Prospect Theory and the CAPM : A contradiction or coexistence?

Under the assumption of normally distributed returns, we analyzewhether the Cumulative Prospect Theory of Tversky and Kahneman (1992)is consistent with the Capital Asset Pricing Model. We find that in everyfinancial market equilibrium the Security Market Line Theorem holds.However, under the functional form for the utility index suggested byTversky and Kahneman (1992) financial market equilibria do not exist.We suggest an alternative functional form that is consistent with both,the experimental results of Tversky and Kahneman and also with theexistence of equilibria.