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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… Click to show full abstract
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 approach is very similar to the optimal portfolio derived in the much more complicated dynamic life-cycle models. An application of our simple method 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 establishes some theoretical support for the growth/value tilts in households' portfolios found empirically.
Journal Title: Journal of Banking and Finance
Year Published: 2020
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