Expected Return is the anticipated profit or loss an investor expects to earn from an investment, based on historical data, probabilities, and market assumptions.
Expected Return is a key concept in investment analysis and portfolio management. It helps investors estimate the potential outcome of an investment before making decisions.
The formula is:
Expected Return = Σ (Probability of Return × Possible Return)
It considers different scenarios and their likelihood, making it useful for evaluating risk vs reward.
Key points about expected return:
A higher expected return usually comes with higher risk, so investors must balance their risk tolerance and investment goals.
"<p>If an investment has:</p> <ul> <li>50% chance of 10% return</li> <li>50% chance of 5% return</li> </ul> <p> Expected Return = (0.5 × 10) + (0.5 × 5) = <strong>7.5%</strong> </p>"