102 Journal of Financial and Quantitative Analysis and Ross(1986)). Second, other researchers have found empirical evidence that security returns are affected by various measures of unsystematic risk(e.g,Lakon ishok and Shapiro(1986)). Finally, some researchers assert that recent empiric evidence indicates the absence of a systematic relationship between beta and se curity returns(e. g, Fama and French(1992). Collectively, the first two criticisms suggest that beta lacks efficiency and completeness as a measure of risk. The third criticism ies either that there is no risk-return tradeoff or that beta does not measure risk Whar Despite this evidence against the SLB model, Fama((1991),p.1593)asserts market professionals(and academics) still think about risk in terms of market 6. This preference for beta presumably results from the convenience of using a single factor to measure risk and the intuitive appeal of beta. Are these advantages sufficient to justify the continued use of beta if the criticisms cited above are valid? The use of beta may be justified as a measure of risk, even if beta is less efficient than alternative measures of systematic risk or is an incomplete measure of risk. However, if there is no systematic relationship between cross-sectional returns and beta, continued reliance on beta as a measure of risk is inappropriate This paper examines the crucial assertion that beta tionship with returns. Unlike previous studies, this study explicitly recognizes the mpact of using realized market returns to proxy for expected market returns. As developed in the next section, when realized market returns fall below the risk-free rate, an inverse relationship is predicted between realized returns and beta. Ac- knowledging this relationship leads to the finding of a significant and systematic relationship between beta and returns. Further, evidence of a positive risk-return tradeoff is found when beta is used to measure risk. These results cannot be taken as direct support of the SLB model, but they are consistent with the implication that beta is a useful measure of risk In the following section, we discuss the predicted relationship between beta and return distributions for both expected returns and realized returns. Section ml reviews previous tests of the relationship between beta and returns. In Section IV, the data and methodology used to test the relationship between beta and realized returns are described. Section V reports empirical results that show a systematic relationship between returns and beta and support for a positive risk-return tradeoff. Section VI concludes the paper ll. Beta and Returns: The SLB Model and Empirical Tests A. Model Implications The SLB model asserts that investors are rewarded only for systematic risk since unsystematic risk can be eliminated through diversification. Thus, the secu rity market line specifies that the expected return to any risky security or portfolio of risky securities is the sum of the risk-free rate and a risk premium determined IRoll and Ross(1994)attribute the observed lack of a systematic relation between risk and retum the possible mean-variance inefficiency of the market portfolio proxies