asset. Recently, Hicks has used a model similar to that proposed by Tobin to derive corresponding conclusions about individual investor behavior, dealing somewhat more explicitly with the nature of the condi tions under which the process of investment choice can be dichotomized An even more detailed discussion of this process, including a rigorous proof in the context of a choice among lotteries has been presented by Gordon and Gangolli. Although all the authors cited use virtually the same model of investor behavior, none has yet attempted to extend it to construct a market equilibrium theory of asset prices under conditions of risk. T We will show that such an extension provides a theory with implications consistent with the assertions of traditional financial theory described above. Moreover, it sheds considerable light on the relationship between the price of asset and the various components of its overall risk. For these reasons it warrants consideration as a model of the determination of capital asset prices. ditions of risk. In Part III the equilibrium conditions for the capital market are considered and the capital market line derived. The implica tions for the relationship between the prices of individual capital assets and the various components of risk are described in Part Iv II. OPTIMAl INVESTMENT POLICY FOR THE INDIVIDUAL The Investor's Preference Function Assume that an individual views the outcome of any investment in probabilistic terms; that is, he thinks of the possible results in terms of some probability distribution. In assessing the desirability of a particular investment, however, he is willing to act on the basis of only two para 4. John R, Hicks, "Liquidity, The Economic Journal, lxXII (December, 1962),787 s.M. J. Gordon and Ramesh gangolli,"Choice Among and Scale of Play on Lottery Alternatives, " College of Business Administration, University of roch 1962 For another discussion of this relationship see W. F. Sharpe,"A Simplified Model for Portfolio Analysis, Management Science, Vol. 9, No. 2 (January 1963),277-293.A xuvorat oin inass an the Theory of Investment, "The 4merican Economic Review, 6. Recently Hirshleifer has suggested that the mean-variance approach used in the as a special case of a more general formulation due to Arrow. See Hirshleifer's "Investment Decision Under Uncertainty, "Papers and Proceedings eventy-Sisth Annual Meeting of the Ame ican Economic or Arrow's "Le Role des Valeurs Boursiers pour la Repartition la Meilleure des Risques, International Colloquium on Econometrics, 1952 A 7. After preparing this paper the author learned that Mr. Jack L. described here. Unfortunately Mr. Treynor's excellent work on thi unpublished