1. What is Expected Return?

Expected return is a key financial metric that calculates the average return an investment is expected to generate based on different possible outcomes and their probabilities. It helps investors assess the potential profitability of investments.

2. How Does the Calculator Work?

The calculator uses the expected return formula:

Where:

• \( p \) — Probability of each outcome (unitless, must sum to 1)
• \( r \) — Return for each outcome (%)
• \( E(r) \) — Expected return (%)

Explanation: The formula multiplies each possible return by its probability and sums all these products to get the overall expected return.

3. Importance of Expected Return Calculation

Details: Expected return is fundamental in portfolio management, risk assessment, and investment decision-making. It helps compare different investment opportunities and build diversified portfolios.

4. Using the Calculator

Tips: Enter probabilities as comma-separated values (must sum to 1) and corresponding returns as comma-separated percentages. Both lists must have the same number of values.

5. Frequently Asked Questions (FAQ)

Q1: Why is expected return important in finance?
A: It provides a quantitative measure of investment performance expectation, helping investors make informed decisions and manage risk.

Q2: What's the difference between expected return and actual return?
A: Expected return is a forecast based on probabilities, while actual return is the realized performance. They often differ due to market uncertainties.

Q3: How do probabilities affect expected return?
A: Higher probabilities assigned to positive returns increase expected return, while higher probabilities for negative returns decrease it.

Q4: Can expected return be negative?
A: Yes, if the probabilities of negative returns are sufficiently high, the expected return can be negative.

Q5: How is expected return used in portfolio theory?
A: It's a key component in Modern Portfolio Theory for optimizing asset allocation and balancing risk versus return.