1. What is Expected Return?

Expected return is a statistical measure that calculates the anticipated value of an investment based on its possible returns and their respective probabilities. It represents the average outcome one can expect from an investment over time.

2. How Does the Calculator Work?

The calculator uses the expected return formula:

Where:

• \( R_i \) — Possible return percentage for scenario i
• \( P_i \) — Probability of scenario i occurring (as decimal)
• \( \sum \) — Summation of all possible scenarios

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 crucial for investment decision-making, portfolio optimization, risk assessment, and comparing different investment opportunities. It helps investors make informed choices based on statistical probabilities rather than guesswork.

4. Using the Calculator

Tips: Enter returns as percentages (e.g., 5, 10, -2) and probabilities as decimals (e.g., 0.3, 0.4, 0.3). Ensure the number of returns matches the number of probabilities, and that probabilities sum to 1.0.

5. Frequently Asked Questions (FAQ)

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 the real outcome that occurs. They may differ due to unforeseen events.

Q2: How should probabilities be assigned?
A: Probabilities can be based on historical data, market analysis, or expert judgment. They must sum to 1.0 (100%).

Q3: Can expected return be negative?
A: Yes, if there are potential loss scenarios with significant probabilities, the expected return can be negative.

Q4: What are limitations of expected return?
A: It assumes probabilities are accurate and doesn't account for extreme events (black swans) or changing market conditions.

Q5: How is this used in portfolio management?
A: Portfolio managers use expected return to optimize asset allocation and balance risk versus reward across different investments.