Occupational Income Betas for Financial Advisers

Grable, John E.; McGill, Samantha
June 2009
Journal of Financial Planning;Jun2009, Vol. 22 Issue 6, p50
Academic Journal
•Previous research has shown that a person's occupational income variability affects the level of risk aversion within a portfolio.Typically, it is assumed that those with high income variability ought to favor fixed-income assets over equities. This paper hypothesizes that a person's income variability is occupation-specific and that an occupational income beta, using a best fit index can be developed for any occupation. •Occupational income betas, the outcome from this study, can be used by financial advisers as an asset allocation tool when developing and rebalancing client portfolios. •This paper establishes beta coefficients for a variety of occupations relative to stocks, bonds, and T-bills. It finds that betas for most occupations relative to T-bills are both positive and large, betas for most occupations relative to stocks are generally low and variable, and betas for most occupations relative to bonds are predominantly significant and positive. •It is shown that the best fit for most occupations is not equities but fixed- income indexes. Of particular interest is the finding showing occupational income, in the majority of cases examined, being most closely associated with the Treasury bill market. •The paper establishes goodness of fit to determine the amount of explained variance using r², finding, in most cases, that variations in occupational incomes could only be somewhat explained, and that, in most cases, the explained variance was low. •The paper concludes with a summary of how financial advisers can calculate occupational income betas and how each beta can be assessed and used when working with clients.


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