Expected Annual Return Calculator

Expected Return Formula:

\[ \text{Expected Return} = \sum (Weight_i \times Return_i) \]

Weight 1 (proportion):

decimal

Return 1 (%):

Weight 2 (proportion):

decimal

Return 2 (%):

Expected Return:

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1. What Is Expected Return?

Expected return is the weighted average of the probable returns of an investment portfolio. It represents the mean value of the probability distribution of possible returns, helping investors estimate the potential profitability of their investments.

2. How Does The Calculator Work?

The calculator uses the expected return formula:

\[ \text{Expected Return} = \sum (Weight_i \times Return_i) \]

Where:

\( Weight_i \) — Proportion of investment in asset i (as decimal)
\( Return_i \) — Expected return of asset i (as percentage)
\( \sum \) — Summation across all assets in portfolio

Explanation: The formula calculates the weighted average return by multiplying each asset's expected return by its portfolio weight and summing the results.

3. Importance Of Expected Return Calculation

Details: Calculating expected return is essential for portfolio optimization, risk management, and investment decision-making. It helps investors compare different investment opportunities and construct portfolios that align with their financial goals and risk tolerance.

4. Using The Calculator

Tips: Enter weights as decimals (e.g., 0.25 for 25%) and returns as percentages (e.g., 8 for 8%). Ensure weights sum to 1 (100%) for accurate portfolio representation.

5. Frequently Asked Questions (FAQ)

Q1: What Is The Difference Between Expected Return And Actual Return?
A: Expected return is a statistical forecast based on probabilities, while actual return is the realized performance. Actual returns often differ from expected returns due to market volatility and unforeseen events.

Q2: How Many Assets Can I Calculate For?
A: This calculator handles two assets for simplicity. For more complex portfolios, the same formula applies by extending the summation to include all assets.

Q3: What Are Reasonable Expected Return Values?
A: Expected returns vary by asset class. Stocks typically range 7-10%, bonds 3-5%, while riskier assets may offer higher potential returns.

Q4: Does This Account For Risk?
A: No, expected return calculation focuses only on return potential. For comprehensive analysis, consider calculating portfolio risk measures like standard deviation or Value at Risk.

Q5: Can I Use This For Individual Stocks?
A: Yes, this calculator works for any investment assets including individual stocks, bonds, mutual funds, or any combination of investments.