NEW FEATURES OF FINANCE THEORY - NONTRADED ASSETS AND THE CAPM

Asset pricing models that rely on the presence of non-tradable assets (such as human wealth) to solve the equity premium puzzle have to conf ront the effect of decreasing absolute risk aversion: rich investors, who according to micro data hold the stock market and whose behavior i s the one that matters, at the margin, for the determination of equili brium asset prices, are less risk averse, ceteris paribus, than the av erage consumer. This paper highlights a channel through which the effe ct of decreasing absolute risk aversion can be overcome: the existence of a positive correlation between the rates of return on traded asset s and on the human capital of marginal investors.