One can describe the above equilibrium property more intuitively. Consider the possibility of combining borrowing or lending with an investment in either of the two portfolios. Suppose there exists some mix of borrowing and a long position in the preferred stock portfolio so that the implied leveraged portfolio return distribution replicates the distribution of the equity portfolio return. If this is true, then the two excess return distributions are equivalent aside from the two distributions' connecting scale factor. The notion of relative risk in this scenario makes sense intuitively since it relates to whether borrowing or lending is necessary to equate the two portfolios' distributions.
Issues surrounding the modeling of the joint distribution of returns are more delicate.
In broad terms, the return specification satisfies a one-factor model. It differs from the prototype model in two respects. Second, the factor model has a random response-coefficient. This crucial feature implies that the returns' distributions cannot be perfectly dependent. An equilibrium will therefore derive from portfolio optimization rather than a pure no-arbitrage argument.