Human-capital-adjusted capital asset pricing model

While multi-beta models are found to be good approximations for the cross-sectional behaviour of stock prices, they fail to explain why that part of an asset's risk related to human capital is not captured by the asset's market beta. The empirical evidence also provides little justification for the linear relationship between expected returns and human capital betas. This paper addresses these issues with a theoretical examination of the effect of human capital on security prices. An intertemporal asset pricing model is derived in which expected returns are linearly and positively related to market betas and human capital betas.