Human Capital and Popular Investment Advice

Glenn Boyle and Graeme Guthrie

No 18962, Working Paper Series from Victoria University of Wellington, The New Zealand Institute for the Study of Competition and Regulation

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.

Date: 2005
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Persistent link: https://EconPapers.repec.org/RePEc:vuw:vuwcsr:18962

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