This paper demonstrates that a conditional version of the Capital Asset Pricing Model (CAPM) explains the cross section of expected returns, just as well as the three factor model of Fama and French. This is achieved by measuring beta (systematic risk) with short-, medium- and long-run components. The short-run component of beta is computed from daily returns over the prior year. While the medium-run beta component is from daily returns over the prior 5 years and the long-run component from monthly returns over the prior 10 years. More immediate changes in risk such as changes in portfolio characteristics are captured in the short-run beta component, whereas, more slowly changing risk due to the business cycle is captured in the medium- and long-run beta components.

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