Human capital and popular investment advice
Boyle, Glenn; Guthrie, Graeme
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 standard models of portfolio choice. Canner et al (1997) point out that the first piece of advice can potentially be explained by human capital considerations, but only by exacerbating the puzzle surrounding the second piece of advice. However, we show that human capital can simultaneously justify both pieces of advice, so long as the correlation between human capital returns and stockmarket returns lies within a range that depends on market and investorspecific parameters. Historical data comfortably satisfy this requirement for the average investor.
Conference: University of Otago, Finance department, Seminar, Commerce 5.21, University of Otago, Dunedin, Otago
Keywords: stock/bond ratio; stock/wealth ratio; investor risk tolerance; investment horizon; models of portfolio choice