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Expected Return Formula:
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Expected Return (ER) is a key financial metric that calculates the average return an investor can anticipate from an investment over time. It considers all possible outcomes and their respective probabilities to provide a weighted average return expectation.
The calculator uses the expected return formula:
Where:
Explanation: The formula calculates the weighted average of all possible returns, where each return is multiplied by its probability of occurrence.
Details: Expected return is fundamental for investment decision-making, portfolio optimization, risk assessment, and comparing different investment opportunities. It helps investors make informed choices based on probabilistic outcomes.
Tips: Enter probabilities as decimals (must sum to 1.0) and returns as percentages. For example: Probability 1 = 0.3, Return 1 = 15% means there's a 30% chance of achieving a 15% return.
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 real return achieved. They often differ due to unforeseen market conditions.
Q2: How many scenarios should I include in the calculation?
A: You can include as many scenarios as needed, but typically 3-5 scenarios cover most investment outcomes (bull, bear, and neutral markets).
Q3: Can expected return be negative?
A: Yes, if the probability-weighted average of possible returns results in a negative value, indicating an expected loss.
Q4: How does expected return relate to risk?
A: Expected return doesn't measure risk directly. Risk is typically measured by standard deviation or variance of returns around the expected value.
Q5: Is expected return guaranteed?
A: No, expected return is a statistical expectation, not a guarantee. Actual returns may vary significantly from expected returns.