Research topics on the risk-return relationship and market beta have made significant contributions in the field of finance in both academia and practice. These topics, nonetheless, have continued to cause conflicting views. As pointed out in Pettengill et al. (1995, 2002), for instance, which has provided the motivation for this study, an ex-ante model has been defined by unobservable expected stock returns, whereas an ex-post model uses observable actual stock returns as a proxy. Expectedly, the difference between unobservable expected stock returns and observable actual stock returns can create confusion since the most significant property that can actually affect market beta is an actual change that becomes materialized in the market situation. In an up market, stocks with high market beta receive higher return compensation (positive risk premium) than stocks with low market beta. In a down market, on the contrary, stocks with high market beta have lower return compensation (negative risk premium) than stocks with low market beta. On the basis of Pettengill et al. (1995, 2002), therefore, this study attempts to gain more accurate understanding of this complex question by re-examining the cross-sectional relationships between the expected stock returns and the three factors associated with the Korean stock market, such as market beta, firm size, and book-to-market equity ratios. In addition, this study is to design an empirical framework on the basis of studies by Fama and French (1993) and Pettengill et al. (1995, 2002), using the three-step cross-sectional regression analysis proposed by Fama and MacBeth (1973). Specifically, this paper empirically investigates whether portfolio market beta, portfolio firm size, and portfolio book-to-market equity ratio in the past period could significantly explain the change in the portfolio's excess return in the future period via the cross-sectional regression analysis. Data of stock, bond, and accounting during the period of January 1987 to December 2010 were obtained from the FnGuide. The sub-periods within the overall period were set according to Fama and French (1992). Here, an up market refers to a period showing a positive market excess return, whereas a down market refers to a negative market excess return. The observed results can be summarized as follows. First, as observed in the study of Fama and French (1992), the results from the models that do not reflect the real market situation have no statistical significance of portfolio market beta to account for the changes of the portfolio excess return in a future period. However, the portfolio firm size and portfolio book-to-market equity ratio are statistically significant. Second, through the results from the models that use market beta, which are classified into either up or down markets, as in the study of Pettengill et al. (1995, 2002), this study confirms that portfolio market beta, portfolio firm size, and portfolio book-to-market equity ratio in a past period can significantly explain the change of portfolio excess return in a future period. That is to say, the usefulness of market beta, firm size, and book-to-market equity ratio is confirmed in the cross-sectional relationship with the expected stock returns when considering market situation into market beta. Third, the results from the models that reflect market situation change into variables, such as market beta, company size, and book-tomarket equity ratio, evincing that all of the variables significantly account for the variation in the portfolio excess return in the future period. Finally, this study empirically confirms the robustness of the previous results mentioned, via additional test, reflecting the various influential factors in the empirical design. Simply, the results observed from the additional test show no difference from the previous results mentioned in this study. The results of this study corroborate that the cross-section of the expected stock returns in the Korean stock market might be much closer to that of Pettengill et al. (1995, 2002) than it is of Fama and French (1992), when considering the change in the market situation. On the basis of the observed evidence, this study also confirms as to whether the reflecting properties of the actual data in applications of the expected models might have an important effect on the observed results. In particular, this study finds that the pricing models in financial theories should sufficiently consider the market situation as a control factor when examining the validity of market beta as well as the risk-return relationship. To further expand this study, future researches can re-evaluate the three-factor pricing model with properties of market situation using the time series regression analysis of Black et al. (1972), as well as confirm the three-factor model's capability to forecast the risk-return relationship.