Published results of empirical tests over the past two decades indicate that the risk-return relation in the Hong Kong stock market is negative. Such findings refute the positive risk-returnrelation stipulatedinthe traditional CAPM. However, traditional CAPM invokes expected or ex-ante returns while empirical tests have used ex-post returns as an imperfect proxy. Thus, in this paper, the risk-return relationship in the Hong Kong stock market is examined using the conditional method based on the work of Pettengill et al., which takes into consideration the dominating ex-post negative excess market returns found in the Hong Kong stock market. Under the conditional Pettengill et al. method, test results demonstrate a strong conditional positive and negative risk-return relationships in the Hong Kong stock market. The results show that the estimated risk premiums in both up and down markets are insignificantly different from the corresponding expected risk premiums. But the estimated risk premiums of the up and the down markets are asymmetric with the magnitude of the down market premium greater than that of the up market. Thus, under the conditional CAPM, the estimated security market line (SML) in the down market is negatively steeper than is the positively sloped estimated SML in the up market. The significant results are not driven by abnormal return behaviour in some of the months or by a particular beta group. Thus, in general, the test results suggest that the conditional CAPM is still practically a useful equilibrium pricing model in the Hong Kong stock market.