The overall variability of a firm's returns depends on the expected return of each individual project, percentage of funds invested in each individual project, and correlation coefficient of returns between the investments.
The reason is that the investor desires higher returns on the higher risk he takes. It is also evident from the Capital asset pricing model which says that the return demanded by the investor is equal to the return on the risk free investment and the risk premium. The investment in a portfolio of investments also affects the weighted average required return. Furthermore, the correlation coefficient of returns between investments must be inversely related so that the investor has a average return on the investment.
