The effects of the capital accumulation ratio on wealth
Academic Article
Overview
Additional Document Info
View All
Overview
abstract
The capital accumulation ratio (CAR) is commonly used in academic research as a measure of household portfolio quality. This study tested whether a higher initial CAR impacts change in wealth over a decade among households in the accumulation life cycle stage. Meeting the 25% CAR guideline resulted in a 28.1% increase in net worth between 1994 and 2004. When broken into quartiles, the relationship between CAR and wealth was monotonic and statistically significant. However, this increase comes at a cost; those who met the 25% threshold CAR increased their standard deviation of net worth from 1994 to 2004 by 8.1%, and those in the highest CAR quartile saw their wealth dispersion increase by 36%. Results from this study suggest that meeting the 25% CAR threshold leads to greater wealth over time at the tradeoff of higher variation in future wealth. 2009 Association for Financial Counseling and Planning Education.
