that are efficient in terms of investment goods, and a range of educations that are inefficient, and may be chosen for consumption purposes.
Keywords: educational choice, efficient frontier, human capital investment, mean-variance
JEL Classification: I21, J24
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