The capital asset pricing model provides an equation for determing the return on a stock. It states that the expected (average) excess return on a stock depends on the expected excess market return according to the following relationship. In the formulation, the estimated beta can be obtained from a time series regression of the stock’s excess return on the excess market return. The risk of a stock and hence the average return on that stock should depend on the volatility of its return and not on this peculiar variable beta which the higher the stock’s own volatility, the higher should be the average return on the stock. So the relative average returns on two stocks should depend on the ratios of their return volatilities and not the ratio of their betas.
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