Introduction

Expected return is a financial concept that represents the anticipated profit or loss on an investment. It’s a crucial metric for investors to assess potential investments and make informed decisions.

Definition

Expected return is the sum of all possible returns, each multiplied by its probability of occurrence.

Calculation Formula

Expected Return = Σ (Return × Probability)

How to Calculate Expected Return

1. Identify all possible returns
2. Determine the probability of each return
3. Multiply each return by its probability
4. Sum up all the results

Example

Investment A:

• 40% chance of 10% return
• 30% chance of 5% return
• 30% chance of 0% return

Expected Return = (10% × 0.4) + (5% × 0.3) + (0% × 0.3) = 5.5%

Conclusion

Understanding and calculating expected return is essential for investors to evaluate potential investments and manage risk. While it provides valuable insights, it’s important to remember that expected return is based on probabilities and past performance, and actual returns may vary.