Behavioral finance and classical finance based on utility maximization appear to be mutually exclusive schools of thought. Despite the fundamental difference, we show that behavioral finance also has a linear relation between risk and return. This relation is obtained without the assumptions of market equilibrium, rational expectations, a specific utility function and the market portfolio. In the behavioral approach, the pricing error of CAPM is not an error. It is attributable to the higher-order moments of return. Empirical tests suggest that the relative risk aversion coefficient is positive and time-varying. Moreover, it correlates negatively with both volatility and return.
Finance and Financial Management | Portfolio and Security Analysis
Ting, Hian Ann, Christopher.
Risk, Return and Risk Aversion: A Behavioral Rendition. (2004). Research Collection Lee Kong Chian School Of Business.
Available at: http://ink.library.smu.edu.sg/lkcsb_research/2338