The Conditional CAPM and the Cross-Section of Expected Returns.

Most empirical studies of the static capital asset pricing model (CAPM) assume that betas remain constant over time and that the return on the value-weighted portfolio of all stocks is a proxy for the return on aggregate wealth. The general consensus is that the static CAPM is unable to explain satisfactorily the cross-section of average returns on stocks. The authors assume that the CAPM holds in a conditional sense, i.e., betas and the market risk premium vary over time. They include the return on human capital when measuring the return on aggregate wealth. The authors' specification performs well in explaining the cross-section of average returns. Copyright 1996 by American Finance Association.