The coefficient of variation compares risk with expected return (standard deviation / expected return).
The required rate of return on equity capital in the capital asset pricing model is the risk-free rate (determined by government securities), plus the product of the market risk premium times the beta coefficient (beta measures the firm's risk). The market risk premium is the amount above the risk-free rate that will induce investment in the market. The beta coefficient of an individual stock is the correlation between the volatility (price variation) of the stock market and that of the price of the individual stock. For example, if an individual stock goes up 15% and the market only 10%, the stock's beta is 1.5. For this reason, beta is a measure that describes the risk (volatility) of an investment project relative to other investments in general (the market).
The expected return of an investment is the weighted average of all of the possible investment returns, with the probabilities of each return occurring serving as the weights. It is not a measure that describes the risk of an investment relative to other investments in general.
The standard deviation of the probable expected future returns of an investment is the absolute measure of the investment's risk. It is not a measure that describes the risk of an investment relative to other investments in general.
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