This paper examines whether additional risk factors such as the variance, skewness and coskewness
of returns offer an appropriate explanation of company returns in the Sri Lankan Capital Market.
Arguments for considering these risk factors in pricing models to better deal with the characteristics
of a smaller developing capital market are presented. Using individual company returns, empirical
tests examine whether the extra risk factors offer a significant explanation of the cross section of
returns. Results indicate that while CAPM betas offer little explanation of company returns, variance
and, to a lesser extent, skewness are significantly related to returns in this market. Coskewness has
little importance. Robustness tests confirm that these measures are unrelated to company size.
