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Human Capital and Popular Investment Advice

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  • Boyle, Glenn
  • Guthrie, Graeme

Abstract

Popular investment advice recommends that the stock/bond and stock/wealth ratios should rise with investor risk tolerance and investment horizon respectively prescriptions that are difficult to reconcile with the simple mean-variance model. Canner et al. (1997) point out that the first piece of advice can potentially be explained by human capital considerations but only by invalidating the second piece of advice. We show that extending the mean-variance model to include human capital without any other modifications can simultaneously justify both recommendations so long as the correlation between human capital returns and stock market returns lies within a range determined by market and investor-specific parameters. Historical data from 11 countries generally satisfy this requirement although the statistical precision of our estimates is fairly weak.

Suggested Citation

  • Boyle, Glenn & Guthrie, Graeme, 2005. "Human Capital and Popular Investment Advice," Working Paper Series 3867, Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation.
  • Handle: RePEc:vuw:vuwcsr:3867
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    File URL: http://researcharchive.vuw.ac.nz/handle/10063/3867
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    1. Degeorge, Francois & Jenter, Dirk & Moel, Alberto & Tufano, Peter, 2004. "Selling company shares to reluctant employees: France Telecom's experience," Journal of Financial Economics, Elsevier, vol. 71(1), pages 169-202, January.
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    7. John Heaton & Deborah Lucas, 2000. "Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk," Journal of Finance, American Finance Association, vol. 55(3), pages 1163-1198, June.
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    Cited by:

    1. Hui-Ju Tsai & Yangru Wu, 2015. "Optimal portfolio choice with asset return predictability and nontradable labor income," Review of Quantitative Finance and Accounting, Springer, vol. 45(1), pages 215-249, July.
    2. Fabio C. Bagliano & Carolina Fugazza & Giovanna Nicodano, 2014. "Optimal Life-Cycle Portfolios for Heterogeneous Workers," Review of Finance, European Finance Association, vol. 18(6), pages 2283-2323.
    3. Oussama Chakroun & Georges Dionne & Amélie Dugas-Sampara, 2006. "Empirical Evaluation of Investor Rationality in the Asset Allocation Puzzle," Cahiers de recherche 0635, CIRPEE.

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