Human Capital Investment And Optimal Portfolio Choice

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Executive Summary

The authors analyze how an individual should optimally invest in human capital when he also has financial wealth. They treat the individual's possibilities to take more education as expansion options and apply real option analysis. In addition, they 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. In this paper, the authors examine the decisions of a life-cycle investor that can invest in his/her own human capital, as well as financial assets.

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