Thursday, June 01, 2006
The Life Insurance Equation
As discussed in my December 2005 column ("The Human Capital Equation"), the risk and return characteristics of human capital should be taken into account when building portfolios for individual investors over their lifecycle. In this column, I want to extend the discussion from the classical asset allocation framework to include the demand for life insurance. These two decisions (asset allocation and life insurance needs) should be determined jointly since financial assets and human capital serve as risk substitutes for each other. I'll begin with a brief review of the financial and statistical interaction between human capital, asset allocation and life insurance. Then I'll delve into a detailed description of the integrated framework and the model which are based on the recent paper of Chen, Ibbotson, Milevsky and Zhu (2005).
The Life Insurance Equation
Source: On Wall Street
The Life Insurance Equation
Source: On Wall Street
Permalink posted by armandn @ 8:00 AM 
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