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Portfolio implications of job-specific human capital risk

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  • David Blanchett

    (Morningstar Investment Management LLC)

  • Philip Straehl

    (Morningstar Investment Management LLC)

Abstract

Human capital is the largest asset for many investors, yet its risks and impact on portfolio choice are often poorly understood. This paper explores human capital risk at the level of industry-specific occupations using a new metric that incorporates both wages and employment. We examine the determinants of human capital risk by decomposing the risk into market-, occupation-, and industry-specific factors. We find that industry and occupation factors in isolation are about equally important, while job-specific-factors, defined as the unique combination of an occupation within a given industry, account for the majority of human capital variance. Overall, we find significant evidence that job-specific human capital differences have a material impact on the optimal portfolio and should therefore be considered during the portfolio optimization/construction process.

Suggested Citation

  • David Blanchett & Philip Straehl, 2017. "Portfolio implications of job-specific human capital risk," Journal of Asset Management, Palgrave Macmillan, vol. 18(1), pages 1-15, January.
    • Handle: RePEc:pal:assmgt:v:18:y:2017:i:1:d:10.1057_s41260-016-0031-6
    DOI: 10.1057/s41260-016-0031-6
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    References listed on IDEAS

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    1. Esther Eiling, 2013. "Industry-Specific Human Capital, Idiosyncratic Risk, and the Cross-Section of Expected Stock Returns," Journal of Finance, American Finance Association, vol. 68(1), pages 43-84, February.
    2. Paul A. Samuelson, 2011. "Lifetime Portfolio Selection by Dynamic Stochastic Programming," World Scientific Book Chapters, in: Leonard C MacLean & Edward O Thorp & William T Ziemba (ed.), THE KELLY CAPITAL GROWTH INVESTMENT CRITERION THEORY and PRACTICE, chapter 31, pages 465-472, World Scientific Publishing Co. Pte. Ltd..
    3. Fama, Eugene F. & French, Kenneth R., 1993. "Common risk factors in the returns on stocks and bonds," Journal of Financial Economics, Elsevier, vol. 33(1), pages 3-56, February.
    4. Merton, Robert C, 1969. "Lifetime Portfolio Selection under Uncertainty: The Continuous-Time Case," The Review of Economics and Statistics, MIT Press, vol. 51(3), pages 247-257, August.
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    Cited by:

    1. Rozsa Zoltan & Belas Jaroslav & Metzker Zdenko & Klementová Iva, 2022. "The Intensity of Perception of Selected Personnel Risk Factors in the V4 Countries," Folia Oeconomica Stetinensia, Sciendo, vol. 22(1), pages 243-262, June.

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