Expected Return

The expected return (or expected gain) is the expected value of a random variable usually representing a gain, i.e. the weighted-average outcome in gambling, probability theory, economics or finance.

It is calculated by using the following formula:

E(R) = Sum: probability (in scenario i) × the return (in scenario i) .

How do you calculate the average of a probability distribution? As denoted by the above formula, simply take the probability of each possible return outcome and multiply it by the return outcome itself. For example, if you knew a given investment had a 50% chance of earning a 10 return, a 25% chance of earning 20 and a 25% chance of earning -10, the expected return would be equal to 7.5:

E(R) = 0.5 × 10 + 0.25 × 20 + 0.25 × (-10) = 7.5 .

Although this is what you expect the return to be, there is no guarantee that it will be the actual return.

Read more about Expected ReturnDiscrete Scenarios, Continuous Scenarios, Alternate Definition

Other articles related to "expected return, return, expected returns, expected":

Expected Return - Alternate Definition
... In finance, expected return can also mean the return of a bond if the bond pays out ... This will always be higher than the expected return in the other sense presented in this article because the bond paying out is the highest payout scenario, and failure is ...
Satellite (financial) - Mathematical Model - The Efficient Frontier With No Risk-free Asset
... of the risky assets, without including any holdings of the risk-free asset, can be plotted in risk-expected return space, and the collection of all such possible portfolios defines a region in this space ... which there is lowest risk for a given level of expected return ... the combination offering the best possible expected return for given risk level ...
Satellite (financial) - Mathematical Model - Risk and Expected Return
... MPT assumes that investors are risk averse, meaning that given two portfolios that offer the same expected return, investors will prefer the less ... on increased risk only if compensated by higher expected returns ... Conversely, an investor who wants higher expected returns must accept more risk ...
Satellite (financial) - Concept
... Investing is a tradeoff between risk and expected return ... In general, assets with higher expected returns are riskier ... select a portfolio with the highest possible expected return ...
Consumption Beta
... a means of understanding and calculating an expected return on investment ... The CCAPM implies that the expected risk premium on a risky asset, defined as the expected return on a risky asset less the risk free return, is proportional to the ...

Famous quotes containing the words return and/or expected:

    Or ever the silver cord be loosed, or the golden bowl be broken, or
    the pitcher be broken at the fountain, or the wheel broken at the
    cistern.
    Then shall the dust return to the earth as it was: and the spirit
    shall return unto God who gave it.
    Vanity of vanities, saith the preacher, all is vanity.
    Bible: Hebrew Ecclesiastes (l. XII, 6–7)

    At times it seems that the media have become the mainstream culture in children’s lives. Parents have become the alternative. Americans once expected parents to raise their children in accordance with the dominant cultural messages. Today they are expected to raise their children in opposition to it.
    Ellen Goodman (20th century)