The Stock Exchange of Mauritius (SEM) has been in operation for more than 15 years. As at December 2004, there were 40 companies listed on the official market. The main objectives of this study were to analyse the risk return characteristics of all the companies listed on the SEM in terms of both total risk and systematic risk; to estimate time-varying betas; to investigate the existence of the size and book-to-market equity effects on the SEM and finally to augment the Fama and French (1993) three-factor model, by taking into account the time variation in betas. The period of study was January 1997 to June 2003 and using monthly returns. The study found out that CAPM stationary betas are different from betas corrected for thin trading. It is therefore crucial to take thin trading into account when estimating systematic risk for markets characterized by thin trading. Time-varying betas are different from stationary betas and the result supports the hypothesis that the SEM behaves like a small market capitalization index. The Fama and French three-factor model holds for the SEM. In other words, both a size effect and a book-to-market equity effect are present on the SEM. The augmented Fama and French model shows that the time variation in betas is priced, but the size and book-to-market equity effects are still statistically significant. The FF model is therefore robust after taking into account the time-variation in beta. However, the results might be sample specific. The test must be extended across other stock exchanges.