Optimal Portfolio Choice and Investment in Education

Abstract

In this paper we analyze how an individual should optimally invest in her own human capital when she also has financial wealth. We treat the individual’s option to take more education as expansion options and apply real option analysis. We 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.Optimal portfolio choice; Investment in human capital; Hedging demand