Investments, tenth edition

Coefficient

c

0

c

vw

c

prem

c

labor

c

size

R

2

A. The Static CAPM without Human Capital

Estimate

1.24

2

0.10

1.35

t-value

5.16

2

0.28

Estimate

2.08

2

0.32

2

0.11

57.56

t-value

5.77

2

0.94

2

2.30

B. The Conditional CAPM with Human Capital

Estimate

1.24

2

0.40

0.34

0.22

55.21

t-value

4.10

2

0.88

1.73

2.31

Estimate

1.70

2

0.40

0.20

0.10

2

0.07

64.73

t-value

4.14

2

1.06

2.72

2.09

2

1.30

16

John Heaton and Debora Lucas, “Portfolio Choice and Asset Prices: The Importance of Entrepreneurial Risk,” 

Journal of Finance 55, no. 3 (June 2000), pp. 1163–98.

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7/17/13   3:47 PM

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P A R T   I I I

  Equilibrium in Capital Markets

 Consistent with theory, Heaton and Lucas find that households with higher invest-

ments in private business do in fact reduce the fraction of total wealth invested in equity. 

 Table  13.3  presents excerpts from their regression analysis, in which allocation of the 

overall portfolio to stocks is the dependent variable. The share of private business in total 

wealth (labeled “relative business”) receives negative and statistically significant coeffi-

cients in these regressions. Notice also the negative and significant coefficient on risk atti-

tude based on a self-reported degree of risk aversion.   

 Finally, Heaton and Lucas extend Jagannathan and Wang’s equation to include the rate 

of change in proprietary-business wealth. They find that this variable also is significant and 

improves the explanatory power of the regression. Here, too, the market rate of return does 

not help explain the rate of return on individual securities and, hence, this implication of 

the CAPM still must be rejected.