Multi-factor models have been proposed as an alternative to the Capital Asset Pricing Model (CAPM), which uses beta as the single measure of risk. This paper relates stock returns to the underlying behavior of beta and five company attributes, i.e., size, earnings yield, cash earnings yield, dividend yield, and book-to-market ratio. Contrary to the CAPM, beta was not found to be statistically significant. Size and book-to-market ratio were found to be significant in the individual regressions, and only size was significant in the multivariate analysis. The study indicates that risk is multidimensional, and researchers and decision makers should not depend on beta alone.

Identifying the forces that contribute to variations of stock return is probably one of the most researched areas in financial economics. The influences may be systematic, such as economic, political or sociological changes which are common to all securities, or unsystematic, which are peculiar to certain industries or firms. The Capital Asset Pricing Model (CAPM ) uses systematic risk represented by beta as a single measure of risk. While early studies supported the CAPM, subsequent studies found a number of other variables that could explain expected stock returns.

The objective of this study is to explore the dependence of stock returns in India on beta and company attributes using panel data analysis. The six variables used were: beta, log of size (market capitalization), earnings yield, cash earnings yield, dividend yield and book-to-market ratio. This study briefly reviews the relevant literature and presents evidence that risk is multidimensional.

Early empirical research on the determinants of expected stock returns focused on the association between average returns on beta-sorted portfolios and their betas, as predicted by the CAPM. These include studies by Black et al. (1972), Blume and Friend (1973), and Fama and MacBeth (1973). However, other researchers highlighted the danger of focusing exclusively on mean-beta space as the return generation process also depends on other variables such as size, book-to-market ratio and earnings price ratio.

Applied Finance Journal, Capital Asset Pricing Model, CAPM, Multi-factor Models, Financial Economics, Market Capitalization, Empirical Research, Japanese Stock Markets, Regression Model, Multivariate Regressions, Decision Makers, Stock Returns.