The Capital Asset Pricing Model (CAPM) argues that only systematic risk should be priced in the market; Specific or idiosyncratic risk does not deserve a risk premium. However, recent empirical studies have raised serious challenges to this belief It appears that “/3” as a measure of systematic risk, has little power in explaining cross-sectional risk and return relationships over long periods of time, while other variables such as “firm size” and “book-to-market ratio,” appear to be more useful risk proxies. This study seeks to explore the cross-section of expected common stock returns in Iranian emerging stock market, namely Tehran Stock Exchange for the period 1993 through 2001. The joint roles of market risk measured by beta, firm size, book-to-market, earnings-to-price, and trading volume on monthly returns is examined. The study findings although consistent with central theme of the CAPM, but are inconsistent with the results of similar studies carried out in major developed stock markets recently.
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