Expected Return

Definition§

The expected return is the profit or loss that an investor anticipates on an investment based on known historical rates of return (RoR). It is calculated by multiplying potential outcomes by the probabilities of them occurring and then summing these results. The expected return provides a measure for making financial decisions, even though it does not offer guaranteed results.

Expected Return vs Actual Return§

Examples§

1. Example of Expected Return Calculation: Suppose you have two possible outcomes for an investment:

   • Outcome A: 30% chance of earning $200
   • Outcome B: 70% chance of losing $50

   The expected return can be calculated as: $$Expected,Return = (0.30 \times 200) + (0.70 \times -50) = 60 - 35 = 25$$

   Therefore, the expected return is $25.

2. Portfolio Expected Return: If an investor has a portfolio consisting of:

   • Stock A with an expected return of 10% and weight of 60%
   • Stock B with an expected return of 5% and weight of 40%

   The portfolio expected return can be calculated as: $$Expected,Return_{Portfolio} = (0.60 \times 10) + (0.40 \times 5) = 6 + 2 = 8$$

Related Terms§

• Return on Investment (RoI): A measure of the profitability of an investment calculated as the net profit divided by the initial cost.
• Risk: The potential for loss or lower-than-expected returns on investments.
• Diversification: The practice of spreading investments across various assets to reduce risk.

Interesting Insights & Humorous Citations§

• “Investing is like a marriage: often, you’ll love it, but sometimes you’ll want to run away—and that’s just the expected return talking!” 😂
• It’s said that “the stock market is filled with individuals who know the price of everything, but the value of nothing.” Wise words, especially when evaluating expected returns! 🧐

Frequently Asked Questions§

• What is the difference between expected return and actual return? Expected return is what you anticipate based on probabilities, while actual return is what you really earn (or lose).

• Can expected returns guarantee profits? No, expected returns are helpful for estimating potential outcomes but do not guarantee specific results. The market remains unpredictable! 🎢

• How do I calculate expected return for a portfolio? Use a weighted average formula, considering each investment’s expected return and its proportion in the portfolio.

Further Reading & Resources§

• Investopedia - A comprehensive overview of expected return.
• Books:
  • “The Intelligent Investor” by Benjamin Graham - A classic read on investing strategies and expected returns.
  • “A Random Walk Down Wall Street” by Burton Malkiel - A great servant to help understand market behavior and expected returns.

Test Your Knowledge: Expected Return Challenge Quiz§

Thank you for exploring the delightful world of Expected Returns! Remember, they may not guarantee profits, but they certainly help bring clarity to investment decisions. Keep smiling and investing wisely! 🌟