Human Capital and Popular Investment Advice
14 Pages Posted: 12 Feb 2004
Date Written: February 5, 2004
Popular investment advice recommends that the stock/bond and stock/wealth ratios should rise with investor risk tolerance and investment horizon respectively, prescriptions that are difficult to reconcile with standard models of portfolio choice. Canner et al. (1997) point out that the first piece of advice can potentially be explained by human capital considerations, but only by invalidating the second piece of advice. We show that extending the mean-variance model to include human capital can simultaneously justify both recommendations, so long as the correlation between human capital returns and stock market returns lies within a range determined by market and investor-specific parameters. Historical data from 11 countries generally satisfy this requirement, although the statistical precision of our estimates is fairly weak.
Keywords: asset allocation, human capital, investment advice
JEL Classification: G11
Suggested Citation: Suggested Citation