In a framework in which the equity beta is decomposed into leverage and the beta of assets, this paper shows empirically the impact of financial leverage on the conditional CAPM. A firm's asset beta is estimated using asset returns constructed from market data not only on equity, but also on corporate bonds and loans. The CAPM alphas at firms' asset level are much smaller than the alphas at the equity level in the sample of firms where market data for debt are available. Furthermore, leverage alone can explain a substantial portion of the well-documented alphas of book-to-market-sorted portfolios. There is a tight link between book-to-market and leverage, explaining the empirical finding that firms' asset returns do not increase across book-to-market-sorted portfolios.