This paper examines the conditional beta-return relation on the stocks listed in the Colombo Stock Exchange by using the cross-sectional regression test. There is no evidence of a positive risk premium on beta when the unconditional relationship between beta and return is considered. However, when the market is split on the market excess returns, there is a signiﬁcant positive (negative) relationship between beta and returns in up (down) markets for individual and portfolio of stocks. Therefore, we cannot reject the usability of beta in explaining stock returns in Sri Lanka. Beta has a signiﬁcant relationship with stock returns subject to the condition of the market. Thus, our ﬁ ndings are new and could be useful for making investment decisions.
Keywords: Return, The CAPM, Beta, Conditional relationship
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Senior Lecturer, Department of Finance Faculty of Management Studies & Commerce University of Sri Jayewardenepura Nugegoda