Human Capital, Asset Allocation, and Life Insurance

Roger Ibbotson, Peng Chen, Moshe Milevsky and Xingnong Zhu

Yale School of Management Working Papers from Yale School of Management

Abstract: Financial planners and advisors have recently started to recognize that human capital must be taken into account when building optimal portfolios for individual investors. But human capital is not just another pre-endowed asset class that must be included as part of the portfolio frontier. An investor's human capital contains a unique mortality risk, which is the loss of all future income and wages in the unfortunate event of premature death. However, life insurance in its various guises and incarnations can hedge against this mortality risk. Thus, human capital affects both the optimal asset allocation and the optimal demand for life insurance. Yet historically, asset allocation and life insurance decisions have consistently been analyzed separately both in theory and practice. In this paper, we develop a unified framework based on human capital in order to enable individual investors to make both decisions jointly. We investigate the impact of the magnitude of human capital, its volatility, and its correlation with other assets as well as bequest preferences and subjective survival probabilities on the optimal portfolio of life insurance and traditional asset classes. We do this through five case studies that implement our model. Indeed, our analysis validates some intuitive rules of thumb but provides additional results that are not immediately obvious.

Keywords: Human Capital; Asset Allocation; Life Insurance (search for similar items in EconPapers)
Date: 2005-05-01, Revised 2008-11-01
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://repec.som.yale.edu/icfpub/publications/2513.pdf (application/pdf)

Related works:
Journal Article: Human Capital, Asset Allocation, and Life Insurance (2006)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ysm:wpaper:amz2513

Access Statistics for this paper

More papers in Yale School of Management Working Papers from Yale School of Management Contact information at EDIRC.
Bibliographic data for series maintained by ().