This paper examines the empirical relationship between Market risk premium, Market/Book Equity, Market/Total Assets and stock returns of 183 firms listed in Borsa Istanbul over the period 2003-2013/6 using panel data analysis. In addition, the aim of this paper is to search for the leverage effect on stock returns. We find statistically significant evidence showing that market risk premium, Market/Book Equity, Market/Total Assets explain stock returns. The results are consistent with the

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... ure. Market value/book value has a negative coefficient whereas market value/total assets has a positive coefficient. Since leverage is the difference between book value and total assets, the leverage effect of the MV/TA leads to the sign change of the coefficient. The result implies the effect of leverage on the stock returns. Companies with low Price/Equity ratios generate higher returns and stocks with lower leverage levels perform better than the ones with higher leverage ratios in Borsa Istanbul. There are several empirical tests of CAPM with contradictory results of the Sharpe-Lintner-Black model (see, for example, Reinganum (1981) , Breeden et al. (1989), Fama and French (1992) ) These tests reveal that there are other variables other than beta which affects the returns. These are (1) size, ME (stock price times number of shares), (2) www.sciedupress.com/afr Accounting and Finance Research Vol. 4, No. 4; 2015  , this result creates lower returns. The returns of the listed stocks in Borsa İstanbul decrease; if these companies have higher debt and vice versa.