Abstract
The twin theories of investment in human capital and management of marketable assets have developed along two remarkably independent paths. Models of investment in human capital have without exception ignored the closely related problem of managing portfolios. This has been possible only because until very recently the literature on human capital has largely avoided the important issue of uncertainty. Simultaneously, the literature on portfolio theory has essentially ignored human capital. Currently, no model of investment in risky marketable assets includes endogenous allocations to education.' In this paper, risky human capital is introduced into a two-period, mean-variance portfolio problem. As in Levhari and Weiss (1974), the basic theoretical model is simple, permitting easy identification of the various effects of uncertainty. Here, however, in contrast to previous work, the Opportunities for risky investment in education are introduced into a two-period, meanvariance portfolio problem. Uncertainties arising from expenditures on education have three sources: ambiguous inputs in the production of skills, a risky rate of depreciation or obsolescence of existing skills, and a stochastic future wage. Properties of efficient and optimal investments in securities and education are derived in detail with special emphasis on education.
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References
1964CAPITAL ASSET PRICES: A THEORY OF MARKET EQUILIBRIUM UNDER CONDITIONS OF RISK*1975THE VALUATION OF RISK ASSETS AND THE SELECTION OF RISKY INVESTMENTS IN STOCK PORTFOLIOS AND CAPITAL BUDGETS**This paper is another in a series of interrelated theoretical and statistical studies of corporate financial and investment policies being made under grants from the Rockefeller Foundation, and more recently the Ford Foundation, to the Harvard Business School. The generous support for this work is most gratefully acknowledged. The author is also much indebted to his colleagues Professors Bishop, Christenson, Kahr, Raiffa, and (especially) Schlaifer, for extensive discussion and commentary on an earlier draft of this paper; but responsibility for any errors or imperfections remains strictly his own.[Professor Sharpe's paper, “Capital Asset Prices: A Theory of Market Equilibrium Under Conditions of Risk” (Journal of Finance, September 1964) appeared after this paper was in final form and on its way to the printers. My first section, which parallels the first half of his paper (with corresponding conclusions), sets the algebraic framework for sections II, III and VI, (which have no counterpart in his paper) and for section IV on the equilibrium prices of risk assets, concerning which our results differ significantly for reasons which will be explored elsewhere. Sharpe does not take up the capital budgeting problem developed in section V below.]1966Equilibrium in a Capital Asset Market1967The Production of Human Capital and the Life Cycle of Earnings1973Studies in the Theory of Capital Markets.1974The Effect of Risk on the Investment in Human Capital1977Human capital and capital market equilibrium1975Human Capital and Labor Supply: A Synthesis