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AbstractWe examine the relation among average returns, market beta, firm size, and book‐to‐market value for Canadian stocks during 1975–92. We document a negative relation between average return and the market capitalization of firms, but find no relation between average return and market beta. While the small firm effect is significant during a period of reduced capital gains tax, it is noticeably lower than during the period leading up to the change. We find that average returns are positively related to book‐to‐market value especially during the period of lower capital gains tax.