Abstract
This study investigates the ability of market beta, book-to-market equity, leverage, and earnings-price ratio to explain the cross-sectional variation in expected returns in the small stock market of Sri Lanka. The results show that, inconsistent with the central prediction of the Capital Asset Pricing Model, the relation between average returns and beta is strongly negative. Earnings-price ratio shows a reliable positive relation with average returns. Market beta and earnings-price are strongly related to returns jointly as well. Firm size, the ratio of a firm's book value of equity (BE) to its market value (/ME), and leverage are not related to average returns in any significant manner