Human Capital, Asset Allocation and Insurance insurance, Insurance, allocation, head

joehogue

Put this together to keep it straight in my head. Fairly intuitive, but maybe it will help you too...

Factor that affects human capital - value of factor - allocation to risk-free asset - demand for life insurance (face value of life insurance policy)

factor ---------------------- value --- risk-free asset --- life insurance

bequest motive --------- higher -------- unch -------------- higher
risk aversion ------------- higher -------- higher ------------ higher
age ------------------------ higher -------- higher ------------ lower
financial wealth --------- higher -------- higher ------------ lower
p of wages & stocks --- higher -------- higher ------------ lower

implications:
-- make asset allocation and life insurance decisions jointly
-- investors should invest financial assets in a way to diversify and balance human capital
-- if stock market does well, investor's financial wealth grows, should reduce % invested in stocks
-- investor with human capital highly correlated with stocks should reduce % to risky assets and increase % to assets less correlated with stocks