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A mean-variance benchmark for household portfolios over the life cycle

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  • Munk, Claus

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 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.

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  • Munk, Claus, 2020. "A mean-variance benchmark for household portfolios over the life cycle," Journal of Banking & Finance, Elsevier, vol. 116(C).
    • Handle: RePEc:eee:jbfina:v:116:y:2020:i:c:s037842662030100x
    DOI: 10.1016/j.jbankfin.2020.105833
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    More about this item

    Keywords

    Life-cycle portfolio decisions; Human capital; Housing; stock market participation; Growth/value tilts;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • D15 - Microeconomics - - Household Behavior - - - Intertemporal Household Choice; Life Cycle Models and Saving

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