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Optimal Portfolio Choice and Investment in Education

Author

Listed:
  • 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)

Abstract

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.

Suggested Citation

  • Egil Matsen & Snorre Lindset, 2007. "Optimal Portfolio Choice and Investment in Education," Working Paper Series 8707, Department of Economics, Norwegian University of Science and Technology.
    • Handle: RePEc:nst:samfok:8707
    as

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    File URL: http://www.svt.ntnu.no/iso/WP/2007/4hc_pchoice_slem.pdf
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    References listed on IDEAS

    as
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    4. 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, April.
    5. Pindyck, Robert S, 1993. "A Note on Competitive Investment under Uncertainty," American Economic Review, American Economic Association, vol. 83(1), pages 273-277, March.
    6. Avinash K. Dixit & Robert S. Pindyck, 1998. "Expandability, Reversibility, and Optimal Capacity Choice," NBER Working Papers 6373, National Bureau of Economic Research, Inc.
    7. 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(4), pages 352-352.
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    More about this item

    Keywords

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    JEL classification:

    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • D14 - Microeconomics - - Household Behavior - - - Household Saving; Personal Finance
    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing

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