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Optimal Portfolio Choice and Investment in Education

  • Egil Matsen

    ()

    (Department of Economics, Norwegian University of Science and Technology)

  • Snorre Lindset

    ()

    (Department of Industrial Economics, Norwegian University of Science and Technology, and Trondheim Business School)

In this paper we analyze how an individual should optimally invest in her own human capital when she also has financial wealth. We treat the individual’s option to take more education as expansion options and apply real option analysis. We characterize the individual’s optimal consumption strategy and portfolio weights. The individual has a demand for hedging financial risk, labor income risk, and also wage level risk.

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File URL: http://www.svt.ntnu.no/iso/WP/2007/4hc_pchoice_slem.pdf
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Paper provided by Department of Economics, Norwegian University of Science and Technology in its series Working Paper Series with number 8707.

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Length: 16 pages
Date of creation: 06 Jul 2007
Date of revision:
Handle: RePEc:nst:samfok:8707
Contact details of provider: Postal: 7491 Trondheim
Phone: 73 59 19 40
Fax: 73 59 69 54
Web page: http://www.svt.ntnu.no/iso/WP/wp.htm
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  1. Dixit, Avinash K. & Pindyck, Robert S. & Massachusetts Institute of Technology. Center for Energy and Environmental Policy Research., 2003. "Expandability, reversibility, and optimal capacity choice," Working papers 97-006WP., Massachusetts Institute of Technology (MIT), Sloan School of Management.
  2. Pindyck, Robert S, 1993. "A Note on Competitive Investment under Uncertainty," American Economic Review, American Economic Association, vol. 83(1), pages 273-77, March.
  3. Williams, Joseph T, 1979. "Uncertainty and the Accumulation of Human Capital over the Life Cycle," The Journal of Business, University of Chicago Press, vol. 52(4), pages 521-48, October.
  4. Svensson, L.E. & Werner, I., 1990. "Nontraded Assets in Incomplete Markets: Pricing and Portfolio Choices," Papers 477, Stockholm - International Economic Studies.
  5. 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 247-57, August.
  6. Alan S. Blinder & Yoram Weiss, 1975. "Human Capital and Labor Supply: A Synthesis," NBER Working Papers 0067, National Bureau of Economic Research, Inc.
  7. Bodie, Zvi & Merton, Robert C. & Samuelson, William F., 1992. "Labor supply flexibility and portfolio choice in a life cycle model," Journal of Economic Dynamics and Control, Elsevier, vol. 16(3-4), pages 427-449.
  8. Luis M. Viceira, 2001. "Optimal Portfolio Choice for Long-Horizon Investors with Nontradable Labor Income," Journal of Finance, American Finance Association, vol. 56(2), pages 433-470, 04.
  9. Yoram Ben-Porath, 1967. "The Production of Human Capital and the Life Cycle of Earnings," Journal of Political Economy, University of Chicago Press, vol. 75, pages 352.
  10. Williams, Joseph T, 1978. "Risk, Human Capital, and the Investor's Portfolio," The Journal of Business, University of Chicago Press, vol. 51(1), pages 65-89, January.
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