It is well documented that the rates of return to holding common stocks and bonds are to some extent predictable over time. There is controversy over the source of the predictability. Some authors attribute predictability to market inefficiencies, and others maintain that predictability is the result of changes in the required return. In this paper we attempt to calibrate the relative importance of these two explanations for monthly portfolio returns. Our evidence suggests that a rational asset pricing model that focuses on risk can explain most of the predictability.