This paper is concerned with empirical measurement, analysis, and comparison of the returns expected by investors in U. S., German, French and Japanese equity markets. The expedited return to equity is a pivotal concept in capital market theory because of the concern of this theory with analyzing relationships between expected returns to the general market and expected returns to individual securities. Because the expected equity returns are not directly observable, the approach almost uniformly taken in the empirical testing of capital market theory is to make additional behavioral assumptions beyond those contained in the basic theory that enable it to be translated into an analysis of market relationships among ex-post returns. Empirical tests then become tests of both the basic theory and the appended assumptions. A new approach to the empirical testing of capital market relationships is to develop empirical approximations to the returns expected in the equity market, and to employ these expectational measures to directly test capital market relationships. This paper formulates and examines this approach. Empirical approximations of the expected equity return for a representative group of major international stock exchanges are formulated, estimated, and analyzed, leading to a direct test of the International Asset Pricing model in its original form.

State-preference theory has developed as a choice-theoretic framework through which many problems of finance and economics dealing with time and uncertainty can be analyzed. Hirshleifer [3], [4], [5], [6] has used the approach to provide significant insights to areas such as production and exchange, investment decisions, and speculative behavior. However, the theory has not made progress in attempting to incorporate state-labeled utility functions into the body of the theory. This paper will develop a method of graphically and analytically allowing for differing utility functions across states. As a further step, the impact of belief-deviation upon the tangency optimum will be discussed. Finally, the significance of these findings upon the consideration of risk will be discussed.