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Expected Return Formula:
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Expected return is a key financial concept that calculates the average of a probability distribution of possible returns. It represents the mean value of all possible outcomes, weighted by their respective probabilities.
The calculator uses the expected return formula:
Where:
Explanation: The formula multiplies each possible return by its probability and sums all these products to get the overall expected return.
Details: Expected return is fundamental in investment analysis, portfolio management, and risk assessment. It helps investors compare different investment opportunities and make informed decisions based on potential outcomes.
Tips: Enter probability values as decimals between 0 and 1 (e.g., 0.25 for 25% probability). Return values should be percentages (e.g., 15 for 15% return). You can enter up to 5 probability/return pairs.
Q1: What's the difference between expected return and actual return?
A: Expected return is a statistical prediction based on probabilities, while actual return is what actually occurs. They often differ due to unforeseen market conditions.
Q2: Should probabilities always sum to 1?
A: Yes, for accurate calculation, the sum of all probabilities should equal 1, representing all possible outcomes.
Q3: Can expected return be negative?
A: Yes, if potential losses outweigh potential gains in the probability distribution, the expected return can be negative.
Q4: How is this different from average return?
A: Expected return considers probabilities of different outcomes, while average return simply calculates the mean of historical returns without probability weighting.
Q5: What are limitations of expected return?
A: It assumes probabilities are known accurately and doesn't account for the variability of returns (risk), which is why it's often used alongside risk measures like standard deviation.