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This paper explores the ability of the capital asset pricing model, as well as the firm specific factors, to explain the cross‐sectional relationship between average stock returns and risk in Athens Stock Exchange (ASE). The objective of this study is to investigate the cross‐section of stock returns in the Greek stock market for the period from July 1993 to June 2001. A methodology similar to that of Fama and French (1992) is employed, by taking into account the constraints imposed by a smaller sample both in time and in terms of number of stocks. Our findings indicate that in the Greek stock market there is not a positive relation between risk, measured by β, and average returns. On the other hand, there is a “size effect” on the cross‐sectional variation in average stock returns.

The purpose of this paper is to examine the relationship between beta and returns in the Athens stock exchange (ASE), taking into account the difference between positive and negative market excess returns' yields.

The data were taken from DataStream database and the sample period consists of 12 years divided into four six‐year periods such that the test periods do not overlap. Regression analysis is applied, using both the traditional (unconditional) test procedure and the conditional approach.

The estimation of return and beta without differentiating positive and negative market excess returns produces a flat unconditional relationship between return and beta. However, when using the conditional capital asset pricing model (CAPM) and cross‐sectional regression analysis, the evidence tends to support the significant positive relationship in up market and a significant negative relationship in down market.

The small number of listed companies in the ASE led to the inclusion of the financial and insurance companies in the sample, and to the formation of a small number of portfolios. The same research methodology could be applied to individual stocks of the ASE and with the exclusion of all financial companies.

The results tend to support the existence of a conditional CAPM relation between risk and realized return trade‐off.