AbstractUsing the family of GARCH‐M(p, q) models and UK data comprising of the market portfolio and a portfolio of smaller company shares over the period January 1970 through June 1994, this paper provides support for the notion that the degree of market capitalisation is an important factor in the analysis of risk‐return relationships. The evidence reported supports the view that, although both portfolios appear to be driven by the persistence of volatility shocks, there exist significant differences in risk‐return beha