PROSPECT-THEORY AND THE RISK RETURN ASSOCIATION - ANOTHER LOOK

In a seminal study, Fiegenbaum (1990) attempted to set down parameters of relationship between risk and return for firms and related it to 'two piece von-Neumann Morgenstern utility function' first explored empirically by Fishburn and Kochenberger (1979). I re-examine the estimated relationship. Specifically, I perform a meta-analysis of the above and below median returns to show that the relationship between risk and return is weaker above median than below median. I also show that the relationship between below median returns and above median returns is very small exhibiting compartmentalization of decision making by the firms similar to individual decision makers.