This paper proposes a risk-based explanation for the book-to-market (B/M) effect. I decompose B/M into net operating asset-to-market (NOA/M) and net financing asset-to-market (NFA/M) components. Portfolio analysis shows that (i) positive B/M, NOA/M and NFA/M are positively related to future returns and (ii) negative B/M, NOA/M and NFA/M are negatively related to future returns. To the extent that positive B/M, NOA/M and NFA/M act as measures of asset risk and negative B/M, NOA/M and NFA/M act as inverse measures of borrowing risk, the nonlinear relations between B/M, NOA/M and NFA/M and future returns provide some evidence to support the risk-based explanation for the book-to-market effect in stock returns.