Human Capital and the Financial Capital Market

Abstract

In the past 2 decades, much progress has been made in the areas of capital and modern portfolio theory, with profound influence upon academic thought and practice.1 But interestingly enough, though human capital theory recognizes human resources as part of an individual's capital asset holdings and modern portfolio theory deals with the pricing of these holdings, only recently have efforts been made to bring these two areas together.2 Employing a popular extension of the Sharpe-Linter capital asset pricing model which allows for the existence of nonmarketable human capital, this study finds that empirically the inclusion of human capital appears to have little meaningful effect upon both general capital asset pricing and individual investor portfolio composition. This is shown to arise from the fact that relationships between returns on almost all types of human capital and those of marketable financial assets are so weak as to make these two capital asset groupings effectively separable.