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Your human capital is risky and positively correlated with the overall performance of the stock market....

Your human capital is risky and positively correlated with the overall performance of the stock market. According to Modern Portfolio Theory, you have concluded that you should invest 75 % of your wealth to the optimal risky portfolio of stocks and 25 % to risk-free bonds. You are currently young (say 30 years). If your human capital is worth $ 660 in present value terms and you have $ 248 in financial wealth, how much should you invest in stocks in your financial portfolio (in $)?

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Answer #1

Modern portfolio suggest that one should optimise his portfolio in order to maximise the return from the market. It could be done through better allocation of assets throughout all asset class

If you have dollar 660 of human capital overall. And you also have a financial wealth of $248. According to the modern portfolio theory it is concluded that you will invest 75% of your wealth to the risky stocks and 25% of your portfolio to the risk free bonds then my allocation to the stock would be-

Stocks= [248*75%]= $ 186

And location to the bond will be rest of the money left after allocating to the stocks

= (248-186)

= $ 62

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