Motivated by the conflict between capital market theory and empirical results related tothe pricing of systematic and nonsystematic risk, we develop, estimate (using option pricingdata), and test a measure of ex-ante systematic risk. In our cross-sectional analysis, we find thatour measure of implied beta is significant in explaining the future returns for a sample of 2,864optionable firms examined during the 1999-2010 sample period. Although we fail to find asignificant relationship between a traditional measure of systematic risk, beta, and future stockreturns, we do provide evidence of a significant positive relationship between future stockreturns and our implied beta measure. However, our robustness tests indicate that the impliedbeta measure is significant only for smaller firms and for firms with higher ratios of book-tomarketequity.