Human Capital, Asset Allocation, And Life Insurance

1828 WordsOct 10, 20148 Pages
In this paper I will discuss and summarize three articles, “Human Capital, Asset Allocation, and Life Insurance” by Peng Chen, Roger G. Ibbotson, Moshe A. Milevsky, and Kevin X. Zhu, “Asset Allocation in a Crisis” by Brian Jacobsen, and “The Pool and the Stream” written by Susan Trammell. In “Human Capital, Asset Allocation, and Life Insurance” the author is trying to prove that even though asset allocation and life insurance decisions have been considered separately in the past, they need to be looked at together because of the affect human capital has on optimal asset allocation and life insurance demand. “We argue that these two decisions must be determined jointly because they serve as risk substitutes when viewed from the…show more content…
As you can see in the graph “Expected Financial Capital and Human Capital over the Working-Life Cycle”, as the investor ages (pre-retirement) human capital decreases and their financial wealth increases. Life Insurance The reason for life insurance is to safeguard the most valued asset a young investor has, human capital. The investor is protecting his future earnings against lifetime uncertainty. In the event of passing away, the insured’s heirs or dependents will be given a sum of money to replace the wages he provided. Commonly, policies are bought to hedge against the mortality risk, “so human capital affects both optimal asset allocation and demand for life insurance.” Mortality risk is hedged by life insurance because the more human capital an investor has, the more life insurance he will need. This is perfect because of the negative 100 percent correlation the consumption (alive) and bequest (dead) state have with one another. Asset Allocation and Life Insurance are Dependent on Human Capital “Motivated by the need to integrate these to decisions, we merged these traditionally distinct lines of thought together in one framework.” Up until now, this idea has never been explored or looked into. The goal of this idea was to see if one variable affected the other and what affect it had on the overall portfolio. The way this idea ties into the amount of life
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