Efficiency of Household Portfolio Using Mean-Variance Model

Traditional Mean-Variance model is used to test efficiency of Korean household portfolio. Three traded assets are selected to represent set of risky assets available to the household investors: KOSPI from KNSO, bond index from KBP, and Housing Purchase Price Composite Indices from Kookmin Bank. Analyses show that optimal risky portfolio is 3.2% for stocks, 49.7% for bonds, 47.1% for real estate, and the expected return is 6.8%. The model is extended to provide efficient asset allocations to various household portfolios with different expected returns. Households with higher expected returns on their portfolio should hold higher proportion of real estate and bonds among total assets. The efficient portfolios are compared to portfolio of Korean households from the KNSO 2006 Household Asset Survey. Our efficiency tests show that all households are holding an inefficient mean-variance portfolio, and that the households could improve their portfolio efficiency up to 25% in terms of RVAR. Our results could be helpful for financial consultants who provide financial advice on efficient portfolio management for individual households.