This paper examines the relationship between industry risk and industry profitability. A three-equation model is employed in which profits, profit variability (total risk) and debt (financial risk) are simultaneously determined. One of the main findings of the study is that risk, as measured by profit variability, is not related to industryprofitability. One possible explanation is that risk-reducing strategies reduced profit variability and thus profit variability had little, role to play in explaining interindustry profitability. A second reason suggested by the results of the profit equation is that the equity/asset variable may be a better measure of risk.