Expected return: In case of expected return, the future is uncertain.

Investors do not know with certainty whether the economy will be growing rapidly or be in recession. As such, they do not know what rate of return their investments will yield. Therefore, they base their decisions on their expectations concerning the future. So, The expected rate of return on a stock represents the mean of a probabilty distribution of possible future returns on the stock. Although this is what you expect the return to be, there is no guarantee that it will be the actual return. Actual return: While on the other hand, Actual return refers to the nominal return made on an investment
during a given period of time (e.g. a quarter or year) relative to the investment's initial value. For
instance, the actual return on a stock purchased at $100 whose value at the end of one year is $120 is said to have a return of $120 - $100 = $20 or 20% ($20 / $100).

i.e Actual return is the actual

gain or loss of an investor, this can be expressed in the following formula: expected return (ex-ante) plus the effect of firm-specific and economy-wide news. So we can say that As opposed to expected return, actual return is what investors actually receive from their investments. The discrepancy between actual and expected return is due to systematic and unsystematic risk. Actual return should not be confused with expected return, which is the
projected return on an investment based on historic performance combined with predicted market trends.

Companies need to think differently about their expected vs. actual. A level of detail in expected data, whether these are transportation costs, bill-of-materials, cut-yields or anything else will not help if you do not have the same level of detail in your actual data collection.

Although expected return is the best estimate available of future returns, the actual return is not likely to equal the expected return. For this reason, investors and managers would like to have an idea of how precise their estimate might be. To help quantify the precision of their estimates, you use two concepts: variance and its square root, the standard deviation.
Standard deviation measures return variability due to factors both specific to the firm, and to factors outside the firm's control. For example, suppose a company becomes embroiled in a major lawsuit, discovers a new technology, or loses a key employee. These events will cause changes in returns. These events are called "firm-specific risks," or "diversifiable risks," reflecting the fact that all firms do not necessarily face the same risks. Macroeconomic factors, such as a rapid rise in inflation, affect all industries, and the performance of the market in general. Therefore, this is called "market," "systematic" or "non-diversifiable" risk, which represents risks created by macroeconomic conditions that all firms face.

In a literal sense, the standard deviation is a measure of how far from the expected value the actual outcome might be. Two stocks may have the same expected return, but have different levels of risk, as measured by variance and standard deviation. Just as the calculation of expected return was based on assumptions, it would be false to assume that variance and standard deviation encompass all aspects of risk. These tools merely give you more information based on past results, or expected future results.
Alternatively, when you have historical data, you can examine how the investment has performed in the past and use that as an indication of how it will perform in the future. By using historical returns on a firm's stock, you can calculate the variance of past returns. Keep in mind that even this method does not provide an absolute basis for determining the riskiness of the stock. Past returns are not always reliable indicators of future results. Nonetheless, calculating variance and standard deviation based on historical returns is often the preferred method, because it relies on historical fact, as opposed to unquantified speculation regarding the future.

Now lets see what Risk is actually:

Risk is the chance that an investment's actual return will be different than expected. Risk includes the possibility of losing some or all of the original investment. Different versions of risk are degree usually measured by calculating of the standard deviation of the historical risk. returns or average returns of a specific investment. High standard deviations indicate a high

Systematic Risk vs. Non-Systematic Risk Non-systematic risk is the risk that disappears in the portfolio construction process when you diversify among assets that are not correlated. Systematic risk is the risk that remains after constructing the market portfolio, which presumably contains all risky assets. It is the risks that cannot be diversified away. Total Risk = Systematic Risk + Non-Systematic Risk

"Alpha measures the difference between a fund's actual returns and its expected returns given its risk level as measured by its beta. A higher alpha is better, but a high alpha is only reliable in the presence of a high R-squared value. Some investors see alpha as a measurement of the value added or subtracted by a fund's manager. A positive alpha figure indicates the fund has performed better than its beta would predict. A negative alpha indicates a fund has underperformed, given the expectations established by the fund's beta.

For an investment to be riskfree, i.e., to have an actual return be equal to the expected return, two conditions have to be met There has to be no default risk, which generally implies that the security has to be issued by the government. Note, however, that not all governments can be viewed as default free.

 There can be no uncertainty about reinvestment rates, which implies that it is a zero coupon security with the same maturity as the cash flow being analyzed.

Beta as full measure of risk. The CAPM assumes that risk is measured by the volatility (standard deviation) of an asset's systematic risk, relative to the volatility (standard deviation) of the market as a whole. But we know that investors face other risks: inflation risk -- returns may be devalued by future inflation; and liquidity risk -investors in need of funds or wishing to change their portfolio's risk profile may be unable to readily sell at current market prices. Moreover, standard deviation does not measures risk when returns are not evenly distributed around the mean (nonbell curve). This uneven distribution describes our stock markets where winning companies, like Dell and Walmart, have positive returns (35,000% over ten years) that greatly exceed losing companies' negative returns (which are capped at a 100% loss). In practice there will be many factors other than the present value of cash flows from a security that play a part in its valuation. These are likely to include:

interest rates market sentiment expectation of future events inflation press comment speculation and rumour currency movements takeover and merger activity political issues.