No. 4/2007

OPTIMAL PORTFOLIO CHOICE AND INVESTMENT IN EDUCATION

Snorre Lindset and Egil Matsen

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.