Expected return

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

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

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

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

• Market conditions,
• Economic indicators,
• Interest rates,
• Company performance,
• Political stability.

Related Concepts

• Risk
• Standard deviation
• Variance
• Sharpe ratio
• Capital Asset Pricing Model (CAPM)
• Modern portfolio theory

See Also

• Investment
• Portfolio management
• Risk management
• Financial analysis
• Return on investment