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[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]
- Risk
- Standard deviation
- Variance
- Sharpe ratio
- Capital Asset Pricing Model (CAPM)
- Modern portfolio theory
See Also[edit | edit source]
References[edit | edit source]
External Links[edit | edit source]
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Contributors: Prab R. Tumpati, MD