Expected Investment Return Calculator

Expected Return Formula:

\[ \text{Expected Return} = \sum_{i=1}^{n} (P_i \times R_i) \]

Expected Return:

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1. What is Expected Investment Return?

Expected Investment Return is a weighted average of possible investment outcomes, calculated by multiplying each possible return by its probability and summing all results. It represents the mean value of the probability distribution of possible returns.

2. How Does the Calculator Work?

The calculator uses the expected return formula:

\[ \text{Expected Return} = \sum_{i=1}^{n} (P_i \times R_i) \]

Where:

\( P_i \) — Probability of scenario i (unitless, between 0 and 1)
\( R_i \) — Return in scenario i (%)
\( \sum \) — Summation over all possible scenarios

Explanation: This formula calculates the weighted average return, where each possible return is weighted by its probability of occurrence.

3. Importance of Expected Return Calculation

Details: Expected return is fundamental in investment analysis, portfolio management, and risk assessment. It helps investors make informed decisions by quantifying the average outcome they can expect from an investment.

4. Using the Calculator

Tips: Enter probability as a decimal between 0 and 1 (e.g., 0.25 for 25%), and return as a percentage value. Ensure probabilities sum to 1 across all scenarios for accurate portfolio analysis.

5. Frequently Asked Questions (FAQ)

Q1: What is the difference between expected return and actual return?
A: Expected return is a statistical prediction based on probabilities, while actual return is the realized outcome. They often differ due to market volatility and unforeseen events.

Q2: How do I determine probabilities for different scenarios?
A: Probabilities can be based on historical data, analyst forecasts, or subjective assessments. They should reflect the likelihood of each possible outcome.

Q3: Can expected return be negative?
A: Yes, if the weighted average of possible returns results in a negative value, indicating an expected loss on the investment.

Q4: What are typical expected return ranges?
A: Varies by asset class: bonds 2-5%, stocks 6-10%, real estate 4-8%. Higher returns typically come with higher risk.

Q5: Should I rely solely on expected return for investment decisions?
A: No, consider risk measures (standard deviation, variance) and personal risk tolerance. Expected return doesn't capture the full risk profile.