Portfolio implications of job-specific human capital risk
Human capital is the largest asset for many investors, yet its risks and impact on portfolio choice are often poorly understood. This paper explores human capital risk at the level of industry-specific occupations using a new metric that incorporates both wages and employment. We examine the determinants of human capital risk by decomposing the risk into market-, occupation-, and industry-specific factors. We find that industry and occupation factors in isolation are about equally important, while job-specific-factors, defined as the unique combination of an occupation within a given industry, account for the majority of human capital variance. Overall, we find significant evidence that job-specific human capital differences have a material impact on the optimal portfolio and should therefore be considered during the portfolio optimization/construction process.
Keywordshuman capital portfolio optimization total wealth market risk financial planning
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