The Capital Asset Pricing Model (CAPM) is based on the Expected Utility (EU) theory that assumes linearity in probabilities and models the assumption of risk-aversion via a concave utility function. Studies in psychology and economics, however, show that individuals systematically violate the...

This paper questions the CAPM's assumption of global risk-aversion. I develop an expected return-risk framework that allows tests of restrictions on marginal utility conditional on the states-of-the-world. Empirical tests using monthly stock returns data show a decreasing marginal utility from...