Expected return

From WikiMD's Wellness Encyclopedia

Expected return is a key concept in finance and investment that refers to the anticipated value or profit from an investment over a specified period. It is a crucial metric used by investors to assess the potential profitability of various investment opportunities.

Calculation[edit | edit source]

The expected return is typically calculated as the weighted average of all possible returns, where the weights are the probabilities of each return occurring. The formula for expected return is:

\[ E(R) = \sum_{i=1}^{n} P_i \cdot R_i \]

where:

  • \( E(R) \) is the expected return,
  • \( P_i \) is the probability of return \( R_i \),
  • \( R_i \) is the return in the \( i \)-th scenario,
  • \( n \) is the number of possible scenarios.

Importance[edit | edit source]

Expected return is essential for portfolio management and risk management. It helps investors to:

  • Compare different investment opportunities,
  • Make informed decisions based on potential profitability,
  • Balance the trade-off between risk and return.

Factors Influencing Expected Return[edit | edit source]

Several factors can influence the expected return of an investment, including:

Related Concepts[edit | edit source]

See Also[edit | edit source]

References[edit | edit source]

External Links[edit | edit source]

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Contributors: Prab R. Tumpati, MD